3 Low-Income Housing Tax Credit (LIHTC)Trends Developers Need to Know

Low-income housing tax credits (LIHTC) are the backbone of affordable housing development. The longstanding government program has helped to create opportunities to develop new affordable housing by providing tax credits that offset affordable rental rates. In light of the national housing crisis—the National Low-Income Housing Coalition estimates that there is a shortage of 7.3 million affordable housing units—developers have shown a renewed interest in the LIHTC program. Thankfully, the government has shown the same interest in expanding the program to support affordable housing. This year, expansions to the program have given developers a new opportunity to enter the affordable housing market and make deals pencil. 

Here are three changes to the LIHTC program that developers need to know. 

Congress Plans Expansion of LIHTC Program

In January, the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 with overwhelming bipartisan support. As the name suggests, the tax relief act was designed to provide support to workers and families through a variety of tax breaks, like child credits, business incentives, disaster relief, and affordable housing. The LIHTC provisions were an exciting expansion to the program. The bill reinstates the 12.5% allocation that expired in 2021. It also reduces private activity bond financing requirements to access the 4% credit from 50% to 30%, giving developers more options to fill out their capital stack. According to research from Reuters, these details will help finance more than 200,000 affordable units. 

Although the bill had bipartisan support in the House, it is currently stalled in the Senate with diminishing possibility of passing. The Senate’s objection to the bill is focused largely on the refundability features in the child tax credit provisions. This suggests that the final version will leave the current LIHTC provisions intact, good news for developers. Still, while the current state of the bill expands the programs, the National Low Income Housing Coalition is pushing for further reforms to the program. Those include designating tribal areas and rural communities as Difficult to Develop Areas, which would allow them to receive a 30% basis boost. With widespread support for LIHTCs, there could be more government expansion of the program on the horizon.

FHFA Increase LIHTC Investment Caps

Fannie Mae and Freddie Mac relaunched their LIHTC investment program in 2018, and the program has been in high demand. This year, the FHFA has increased the agencies’ investment caps for LIHTC to $1 billion, up from $850 million last year. Within the new increased cap, $500 million is dedicated to investments that the FHFA has identified as properties that have difficulty attracting investors. According to the FHFA, the LIHTC program has enhanced the agencies’ ability to pursue mission-driven affordable investments, including housing in Duty to Serve-designated rural areas, preserve affordable housing, support mixed-income housing, and provide supportive housing.

In addition to increasing the investment caps, the FHFA will also require investors to waive the qualified contract provision. LIHTC properties are required to maintain compliance for 30 years, but the qualified contract provision allowed owners to transition the property to market rate after 14 years if they planned to sell the asset. Now, the enterprises will only accept investments in LIHTC properties where the owners have waived the right to a qualified contract. FHFA contends that the policy change will support 30-year affordability periods, explaining that the policy ensures “properties remain affordable for the full period outlined in the developments” extended use agreement. The qualified contract provision was a loophole for property owners, and the FHFA estimates that 100,000 affordable units have been lost since 2021 as a result. 

LIHTC Per-Capita Multiplier Sets Record

With inflation still a primary concern for affordable housing stakeholders in 2024, the IRS has adjusted the per-capita multiplier, setting a new record. In 2024, the price used to calculate the 9% LIHTC state ceiling will be the greater of $2.90 multiplied by the state population or $3.36 million. This represents an increase of 15 cents for 2024, tying the record for last year in the largest annual increase without a legislative cause. 

In addition to the pricing adjustment, the IRS also increased the small-state minimums for the 9% tax credit. Setting another record, the minimum is now $3.36 million, up from $3.185 million in 2023. The private activity bond per-capita multiplier increased to $125, up from $120 in 2023. 

Developers have shown increasing interest in LIHTC deals, and these expansions are helping support entry into the sector. However, high-interest rates have challenged the capital stack, putting stress on already delicate deals. Developers can offset some of these financial challenges by utilizing modern real estate development software and automation to streamline processes and create valuable efficiencies. With programs like Northspyre, developers are better able to track spending and produce accurate financial forecasts that have a real impact on the bottom line, helping to increase the viability of challenging LIHTC projects with an advanced capital stack. Forward-thinking developers are using all of the tools at their disposal, from technology to tax credit programs, to pursue opportunities in the current market. 

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