Navigating LIHTC: Essential Tips for Property Managers

by | Training

The world of affordable housing can be confusing, but the Low-Income Housing Tax Credit (LIHTC) program is an important resource for developers. LIHTC helps create housing options for those with lower incomes. Let’s explore what LIHTC is, how it works, and what rules and regulations are important for property managers to understand.

With more than 20 years of experience in the business of affordable housing compliance in multiple states, we are happy to share our knowledge to get you where you need to be to ultimately help your customers.

Table Of Contents:

What is the Low-Income Housing Tax Credit (LIHTC)?

Congress created the LIHTC program in 1986 as an incentive for private investment in affordable rental housing. Instead of direct subsidies, this program gives tax credits to developers who create or rehabilitate rental units for people with low to moderate incomes.

Imagine a developer wants to build an apartment building. They could build luxury apartments and charge higher rent. However, if they want to create affordable housing, LIHTC can help by offsetting costs for developers who agree to set aside units for lower-income households at reduced rents.

That said, even LIHTC projects usually involve more than one type of funding. You can learn more about funding by researching the Texas LIHTC program.

How Does LIHTC Work?

The process of securing and using LIHTCs is multi-layered, so let’s break it down.

LIHTC

1. Allocation of Tax Credits

First, state housing agencies get a certain amount of federal tax credits each year, which are used to fund their own awards. These agencies typically publish their own Qualified Allocation Plans (QAP) to ensure these funds are used well. A QAP outlines the criteria that the agency will consider.

2. Developer Application

Developers submit applications to the state housing agency once they understand the requirements. Then, the housing agency reviews and scores the projects using its stated criteria. That process includes factors like the need for affordable housing in the area, the financial feasibility of the project, and the experience of the development team.

3. Award of Tax Credits

Projects that meet the criteria receive an allocation of LIHTC in dollar amounts awarded over ten years. This allows developers to claim a dollar-for-dollar reduction on their federal income taxes.

4. Syndication

Most developers do not directly use the LIHTC they receive. Instead, they work with investors in a process called syndication, where a syndicator puts together an investment fund to purchase the tax credits.

Investors, typically corporations, buy shares of the tax credits. This syndication partnership benefits everyone: developers get upfront financing and investors benefit from the tax credits.

5. Construction and Operation

Developers use the invested funds to build or fix up their affordable housing projects and must meet specific rules in return. For example, a specific number of units must be rented to qualified, lower-income households, and rent prices are capped.

They must also stay compliant with all LIHTC regulations for 15 to 30 years. Rural development is one area that benefits from these programs.

How Does a Property Management Company Prepare for an LIHTC Review?

The property manager’s work begins once the development is finished and occupied. The government requires a rigorous ongoing review process, as outlined by groups such as the Department of Housing and Urban Development (HUD). Refer to the IRS 8823 Audit Guide for more information.

These compliance standards ensure affordability, resident eligibility, and building safety. Preparing for LIHTC reviews involves keeping records and data up to date. This includes information like area median income for the tenant population.

Record Keeping & Reporting: A Cornerstone of Compliance

Accurate record-keeping and timely reporting are absolutely vital to a successful LIHTC annual review. Every step in your tenant’s journey matters. Make sure to keep the following on file and up-to-date for easy access during a compliance review:

  • Applicant Files: Include all required income verifications, application information, and any applicable household composition documentation.
  • Lease Files: Be sure each lease complies with your LIHTC program rules and contains required addendums, following all state laws concerning leases, renewals, and notices to tenants.
  • Re-certifications: Annually review your tenant files and update income verification. Make rent adjustments when income limits, set-asides, or rent limits change. You may need to do this for a household multiple times in a year. Refer to the HUD MTSP Income and Rent Limits for the latest figures.
  • Waiting Lists: If applicable, keep a clearly defined, objective waiting list. Include dates, times, unit sizes, and resident household composition for audit purposes.
  • Utility Allowances: These are key for keeping properties and rent within limits. Calculating utility limits is more complex than many people think, as there are different options. For example, you can use either the Gross Rent method or set a different baseline using guidance from HUD about how to figure out utility limits.

Understanding Qualified Census Tracts (QCTs) and LIHTC

The government created the 9% tax credit to encourage development in high-poverty areas, such as Qualified Census Tracts (QCTs). If a property is not in a QCT, a project must rely on 4% credits, which cover a smaller portion of the project costs today.

Interactive lookup tools are often helpful in determining the status of potential LIHTC properties.

Compliance Challenges: Protecting Affordability Long-Term

While LIHTC has a good track record, ensuring the affordability of these units over the long term can be a problem. This is especially true in places where market-rate rents are rising quickly.

For instance, owners of properties could opt out of the LIHTC program after 15 years in most states, which would allow them to convert the property to market rate. Even if owners don’t take this action, properties can stop being affordable as operating costs rise, as LIHTC affordability requirements often don’t keep up with these changes.

Additionally, the “qualified contract” loophole allows owners to circumvent some of the rules. For example, an owner could potentially remove affordability restrictions in year 14, as explained here. Many people advocate for additional steps to be taken to make sure that LIHTC properties stay affordable, thus protecting this critical source of lower-income housing.

If this is sounding complicated, you’re not alone. We know how tedious it is to prepare for your LIHTC utility allowance review. That’s why we encourage you to consider a compliance consultant. A compliance consultant can help you create a unique solution to your regulatory requirements and offer technical assistance.

Looking for an affordable housing compliance consultant? Sanchez Compliance & Consulting has the resources you need for all your property management needs.

FAQs about LIHTC

Which three types of housing are typically created under the LIHTC program?

LIHTC funds go towards multiple types of housing. New construction of apartments for families makes up the biggest chunk, followed by rehabilitation of existing apartments. Housing specifically designed for senior citizens is also a significant piece. LIHTC developments often offer multiple housing types as part of the same property, though sometimes they focus on just one demographic group.

How does LIHTC work in Texas?

Texas follows the national LIHTC framework, where developers apply for tax credits through the Texas Department of Housing and Community Affairs (TDHCA). TDHCA reviews applications and awards tax credits to qualified projects based on a competitive scoring process.

In Texas, properties receiving credits must generally remain in the program for at least 30 years, consisting of a 15-year compliance period plus a 15-year extended use period. TDHCA may offer additional points to developers who commit to longer affordability periods, such as 40 or 45 years.

TDHCA ensures rent levels and income restrictions stay within federal and state guidelines. While only maximum rents are capped, actual rent amounts may go down if utility allowances change. Rent and income limits are published annually and can be found on HUD’s MTSP Income and Rent Limits page.

How does LIHTC investing work?

The typical LIHTC investment comes via syndication. A company specializing in this process pools together funds that investors, usually corporations, purchase shares of. Investors receive a portion of the annual tax credit and eventual profits from the sale of the project after the compliance period is over.

It’s a complex structure with specialized legal, tax, and compliance requirements. However, these projects are a stable long-term investment. Investors enjoy solid returns in addition to a decrease in their federal income tax liability.

What is the Texas low-income housing tax credit program?

The state of Texas oversees its LIHTC program through the Texas Department of Housing and Community Affairs. Like in other states, Texas gives preference to developments in qualified census tracts.

Texas guidelines require that any units built with these funds must stay affordable for at least 30 years. Their process for application and scoring uses various criteria. For example, projects can get extra points if they support Community Development Financial Institutions (CDFIs).

Projects also have the chance to get on waiting lists for future awards in case of carryover credits from prior years, in which case they can move forward quickly once those credits become available.

Conclusion

LIHTC is a powerful tool that helps developers create much-needed affordable housing across the country. It also incentivizes investments for solid long-term returns while also providing tax advantages. With proper adherence to guidelines, the LIHTC program can continue helping communities for many years.

Hire a Compliance Consultant

It’s tough to keep up with the ever-changing demands of the Low-Income Housing Tax Credit (LIHTC) program. You want to make sure your residents have safe and affordable housing. We get it. That’s where we come in. Sanchez Compliance & Consulting will work with you to understand your specific needs.

We can help with:

  • Applicant screening and certification
  • Rent calculations and income limits
  • File audits and inspections
  • Staff training

Don’t let LIHTC compliance stress you out. Contact us today for a free consultation. Let’s focus on what matters most – your residents.