Increasing numbers of hospitals and health systems are addressing social determinants of health in order to advance the health status of their communities. Among these efforts, the development of affordable housing is regarded as a key to improving the physical and mental health of a community’s low-income population. Consequently, many hospitals and health systems, either by partnering with developers of low-income housing projects or by establishing their own development companies, are becoming directly involved in providing affordable housing in their communities.
The low-income housing tax credit (“LIHTC”) program is one of the federal government’s chief mechanisms for supporting the development of affordable rental housing. These federal housing tax credits are awarded by the respective state agency to developers of qualified rental projects. Various types of low-income projects may qualify for the tax credits, including single rental units, apartments and, in some states, assisted living facilities for low-income seniors (often, all or most of the residents of these assisted living facilities are Medicare enrollees).
Developers typically “sell” a project’s tax credits to outside investors in exchange for equity in the project. Monetizing the tax credits reduces the debt developers would otherwise have to incur and the equity they would otherwise have to contribute in order to fund the project. In addition to the equity generated by the tax credits, projects receiving 4% tax credits are often financed with tax-exempt bonds. With lower financing costs, these projects can offer lower, more affordable rents.
There are two types of LIHTCs, the 9% credit and the 4% credit. The 9% credit is generally reserved for new construction and may not be combined with tax-exempt bond financing. In a transaction receiving an allocation of 9% tax credits, the project’s equity investor may claim each year, for 10 years, a tax credit equal to at least 9% of a project’s qualified basis.
The 4% credit is generally used for new construction financed with tax-exempt bonds and rehabilitation projects. Although referred to as a “4% credit,” the formula used by the IRS to calculate the amount of tax credits for a project has historically resulted in credits that are below 4% of a project’s qualified basis. For example, for 2019 and 2020 the applicable rates ranged from 3.07% to 3.30%. Fortunately, going forward these sub-4% rates will be prevented as a result of certain LIHTC provisions in the COVID relief legislation passed by Congress in December.
As a result of the legislation, each year, for 10 years, a tax credit equal to at least 4% of a project’s qualified basis may now be claimed. This 4% floor is available for tax-exempt bond-financed projects placed in service after December 31, 2020 (provided that at least a portion of the project is financed by tax-exempt bonds issued after December 31, 2020). For projects not financed with tax-exempt bonds, the 4% floor applies to buildings placed in service after December 31, 2020 (provided the project receives an allocation of 4% tax credits for 2021 or a subsequent year).
By establishing the 4% floor, the legislation increases and solidifies the amount of tax credits available for eligible projects. Thus, the 4% floor should spur additional investments in affordable rental housing.