Transcript Taking advantage of 4% tax credits for affordable housing

Taking advantage of 4% tax credits
for affordable housing
Mark A. Curtiss
Massachusetts Housing Partnership
4% LIHTC? What’s that?
• Part of the federal Low-Income Housing Tax
Credit (LIHTC) program
• Two kinds of LIHTC: 4% and 9%
• 4% credits are only available for affordable
rental housing projects with an allocation of
private activity tax-exempt bonds
• In 2008, each state will get the greater of $262
million or $85 x state population in private
activity tax-exempt bond cap to allocate
What’s to like about 4% credits?
• Often easier to get than 9% credits
• Have the added benefit of tax-exempt bond
financing, meaning lower interest rates and
ability to support more debt
• Can work especially well for existing
affordable properties that need some capital
improvements
Total Subsidy Value
Value of 4% and 9% Tax Credits at
Various Acquisition/Construction Costs
with Total Eligible Basis of $150,000
Acquisition / Construction Basis
Total Subsidy Value
Value of 4% and 9% Tax Credits at
Various Acquisition/Construction Costs
with Total Eligible Basis of $200,000 (DDA)
and $175,000 basis cap on 9% credits
Acquisition / Construction Basis
This is great; what’s the catch?
• Affordable housing isn’t the only use of
private activity tax-exempt bonds
• Each year, rental housing competes with
education, economic development, singlefamily homeownership, and other programs
for “volume cap” dollars
• Allocations for multifamily housing vary
dramatically from state to state
Allocations of Private Activity Bond Cap
by Bond Use by State 2003-2006
in millions
Source: The Bond Buyer
Source: The Bond Buyer
The Challenge:
How do you demonstrate the importance of
rental housing compared to all of the other
noble uses of tax-exempt bonds?
The Solution:
Show how much more leverage you can get
using tax-exempt bonds for multifamily
housing. The key is the 4% tax credits.
The case for more volume cap for
rental housing
• The rate differential between taxable and tax-exempt rates is
valued at about 11% of the face amount of the bonds—all of
the potential bond uses see this benefit
• The value of the tax credits is typically 35-50% of the face
amount of the bonds
• So, each dollar in tax-exempt bonds used for affordable
housing can leverage 3-5 times as much value as any other
use of the funds because of the 4% tax credits
• We are maximizing the federal resources available, with no
additional cost to the state
• You can find a detailed analysis of this at:
http://www.recapadvisors.com/pdf/wu57.pdf
It worked!
Impact of increased volume cap
in Massachusetts
• We estimate that increasing the volume cap
used for affordable housing by $100 million
will raise an additional $45-50 million in
federal tax credit subsidy in MA
• Our goal is to advocate for further increases
up to 50% of state’s volume cap over next
several years
• This could allow us to build/renovate an
additional 1,500+ units per year
Issues/Next Steps
• 4% credits don’t work everywhere—you want to be
sure you can use all of the volume cap your state
allocates for multifamily bonds
• This doesn’t need to be a zero-sum game:
Look at opportunities to share the benefits
• We are exploring whether we can subsidize the
difference between taxable and tax-exempt rates to
support previous uses of the bonds, indirectly using
savings resulting from all of this new tax credit equity