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Thursday, April 8, 2010

An Introduction to the Design of the Low-Income Housing Tax Credit

Mark P. Keightley
Analyst in Public Finance

The low-income housing tax credit (LIHTC) program is one of the federal government's primary policy tools for encouraging the development and rehabilitation of affordable rental housing. LIHTCs are non-refundable tax credits, which are allocated to developers who typically sell them to private tax credit investors to raise capital (or equity) for real estate projects. Selling the tax credits reduces the debt and/or equity that developers would otherwise have to incur. With lower financing costs, tax credit properties can potentially offer lower, more affordable rents. 

In the 111th Congress, the American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111- 5, created a temporary LIHTC-grant exchange program. The program, sometimes referred to as the Section 1602 LIHTC-grant exchange program after Section 1602 of ARRA, allows states to elect to exchange a portion of their 9% LIHTCs for grant funding. Specifically, ARRA allows a state to elect to exchange for grants all of their unused and returned LIHTC allocation from 2008, 40% of their 2009 LIHTC credit allocation, and 40% of any allocation in 2009 made from the national LIHTC pool. LIHTCs may be exchanged for grants at a rate of $0.85 on the dollar. The exchange program was intended to ensure developers were able to obtain the financing needed to complete and support LIHTC projects. Some developers had experienced difficulties selling their tax credits as a result of lower investor demand stemming from the financial crisis and economic downturn. 

On December 9, 2009, the House passed H.R. 4213, the Tax Extenders Act of 2009. H.R. 4213 was amended by the Senate in the nature of a substitute (S.Amdt. 3336; the American Workers, State, and Business Relief Act of 2010), and passed by that chamber on March 10, 2010. Both bills contain what amounts to a proposed one-year extension of the LIHTC-grant exchange program. Both bills would allow states to exchange a fraction of their annual non-refundable LIHTC allocation for refundable LIHTCs. The portion of tax credits that would be refundable would be the same as the portion of tax credits that could previously be exchanged for grants. The Treasury would then pay each state an amount equal to their refundable LIHTC election. States, in turn, would then use the funds received from Treasury to make grants to developers. Thus, the proposed modification would effectively extend the Section 1602 LIHTC-grant exchange program for one year. 

On March 24, 2010, the House passed H.R. 4849, Small Business and Infrastructure Jobs Tax Act of 2010. The bill contains a proposal that would allow LIHTC projects receiving the 4% credit and tax-exempt bond financing to receive a direct payment from the Treasury in lieu of their tax credits. The proposal is similar to the Section 1602 LIHTC-grant exchange program for the 9% credit, although administrative differences and the timing of direct payments creates a substantive discrepancy between the two programs. The 4% direct payment program would apply to buildings placed-in-service through 2010.

Date of Report: March 31, 2010
Number of Pages: 9
Order Number: RS22389
Price: $29.95

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