However, there is a way that developers can be a component of the solution to this growing housing crisis: build urban multifamily housing properties using tax incentives to guarantee financing for the project. The federal government issues tax credits each year to state governments, who then award the credits through a competitive process to private developers of affordable multifamily housing. Called Low Income Housing Tax Credits (or LIHTCs), the goal is to give priority to projects that provide affordable housing for longer periods of time.
Many investors seek affordable housing developments in order to receive the tax credits, as their income tax liability is much greater. It’s beneficial for developers because they are now guaranteed financing through these investors and have to put up less equity up front to build the property. The 10- to 20-year credit is toward the property taxes that the property owner must pay annually, and range anywhere from 4 to 9 percent, an attractive investment for lending companies who seek developers applying for LIHTCs.
According to the Low Income Housing Resource Center, LIHTC properties typically experience a relatively quick lease-up and offer strong potential economic returns, primarily due to the existence of the credit. LIHTC properties are often packaged as limited partnerships such that they afford limited liability to their investors.
There are millions of dollars available through LIHTCs in the form of lower cost loans, tax incentives and bonds in order to finance development. As for the available land, periodically municipalities and their agencies such as the City of Dallas and the Dallas Housing Authority offer several sites suited for development of affordable housing.
Affordable housing is simply rent-restricted housing; it is not Section 8 housing (in which qualifying residents are given vouchers). The rules stipulate that an individual’s rent cannot exceed 65% of their gross income, so each tenant may not pay the exact same amount as the others. At the end of the tax credit period, the properties remain under control of the owner who can now charge a full rental fee for all of the units. Because the tax credits and bonds are privately funded, a property owner can sell at any time during the life of the credit – ensuring continued affordable housing and making a significant return on their initial investment.
