Low Income Housing Tax Credits (LIHTC) 101 – Applying for 4% credits

How do you receive an allocation of 4% LIHTC?

4% Low Income Housing Tax Credits (4% Credits) are utilized to finance new construction and/or acquisition & rehabilitation of affordable housing projects. To receive an allocation of 4% Credits a developer must first apply for and receive an allocation of tax-exempt volume cap limited bonds (Tax-Exempt Bonds).

How do you receive an allocation of TE bonds?

To receive an allocation of tax-exempt bonds a developer must apply to a local government, or a local unit of government that receives a set-aside of the authority to allocate Tax-Exempt Bonds. Make sure to verify with the Housing Finance Agency (HFA) during the bond application process that your project meets minimum points required under the Qualified Allocation Plan (QAP) applicable to the area in which the project is located. Projects that do not meet the QAP standards are not eligible for the 4% Credits.

What happens after you receive an allocation of TE bonds?

Federal law mandates developments to separately apply to the Housing Finance Agency (HFA) for the 4% Credits. However, if the bond issuer is the HFA, typically the HFA accepts one unified application for the issuance of the Tax-Exempt Bonds and the 4% Credit allocation.

Tips for developers

Receiving an allocation of Tax-Exempt Bonds is becoming competitive in many states. Be sure to engage with the city, HFA, lenders, and investors as soon as possible. Also, check that your project satisfies the housing tax credit allocating agency’s QAP that is in effect for the year in which the total tax-exempt bonds issued for the development are more than 50% of the project aggregate basis.

Tax-exempt bonds have their own minimum set-aside restrictions. The minimum set-aside options available for bonds are 20% at 50% AMI and 40% at 60% AMI. If a developer chooses to use average income for the minimum set aside for tax credits, the development must also meet either 20% at 50% AMI or 40% at 60% AMI for the bonds.

There are many other factors to consider for 4% Credits, including but not limited to reimbursement of predevelopment costs, 50% test, and different financing structures (conduit financing, pooled financing, cash collateralized, draw down bonds, etc.)

For additional considerations please reach out to Alex Cho, CPA or contact our Real Estate Solutions Team at Mahoney.