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LIHTC Program Now Funds About 90% Of U.S. Affordable Housing Projects

Trying to profit from developing affordable housing projects can be a challenge, but a growing government program is funding the creation of affordable housing stock.

LIHTC Program Now Funds About 90% Of U.S. Affordable Housing Projects

The Low-Income Housing Tax Credit program has been in effect for 31 years, and funds roughly 90% of the country's affordable housing projects.

Talk about a convoluted process LIHTC offers tax credits and subsidies to investors who will build housing for residents who meet income level requirements, and most who get into this type of development become specialists before long, as it is such a niche in the industry.

Under LIHTC, investors receive subsidies of 30% or 70% for a development, depending on the type of tax credit used. The affordable housing properties retain high occupancy levels and low foreclosure ratings of less than 1%, according to Reis. These projects are also effective ways to rebuild housing after natural disasters, as was the case following Hurricane Rita in 2005.

LIHTC Program Now Funds About 90% Of U.S. Affordable Housing Projects
Affordable housing under construction in West Sacramento

“There may be a shortage of supply in affordable housing … because vacancy rates are really low compared to regular multifamily apartment properties,” Reis senior analyst Shan Ahmed said.

Metros such as Miami, Denver, Los Angeles and San Francisco had less than 1% vacancy rates during Q4 2016, according to Reis data.

Reis expects affordable housing vacancy for the U.S. to remain relatively flat (around 1.6%) through 2020, even with multifamily vacancies expected to rise with increased supply of market-rate Class-A housing.

"There are a lot of people who really need [affordable housing]," Ahmed said. "I think the thing is that what the government determines as affordable isn't necessarily going to be cheap."

Room For Improvement?

Though established back in 1986, the program still has a few kinks to work out.

The maximum rent for affordable housing is based on the area’s median income. In areas with higher median incomes, affordable housing rents may be more expensive than Class-B or C apartments built in the 1960s, Ahmed said.

“Affordable housing is cheaper, but that doesn’t necessarily mean that it is impossible to live in Class B/C non-LIHTC property,” Ahmed said.

Due to market conditions and construction costs, developers have built a lot of Class-A apartments but not a lot of Class-B or C space, which has contributed to the sharp rise in rents, Ahmed said. In San Francisco, the average market-rate asking rent for Q4 2016 was about $2,900, while average affordable housing rents were $1,273.

LIHTC should not be confused with the Section 8 program. The government is no longer funding the Section 8 voucher program for new properties; it is the existing Section 8 properties that can renew their status. Rent control also differs because it is area-specific and anyone can live in a rent-controlled apartment, while LIHTC properties are based on income, Ahmed said.