How the LIHTC program works

  1. A fixed amount of tax credits are allocated by the IRS to each state-based population.
  2. State housing agencies allocate the credits to developers based on a state designed application process and pursuant to the goals laid out in the Qualified Action Plan (QAP).
  3. Two types of tax credits are available: 9% (which is often competitive) and 4% (which is often combined with state bond financing).
  4. The developers who have been awarded the credits sell the credits to investors. This creates cash equity which provides a significant portion of the funds the developers need to develop affordable housing. A 9% tax credit raises about 70% of the cost of a development and a 4% credit raises about 30% of the cost of a development.
  5. The developers build the housing and agree to rent the housing at an affordable rent that is usually below market. This is called a use restriction. Developers have a choice of two use restrictions:
    • >20% of the units occupied by tenants @ <50% AMI, or
    • >40% of units occupied by tenants @ <60% AMI
    • AMI= the Area Median Income
    • Some States require or give preference to projects with even deeper subsidies.
  6. For properties developed between 1986 and 1989, the use restrictions last only 15 years. Post-1989 developments have at least 30-year use restrictions and some states require up to 55 years.