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How the 9 Percent Tax Credit Program Works

The 9 percent LIHTC plays a vital role in the production and rehabilitation of affordable rental housing across the United States and is considered to be an extremely successful and efficient method for facilitating the production and rehabilitation of affordable housing. On average, 50 percent of the total financing for 9 percent LIHTC projects comes from equity derived from the credit. Many states have used the 9 percent LIHTC as their primary tool to facilitate the production and rehabilitation of affordable rental housing.

While 4 percent tax credits are essentially unlimited, each year the federal government allocates a set amount of 9 percent LIHTC authority to each state on a per-capita basis. For 2016, states received $2.35 in tax credits per person.

In areas with high area median incomes and high rents, the 9 percent LIHTC can effectively create new and preserve existing rental housing with below-market rents. Because of the higher incomes in these areas, LIHTC developments are financially feasible since LIHTC rents, while below-market, are tied to the AMI of the metropolitan area and as such will be higher in these areas than in areas with lower median incomes, leading to better cash flows for the property. However, these higher rents may require additional subsidy, in the form of Housing Choice Vouchers for example, in order to make units affordable to very-low or extremely low-income households.

As existing LIHTC properties have aged, the 9 percent tax credit has become a good source of funding for their recapitalization, modernization and preservation of affordable rental units. Many projects have combined federal funding streams with 9 percent tax credits. Many 9 percent tax credit deals have involved the preservation of project-based Section 8 properties. States and localities have also used these tax credits to help fund the revitalization of distressed public housing developments through HOPE VI or capital fund financing.

Market Conditions Favorable for the Use of 9 Percent Tax Credits

The 9 percent tax credit also works well in communities with limited rental housing and high value for-sale homes. Households with incomes below 60 percent of the AMI in these communities often have limited housing options, so new LIHTC apartments provide affordable housing for the workforce, a critical component of a healthy, growing, and efficient economy. When the demand for housing and other development is high, land costs tend to be high as well, creating a challenge to the production and rehabilitation of affordable housing. Land acquisition is not calculated into the “qualified basis” used to determine the tax credit, so many LIHTC development proposals in these areas also require assistance with land acquisition.

By contrast, in areas with both relatively low incomes and low rents, the 9 percent credit may not work as efficiently. Because LIHTC rents are tied to AMI, the required rents may be too low to make the development of LIHTC rental housing financially feasible, especially if existing rents in the community are also low. Competition from market-rate rental housing communities in these communities also might limit demand for the LIHTC housing.

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