4% LIHTC Initial Application 10 - 1 Rev. 07-07
LOW INCOME HOUSING TAX CREDIT PROGRAM
Amendments to LIHTC Program
Each state is allocated annual tax credits in an amount equal to $1.90 per state resident for 2006 with an increase indexed to inflation thereafter. Recent congressional action and Internal Revenue Service rulings have brought about the following changes to the LIHTC Program:
; OHCS must provide a preference for projects located in Qualified Census Tracts, the development of
which contributes to a concerted community development plan.
; "Community Services Facilities" can be used to generate credit if the facility is designed to serve
primarily low income individuals whose income is 60% or less of area median income and the facility
does not generate in excess of 10% of the total eligible basis.
; Allows OHCS, at its discretion, to award credits in a manner not in accordance with the requirements
of the Qualified Allocation Plan. Should an award be made that is not in accordance with the
requirements of the Qualified Allocation Plan, OHCS must document this allocation in writing to the
; All projects that receive a reservation of Low Income Housing Tax Credits will have six months from
the date of their carryover allocation to meet the 10% of Costs Incurred Test (10% test). The 10%
test requires third party certification of incurred project costs to date be presented to OHCS for
approval. Projects using 4% tax credits with tax exempt bond financing do not have the
; IRC Section 42 requires a comprehensive market analysis of the housing needs of the low-income
individuals in the area served by each housing credit project. The analysis must be conducted at the
developer's expense before the credit allocation is approved. A disinterested party approved by the
allocating agency must conduct the analysis. (See the market assessment and LIHTC sections of the
application for more information.)
; If HOME funds are granted to the general partner in a limited partnership and in turn loaned to the
limited partnership, in order for the HOME funds to be included in basis one of the following must
occur: 1. HOME funds must be loaned to the limited partnership at an interest rate that equals or
exceeds the federal applicable rate or 2. HOME funds can be loaned at a rate less than the federal
applicable rate if at least 40% of the total units in each building are occupied by persons whose
income is 50% or less of median income and rented at rates affordable to persons whose income is
50% or less of median income.
; A 130% bonus is available to projects located in HUD-determined Qualified Census Tracts (QCT’s)
and Difficult to Develop Areas (DDA’s). The Qualified Census Tracts are defined as census tracts in
which 50% or more of the households are at or below 60% of area median income, as well as census
tracts with a poverty rate of 25% or higher.
The Low Income Housing Tax Credit (LIHTC) was enacted by Congress to encourage new construction and rehabilitation of rental housing for low-income households. In establishing the tax credit incentive, Congress recognized developers may not receive enough rental income from a low-income housing development to: 1) cover the costs of developing and operating the project, and 2) provide a return to investors sufficient to attract the equity investment needed for development. To spur investment, Congress authorized the states, within specified limits, to allocate tax credits to qualifying housing projects. The credits may be shared among owners (equity investors), much as income and losses are shared among business partners for tax purposes. Generally, the investors are recruited by syndicators, and ownership rights are controlled by limited partnership agreements.
4% LIHTC Initial Application 10 - 2 Rev. 07-07
The amount of LIHTC that may be awarded to a building is based upon the cost of the building and the portion of the project that low-income households will occupy. The cost of acquiring, rehabilitating, and constructing a building constitutes the building’s eligible basis. The portion of the eligible basis attributable to low income units is the building’s qualified basis. In general, the qualified basis excludes
the cost of land, obtaining permanent financing, rent reserves, syndication and marketing. The applicable percentage of the qualified basis may be claimed annually for 10 years as the low income housing tax credit.
The LIHTC program is jointly administered by the Internal Revenue Service (IRS) and state tax credit allocation agencies, such as Oregon Housing and Community Services (the “Department”). Credits are provided to states to allocate to eligible affordable housing projects. These credits are considered to be under the State’s per capita credit authority and are a limited and scarce resource.
Overview of the Credit Allocation and Review Process
Under Section 42 of the Internal Revenue Code, OHCS is responsible for determining which applicants should receive the tax credit and the dollar amount of credits each should receive. In making these determinations, OHCS must comply with federal requirements and meet the following program goals: ; Give preference to projects that provide housing to households with the lowest incomes for the
longest period of time,
; Assist in affordable housing development in areas with the greatest low income housing needs, ; Provide housing for special needs populations,
; Encourage equitable allocation of credits across the state,
; Support housing for families with children,
; Support housing in Qualified Census Tracts and/or areas where community revitalization is a local
; Encourage resident services and community involvement,
; Provide an allocation of tax credits in an amount sufficient to make the project financially feasible
and viable as a low-income housing project throughout the compliance period.
In addition, OHCS may supplement these general goals with more specific local goals in order to meet
local low-income housing needs. This may include but not be limited to:
; Mixed income projects where appropriate,
; Mixed use projects where appropriate,
; Acquisition and rehabilitation of expiring use projects,
; Housing near employment centers,
; Approaches in design, planning, building and financing of low income housing that maintain quality
and long term sustainability, durability and ease of maintenance of affordable units, ; Other goals as determined locally or by OHCS.
Tax credits are awarded on a per building basis. For a particular building to qualify for tax credits, it must be a part of a low income housing "project". To qualify for consideration for credits a project must: ; be residential rental property
; make an election to restrict both rent and income as follows:
Rent: restrict rents (including utility charges) for tenants in low income units to 30 percent of either
the 50 percent area median income as adjusted for family size or the 60 of area median income as
adjusted for family size. Rents may be further limited based upon the limitation selected and other
representations made in the application to OHCS.
Income: maintain at least 20 percent of the available units for households earning up to 50 percent
of area median income as adjusted for family size, or maintain at least 40 percent of the available
units for households earning up to 60 percent of area median income as adjusted for family size.
maintain habitability standards: if the project involves rehabilitation, there must be expenditures of
4% LIHTC Initial Application 10 - 3 Rev. 07-07
at least $3,000 per unit or 10 percent of the unadjusted basis of the building, whichever is greater ; operate under the program’s rent and income restrictions for a minimum 30 year extended use time
The OHCS application process was created in accordance with the requirements of Section 42 of the Internal Revenue Code to select proposals for tax credit awards. The application process is more fully described later in this document. OHCS may not award more credits to a project than are required to make the project financially feasible. In evaluating projects, OHCS must consider any proceeds or receipts expected to be generated through tax benefits, as well as the reasonableness of development hard and soft costs. In general, the IRS expects OHCS to compare the proposed project’s development costs
with the non-tax credit financing, both private and public. The difference between the costs and the sources to finance the costs is the financing gap. Tax credits may be used, up to a ceiling, to attract the equity investment to fill this gap.
Once credits have been awarded to a developer, the developer typically sells the credit to private investors. The private investors use the credits to offset taxes otherwise owed to the federal government. The money private investors pay for the credits is paid into the project as equity financing. This equity financing is generally used to fill the gap between the development cost of a project and the non-tax credit financing sources available, such as mortgages, that could be expected to be repaid from rental income.
Owners must place the project in service no later than December 31 of the allocation year (for competitive projects), unless a Carryover allocation is obtained. If a Carryover allocation is obtained, the project must be placed in service no later than December 31 of the second year following the original allocation. Investors can claim the credits for each year of a ten year period (called the “credit period”) as long as the project is operating in accordance with the representations made to OHCS in its
application for credits and in accordance with IRS regulations. Individual and corporate investors
attach an IRS Form 8609 (initially obtained from OHCS in the first year of placed in service), “Low
Income Housing Credit Allocation Certification” to their income tax returns when they claim the credits.
Once a project has been placed in service, OHCS is responsible for monitoring the project for compliance with state and federal requirements concerning household income, rents, project habitability, resident services and other requirements as represented in the application, Declaration of Land Use Restrictive Covenants and other agreements. If noncompliance is discovered, OHCS must report the event of noncompliance to the IRS and if the non-compliance is not corrected, the IRS may recapture or deny credit for previously used or issued tax credits. The IRS issues regulations on monitoring requirements that OHCS follows. These regulations are described in the Tax Credit Compliance Guidebook (available from OHCS upon request).
To apply for tax credits, a developer must submit a detailed proposal to OHCS in the format prescribed which incorporates the specific requirements listed below: