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  • Housing Credit FAQ


    What is the Housing Credit?
    The Low-Income Housing Tax Credit (Housing Credit) is a federal tax credit created by President Reagan and Congress in the Tax Reform Act of 1986 designed to encourage private sector investment in the new construction, acquisition, and rehabilitation of rental housing affordable to low-income households.

    The legislative history for the Housing Credit states Congress created the Housing Credit because, “it was concerned that the tax preferences for low‐income rental housing available under prior law were not effective in providing affordable housing for low‐income individuals. Congress believed a more efficient mechanism for encouraging the production of low‐income rental housing could be provided through the low‐income rental housing tax credit.” Over the last three decades, the Housing Credit has become the most successful affordable rental housing production program in history.

    The Housing Credit offers a dollar-for-dollar reduction in a taxpayer’s income tax liability in return for making a long-term investment in affordable rental housing. State agencies award Housing Credits to developers, who then sell the Credits to private investors in exchange for funding for the construction and rehabilitation of affordable housing. These funds allow developers to borrow less money and pass through the savings in lower rents for low‐income tenants. Investors, in turn, receive a 10‐year tax credit based on the cost of constructing or rehabilitating apartments that cannot be rented to anyone whose income exceeds 60 percent of area median income (AMI).

    The program allows states to allocate Housing Credits to developments they select pursuant to qualified allocation plans (QAPs) they develop that identify the type, location, and other characteristics of affordable housing needed throughout the state. The plans must describe the criteria agencies will apply in allocating the Credit and are subject to review on an annual basis after a public hearing and comment process. In this way, the Housing Credit empowers states to respond to the housing needs, priorities, and challenges that states consider most important.


    Whom does the Housing Credit serve?
    While the program was originally designed to serve low-income working households earning between 50 to 60 percent of AMI, state HFAs often reach families with much lower incomes. According to HUD data on Housing Credit resident demographics, nearly half (46.1 percent) of all households living in Housing Credit apartments are extremely low-income, meaning they earn 30 percent or less of AMI. Another 35 percent of residents are very low-income, meaning they earn more than 30 percent, but less than 50 percent of AMI.

    The flexibility of the Housing Credit has made it an attractive tool for meeting housing needs across rural, urban, and suburban areas. Not only does the Housing Credit serve low-income families, but it also finances housing for low-income seniors, veterans, members of Native American tribes, and people with disabilities. The Housing Credit has been instrumental in the production of permanent supportive housing for persons experiencing homelessness and other special needs populations.


    Why is the Housing Credit necessary?
    The Housing Credit is necessary because our nation faces an affordable housing crisis, which is growing more and more critical. Increased demand for rental housing in recent years has caused rents to rise dramatically. By the end of 2014, rents were on average 15.2 percent higher than they were in 2009. According to HUD’s Worst Case Housing Needs report, 7.7 million very low-income renter households had worst case housing needs in 2013—meaning they do not receive government housing assistance and pay more than half of their income for rent, live in severely inadequate conditions, or both—a 49 percent increase in just 10 years.

    Since 2000, the rental housing shortfall for extremely low-income (ELI) renters—measured as the gap between the number of ELI renters and the number of units available and affordable to those households—has grown by 55 percent. As of 2013, 11.3 million ELI renters competed for only 3.2 million available and affordable units. Renter households who are unable to find an affordable apartment are forced to pay a significant portion of their income for housing—often more than half their income—leaving little money left over for other critical necessities like food, transportation, childcare, healthcare, and utilities.

    The Housing Credit is an efficient and effective tool for providing affordable housing to the people who need it most. The Credit accounts for the vast majority of the country’s new rental housing affordable to low-income people, creating affordable housing opportunities for the millions of families in our country today who otherwise pay an excessive portion of their income for housing, live in substandard and overcrowded conditions, or face homelessness.


    How much housing has been developed because of the Housing Credit?
    By providing an incentive for private sector investment, the Housing Credit has financed nearly 3 million apartments for low-income households, with approximately 100,000 units added to the inventory each year.


    What does the Housing Credit cost?
    The cost of the Housing Credit to the federal government is fixed and determined by statute. Each state’s Housing Credit allocation is subject to a volume cap based on its population that limits the availability of the Credit in each state. In 2016, the state Credit cap is $2.35 times the state’s population, with a state minimum of $2,690,000. Volume cap figures are published by the IRS on an annual basis.

    According to the Office of Management and Budget’s FY 2017 Budget estimate, for the 10-year period between 2016 and 2025, the Housing Credit will cost approximately $87.6 billion. For FY 2016, its estimated cost is $7.88 billion. The cost of the Housing Credit represents less than 3 percent of all, affordable and non-affordable, housing-related federal tax expenditures.


    Who administers the Housing Credit?
    The Housing Credit is typically administered by state Housing Finance Agencies (HFAs), state-chartered authorities established to help meet the affordable housing needs of the residents of their states. Although they vary widely in characteristics, such as their relationship to state government, most HFAs are independent entities that operate under the direction of a board of directors appointed by each state's governor. The Housing Credit, in addition to tax-exempt housing bonds and the HOME program, is at the center of HFA affordable housing activity.


    Who oversees the Housing Credit’s administration?
    The U.S. Treasury through the Internal Revenue Service (IRS) oversees the Housing Credit program, monitors it for noncompliance, and issues program guidance and regulations. In addition to IRS monitoring, state agency scrutiny and private sector oversight—under threat of severe tax penalty for noncompliance—are hallmarks of the Housing Credit program and have eliminated the need for extensive federal involvement and bureaucratic regulations. This oversight system represents an unprecedented departure from previous federal housing programs and is an essential element of the program’s success.


    What is the Housing Credit’s economic impact?
    The Housing Credit is also vital to the housing and economic recovery. The program supports approximately $3.5 billion in federal, state, and local taxes; $9.1 billion in economic income from wages and business income; and 95,700 jobs across various U.S. industries every year. The National Association of Home Builders estimates that in its first year, a typical 100-unit Housing Credit property on average provides $8.7 million in additional wages for local workers and business profits; creates $3.3 million in additional federal, state, and local tax revenue; and supports 116 jobs.


    Does the Housing Credit leverage other funding?
    A unique feature of the Housing Credit is its ability to leverage private equity which investors contribute upfront with the expectation of obtaining Credits in the future. In addition, virtually every state combines the Housing Credit with other federal housing subsidies to make housing affordable to ELI families, the elderly, and special needs populations. Approximately 40 percent of Housing Credit apartments have been financed using tax-exempt multifamily Housing Bonds, allowing them to achieve a lower interest rate on project debt than would otherwise be available.


    Would the private sector finance affordable housing without an incentive like the Housing Credit?
    No. Unlike many other tax expenditures, which subsidize activity that would occur at some level without a tax benefit, virtually no affordable rental housing development would occur without the Housing Credit. It simply does not make economic sense for the private sector to finance affordable housing absent an incentive such as the Credit. Harvard’s Joint Center for Housing Studies states that, “to develop new apartments affordable to renter households with incomes equivalent to the full-time minimum wage, the construction cost would have to be 28 percent of the current average (which is already 30 percent below the 2007 peak in real terms).” In addition to attracting private sector equity, the Housing Credit encourages lenders to finance affordable housing developments when they may be otherwise disinclined to do so.


    Doesn’t the Housing Credit just enable corporate investors to reduce their tax liability?
    The Housing Credit is a purchased tax benefit, and substantially all of the net economic benefit of the program goes to low‐income families, not corporations. Investors must pay for the Credit; they do not receive it for activities in which they would otherwise engage absent the Credit. In contrast to other corporate tax expenditures, corporations are only the intermediaries that enable private resources to be used to deliver affordable rental housing to low‐income and special needs populations, housing which would not be built without the Credit.

    The Housing Credit equity market is extremely competitive, and demand has driven pricing for the Credit to close to $1 per $1 of tax credit on average. In some areas, demand for the Credit is so high that investors pay over $1 per $1 of tax credit due to the added benefits of Housing Credit investment for bank investors that are seeking to reduce their tax liability while meeting Community Reinvestment Act requirements. These high prices for the Credit translate into more equity for affordable housing, and are a testament to how well the program was designed.



    How well do Housing Credit properties perform?
    With sophisticated state agency underwriting capacity, strict compliance requirements, and due diligence from the private sector, the inventory of Housing Credit properties overall has an outstanding performance track record according to all commonly used real estate metrics. Only 0.66 percent of Housing Credit developments have ever resulted in foreclosure, an unparalleled record compared to market rate multifamily properties and other real estate assets. States underwrite Housing Credit properties with a slim profit margin, careful not to over-subsidize any particular project. The nationwide median debt coverage ratio across Housing Credit properties in 2014 was 1.33—high enough so that the majority of properties can cover operating costs without relying on emergency reserves, while keeping rents at a level affordable to most residents and not providing an excessive boon to investors.


    In addition to affordable housing, what other benefits does the program provide?
    In addition to providing shelter, safe, sustainable, and affordable rental housing opportunities lead to improved child well‐being, enhanced educational achievement, improved health outcomes, increased employment access, proximity to transportation options, community revitalization, and reduced dependence on emergency services and institutional care.


    What would be the impact of repealing the Housing Credit?
    Repealing the Housing Credit would stop the development of thousands of desperately needed rental homes. Affordable housing needs would intensify and hundreds of thousands of low‐income families would face greater difficulty accessing affordable homes. Thousands of affordable units would be lost because the Housing Credit would not make their preservation possible. Jobs and economic revenue would decrease because of the reduction in construction, supplies, and other economic activity associated with the Housing Credit.

    The federal revenue raised from repealing the Housing Credit would be minimal, especially in the first several years. Although often listed in the top ten of corporate tax expenditures, the cost of the Housing Credit is dwarfed by the top four corporate tax expenditures and all of the largest corporate tax expenditures are smaller than the smallest of the top ten individual tax expenditures. Furthermore, the revenue raised from the program’s repeal would be minimal because the Housing Credit is purchased up front but applied to tax liability annually over ten years and, thus, taxpayers would continue to receive their credits for several years after repeal.


    How can Congress strengthen the Housing Credit program?
    Despite the Housing Credit’s successes, the unmet need for affordable rental housing continues to far outstrip the available resources. This imbalance between demand and supply has become even more pronounced in recent years as the overall number of renters has increased and incomes have stagnated. Moreover, as the federally subsidized affordable stock ages, we have become more and more dependent on the Housing Credit to meet preservation needs in addition to financing new construction.

    Congress has the opportunity to build on what works by expanding the Housing Credit and providing states more flexibility so that they can maximize their resources. NCSHA recommends that Congress increase Housing Credit authority by at least 50 percent. Increased programmatic flexibility to target existing resources to those properties that need them most for financial feasibility would also improve the Credit’s functionality at the state level.

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