The Low-Income Housing Tax Credit is an effective tool for financing the construction and renovation of affordable housing in cities and towns across the United States. Created in the 1980s with bipartisan support, it has resulted in the creation of well over 2 million new affordable housing units. However, the 2016 election results have impacted the demand for investment in tax credits and could affect the creation of new affordable units in the coming years.
Generally speaking, the Low-Income Housing Tax Credit (LIHTC) program leverages the private market to support the creation of affordable units. Enterprise Community Partners provides a good explanation here. A developer of market rate housing units may need to charge an average rent of $1,500 per month to cover the cost of construction. A lender provides a mortgage for the project if they believe rents will support it. Low or moderate income households may only be able to afford rent of $800 per month, for example, which won’t cover the cost of construction. The only way for a lender to provide a mortgage is if that considerable construction cost gap is bridged by other financing. The LIHTC allows large companies to deduct taxes against the investment in tax credits to fill this gap. That’s about the limit of my ability to explain it, but a good explanation of the program from an investment perspective is provided here.
Tax credits can be used in a variety of ways. They can be used to develop new housing for families in urban locations like Brighton’s The Greenleaf in Minneapolis; in the suburbs, like Aeon’s Sienna Green in Roseville; housing for seniors like Commonbond’s Views at City Walk in Woodbury; and even housing with support services, like Nicollet Square, which supports youth experiencing homelessness. Tax credits can be used to renovate existing buildings, as is often the case with the work of ArtSpace, like Northern Warehouse, for example. They can be combined with historic tax credits to preserve wonderful old buildings and create affordable housing, like with Dominium’s Pillsbury A Mill renovation. Smaller towns and cities across the country benefit from the LIHTC program, like Park View Terrace in Moorhead, developed by Schuett Companies in the 1970s and recently renovated using tax credits. Smaller cities often have even fewer affordable options than large cities, so an elderly person counting on paying $275 per month for an apartment may actually have no other place to live.
The LIHTC program has positive and far-reaching social and economic impacts. Renters like the like it because as it adds housing choices, often more attractive ones, since only being able to afford $800 in rent, for example, often means renting in an aging building in a less-than-ideal location. Employers appreciate when their staff live closer to work and near transit, which can mean a more reliable commute. Teachers like it when their students have a stable housing situation and don’t have to switch schools mid-year. Developers like another way to develop additional units. Contractors like it since it adds to potential projects to their punch lists – a $10 million, 50-unit project is essentially all the same to them. LIHTC also ensures that rents are maintained at an affordable rent for the duration of the mortgage, usually 20 years, protecting renters against rising rents when markets get hot, as is happening in the Twin Cities and many metros nationwide.
In theory, both sides of the aisle support the LIHTC program. Those who are liberal and more socially-minded support housing for those who may not otherwise be able to afford it. Those who are more conservative and favor the free market support the leveraging of development using tax incentives. Bipartisan support is arguably why the program was passed by congress in the first place, and a key to why it has lasted.
When it comes to affordable housing, there is no red America or blue America. The benefits of the LIHTC program are felt in a number of ways, in urban and rural areas. Although the incoming administration could very well make changes to the tax code, the LIHTC is popular and likely to survive. However, it is very important that we pay attention. Just has it has been with each new president and congress, those who support the LIHTC as a means to provide affordable housing have called on their leaders to maintain this important program. If you agree, contact your congressperson and senator today to keep the LIHTC strong.
President Obama, thank you!
On a related note, if you value the New Markets Tax Credit, please use this link to sign a letter to congress to preserve it.
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