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

The Only Tool in the Box: What It Means That LIHTC Dominates Affordable Housing

Even those who praise the tax credit program and what it has accomplished are concerned that there are so few sizeable alternatives to it.

Photo by Julie Pimentel, via Flickr, CC BY-NC 2.0 DEED

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?


What effect does the dominance of LIHTC have on the affordable housing field? In the mid-2010s, Michael Bodaken, then executive director of the National Housing Trust, had an idea for a way to create mixed-income housing in neighborhoods that had quality schools, healthy resources, and access to transportation. It’s often difficult to build in neighborhoods like these due to zoning restrictions on multifamily construction or pushback from existing residents.

The National Housing Trust is a nonprofit lender as well as an affordable housing developer and manager. What if, Bodaken thought, the organization financed the purchase of existing moderate-rent buildings by mission-oriented owners who would then begin to accept housing vouchers for a percentage of the units? The idea would sidestep NIMBYism and the time and expense of finding land and carrying out construction, while still providing voucher holders, who are often discriminated against by landlords, with access to high-opportunity areas.

The idea seemed simple and elegant. The National Housing Trust raised $5 million for the program, and it offered good rates to potential borrowers. But there were few takers.

Multiple challenges always arise with any experimental program, but one of the things the National Housing Trust ran into, says Priya Jayachandran, the organization’s current executive director, was that most of their likely borrowers were some combination of flummoxed by or uninterested in figuring out a deal that did not include Low-Income Housing Tax Credit (LIHTC) funding.

“So many of the [affordable housing] owners were structured around LIHTC” in terms of staffing and operations, Jayachandran recalls. “Their originations team, their asset management team . . . This money was attractively priced, and then to get it out the door, we kept on lowering the costs to try and make it more attractive. But they just weren’t set up to even look for these opportunities.”

This was not an isolated incident. The LIHTC program is by far the largest and most consistent source of financing for affordable housing in the nation. And that dominance both directly and indirectly hampers what can be built, who can build it, and the ability to implement other kinds of projects.

the 800-pound gorilla

LIHTC has helped create 3 million homes over its lifespan.

And while there’s no disputing its dominance, there appears to be no definitive calculation of just what percentage of affordable rental projects involve LIHTC funds, largely because there’s no consensus about exactly what would be counted as an “affordable” rental project. Also, even if a definition were agreed upon, the data is scattered in different forms across many different programs and levels of government.

Of existing subsidized housing that received some kind of federal money, 51 percent got LIHTC, according to the National Housing Preservation Database. But the percentage of new projects that rely on LIHTC is actually much higher, because most other federal sources have either stopped or substantially cut funding for new construction. Even public housing authorities are turning to LIHTC in their redevelopment projects.

Several sources told Shelterforce that estimates in the 85 to 90 percent range are common and seem to match their experiences. The New York Times in 2012 estimated LIHTC money had built about 90 percent of affordable housing in the U.S.

LIHTC has even been involved in a significant portion of all (subsidized and unsubsidized) apartment construction—about 25 percent of new buildings from 2000 to 2019.

There are many reasons this one financing tool has become so dominant. Primary among them is that as a tax credit rather than an appropriation, LIHTC doesn’t face the kind of scrutiny and cuts other housing programs do. And because private sector actors benefit from participating, the program has powerful, even bipartisan, support. (Though legislative fights still happen over how many tax credits to issue.)

Another reason: It’s been working well, at least at what it’s good at—churning out an average of 50,000 rental units per year for people making around 40 to 60 percent of their area’s median income.

Most people who are concerned about the effects of LIHTC taking up so much room in the affordable housing financing toolbox also insist it’s a good and powerful tool.

“If you look at the quality of the LIHTC housing that has been produced over the last 30 years compared to the housing that was produced 30 years prior to that, there is no question that this is a great program,” says Sean Closkey, president of ReBUILD Metro, a nonprofit community-based developer in Baltimore, Maryland. “And it has made a . . . material difference in terms of making sure that we’re creating quality places for families that have lower incomes.”

The problem, says Closkey and many others with deep experience in the field, is that the program’s very dominance is essentially causing the world of affordable housing finance to function like a monoculture, with several negative effects on affordable housing outcomes and the organizations working to produce them.

many kinds of housing are left out

The tax credit program is primarily designed to deliver large, multifamily rental buildings with units affordable to households making less than 60 percent of area median income. While it’s not strictly forbidden to use LIHTC money in a wider variety of projects, the reality is that the program doesn’t work as well outside of its wheelhouse.

It is strictly a rental program, so the only way to use it for homeownership projects is through long-term lease-purchase programs where the ownership transition comes after 15 years.  Because of this limitation, “it’s taken all the oxygen out of the room for thinking about economic mobility,” argues Ben Metcalf of the Terner Center for Housing at the University of California–Berkeley. There are some other ways to use the program to extend eventual financial benefits or control to residents, but they are extremely uncommon.

LIHTC’s income restrictions mean it can’t be used for moderate-income or “missing middle” housing. It could be used for mixed-income housing, since technically just 40 percent of units must comply with the income and rent rules. But compliance becomes harder to manage in a mixed-income building, and applications that are 100 percent affordable tend to have an advantage in the competitive tax credit awards process. Additionally, with all the overhead required by the program—lawyers, syndicators, consultants, etc.—it’s difficult to make smaller buildings pencil out. And in areas with fewer financial institutions, the added value for investors created by the boost to their Community Reinvestment Act rating isn’t as strong, so they pay a reduced price for the credits.

The program’s high-value 9 percent tax credits are awarded competitively by state housing finance agencies, based on a point system, and there are far too few to go around. In such an environment, the projects that are awarded credits are those that get the most points—so they tend to be very similar. It’s hard to get projects outside of the LIHTC “sweet spot” funded, even if they technically would qualify.

“It is really tough to do projects less than 100 units,” says Callahan Seltzer, who is currently with HR&A Advisors and a former national housing director at Local Initiatives Support Corporation. “It’s tough for those to even score well [on applications to the state to receive tax credits]. Oftentimes, syndicators, and then, de facto, the investors, aren’t as interested.” And yet, she notes, 20- or 30-unit buildings are often what are needed, especially in rural areas.

Claudia Wilson Randall, executive director of the Community Development Network of Maryland, also sees this problem. “It doesn’t get at what could be smaller projects, say, between 20 and 50 units, which a lot of communities may be more open to,” she says. “That’s something the market really needs, in my view.”

Seltzer described a project in Denver, Colorado, that was designed to be a 40- to 60-unit development. Because all of the project’s financing sources were oriented around LIHTC, the plans needed to be adjusted to win funding. The result? What was once envisioned as a smaller project was reimagined into a 125- to 160-unit development.

When you have multiple different types of housing problems, and you have a single type of housing finance solution, it would be reasonable to assume that that’s not a great match.

Rochelle Mills, president and CEO of Innovative Housing Opportunities in Los Angeles, California, is exasperated with how hard it is to get tax credits to create mixed-income developments. Her organization was awarded funds from Los Angeles’s Measure HHH to build 100 units, half for very low-income households and half for the chronically homeless. But, she says that “when we went to the community to let them know what we were doing, they were a little frustrated. Within a half a mile radius there were six other new extremely low-income housing unit projects.”

But there’s a twist: The neighbors didn’t want to block the project—they wanted to add to it. “Most of the surrounding area [was] single-family residences with elders who are house rich and cash poor,” Mills explains. “There is too much house for them to live in. But they can’t sell them and stay in the neighborhood because they’d be over income” for the existing affordable housing. So Innovative Housing Opportunities redesigned its project to add 60 more units affordable at a slightly higher income level—60 to 80 percent of AMI—and sought private financing to fill the gap.

Although LIHTC projects are only required to have 40 percent of their units meet program affordability requirements, nearly all LIHTC developers go for 100 percent affordability to maximize the amount of credits they are eligible for. Mixed-income applications struggle to compete for credits against all-affordable proposals because they promise fewer units at the lowest income limits.

This is what Mills suspects is happening to her mixed-income project. After several failed applications, and facing a lot of carrying costs for land already purchased, Mills says the organization considered trying to develop it entirely with private funds, but “the entire site has been purchased with money based on a LIHTC execution. . . . All of the contracts would have to be undone.” Even with partial private financing, her organization would likely have to give back some public money in order to accept the private money, she says. “It turns out to be extremely messy.” They are still trying to assemble the financing.

LIHTC solves “fundamentally a multifamily problem,” says ReBUILD’s Closkey. “And if you look at many places, the residential distribution of housing between multi and single family is not weighted towards multifamily residential, it’s weighted towards single-family residential. And in places like Baltimore, vacancy is fundamentally a single-family problem.” As a rental-only program with high overhead costs, LIHTC doesn’t work at all for homeownership projects—and it is hard to make scattered site, mixed-income, or even smaller multifamily pencil out or be competitive. But those kinds of projects, or even smaller multifamily buildings, are how ReBUILD would like to address vacancy. “Mid-rise 4-story buildings is what, essentially, we are financing [with LIHTC],” Closkey notes. “The projects that are getting funded are pretty consistently a very similar product.”

In theory, LIHTC can be massaged to serve many uses, if only those projects can make it through the application process and layer in enough other funding mechanisms. But those are some pretty big ifs, and they’re challenging to make work. “Obviously, you can layer vouchers . . . into these things, or you can get rental assistance funding,” says Metcalf. “But it’s not set up to do that.”

It wouldn’t be a problem that LIHTC is only set up to do one thing, if it weren’t eating up such a large portion of affordable housing financing. But its industry dominance is making it very hard to address other housing needs. “When you have multiple different types of housing problems, and you have a single type of housing finance solution, it would be reasonable to assume that that’s not a great match,” says Closkey.

it limits innovation

Another way LIHTC’s omnipresence constrains the affordable housing world is that its standards, expectations, and procedures apply to projects that don’t even use it. This is because the program is so ubiquitous that most other funding sources are structured with the assumption that they are providing leverage for a tax credit development. As a result, says Tom De Simone, president/CEO of Genesis LA, a community development financial institution (CDFI) in Los Angeles, “all the other leverage sources have kind of glommed on to their rules and design requirements.”

“All financing is aligning around LIHTC,” agrees Seltzer. “I see it at the local level with these subordinate soft financing programs . . . in the Notices of Funding Availability . . . the gap-solving money from cities. It is [all] designed to fit the tax credit.”

De Simone describes how this state of affairs funnels tax credit money toward projects that shy away from innovation: “If you’re trying to innovate in the area of scale or project size, or if you’re trying to bring in more private capital, you might have to do certain things . . . to make the project viable. And then you start running up against the rules that maybe even just your one public source now has, because it’s tied to a system that expects your entire project to be [LIHTC]-financed.”

Because of this, “you can’t ever make these give-and-take kind of concessions in projects to try different things,” De Simone says, adding that “it really stymies alternative housing models and approaches.” Shared housing—which frontline providers say can work well for certain populations but cannot be funded by many public sources—is one example of something that rarely gets implemented despite its promise, he says.

De Simone notes that 10 percent of Measure HHH funding in Los Angeles was supposed to support “alternative” projects, but most projects he’s familiar with reverted to a standard LIHTC path after the COVID-19 pandemic raised construction costs. “What I think happens overall in the system is you have to design your project to the most regulated funding source because you don’t know what source you’re ultimately going to need,” he says. “And so these buildings become kind of one size fits all.”

Seltzer agrees. “People are only going to do LIHTC-qualified projects” even if they aren’t committed to using tax credits, she says, “because if they’re pursuing multiple [funding] sources at once, they need to make sure that they’re not canceling out the potential for it to look good for a tax credit investment.”

Innovation gets lip service but is not often actually welcomed. “I thought, innocently . . . everybody would be excited” about Innovative Housing Opportunity’s unusual move of securing private funding for a mixed-income development, Mills says. Instead, “it has been almost the opposite. Almost completely the opposite.”

When one system is so dominant, says Closkey, “every single source [of funding] sort of becomes a tributary to that system, right?” For example, when American Rescue Plan Act money first became available, Closkey says affordable housing developers had to wonder, “‘Well, how does this play with LIHTC?’ as opposed to saying, ‘Well, what can this do to complement LIHTC?’”

It’s not that it’s impossible to get non-LIHTC financing—ReBUILD Metro does scattered-site work around each of its larger LIHTC buildings to support a full neighborhood approach. But it sure does make it harder, and limits the scale, because all the other sources of funding “are saying, [LIHTC] is what I’m prioritizing. And therefore if you’re not that, you get whatever’s left,” explains Closkey. “So probably the biggest source you’re going to have is about $50,000.” For a multimillion-dollar project, that “whatever’s left” status would require securing a nearly impossible number of sources.

it tilts the developer playing field

LIHTC is famously complex—sometimes jokingly called “a full-employment program for lawyers.” It can be hard for smaller organizations to manage the number of players, layers of financing, and requirements of compliance reporting, not to mention plan for steady staffing when it can take years of repeated applications in a highly competitive environment to actually get a tax credit award.

Given that LIHTC is the primary source of financing for new affordable housing construction, it’s difficult for smaller, community- or neighborhood-based developers—who often conduct work beyond housing development, such as advocacy, community planning, or service provision—to get their applications noticed.

“In Maryland, there are a group of 15 to 20 [organizations] at the top of the pyramid of LIHTC,” says Wilson Randall. “They’re always going to get LIHTC tax credits. If not this year, then next year . . . They know exactly what to do to get the most points. . . . It doesn’t encourage any kind of innovation at all.”

Meanwhile, other organizations are struggling—especially ones serving targeted geographies or specific communities, such as people with disabilities or in recovery. “We hear a lot about the frustration that those groups have,” says Wilson Randall. “Even though there are subsidies just targeted for them,” the programs don’t provide enough funding to complete projects, and “it’s really difficult for them to be competitive in a tax credit deal.” Some organizations are losing staff after their third or fourth failed tax credit application.

If smaller community development corporations (CDCs) do succeed at breaking into the tax credit arena, it often changes them. “You have a choice, you either have to build out your capacity by essentially building a real estate business within your CDC, or you have to joint venture with another organization and the moment you do that, you lose control,” says Metcalf. He doesn’t think this is all bad. Some organizations have “threaded the needle,” he says, by leveraging the financial sophistication they’ve had to develop to participate in the tax credit program to garner more resources and respect. On the other hand, he notes, it can cause mission drift. “One of the real concerns from day one is that it has turned people and organizations that were first and foremost advocates into folks who are transactionally focused.”

This doesn’t mean that community-based development organizations (CBDOs) cannot survive without LIHTC. Indeed, the recent Grounding Values survey of CBDOs found that only 31 percent of the respondents had used LIHTC between 2018 and 2021. The Community Development Network of Maryland’s membership is about 150, but only a couple dozen can access LIHTC. What it does mean is that many CBDOs don’t have access to the largest and most consistent source of construction financing.

“There are a lot of groups out there [for whom] maybe real estate isn’t their core mission, but they have land, or they need real estate to fulfill their mission,” says Seltzer. Those groups have a harder time getting capital, she says, in part because CDFIs, banks, and foundations are used to the predictable outcomes and data that LIHTC projects provide from the get-go. “The thing that frustrates me the most about our housing system,” she adds, “is we talk about inaccessibility all the time, like, ‘Oh, the housing market is not accessible for this group or this group or this group.’ And yet, how have we replicated that same inaccessibility in our own financing system?”

overspecialized staff

One other potential consequence of nearly all projects flowing through this one complex program is over-specialized staff.

“If you don’t know how to talk about tax credits, people don’t even want to talk to you in the housing world,” says Seltzer. “I’ve seen this with brilliant colleagues who have experience all over the world doing really complex housing and infrastructure projects, but they come here to do housing work, and they don’t know this cottage industry of the Low-Income Housing Tax Credit and they’re not taken seriously.”

Closkey says that staff expertise is one of the challenges of doing non-LIHTC funded projects. They require a lot of assembling and aligning all the other bits of funding, and their requirements, “whether it’s weatherization or historic or infrastructure money . . . Well, how many people know how to do that? Given we focused all of our people on the other thing, the answer is not very many.”

And staff constantly steeped in LIHTC can fall prey to the all-problems-look-like-nails-when-what-you-have-is-a-hammer issue, limiting their interest in taking risks for innovation, as Jayachandran found with the National Housing Trust’s loan program.

Rich Wallach, senior director of housing finance and business development at Burbank Housing in Santa Rosa, California, has done several affordable housing bond deals that didn’t involve LIHTC, and he doesn’t think it’s so dire. “Yeah, we all had to learn a little bit more about the model . . . it certainly is a different way of thinking,” he says, but also asserts that for people with a finance background, it wasn’t that hard to figure out.

a better housing finance ecosystem

What do we need to do? The answer was nearly universal: We need more and different kinds of affordable housing funding. That is the only way to turn away from a monoculture toward a more balanced housing ecosystem. As Mills says, “we’ve got to have more than one tool in the toolbox.”

It’s important, says Wallach, “that we come up with alternate models that aren’t tied to that whole ecosystem of investors and attorneys and accountants.”

The wish lists for those additional tools are varied. Closkey would like to see more homeownership development programs, and something to allow nonprofits to compete with private equity firms to acquire single-family homes.

“In a rational world,” says Metcalf, “we would have a shit-ton more project-based vouchers,” which would provide an alternative source of subsidy for the construction and operation of more truly affordable housing. Add to that, he says, “some sort of shallow subsidy that’s available to help folks build moderate-income housing” and “some sort of coherent limited equity co-op investment program that’s being backstopped by the federal government” to expand ownership opportunities.

New movements for social housing funding are often framed as direct alternatives to LIHTC’s indirect public-private model.

Wallach would like to see a whole new model of philanthropy that fills in the space between grants and program-related investments that expect nearly market-rate returns with truly affordable debt, in the 2 to 4 percent interest-rate range.

De Simone suggests that not only do we need more and different programs, but that a least some of those programs should be structured to cover a larger portion of development costs—therefore requiring less time and energy spent scrambling to assemble multiple sources. Ideally, he says, awards would be sized so that if a development were also mixed income, “you could maybe get away with just one source [of subsidy]. Maybe it would be $250,000 [per unit.] . . . People [might say] ‘Oh my God, that’s a lot of money per unit,’ but a LIHTC unit in California’s [already] got $6–700,000 public subsidy. Who cares that that came from five different layers of government? It’s all public subsidy.”

There are also, of course, some recommendations to reform LIHTC itself. Wait lists so applications don’t have to be repeated yearly, for example, and applications that would assign tax credits and other state resources in one go were repeatedly mentioned.

In addition, many of the problems discussed in this article would be at least reduced if competition for LIHTC’s 9 percent credits were less intense. If there were just more of them—such that multiple viable projects weren’t turned down for every project that did receive tax credits—it would theoretically be easier to get varied and innovative projects funded, and the effects on organizations that can’t withstand years of delay could be lessened. On the other hand, increasing the number of tax credits without also diversifying affordable housing finance streams would only increase the LIHTC program’s dominance and could make some of the other problems worse.


Most of these ideas, of course, run up against the vested interests participating in the LIHTC program—and the relatively weaker support for other, more direct housing programs.

Those vested interests include not only the investors and developers who win the tax credit competitions, but an industry of lawyers, consultants, and syndicators that has built up around the complex program. “Everybody’s profiting from this syndicators’ architecture,” says Wilson Randall. “There’s all this apparatus that you need in order to do tax credit projects. And it feels like everybody is being successful except the folks that are closest to the community.”

A substantial portion of the sources for this article, plus others who spoke on background, were afraid to give their full opinions about the tax credit program and its effect on the sector while on the record, fearing ostracization. “The actual program solutions—what would you do to bring down costs and accelerate the production of safe, decent housing that our communities need? It’s very straightforward,” says Kate Hartley, section director of the Bay Area Housing Authority. “The politics of it are a nightmare.”

Nonetheless, there’s also a growing consensus that we cannot tax credit our way out of the housing crisis we are currently in. “The LIHTC program really is the best game in town,” says Mills, but “it can’t be the only game in town.

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