The ABCs of LIHTC: Understanding the Low-Income Housing Tax Credit

Affordable housing is one of the most pressing challenges in the U.S. today, and the Low-Income Housing Tax Credit (LIHTC) has been a cornerstone solution for nearly 40 years. By incentivizing private investment in affordable housing development, LIHTC has financed over 4 million homes and supported millions of families. This guide will break down the essentials of LIHTC, how it works, and why it remains a crucial tool in solving the housing crisis.

What is LIHTC?

The Low-Income Housing Tax Credit (LIHTC) is a federal program established in 1986 to encourage private investment in affordable housing. By providing tax credits to developers, the program helps fund the construction and rehabilitation of rental properties for low-income households.

Key points:

• ‍LIHTC is the primary financial tool for developing affordable housing in the U.S.
• The program has helped create over 4 million affordable homes.
• It operates as a public-private partnership, leveraging private investment to maximize impact.

How does LIHTC work?

The LIHTC program provides federal tax credits to developers who commit to creating affordable housing for low-income residents. These credits can be sold to investors, generating equity to fund the project. The program is administered at the state level by housing finance agencies, which allocate credits through a competitive application process.

There are two types of tax credits:

• 9% Credit: Covers a significant portion of eligible development costs for new construction without additional federal subsidies.
• 4% Credit: Used for projects with tax-exempt bond financing, typically covering rehabilitation and preservation efforts.

The syndication process

• Developers apply for LIHTC allocations from their state housing agency.
• Once awarded, developers sell the credits to investors, usually banks or corporations.
• The investment provides upfront equity, reducing the need for traditional debt financing.
• Investors receive tax benefits over a 10-year period in return for their contribution.

The impact of LIHTC

LIHTC has a profound impact on communities across the U.S., beyond just providing housing.

Economic benefits

• Supports job creation: Every LIHTC project generates construction and long-term property management jobs.
• Stimulates local economies: Development leads to increased demand for local goods and services.
• Increases tax revenues: Property improvements contribute to higher local and state tax revenues.

Social benefits

• Reduces housing costs: LIHTC-funded housing provides significant rent savings for low-income families.
• Improves community stability: Affordable housing developments reduce homelessness and housing instability.
• Enhances quality of life: Many LIHTC properties offer on-site services like health screenings, job training, and educational support.

Case study: Sageland Flats & Cedar Ridge

Walker & Dunlop helped secure both permanent debt and LIHTC equity financing for Sageland Flats and Cedar Ridge, two affordable housing projects in San Antonio.

• Sageland Flats: 338 affordable units, funded with $42M in Fannie Mae MTEB loan and $36M in 4 percent LIHTC equity.
• Cedar Ridge: 239 senior living units, financed with $27M in Fannie Mae MTEB loan and $25M in 4 percent LIHTC equity.

These developments are expected to have an economic impact of over $191 million and support nearly 1,000 jobs, demonstrating the power of LIHTC in driving real change. (Read more about these properties here.)

How policymakers and advocates can support LIHTC

LIHTC has been instrumental in tackling the housing crisis, but ongoing advocacy is necessary to expand and protect the program.

Legislative priorities

• Affordable Housing Credit Improvement Act: A bipartisan bill aimed at increasing LIHTC allocations and streamlining financing processes.
• Expanding LIHTC: Advocates are pushing for a 50 percent increase in credit allocations to meet growing housing needs.
• Regulatory improvements: Efforts to reduce administrative burdens and streamline LIHTC financing structures.

Ways to advocate

• Contact legislators to support LIHTC expansion.
• Join industry organizations like the Affordable Housing Tax Credit Coalition.
• Participate in advocacy events and conferences focused on affordable housing policy.

Walker & Dunlop: Advancing affordable housing by supporting LIHTC

The LIHTC program is a proven, effective tool in addressing the affordable housing crisis. By leveraging private investment, it creates homes and generates jobs and economic growth. As the need for affordable housing continues to rise, expanding and improving LIHTC will be essential in ensuring that families have access to stable, high-quality housing. Reach out to our LIHTC experts to learn more about Walker & Dunlop’s support for LIHTC.

For more insights on LIHTC and advocacy efforts, visit the Affordable Housing Tax Credit Coalition.