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  • Low Income Housing Tax Credit
Low Income Housing Tax Credit

Low Income Housing Tax Credit

  • Year Started 1986
  • Administratering Agency State and Local LIHTC Allocating Agencies
  • Total Units Count 3,435,161
  • Total Assisted Units Count 2,683,016
  • # Persons/Houshold Served 2,274,058
  • Funding Agency State Specific Housing Agency- IRS Tax Credit to Investors
  • Population Targeted Low Income Households below 60% of area median income (AMI), modified to include some households at 80% of AMI however average of all income of all households must be 60% of AMI or below
  • Client Group Type LIHTC
  • Housing Type Name Low Income Housing Tax Credit
  • Last Updated June 1, 2022

If the resource information above is incorrect, please notify your local HUD field office.

The Low Income Housing tax credit program ( LIHTC ) is the most pivotal resource for creating affordable housing in the United States. The LIHTC program was created by the Tax Reform Act of 1986. The Treasury Department and State Housing Finance Agencies administer the program. Due to this Tax Credit there has been a surge in recent years of new multifamily LIHTC communities, housing many of our country’s low income families. Most Communities are located in urban areas often causing a positive revitalization of low-income neighborhoods. This provides sustainable and decent living conditions for families in need.

The LIHTC program allocates approximately $8 Billion in the annual budget to state and local LIHTC agencies so that they can issue tax credits for the acquisition, new construction, or rehabilitation of rental housing to households having less income. For the community developer/owner to obtain the tax credits they need to meet one of the following:

  • A min of 20% of units must be rented by tenants with incomes less than 50% of Area Median Income
  • A min of 40% of units must be rented by tenants with incomes less than 60% of the Area Median Income

LIHTC is the largest rental housing production program in history and significantly outnumbers the other government-funded rental units available. A benefit of LIHTC Properties is that the rent is not based on the tenants income. Tax credit units must be affordable to households. The rents do not vary according to each individual family or tenant thus, reaching a slightly higher income group (while still maintaining people who are between 50-60% of Area Median Income).

The downfall of this program is the tax credit provided a surge of new construction and redevelopment projects–which one would think would be a great thing. Unfortunately, there are some properties that have reached their required 15 year affordability restrictions and may choose to bring rents from that property to market rates. At times this is unavoidable, as the properties at this time may need high cost renovations. New LIHTC projects have been mandated to affordability restrictions for a 30 year period in addition to the legislature trying to entice owners to extend the affordability by passing more tax incentives.

The LIHTC data at the property and tenant-level is collected by the Department of Housing and Urban Development. The data collected by the HUD at the property level includes information on the size, unit mix, and location of individual projects.

Historic ( HTC ) and New Markets Tax Credits ( NMTC )

The Federal Historic Preservation Tax Credit program is familiar with the significance of the private sector investment in the rehabilitation and re-use of historic buildings and encourages the same.

The program is administered by the National Park Service and the Internal Revenue Service in partnership with the State Historic Preservation Offices. There are some states offering tax credits for historic buildings and asking the applicants to apply to Federal and State programs together.

The Community Development Financial Institutions Fund or CDFI is a program within the U.S Department of the Treasury that administers the New markets tax credit. As long as a property is within the low-income community recognized by the U.S. Department of the treasury, NMTC can finance a range of property types such as mixed-use multifamily property.

Its investors usually invest in intermediary entities such as Community development entities which later on provide funding to the project level ownership entity. There are limited occasions in which HTC and NMTC can be used in FHA-insured projects.

Subsidy Layering Review ( SLR )

There are no subsidy layering review requirements for LIHTC projects as they have been eliminated using the FHA-insured loans. It is imperative for the lender and HUD underwriter to review sources and use statements for Mortgageable and non-mortgageable funds.

The non Mortgageable costs are necessary to complete the project and must be certified by the funding source to be reasonable. The formal SLR is required for the public funds combined with the FHA mortgage in a tax credit project.

The public Funds include the Home investment partnerships program funds and other federal loans, local or state-provided financing, and budget-based section 8 rents. The funds requiring the SLR will be reviewed by the HUD on the basis of the FHA MAP Lender’s analysis.

Tax Credit Bond Cap Allocations

The applications for the LIHTC projects must have evidence. The evidence includes

  • A LIHTC award of 9% state agency allocation or 4% tax allocation. 
  • Verification from the appropriate agency in case of historic credits and new market credit credits.

There are no fixed timings for the LIHTC allocation as it varies by state and in some instances, FHA applications have to be submitted before the final allocations of the tax credits.

HAP Contract Renewals

Whenever a section 8 HAP contract is involved, it is the borrower and lender who are responsible for ensuring the satisfaction of renewal terms under the Section 8 renewal guide. The renewals are not necessary if the existing housing assistance payment contract ( HAP ) has 15 years of term remaining.

Based on the remaining term of the HAP contract, the loan can be underwritten for affordable housing. Even if the HAP has less than 15 years remaining, the renewals are not required but the lender must underwrite to the section 8 market.

The lender must review the Rent Comparability Study ( RCS ) as a part of the underwriting process when reviewing the MAP appraisal in the HAP contract renewal request. The lender has to underwrite the rent keeping in mind the rents from the RCS to develop the income and expense estimates and also to address the inconsistencies in the lender’s narrative.

The review of the contract’s renewal will be done by the HUD’s underwriter to verify if the rents requested by the borrower in the renewal are supported by the RCS.

There must be coordination among the assigned HUD underwriter, the field office’s asset management, portfolio oversight representative, and HUD’s HQ OAMPO essential.

  • to ensure that the contract renewal request and the rent increase have been approved on time or not. 
  • In addition to this, a prepayment approval is required if the need arises. 
  • Whether the other waivers are processed and approved in a timely manner or not.

Before submitting the firm commitment application, the section 8 HAP renewal requests and rent adjustment requests should be delivered to the performance-based contract administrator ( PBCA ) 60 days prior. Consequently, the owner and the lender have to carefully manage the timing as the rents, expenses, and debt service must be consistent with the section 8 contract renewal request.

Likewise, the request for the prepayment of an FHA-insured loan must be submitted to the headquarters before submitting the firm application package to the HUD field office.

Application and Submission Requirements

The following things should be included in the documentation to be provided in the firm application:

  • There should be a HAP contract renewal request and rent comparability study. 
  • The HUD forms 92264, 92273, and 92274 and MAP compliant appraisal should be submitted along with the application. But it depends upon the appraiser’s discretion to choose one or the other format whichever will be acceptable to the lender.

The application documents pertaining to the New pilot are fully listed in the New Pilot Application exhibits checklist.

  • An excel spreadsheet containing the information on sources, uses of funds, pay-in requirements, the flow of funds, and other matters which are essential for the analysis of LIHTC projects must be submitted instead of the standard wheelbarrow.
  • The other standard documents will be concerning the section of the act ( SOA ) program.

The HUD has issued separate guidance for RAD, FHA, and LIHTC projects.

Mortgage Amounts Calculation

The tax credit project applications that involve the transfer of ownership to IOI purchases should be treated either as acquisition or refinancing transactions for sizing the mortgages.

It is crucial to deposit the unspent contingency funds in an FHA-insured loan project into reserve for a replacement account. It is for doing further improvements, upgrades, and betterments to the property.

Secondary Debt in Tax Credit Transactions

  1. LTV ratio and private secondary debt- The transactions devoid of low-income housing tax credits limits the combination of FHA insured and secondary financing only to a loan limit of 92.5%. As far as tax credit projects are concerned, the debt limits can restrict tax credit amounts and property basis. The secondary debt is subjected to the following conditions:
    • There is a limit of 75% payments on all secondary debts or less. Be it public or private, the limit applies to all secondary debts to ensure that at least 25% of the surplus cash remains with the owner as an incentive.
    • Based on the HUD’s underwriter analysis, the FHA-insured loan and the total private secondary debt should not exceed 100% of total mortgageable and non-mortgageable project costs.
    • The maturity date of the secondary debt must be the same or later than that of the first mortgage. There are certain exceptions that the HUD underwriter must consider on a case-by-case basis for public debt and also when other HUD programs require shorter amortizations.
    • The secondary debt can be easily paid off within its term with 75% of the surplus cash.
    • The HUD’s form of surplus cash note will keep the record of the debt. If the lender provides a thorough analysis of the project cash flow, then the HUD will permit the compounding of interest.
    • With the project, the private debt of up to 100% can be secured but it is subjected to the automatic re-subordination in the refinancing of the first mortgage.
  2. Bridge Loans- As compared to secondary financing, temporary bridge loans are treated somewhat differently.
  3. Public debt- The loans which are funded with the HOME funds or other federal, local, or state sources will be lent directly to the HUD’s borrower. As all these sources are treated as the public secondary financing process so there is no need to include them in the calculation of the 100% total project cost.

Developer Fees

Treatment of developer fees- The developer fees is treated as mortgageable costs as long as they are approved by the LIHTC allocation agency and scheduled for payment in amounts agreed upon with the investor.

Whenever a developer’s fees is to be included in the project’s budget, neither BSPRA nor SPRA should claim irrespective of the fact whether it is treated as a mortgageable cost or not.

Relationship of developer fee to the general contractor profit in an IOI relationship- An IOI between the owner and contractor does not require a waiver but it should be disclosed in the application as it may affect the fee and profit structure.

Deferred developer fee- The repayment terms should be identified in the borrower’s limited partnership agreement if the repayment is an obligation on the borrower.

The payoff of deferred developer fees- The deferred developer fee debt from the recent transaction will account as originally structured. It will be treated as equity if it is an obligation on one of the more upper-tier members.

Equity Bridge Loans ( EBLs )

The borrowers or tax credit investors can use the equity bridge loans as a substitute for the pay in equity during the project’s development and stabilization phases.

  1. The EBLs should be subordinate to HUD-insured mortgages and should not be secured on any other mortgaged property. These can also be secured with the tax credits, tax credit equity, and interests of the investor members in the project’s ownership.
  2. It must be non-recourse to the borrower and the lender will exercise no claim in the event of FHA loan proceeds, and reserve or deposit made with the FHA lender.
  3. If the HUD acquires it by foreclosure, the bridge loan documents will be given to the FHA borrower.
  4. There must be valid evidence along with the obligation in the form of the promissory notes with provisions and limitations.

Syndicator and Investor Fees Paid from Operations

The tax credit projects which involve asset management, the fees are paid to the investor representative. The office of asset management and portfolio oversight makes the provision for the usual, customary fees, and expenses of tax credit projects, payment of investors, and asset monitoring fees.

If the above-mentioned expenses are included in the operational budget, then the loan must be sized accordingly, and the ideal treatment must be mentioned in the closing documents.

Mark to market transactions- The owners receive the incentive performance fee which is paid before calculating the split. M2M asks the owner to use 75% of the surplus cash for paying the program’s secondary loans.

Special Conditions For All Tax Credits and Projects With Master Leases

It is necessary to include the special conditions to the firm commitment as they apply to the mortgage issuance for project applications.

  • The initial equity investment amount is 20% of the total tax credit equity. 
  • Evidence of an agreement binding the tax credit investors should be submitted by the lender to contribute to the project’s completion costs. 
  • The tax credit equity documents of which borrower or participants are a party should be approved by the HUD before initial endorsement. 
  • A provision prohibiting the changes to the organizational documents affecting the obligations of the tax credit should be added. 
  • The project is exempted from the cost certification. 
  • The bond documents should be approved by the HUD before endorsement. 
  • Ensure to specify the language irrespective of the deferred developer loan included in the documents or the note.

To gain more in-depth knowledge about the Low-income Housing tax credit, visit below link for more info: Low Income Housing Tax Credit

Frequently Asked Questions

Statutory and Regulatory Authority

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Section 202, Housing Act of 1959

  • 12 U.S.C.A. § 1701q

Section 811, National Affordable Housing Act of 1990

  • 42 U.S.C.A § 8013

Select HUD Regulations

  • 24 C.F.R. Part 247 (evictions)
  • 24 C.F.R. Part 891 (supportive housing for the elderly and persons with disabilities)