What the Heck is LIHTC? (Lie-Tech)

Low Income Housing Tax Credits (LIHTC's) are a tax program used commonly over the past 15 years for affordable housing developments. Pronounced most recently Lie-tech, these so-called tax credit deals are responsible for pushing affordable housing out of the old Section 8 stigma and into a world where you don't always know that you are walking into affordable housing. With notable exceptions, the construction is generally better, the management is more high-class, and the apartments are nicer than what we had previously seen in affordable housing.

Tax credits are generally allocated by various State agencies on behalf of the federal government and can be obtained through a rigorous application process. While there are several very good developers involved in LIHTC housing, the trend has been for not-for-profit corporations to act as developer and owner of these projects. A benefit of having a not-for-profit involved (typically called a CDC or Community Development Corporation) is that they often provide some type of resident services programs that contribute to the stability of the rental population, which in turn keeps these properties more pleasant, livable and healthy. When you are involved with your residents, you can identify and respond more quickly to problems as they arise, before the whole community is affected. Problems can be of both a social and/or livability nature.

The LIHTC is a tax credit that never shows up in GAAP financial data. Rather, it is taken as a dollar for dollar reduction in tax on tax returns. The credit is issued for 15 years with related compliance requirements, but generally received on the return for 10 years.

As a tax exempt entity, CDC's have no use for a tax credit and so they sell their allocation to banks and other consortiums to raise additional financing to complete development of affordable housing projects. In exchange for purchasing the credit, the investors typically retain 99% ownership in the project on a limited basis during the compliance period. Because of the government's involvement and the now typical leveraging of the credit with other types of tax-exempt and federal financing, LIHTC projects should never be undertaken without the assistance of competent professionals versed in these matters.