Low Income Housing Tax Credits in the USA

Vic O’BrienDevelopment DirectorGreenSquare Group

Study supported by

Study supported byLow Income Housing Tax Credits in the USA

Context of the research

Context of the research

• HCA grant reduced to c. £25k per unit• Pressure on HA asset cover• HA production limited• UK housing crisis/ low house production

Solutions?

• Can a way be found of developing without recourse to asset cover?

• How do we fund affordable housing in the context of reducing grant and s106 opportunities?

The USA approach

• Alternative funding systems using equity investment and tax credits

• Not much UK information on this form of funding

• Winston Churchill Memorial Trust

Study supported byLow Income Housing Tax Credits in the USA

The Study

The Study

• How does US system work?

• Are their elements of the US funding system we could apply in the UK?

• Visited 60 contacts in Boston, Washington DC, New York North Carolina and New Haven

Low Income Housing System Structure• Developers • Syndicators• Investors• State Housing Finance Agencies• US Department of Homes and Urban

Development• Lobbyist, advisors and trade bodies• Inland Revenue Service (IRS)

Funding structure - project

Investor CInvestor A Investor B

99.99%

Limited Liability Company (LLC)

0.1%

Syndicator (General Partner)0.1%

99.99%

Developer(General Partner)

Upper Tier

Lower Tier (Development Project)

Limited Liability Company(LLC)

Funding market

FUND FUND FUND

Syndicator Syndicator Syndicator Syndicator

Upper Tier

Lower Tier

State HFAs

• Prepare Qualified Allocation Plans

– Quality requirements– Cap allocations per scheme– Allocate tax credits– Manage programme– Organise compliance

State support

• Grant as loans (Groans)• Free and discounted land• Section 8• Linkage

Rents

• Average Median Income• Maximum income 60%, 50%, 40% of AMI• Housing costs = 30% of Income• Issue of Extremely Low Income (ELI)

Quality

• Larger floor areas• Apartments• High quality finishes • Property manager and residents’ lounge

Compliance

• State compliance assessments• Syndicator• Investor• Operator• Breaches reported to IRS

= Tax Credit reduction• Failure rate very low at less than 0.7%

Developers

• Neighbourhood Development Corporations • Larger non-profit developers• Private developers

Study supported byLow Income Housing Tax Credits in the USA

How the system works

How the system works

• Tax Credits – reduction in tax $1 for $1• Congress distributes LIHTC to each state on

per head basis• HFAs create QAP and call for bids• Tax Credits allocated to winning bids• Developers build project and lets• Investor claims Tax Credits from IRS

Community Re-investment Act

• Response to ‘red lining’

• Banks rated on community banking performance

• Banks need high CRA rating

• LIHTC way of supporting CRA rating

Pricing of LIHTC

• LIHTCs are ‘priced’ through competition under QAPs

• Price in urban coastal areas is high and low in central continental areas

• Market crash and corporate investors• The role of Freddie Mac and Fannie Mae

Issues

• Inefficient• Taxable income required for 10 years• Affordable housing not permanent• Focus on assets rather than customer

service• Housing industry fragmented and with

limited assets

UK LIHTC

• LIHTC creates equity investment in affordable housing

• no requirement to service LIHTC investment from rent

• Creates first loss funding so no pressure on HA asset bases

UK LIHTC

• Improve on USA system– Minimise inefficiency– Permanent LIHTC affordable homes– Aggregate how funds are raised– Channel through HCA?

• Further research on the net tax revenue impact required

Study supported byLow Income Housing Tax Credits in the USA

Recommendations

Recommendations

• Assessment of LIHTC in the UK • Review of how HCA could support a UK

LIHTC system• NDCs – could we create a UK version?• Learning: large apartment blocks of

affordable housing in US

Recommendations

• Set up first loss investment funds to support affordable housing development

• Create market for tradable equity and debt in HAs

• Promote and invest in Community Development Funding Institutions

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