The federal Low Income Housing Tax Credit (LIHTC) program is the main source for financing construction or rehabilitation of affordable rental housing. Each year in Minnesota roughly 800 – 1000 apartment units are financed through LIHTC.
The financing comes in the form of a tax credit to investors, who provide cash or ‘equity’ to the developer of a project and, in return, receive a dollar-for-dollar reduction in their federal income taxes. Unfortunately the economic collapse has taken away much of the market for the credits:
- in the current economy large banks, a primary purchaser of tax credits, are running losses and no longer have profits to offset in a tax credit; and thus,
- decreased demand for the credits has reduced the value of existing tax credits by as much as a third, making for less equity to finance affordable housing;
- furthermore, more risky affordable housing projects (e.g. rural projects, supportive housing) are having difficulty attracting any investors
In response to this loss of tax credit investment, Congress created two funding approaches in the stimulus package earlier this year.
- The Tax Credit Assistance Program (TCAP) provides states funds through HUD to offset the drop in value of the credits. TCAP funds have to be used by February 2012.
- States are eligible to return unused credits (up to 40% of credits available in 2009 and all prior years’ credits) to Treasury for cash.
November ’09 Update: Most of the TCAP funds and funds obtained by returning unused credits have been committed to housing projects in Minnesota. Nationally, housing advocates are working to get a one year extension of the state’s ability to exchange the tax credit to Treasury for cash. There is not yet a bill identified for this extension.
