LIHTC Housing – How does it Work?

LIHTC, often pronounced Lie-Tech, is the acronym for Low Income Housing Tax Credits. They are one of the few tools available to Developers and the States to create affordable rental housing. We’ve referenced LIHTC several times here regarding The Paddocks and Riverside Commons apartments, but how does it work?

Here’s a simple (kinda) step by step description:

• Low Income Housing Developers need subsidy funds because the cost of constructing affordable housing is the same as constructing market-rate housing.
• The Internal Revenue Service allocates Low Income Housing Tax Credits (LIHTC) to states based on population. In the case of Indiana, these Tax Credits are administered by the Indiana Housing and Community Development Authority (IHCDA).
• Developers work with a community(ies) to put together an application that meets community needs and meets IHCDA goals.
• Developers apply for tax credits with IHCDA. The application process is competitive. In the round awarded 2/25/21, only 19 out of 51 total applications received tax credits.
• IHCDA selects developments to receive awards. Various criteria, goals and set-asides are used to determine which applications are successful.
• Developers work with syndicators to convert the LIHTC into equity by selling them to investors who will utilize the tax credits to offset tax liability. Investors by the credits at a discount since some of them will not be available until the 10th year.
• Developers build affordable housing in Indiana communities.
• The equity generated through the sale of LIHTC allows the developer to rent units at below market rates. This is required for a minimum of 15 years.