COVID-19 Relief Package Contained A Big Win for Affordable Housing Advocates

Low-Income Housing Tax Credits are a major boost to affordable housing developers, and the new COVID-19 relief package made a favorable change to how those credits are calculated.

For years, advocates for affordable housing have lobbied for a key change to the Low-Income Housing Tax Credit (LIHTC): a minimum rate of 4% for rehabilitation projects. In general terms, this rate is the way the tax credits are calculated — a rate of 4% means the developer receives an amount equivalent to 4% of the eligible cost of the development in tax credits per year. This provision was included in the COVID-19 relief package signed into law at the end of 2020. The current rate is 3.09%, and though 4% may seem like a small jump, it has big implications for affordable housing. Let’s unpack what the new rate floor means for developers and investors.

What is the LIHTC rate?

There are actually two rates that apply to LIHTC properties. Generally, one is for new construction and one is for rehabilitation projects (and new projects financed by tax-exempt bonds). The tax credit for new construction is designed to subsidize up to 70% of the cost of the development over 10 years, and, by law, this rate never goes below 9%. Advocates have been trying to get a similar floor for the tax credit for rehabilitation projects of 4%. The tax credit for rehabilitation projects is designed to deliver a subsidy of up to 30%.

How does the rate affect the tax credit a developer gets?

It may help to use an example. Say we are working with a developer who is rehabilitating an apartment building with a qualified basis of $2 million.

(“Qualified basis” here means the amount of money being spent on the property that is eligible for tax credits. If only half the property were being used for affordable housing, for example, only half of the cost, the basis, could be used to calculate the tax credits.)

In this development, if the qualified basis was $2 million, the developer would be eligible for $80,000 per year in tax credits for 10 years, $800,000 total.

$2,000,000 x .04 = $80,000

and $80,000 x 10 = $800,000.

Before this legislation passed, the LIHTC rate was not at 4%, but was hovering just above 3%. To take that same example of our development with the $2 million qualified basis, if we reduce the rate to the December 2020 rate of 3.09, that takes our developer’s annual tax credit down to $61,800, or $618,000 over 10 years.

The increase to 4% may seem like a small change, but Novogradac estimates that it could lead to the development of more than 130,000 additional affordable housing units over the next 10 years.

How is the LIHTC rate set?

Before the December 2020 legislation, the rate for LIHTC rehabilitation projects varied depending on current interest rates at the time. Each month, the Treasury Department sets the rate, which applies to any low-income housing tax credit buildings that are completed and available to be rented that month. During the pandemic, the rate for rehabilitation properties sunk close to 3%, due to cuts to federal borrowing rates, and developers and housing advocates alike warned that this rate was depressing production. So the new 4% floor effectively addresses this issue, too.

What other recent legislation affects affordable housing?

  • The legislation signed at the end of 2020, the Consolidated Appropriations Act, also extended the federal eviction moratorium through January, and President Biden signed an executive order extending it through March.
  • For struggling households, the bill also included rental assistance funded through the Coronavirus Relief Fund administered by the Treasury Department. These funds are available to renters whose 2020 incomes are at or less than 80% of the area median income, with a priority given to those earning less than 50% of the AMI or who have been unemployed for 90 days.
  • The IRS also issued Notice 2021-12 in January 2021, which provided relief for various requirements for LIHTC properties, including extending some deadlines and waiving certain operational requirements due to the ongoing pandemic. Reach out to us at info@sbfcpa.com if you have questions about how Notice 2021-12 might affect your property.

If you are considering investing in LIHTC properties, have questions about tax credits for affordable housing, or need help navigating the new IRS extensions and waivers, email us at info@sbfcpa.com.

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