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Jul.July 28, 2022 02:30 PM

The Problems Facing the Affordable Housing Industry – and How We Can Solve Them

 

While “putting a roof over everyone’s head” has long been a political talking point and ambition, the United States only first offered an actionable plan to tackle the tangible issue in the 1980s. That’s very recently, in the grand scheme. In President Reagan’s Tax Reform Act of 1986, a provision was added that simultaneously provided encouraged investment in multifamily housing for the poor, and acknowledged the need for it with housing accessibility to low-income people at a very real breaking point.

The Act’s solution? The Low-Income Housing Tax Credit. LIHTC is a dollar-for-dollar tax credit for affordable housing investments, providing incentives for the use of private equity for developments aimed at low-income Americans. The Program stipulates a maximum rent that can be charged based on an Area Median Income (AMI), and creates credits, frequently called Section 42 credits, that are more attractive than standard tax deductions. Thus enticing investors.

LIHTC works by allowing an investor to take a federal tax credit equal to a percentage of the cost incurred for development (4% or 9%, for 10 years) of the low-income units. Development capital is raised by “syndicating” the credit to investors, and a developer will either propose the project to a state agency seeking an allocation of credits, or obtain tax-exempt bonds to finance half the project cost and complete the project, certify that cost, and rent it to low income tenants. Since its inception, the LIHTC Program has become an effective tool for developing affordable rental housing, stimulating the production or rehabilitation of nearly 2.4 million affordable homes. Administered at the state level by State housing finance agencies, it financed approximately 50,000 low-income rental units annually from 2011-2015 alone, with median costs per unit for new construction ranging from $126,000 in Texas to $326,000 in California. LIHTC accounts for approximately 90% of all newly created affordable rental housing in the US today, and its projects increase land value in surrounding neighborhoods.

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