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Program Basks
<br />The Department of the Treasury's Internal
<br />Revenue Service (IRS) jointly administers the
<br />LIHTC program with state -designated hous-
<br />ing credit agencies (HCAs). The IRS allocates
<br />tax credits to HCAs and provides program
<br />oversight. Then, HCAs determine which proj-
<br />ects receive those tax credits and monitor
<br />LIHTC projects for program compliance.
<br />Federal law establishes minimum proj-
<br />ect eligibility thresholds and requires each
<br />HCA to adopt a qualified allocation plan
<br />(QAP) to guide the merit -based distribution
<br />of LIHTCs. These QAPs must include, among
<br />other factors, location standards that deter-
<br />mine project eligibility.
<br />At a minimum, at least 20 percent of all
<br />units in an LIHTC project must be set aside
<br />as affordable rental units for households at
<br />or below 5o percent of AMI, or 4o percent of
<br />all units at 6o percent ofAMI. In practice,
<br />however, most LIHTC developments are ioo
<br />percent affordable. LIHTC projects must be
<br />deed restricted to maintain affordability for
<br />a minimum period of 15 years, with an addi-
<br />tional 15-year "extended -use" period, where
<br />project owners can apply for relief to opt out
<br />of affordability requirements. However, some
<br />states, and some local financing options,
<br />have longer required affordability periods.
<br />Developers can apply to HCAs for
<br />LIHTCs to construct new or renovate exist-
<br />ing rental buildings. The total amount of
<br />tax credit available to a project depends on
<br />its "applicable percentage" of tax credit,
<br />"eligible basis" of development costs, and
<br />"applicable fraction" of rent -restricted units.
<br />The "applicable percentage" refers to
<br />the type of tax credit the developer is seek-
<br />ing. LIHTCs are designed to subsidize either
<br />3o or 7o percent of the low-income unit costs
<br />in a project. The 3o percent subsidy, which
<br />is known as 4 percent tax credit, covers new
<br />construction that uses additional subsidies
<br />or the acquisition cost of existing buildings.
<br />The 7o percent subsidy, or nine percent tax
<br />credit, supports new construction with mini-
<br />mal subsidies.
<br />The "eligible basis" refers to the devel-
<br />opment costs that can be subsidized by tax
<br />• credits. These include building acquisition
<br />or construction costs, costs associated with
<br />soil testing or engineering, and costs asso-
<br />ciated with utility connections, but they do
<br />not include land acquisition or financing
<br />costs. Projects located in Qualified Census
<br />Tracts (i.e., low-income or high -poverty cen-
<br />sus tracts) and Difficult Development Areas
<br />(i.e., areas with high construction costs
<br />relative to AMI) can subsidize i3o percent of
<br />eligible costs.
<br />The "applicable fraction" refers to rela-
<br />tive size of the affordable component of a
<br />project. This is calculated as the lesser of
<br />either the ratio of affordable units to all units
<br />or the ratio of affordable unit floor area to
<br />total project floor area.
<br />Putting it all together, multiplying the
<br />eligible basis by the applicable fraction
<br />determines the "qualified basis" of the
<br />project. Multiplying the qualified basis by
<br />the applicable percentage (i.e., four or nine
<br />percent) determines the total amount of tax
<br />credit available to a project.
<br />Once an HCA has awarded a developer
<br />LIHTCs, the developer can sell those credits
<br />to investors to generate equity for affordable
<br />housing development. In return, investors
<br />claim the tax credits over'a 10-year period
<br />and may even collect partial cash flow from
<br />the project.
<br />LIHTC and Other Affordable Housing
<br />Strategies
<br />LIHTCs can be paired with other HUD -spon-
<br />sored affordable housing programs such
<br />as Housing Opportunities for People Every-
<br />where, Choice Neighborhoods, Community
<br />Development Block Grant, Home Investments
<br />Partnerships, and project -based vouchers,
<br />as well as state and local funding. LIHTC units
<br />can also cater to special population groups
<br />including seniors, the LGBTQ community,
<br />veterans, and other vulnerable classes that
<br />are often underhoused. Tax credit housing
<br />developments are usually multifamily (due to
<br />economies of scale), but can occasionally be
<br />single- or two-family rental homes.
<br />While there is no inherent barrier to
<br />using LIHTC to finance affordable units
<br />required by a local inclusionary zoning ordi-
<br />nance, these tools seldom work in concert
<br />to affect project design. This is because
<br />relatively few local zoning codes require
<br />developers to set aside at least 20 percent of
<br />all units in a project as affordable units, and
<br />relatively few require all those units to be
<br />affordable to households earning 5o percent
<br />ofAMI. Therefore, most projects that depend
<br />on LIHTC credits for gap financing will satisfy
<br />inclusionary zoning requirements, but it is,
<br />perhaps, unlikely that the presence of those
<br />inclusionary zoning requirements influenced
<br />the mix of units in the project. In fact, the
<br />overwhelming majority of LIHTC projects
<br />between 1987 and 2014 did not include any
<br />market -rate units (HUD 2016). This would
<br />seem to indicate that there is little over-
<br />lap between developers who only include
<br />affordable units in their projects to satisfy
<br />inclusionary zoning requirements and devel-
<br />opers using LIHTC credits.
<br />Results of the LIHTC Program
<br />In 2016 the IRS allocated $2.35 in credit per
<br />capita (IRS 2015). Between 1987 and 2014,
<br />the LIHTC program placed 2.78 million hous-
<br />ing units in service, averaging more than
<br />107,00o units per year from 1995 to 2014
<br />(HUD 2016).
<br />These units are distributed across the
<br />country in urban, suburban, and rural com-
<br />munities. They include units targeted at
<br />families, older residents, those with disabili-
<br />ties, and those experiencing homelessness.
<br />Among projects with reported data, more
<br />than a third of the affordable units put in
<br />service between 1987 and 2014 were in
<br />Qualified Census Tracts (HUD 2016).
<br />The prevalence of LIHTC projects in
<br />high -poverty neighborhoods is intuitive,
<br />considering both the program's higher poten-
<br />tial subsidy for projects in those areas and
<br />the strong opposition by residents in many
<br />communities to siting low-income housing
<br />in higher -income areas. However, the long-
<br />standing trend toward steering affordable
<br />housing into high -poverty neighborhoods
<br />was recently challenged by the U.S. Supreme
<br />Court's 2015 decision in Texas Department of
<br />Housing and Community Affairs v. Inclusive
<br />Communities Project, Inc.
<br />The court's ruling endorsed the notion
<br />of citing disparate impact in housing cases.
<br />In essence, lower courts are now equipped
<br />to cite the disparate impact clause of the
<br />1968 Fair Housing Act when new affordable
<br />housing is clustered together in resource -
<br />starved neighborhoods. The Supreme Court
<br />ruled that decisions and practices have
<br />discriminatory effects —even without dis-
<br />criminatory intentions. The case stemmed
<br />from a Texas lawsuit that claimed that the
<br />state had contributed to "segregated hous-
<br />ing patterns by allocating too many tax
<br />credits to housing in predominantly black
<br />inner-city areas and too few in predomi-
<br />nantly white suburban neighborhoods."
<br />ZONINGPRACTICE 9.17
<br />AMERICAN PLANNING ASSOCIATION I page3
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