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You Asked: How do low-income housing tax credits work?

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It’s no secret rents in Idaho are getting more expensive, but the mechanics behind how the state’s biggest program to create affordable housing works is a little more complicated. 

With no state-funded programs to develop affordable housing, the Gem State’s best weapon for developing new affordable housing units is the Low-Income Housing Tax Credit program through the U.S. Treasury. This program uses taxpayer money to incentivize partnerships where private companies get government funding for projects and in return promise to restrict the rent for forty years. 

[Treasure Valley housing crisis causes ripples across economy, community]

The program created over 2.3 million units nationwide since it was launched in 1986. In 2020, 527 of them were built in Idaho. 

This initiative, overseen by the Idaho Housing and Finance Association, is the main driver of affordable housing development statewide and without it, it’s likely that hardly any units set aside for low-income residents would be created at all. But, there aren’t nearly enough tax credits to fund all of the proposed projects every year and critics say the program includes too many regulatory hurdles and built-in profits for developers that result in a high cost to taxpayers for not enough units at low enough rates. 

How does it work?

It’s more complicated than a cash grant to developers. 

Every year, the federal government distributes the housing tax credits to different state and local housing agencies depending on population size and other factors. These agencies then take applications for projects and distribute the credits to the winning developers, who proceed to sell them for cash to banks or other investors. They then use this cash as equity to build the project and help them absorb the cost of building a new building and then capping rents, instead of charging top dollar. 

The challenge with affordable housing built by the private sector is always making the math work. In order to build projects, developers need enough cash on hand to be able to land loans from banks to finance the project with the more restricted rents they’d like to charge. This is usually achieved with a combination of the LIHTCs, loans from a bank and what’s frequently called “gap financing” by an outside source. Because Idaho doesn’t have any money in its affordable housing trust fund, the gap financing for these projects is left up to cities, urban renewal agencies or nonprofits. 

Vanessa Fry, interim director for Boise State University’s Idaho Policy Institute, said when the program was created there needed to be a way for developers to make a profit to ensure participation. 

“I think engagement of the private sector requires the ability to have a positive return on the investment you’re making,” Fry said. “Is it right or wrong? I guess the question would be if there wasn’t a profit margin to be made, would anyone engage in LIHTC? I imagine there was a lot of conversations back then about what developers need to engage in this sort of partnership.”

‘Because it’s the right thing to do’

The deal might not be as sweet as it seems from the outside though. 

Clay Carley, a prolific developer in downtown Boise, is about to start moving residents into a LIHTC project at the corner of 6th and Grove with 60 units. The majority of the apartments will serve those making less than 60% of the area median income, or less than $31,000 for a single person. The rents will be calculated based on a maximum formula set by the federal government depending on the person’s income and the size of the unit. According to BoiseDev’s reporting in 2020, the units will start as low as $350 a month and scale up to as much as $2,300 for units that aren’t restricted by the tax credit. 

When developers typically build a project, they receive between a 4 and 6% development fee up front to compensate them for building the project, but developers who build LIHTC projects get as much as a 12% development fee as compensation. Carley said this helps keep developers interested, but it’s a drop in the bucket when it compares to the high costs of completing such a difficult project and the millions in lost rent over 40 years of restricted rates. 

“There is some period of time you can’t even sell (the project),” Carley said. “At the end of 40 years, it goes for market rate (rents), if you choose. Then your value goes up dramatically, but you have a 40-year-old product. It just has restricted value because of (LIHTC), so you don’t do affordable housing for the economics. You do it because it’s the right thing to do.”

What made this deal workable for Carley was that he had already owned the valuable plot of downtown land for years and he has a full pipeline of other projects coming online set to rent at market rates for years to come. With the help of the tax credit and a boost from Capital City Development Corporation, he was able to get the balance sheets to work. But, he still had to pay hundreds of thousands of dollars for legal fees to comply with the Treasury’s requirements and pay an affordable housing expert to help him navigate the process. 

At the end of the day, he could have made far more money for far less hassle by making it a luxury mixed-use project along with the neighboring building. He also has the same property tax bill due if he were charging luxury rents. 

“It doesn’t make economic sense on prime land, especially that location,” Carley said, about his project site. “It was many millions of dollars difference over the 40 year restricted rent period between affordable and market rate.”

Public housing to private landlords

You might be wondering, why can’t the government just build affordable housing with no profits involved instead?

The move to private developers building America’s affordable housing units started in the late 20th century when large high rises in big cities like Chicago and New York City started to get criticism for high crime rates and segregation along racial and economic lines. A series of policies starting in the late 1960s slowly culminated in a ban on affordable housing constructed and managed by the federal government and the demolition of large complexes into the 1990s. 

The Clinton Administration capped off this move away from public housing by signing what’s known as the Faircloth Amendment This move banned any state or locally-run housing authority from using its funds toward building more units, which they can only use to renovate or replace existing units. It essentially capped housing authorities at the same amount of units they needed twenty years ago, while the need for affordable housing boomed. 

The Idanha is a low-income housing tax credit building. Photo: Margaret Carmel/BoiseDev

LIHTC and Section 8 vouchers, which could be used anywhere landlords would accept them to get subsidized rent, came in to take their place. 

“I think what came out of that is federal government of itself can’t build and maintain housing,” IHFA’s Vice President for Project Finance Cory Phelps said. “It’s not what they do. That’s why the tax credit came about because what it allows is you to do is partner with people who know how to build housing that can manage that housing and ensure they’re renting to the tenants that under the program they’re supposed to be renting to.”

Do we get enough bang for our buck?

LIHTC might have replaced the unpopular high-rise public housing buildings of the 20th-century inner cities, but that doesn’t mean this program is always winning high marks. 

Every year, IHFA receives double the number of applications for projects than it has funds to award. To narrow the projects down, staff at IHFA use a number of criteria like market studies, the mix of units and the level of income it will support, location near amenities and public transportation and if the locality hasn’t received an award for a project recently to narrow down the choices. Carley called the federal government’s offering “skimpy.”

A preliminary rendering of Bluebird Village, a proposed LIHTC project in Ketchum. Screenshot from Greg Dunfield’s presentation at Ketchum City Council in 2020.

And because of rising construction costs and other market constraints on the private sector, the number of units these tax credits can buy is shrinking. A 2017 investigation by NPR and Frontline found LIHTC produced fewer units than it did in the late 90s, all for 66% more tax credits. More than 70,000 units were built in 1997, but by 2014 less than 59,000 were constructed. This ramp-down of production comes at the same time as the private sector was building fewer homes in general as it struggled to come out of the 2008 recession and the subprime mortgage crisis. 

The Urban Institute, a Washington DC-based think-tank, released a report on LIHTC in 2018 finding that the program helped create new units and preserve existing housing, but it also faced challenges. It might help put new units online, but when the decades-long period of affordability expires so do the low-rents and tenants are left without many other options and the lengthy, often convoluted process makes it difficult for developers to participate. 

The program sometimes has rents targeted for those making less than 30% of the area median income, but it’s rarely a large number of units due to the deep subsidy needed to support the low rents. The Urban Institute report argued this is a weakness in the program because it means those renters are often dependent on additional help from the federal government, like a Section 8 voucher to reduce rent even further.

For years, commenters on BoiseDev and other local publications remarked at the rents in Treasure Valley affordable housing projects. These formulas are set by the U.S. Department of Housing and Urban Development based on the area median income and other rents in the area. And according to everyone interviewed for this story, there is little likelihood they will be adjusted downward any time soon. 

Fry said new research she’s been conducting found over a third of Idahoans are considered rent-burdened, which means they pay more than a third of their income towards housing. 

“That’s a large portion of our state and that affects all kinds of things,” Fry said. “It affects the household’s ability to pay for all kinds of things, engage in the economy and make ends meet.”

Margaret Carmel - BoiseDev Sr. Reporter
Margaret Carmel - BoiseDev Sr. Reporter
Margaret Carmel is a BoiseDev reporter focused on the City of Boise, housing, homelessness and growth. Contact her at [email protected] or by phone at (757)705-8066.

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