One of the best examples of a strategic partnership between the public and private sectors is the federal Low-Income Housing Tax Credit Program (LIHTC Program). Created as a part of the Tax Reform Act of 1986, the program has developed over the last 25 years into a highly efficient collaboration among a diverse set of participants, including for-profit developers, nonprofit organizations, institutional investors, and federal, state and local governmental agencies.
The LIHTC Program has been the primary source of low-cost capital in the United States for the development and preservation of affordable rental housing, and is arguably the nation’s most successful affordable housing program. According to the National Council of State Housing Agencies, since its inception the program has created more than 2.4 million low-income affordable housing units.
How the LIHTC Program Works
The success of the program is due in large part to combining the discipline and efficiencies of the private sector with the benefits of the oversight and regulation of the public sector. The federal government allocates LIHTC Program credits annually to each state based on population. Following a public notice and comment period, state agencies develop qualified allocation plans, which reflect the particular state’s affordable housing priorities, and award their tax credits to projects that are representative of such priorities. State and local governmental agencies also participate in the program by providing loans or other financial assistance to projects.
The LIHTC Program then provides financial incentives for private investment in the affordable rental housing projects. Developers apply for the tax credits in a competitive process, and, if selected, they can earn development fees for constructing or rehabilitating qualified low-income housing projects, property management fees for managing projects in compliance with LIHTC rules and additional incentive fees for the efficient operation and management of projects. Qualified nonprofit developers also are eligible to receive a right of first refusal to purchase the project at the end of a 15-year compliance period at a statutorily prescribed below-market purchase price.
A Market Competing for Credits
Institutional investors, including national and regional banks, insurance companies and other corporations “compete” for participation by virtue of the price they are willing to pay for the LIHTC Program credits. In exchange for a capital investment, investors receive dollar-for-dollar tax credits over a 10-year period.
Because an investor’s ability to claim the tax credits is dependent in large part on the successful construction (or rehabilitation), lease-up, operation and ongoing compliance with the technical requirements of the LIHTC Program, investors bring efficiencies to the program through their participation in the initial underwriting and ongoing oversight of project investments. Private-sector participants must complete construction or rehabilitation of the project and lease units at affordable rents to tenants who meet specified low-income levels before such participants are eligible for the LIHTC Program credits.
Economic Conditions Spur New Programs
Amid tightening public budgets and weak economic conditions, the LIHTC Program also mirrors the weakness of both the public and private sectors. But where public housing funds have dried up, the private sector has found new and creative solutions, and where the private sector’s participation in the program has faltered, the public sector has stepped in.
This interplay of public and private sector efforts was demonstrated most visibly during the recent financial crisis, when a decline in investor profitability resulted in a sharp decline in LIHTC investments from nearly $9 billion in 2006 to half that level in 2009. To encourage continued investment in affordable housing through the LIHTC Program, Congress created two new programs as a part of the American Recovery and Reinvestment Act of 2009: the Tax Credit Assistance Program, which provided gap funding from the U.S. Department of Housing and Urban Development to otherwise stalled LIHTC Program projects; and the Section 1602 Tax Credit Exchange Program, which allowed states to exchange a portion of their LIHTC Program credits for grant funds from the U.S. Department of the Treasury to finance affordable housing projects.
Private-sector coalitions and organizations, including both profit-seeking participants and mission-oriented not-for-profit groups, are instrumental in shaping legislative housing policy and dialogue, while public-sector legislation and policy provides an effective means of correcting market imbalances.
Together, these partnerships of public and private-sector participants have resulted in a more efficient use of federal, state and local resources and have created the largest number of affordable rental housing units in U.S. history.