Low-Income Housing Tax Credits (LIHTCs) are one of the most important federal programs to incentivize affordable rental housing for low-income people through private equity as they account for about 90% of all of the affordable rental housing units created in the U.S. At their core, LIHTCs are a pay-for-success subsidy mechanism that allows an investor to buy federal tax credits equal to a percentage of the cost incurred for development of the low-income units, creating equity for owners that reduces the project development debt burden. The IRS allocates funds on a per capita basis to each state; to apply, the developer must propose a project to a state agency (e.g. the Pennsylvania Housing Finance Agency), seek and win a competitive allocation of tax credits, complete the project, certify its cost, and rent-up the project to low income tenants. During the initial 15-year compliance period, in which tax credits are subject to recapture, a developer will usually enter into a limited partnership with investors so that it can sell the tax credits to the investors in exchange for cash.
In Pittsburgh there were 3 housing projects that were awarded LIHTCs in 2015, which will create a total of 141 affordable rental housing units in Allegheny County. Remaining credits were distributed throughout the state to cities from Philadelphia to State College.
This type of tax credit is very competitive and usually reserved for new construction. It allows a developer each year to claim a tax credit equal to roughly 9% of the project's construction cost to develop affordable housing for a period of ten years. Part of its requirements is that at least 20% of the units in a housing development be affordable to households at or below 50% AMI, or at least 40% of the units affordable to households earning at or below 60% AMI. The affordability period is 30 years. In reality, however, the applicable credit is not actually 9%; instead, the specific rate that a project will receive is set so that the present value of the 10-year stream of credits equals 70% of a project's construction costs.
This type of credit is usually claimed for rehabilitated housing and new construction that is financed with tax-exempt bonds. The basic affordability requirements of these credits is the same as 9% LIHTC except that instead they only provide an annual tax credit of roughly 4% of the cost to develop affordable rental housing over ten years. They are awarded on a non-competitive basis but instead require that the housing development receive a tax-exempt bond financing of more than 50% of the development cost and comply with the program requirements. In reality, too, the actual credit flunctuates around 4% but is set by the Treasury Department to deliver a subsidy equal to 30% of a project's construction costs.
Office of the Comptroller of the Currency | Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks
National Housing Law Project | Overview of the Low-Income Housing Tax Credit Program (LIHTC)
Congressional Research Service | An Introduction to the Low-Income Housing Tax Credit