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Reported Article LIHTC: The Good, the Bad, and the Very Complicated

How to Reform the Low-Income Housing Tax Credit Program

Housing and policy experts agree that LIHTC has successfully increased the supply of affordable housing. But they also believe there's room for improvement.

Photo by Flickr user Victoria Pickering, CC BY-NC-ND 2.0 Deed

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This article is part of the Under the Lens series

LIHTC: The Good, the Bad, and the Very Complicated

The Low-Income Housing Tax Credit (LIHTC) program awards billions in tax credits each year to private market investors and developers who promise to build or preserve affordable housing. But the program is notoriously complex. Who enforces its rules? Why is it so dominant in the housing sector? What's the current state of efforts to reform it?

For nearly 40 years, the federal Low-Income Housing Tax Credit has successfully spurred private-sector investment in the construction and rehabilitation of affordable rental housing. Since its creation in 1986, the credit program has financed more than 3.7 million units, according to the National Council of State Housing Agencies (NCSHA).

While the program—often referred to by its acronym, LIHTC (pronounced “lie-tech”)—is widely valued, those who know, use, or support it still have wish lists for making it better. Shelterforce spoke with affordable housing and policy experts, advocates, and housing credit syndicators—intermediaries who connect investors with affordable housing developers—about changes they think would improve the long-standing program.

coalescing in support of the affordable housing credit improvement act

The primary LIHTC wish lists of many in the sector mirror one another and match portions of what’s in the Affordable Housing Credit Improvement Act (AHCIA), a comprehensive bill containing 27 measures to expand, fix, and streamline the LIHTC program. A significant number and range of organizations came together to help craft the bill, says Emily Cadik, CEO of the Affordable Housing Tax Credit Coalition (AHTCC), a trade organization that works to protect and expand LIHTC.

“It was the investors, the nonprofit developers, the for-profit developers, the syndicators, the state agencies, all coming together to figure out, what are the pieces that we could all say have consensus among the affordable housing community?” Cadik says of the discussions that informed the AHCIA. “Because one of the things we’ve learned from our efforts to provide more affordable housing is, if we all come to Congress asking for different things, then none of us get anything. So it was very important to have consensus.”

Jennifer Schwartz, director of tax and housing advocacy at NCSHA, agrees. “It is a very broad coalition of groups that don’t always agree on everything, but we agree on what’s in this bill,” she says.

NCSHA is a co-chair of the ACTION Campaign, a coalition of more than 2,500 business and nonprofit organizations established to create a unified stakeholder voice in advocating for the LIHTC program. The other co-chair is Enterprise Community Partners, a nonprofit affordable housing developer, investor, syndicator, and policy organization, and AHTCC, the trade organization, is on the campaign’s steering committee. The ACTION Campaign is pushing hard for passage of the Affordable Housing Credit Improvement Act.

The legislation has been introduced in the past four Congresses and has bipartisan support, but it has languished without a tax bill it can be attached to. It was reintroduced in May by U.S. Reps. Darin LaHood (R-Illinois) and Suzan DelBene (D-Washington), and Sens. Maria Cantwell (D-Washington) and Todd Young (R-Indiana). Its bipartisan support is unusually strong: As of early October, the bill had 172 co-sponsors in the House and 30 in the Senate, according to NCSHA figures, spread equally across Republicans and Democrats in both chambers.

The bill promises to support the financing of roughly 2 million homes over 10 years, its sponsors say. 

needed: more of a good thing

Many on the development and investing side cite as top-of-list the need for more resources to allow LIHTC to continue to function as the effective tool it is.

“We have such a dearth of affordable housing. We need more, and the Low-Income Housing Tax Credit is the way to do it,” says Althea Arnold, senior vice president for policy at Stewards of Affordable Housing for the Future (SAHF), a network of 12 large nonprofit affordable housing developers. “And so first and foremost, I would just say the best thing we can do is to expand it.”

Robin Hughes, president and CEO of the Housing Partnership Network (HPN), echoes this thought. HPN is a national collaborative of more than 100 nonprofit housing and community development organizations, including multifamily housing developers who rely on LIHTC for financing. Hughes says conversations she hears around LIHTC are mainly focused on preserving and expanding what the program already does.

“LIHTC is such a critical part of how our members produce affordable housing,” Hughes says. “With my hat on as leader of a membership organization, improvement is less about changing the program—because I do think it’s achieving its intended goals—and more about getting more resources into the housing system. While perhaps not creative or exciting, expanding the program means more supply is created, more people are housed. I think of the tax credit program in the purity for what it is: It can achieve its production goals, based on the availability of resources.”

Hughes and Arnold—and nearly everyone else who spoke with Shelterforce—spelled out two key priorities to spur more LIHTC housing creation. One of those is to make more  9 percent credits—which subsidize a higher portion of development and are competitively awarded—available and the other is to make it easier to access 4 percent credits.

Lori Little, CEO of the National Affordable Housing Trust (NAHT), a nonprofit LIHTC syndicator and development consultant, notes that in 2018, Congress enacted a 12.5 percent increase in the available 9 percent LIHTC credits allocated to states, but that legislation expired in 2021. “We never made that permanent. So we had a 12.5 percent drop,” she says.

Little and others support the provision in the AHCIA to not only add back that 12.5 percent but further increase allocations of 9 percent credits by 50 percent over two years.

The second issue involves the 4 percent credit, which provides less subsidy and relies on combining credits with private activity bonds. Current rules require that at least 50 percent of development costs must be financed by a state private activity bond in order to receive the 4 percent housing credits.

“A lot of projects don’t need such a high level of bond financing, and many can’t sustain it, says Ayrianne Parks, senior director of policy advocacy at Enterprise Community Partners. “Also, it’s a finite resource, as bonds are used by states not only for housing development but for other things, like infrastructure. States are bumping against their [private activity bond] caps.” (Those caps are federally set.)

If enacted, the AHCIA would drop the bond financing requirement from 50 percent to 25 percent.

“This change,” Parks says, “would increase the affordable housing supply by 1.4 million additional rental homes over the next 10 years—and at the same time free up bond resources for the states.”

lihtc could serve more populations

LIHTC-financed housing typically is priced for tenants earning 50 to 60 percent of area median income, or AMI. But that covers only a small portion of those who need housing assistance.

Groups like the National Low Income Housing Coalition (NLIHC), which advocates for housing that serves people earning less than 30 percent of AMI and those facing homelessness, want to see the LIHTC program serve more of the lowest-income people. “A blind spot for LIHTC in my head has always been that by only making LIHTC developments serve tenants making 50 percent to 60 percent of area median income, LIHTC is doing nothing to address homelessness and housing poverty,” says Kayla Laywell, a housing policy analyst at NLIHC.

Because investors in LIHTC are typically financial institutions trying to improve their Community Reinvestment Act rating, areas that are underserved by banks, including rural and Native communities, also typically get less benefit from LIHTC.

NLIHC has stated its support for passage of the Affordable Housing Credit Improvement Act, which would reform the tax credit to provide some additional incentives to developers to build homes affordable to extremely low-income households and to site projects in underserved rural and Native communities. It’s often difficult to generate sufficient rent to support debt in these projects. The AHCIA would automatically put rural and Native areas in the “difficult to develop area” (DDA) category, which makes properties eligible for up to a 30 percent boost in maximum subsidy. It would also add a requirement that states consider the housing needs of Native Americans as one of the selection criteria when allocating credits.

greater efficiency and streamlining

Many also say that LIHTC could benefit from efficiency improvements.

From her standpoint of working with both investors and housing developers, NAHT’s Lori Little supports changes in LIHTC processes that would help create more housing more efficiently, for instance, as she puts it, “de-layering the oversight items at the local, state, federal agencies.”

While LIHTC is a federal program, it leaves a lot to the states. States can tailor their qualified allocation plans (QAPs), which specify tax credit eligibility and priorities for awarding them, to address particular local needs. Little would like to see the multi-agency process streamlined.

We tend to look to LIHTC to solve all the problems that a resident may have, and that’s good, but it makes the program very compliance-oriented.

“What’s important in New York may not be what’s important in Ohio, and that flexibility is wonderful,” she says, “but then you have the IRS and the state, with the QAP and state housing agency and any additional subsidies like [Community Development Block Grant] money. And if HUD is involved, they have their own set of rules. So suddenly you’ve got 100 units of housing with eight or 10 different compliance components—and that makes it more expensive. It is very governed. And everyone wants to put their bells and whistles on it. We tend to look to LIHTC to solve all the problems that a resident may have, and that’s good, but it makes the program very compliance-oriented.”

Robert Rozen, a policy attorney and consultant who was involved in the inception of LIHTC when he worked as legislative counsel for U.S. Senator George Mitchell in the 1980s, expresses support for an AHCIA provision that he says would “reduce or remove NIMBY-ism pressure points.” The current LIHTC statute requires state agencies to notify the chief executive officer (or equivalent) of a local jurisdiction in which a proposed LIHTC-financed project would be located. Some states go further, requiring or incentivizing developers to demonstrate that local support exists for LIHTC developments.

“These requirements have the effect of arming opponents of affordable housing with political levers to oppose affordable housing siting,” Rozen says. “I would not say it’s a big problem, but it does affect some projects.”

The AHCIA would eliminate the notification requirement and specify that states’ QAPs cannot include consideration of support or opposition for a project by local or elected officials, essentially removing elected officials’ role in influencing where a LIHTC project is sited.

“It falls under the category of streamlining,” Rozen says. “The more hurdles, the more costly the projects are. And fair housing advocates support this, too.”

needed: more tenant protections

The AHCIA is a big bill, but it doesn’t address all the changes affordable housing stakeholders would like to see.

Advocates for tenant rights and for extremely low-income tenants would like to see LIHTC explicitly ensure tenant protections, such as requiring anti-eviction protections, standardizing lease provisions, and preventing unexpected rent hikes.

“Because it’s run by the Department of Treasury and the IRS, people in Congress will say, ‘Well, we don’t need tenant protections, it’s a tax program,’” says NLIHC’s Laywell. “But really, being the largest supply-side investment into affordable housing, there needs to be a lot more tenant protections.”

Marcos Segura, a staff attorney with the National Housing Law Project (NHLP), says, “The focus of investors and developers, and also of Congress members, is around LIHTC expansion. And that’s part of the equation, expanding the affordable housing stock. But there’s no attention to the other side of the equation, which is providing housing certainty and stability. And for that, you need tenants’ rights. LIHTC is the only federally funded affordable housing program that doesn’t have that attention to traditional tenant rights issues.”

LIHTC is the only federally funded affordable housing program that doesn’t have that attention to traditional tenant rights issues.

NHLP has a long wish list for LIHTC changes, such as more clearly defining “good cause” for evictions; standardizing application policies and lease provisions; ensuring a grievance procedure to resolve landlord-tenant issues before they end up in litigation (in which tenants often have no representation); improving language access for tenants with limited English proficiency; and changing the rent formula for LIHTC properties to be based on a percent of a household’s actual income, rather than based on the broader area median income.

As an alternative to changing the rent formula itself, NHLP would at least like to see LIHTC require limits on the frequency and amount of rent increases. Some state housing agencies, Segura notes, have already set such limits in their QAPs, which spell out local priorities for developers seeking LIHTC credits.

NHLP has taken no official position on the AHCIA legislation, but Segura offers his own assessment: “I would say it’s just more of the same,” he says. “It’s massive expansion and additional tax benefits to investors. It’s bipartisan and has a lot of support, even though it has very few basic tenants’ rights or general improvements to the program. It’s just ‘Give us more money, let’s build more, that’s going to make these properties more affordable, that’s going to create tenant rights.’ But I don’t see the path to that. Expansion needs to be accompanied by reform.”

data collection and transparency

Segura says NHLP would also like to see more data collection and transparency built into the LIHTC program.

“In general, there’s a lack of basic data,” he says. “For example, who owns these projects—nonprofits, for-profit entities? How many voucher tenants occupy units at LIHTC properties? Because one of the statute’s clear goals is increasing accessibility for voucher participants,” he says. “Are developments typically meeting all the federal and state habitability standards? How many have exited the program early? We know that’s an issue—we just don’t know the extent of it.”

There are individual transparency concerns as well. “Given that there are no requirements that a tenant’s lease state what income designation is attached to their unit, tenants and advocates have experienced great difficulty in determining whether a tenant is being charged the correct amount of rent,” wrote Kara Brodfuehrer, then–staff attorney at the National Housing Law Project.

Overall, NHLP sees a lack of adequate consequences for failure to comply with LIHTC rules on things such as rent setting or discrimination against voucher holders.

“The focus has not been on enforcement and monitoring,” Segura says. “Having a more robust enforcement strategy at the federal level that mirrors what HUD or USDA’s multifamily housing programs have would be an improvement.”

preservation problems

Two issues around preserving affordability of LIHTC units over the long term are not addressed by the AHCIA.

As Shelterforce has covered previously, problems with the right of first refusal (ROFR) for nonprofits have increasingly been arising in year 15 of LIHTC projects. This is the point when investors, having received the promised tax credits, typically exit the project. The nonprofit developer purchases the property, and the affordability requirements continue for at least 15 years after that.

Recently, however, some investors have been disputing the right of the nonprofit to purchase, or making it very expensive for them to do so, putting the housing development’s long-term affordability at risk.

Rozen says the problem stems in part from ambiguity over terminology, as the common definition of “right of first refusal” in real estate is different from what’s in the LIHTC rule, and bad actors are exploiting the confusion. “These outside entities and aggregators are claiming that it’s just the common-law right of first refusal,” Rozen says. “Courts have been rejecting this argument, but it still goes on. It’s basically extortion.”

While the ROFR problem is not addressed in the AHCIA, it is covered in the Decent Affordable Safe Housing for All, or DASH Act, introduced by Senate Finance Committee Chair Ron Wyden (D–Oregon). The DASH Act would clarify nonprofits’ right to purchase a LIHTC development from their limited partner.

The other preservation issue repeatedly cited is the “qualified contract” rule, a loophole that allows an affordability opt-out after just 15 years, instead of the required 30. At year 14, the owner of a LIHTC-financed property can ask the state to find a buyer for the property. If no buyer is found within a year, the property can exit the program. One of the complications is that under an outdated IRS pricing formula, the qualified contract price is often above market rate, and thus it’s unlikely a buyer will emerge who is willing to keep rents low. The Save Affordable Housing Act (SAHA), introduced by Rep. Joe Neguse (D-Colorado) and championed also by Sen. Wyden, would repeal the qualified contract provision for all future LIHTC deals and adjust the statute with protections for existing LIHTC properties.

NCSHA estimates that as of the end of 2022, at least 110,000 units had been lost before the end of their extended affordability agreements due to qualified contracts.

“Closing the qualified contract loophole has become a major priority for NCSHA and our HFA members,” says Schwartz. While waiting for change at the federal level, NCSHA’s recommended practices for state housing finance agencies include requiring tax credit applicants to waive their right to a qualified contract and establishing disincentives for existing owners to exercise it.

“State agencies are doing everything they can to turn the tide through implementation of strict rules related to QCs,” Schwartz says, “but the best thing would be for Congress to address this in federal legislation.”

Provisions to repeal the qualified contract rule and clarify nonprofits’ right to purchase at year 15 were part of the Build Back Better Act, which passed in the House in late 2021 but ultimately failed in the Senate.

what’s the likelihood for reform?

No one can say when or if the DASH Act, SAHA, or the comprehensive AHCIA bill will pass. Supporters are hoping some or all of these bills’ LIHTC reforms will be included in a larger tax bill if one emerges before the end of the year. There is no clear opposition to the reforms, supporters say; rather, the obstacles lie in the gridlock that grips Congress today and the uncertainty of the body taking up a larger tax bill. Some predict that if reforms aren’t enacted this year, the next opportunity won’t come until 2025, after the election year.

“I think the main thing that keeps us from being able to advance the bill or its provisions is the general environment, and whether or not Congress is willing to move tax legislation broadly,” says NCSHA’s Schwartz. “We just do everything that we possibly can to position ourselves for when an opportunity arises. This is a marathon, not a sprint.”

Other Articles in this Series

LIHTC: The Good, the Bad, and the Very Complicated