A fixed amount of tax credits are allocated by the IRS to each state-based population.
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).
Two types of tax credits are available: 9% (which is often competitive) and 4% (which is often combined with state bond financing).
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.
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.
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.