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SMCo Principal Pete Wesch talks about the dos and don’ts of using low-income housing tax credit
If you’re considering low-income housing tax credit (LIHTC) to expand your affordable housing inventory, there are some dos and don’ts to be addressed.
Over the past three decades, Smith Marion & Co. has been part of the evolution of the Low-Income Housing Tax Credit (LIHTC) developments from a novelty to the primary vehicle for adding public housing units.
We’ve witnessed the evolution of the contractual and investor side of LIHTC. The early projects often had smaller or even individual investor partners or members (IP/IM). Partnership or operating agreements were relatively short, and IM/IPs had an expectation of a buyout at some time after the completion of the 15-year federal compliance period.
This was generally unrealistic, considering most LIHTC properties have barely sufficient cash flow to sustain themselves. They are, after all, meant to provide affordable housing, and not profits for investors. Today’s IM/IP are generally large institutions, who themselves market the tax credit to many smaller individual investors.
Because IM/IPs are selling investments to their clients, they often insist on a much tighter timeline for the development of the project. The developer can face steep reductions in investment if those timelines are not met.
On the positive side of that change, the IM/IPs are now looking to exit the project as soon as the tax credit and deductible losses are exhausted, without any further compensation.
Making affordable housing more accessible
Our ability to build enough homes to shelter the homeless and provide safe housing for all Americans hinges on the supply of capital for affordable housing production. Year after year, demand outstrips supply.
Thankfully, at the end of December 2020, Congress made the decision to expand access to affordable housing.
The reality is that LIHTC is the largest single source of federal funding for affordable housing. Developers receiving the credit sell it to investors in exchange for equity to finance the construction or rehabilitation of existing housing.
The plan to establish a 4 percent floor for the housing tax credit program will help build more desperately needed affordable housing for decades to come, according to a press release published on the VT Digger website.
Unlike the 9 percent or ‘allocated credit,’ the 4 percent credit up until now had not been fixed; instead it was calculated based on prevailing interest rates and shifted every month. Therefore, depending on the economy the 4 percent credit could be worth considerably less to investors.
Senator Bernie Sanders comments, “Fixing the 4 percent tax credit is long overdue.” This 4 percent credit up will help low-income families who are already struggling through this economic and health crisis and will also support those who work in the trades and small business owners.
More details about the future of affordable housing can be found here.
Get the right LIHTC team on your side: Smith Marion & Co.
If you are considering expending your affordable housing inventory through LIHTC, the team at Smith Marion & Co. is ready to assist by providing tailored services, spanning from initial analysis, to cost certification, financial statement auditing and tax preparation, as well as exit analysis and planning.