About Low Income Housing Tax Credits

The Low Income Housing Tax Credit (LIHTC) program provides millions of dollars every year for the development of affordable housing. Travois, Inc., along with Indian Tribes across the country, has used the LIHTC program to generate more than $300 million in housing on reservations. The program provides for new construction or the rehabilitation of existing units, both of which are compatible with NAHASDA.

Consulting Services: There are many steps in the tax credit process. Travois, Inc., will assist you at each stage so that the project is awarded credits, you find the investor that is the best fit for your project, and the houses are completed and placed in service in a timely manner. The following steps spell out a typical project:

-Deciding on a project:

Number of Units
Type of Units (Single or Multi-Family, Concentrated or Scattered Site, Elderly or Families with Children)
Cost to Build or Rehabilitate
Likely Investor Proceeds

-Preparing the Tax Credit Application:

Meeting State Requirements
Maximizing your Competitiveness in the Process
Protecting your Long Term Goals
Bringing Additional Capital (Affordable Housing Program Grants, ICDBG, RHED)

-Negotiating with Potential Investors

Choosing the Right Investors
Examining the Offers
Negotiating for the Most Beneficial Term
Reconciling Differences

-Closing the Transaction:

Assisting with the Due Diligence Process
Reviewing Documents and Agreements
Coordinating with all Parties
Documentation for Draw Requests

The LIHTC is generally known as a permanent rental housing program. It is a program restricted to serving families whose income is no greater than 60% of the area median income. These families can rent affordable housing units because the rent is set at a rate tied to an amount assumed to be affordable for such families. However, the original intent of the legislation, enacted in 1986, was to encourage homeownership and the program has specific incentives to encourage its use for home buyers rather than merely home renters. In some states there are especially strong incentives to use the LIHTC program as a homeownership tool.

By federal statute (Section 42 of the IRC), houses built under the Low Income Housing Tax Credit program must be maintained as rental housing for a minimum of fifteen years. This is known as the Mandatory Compliance Period. Furthermore, each state is required to administer the program in such a way as to ensure that an additional period of at least fifteen years is tacked on to the first mandatory compliance period. This is known as the Extended Use Period, bringing the total effective mandatory rental period to at least 30 years.

However, there is a single very important exception to the requirement for an extended use period and that is a provision allowing the housing units developed through the program to be sold to income-eligible households at the end of the first mandatory compliance period. If the initial housing units are developed through a lease-purchase plan in which the original tenants have a right of first refusal to buy the units at the end of the mandatory compliance period (15 years), then the Extended Use provision is not enforced. In other words, the developer of the project can simply sell the units to the families who live in the units at the end of fifteen years and that is considered to be complying with the Extended Use requirement.

What are the advantages of such a financing structure?

Rents are extremely affordable for low income families. It is not uncommon for three-bedroom and four-bedroom houses to be rented for as little as $150 to $175 per month, or less.
All the while that the families are renting, the tenants can also become home-buyers, although over a fifteen year period. This allows sufficient time to overcome credit problems and to gain skills in homeownership, including maintenance and home management.
It is imperative, however, that some homeownership counseling be provided to low income tenants so that they can effectively deal with the responsibilities of homeownership.
Because the home-buying tenants are assuming the bulk of the responsibilities for managing and maintaining the units, the sponsor, either the Tribe or Indian Housing Authority or a non-profit housing corporation, does not have as great a burden of housing management as would otherwise accompany such a development.
Unlike the former Low Rent and Mutual Help housing programs, as a tenant's income rises, the rent does not increase. Rent only increases as costs increase and only at an approved rate. Tenant income is only considered at the time of entry. This encourages thrift and hard work since rent takes an ever smaller proportion of a family's income as their income rises.
NAHASDA grant funds are ideally suited for use in combination with the LIHTC program in order to lower the rents as much as possible. NAHASDA funds can be structured as loans to the development even while the Tribe or Tribally-Designated Housing Entity (TDHE) received the funds as a grant. In this way, the project has the use of the funds to lower the overall costs of the project.
If the permanent loans for the project are blended, with some loans amortizing over a 30 year period and some amortizing over a fifteen year period, the tenants buying the units at the end of the first fifteen years could have a very low principal balance to finance. To ensure that the tenants are not enriched too greatly, it is possible for the Indian Housing Authority or non-profit sponsor to charge a small "residual" at the time of purchase, which would go to the sponsor at the end of the term. This is not required, however.
A reasonable developer’s fee is allowed for LIHTC projects. In most states, a fee approximating 8% to 13% of total development costs is considered reasonable, though a fee of up to 15% is "allowable." This could generate up-front funds of $75,000 to $100,000 or more for the Housing Authority (as the sponsor) from even a modest-sized project.
Generally, about 5% to 10% of gross operating revenues is set aside as a reserve for replacement for each unit. In this way, the tenants buying the units will have sufficient funds to replace deteriorated systems such as the roof, appliances, outdated or worn out carpets, etc., when they acquire the units as homeowners.