Exploring Low-Income Housing Tax Credits [Part 3]

Learn about different LIHTCs, compliance periods, selling LIHTC properties, and how LIHTCs and Opportunity zones work together.

In the second entry of this series, we took a look at the usage of the LIHTC program by developers, and how these loans are syndicated. Next, we will delve into compliance periods, opportunity zones, and the difference between the 4% and 9% LIHTC.

The Difference Between 4% vs. 9% LIHTC Credits

The LIHTC can be utilized to subsidize either 30 percent or 70 percent of the costs to create low-income units in an apartment development project. The LIHTC that subsidizes 30% of development costs, also referred to as a 4% LIHTC, is the one typically used for property acquisition and rehabilitation, while the 70% subsidized LIHTC, or 9% LIHTC, is usually reserved for new construction.

LIHTC Compliance Periods

After a LIHTC project is constructed or rehabilitated, it is generally required to stay in compliance for an additional 15 years, even though the standard length of the LIHTC credit period is only 10 years (making a combined total of 25 years). This additional 15-year period is called an Extended Use Period or “EUP”. While 15 years is a generalized minimum, some states require projects to stay in compliance for longer durations, and in certain cases, this period can even last multiple decades. EUP compliance requirements are usually less strict than compliance requirements for the initial 10-year period but can vary significantly by state and by individual project.

Developers and investors should make sure to familiarize themselves with the compliance requirements of the state their property is in. Should a project fall out of compliance during the initial 10-year period, borrowers may lose future credits as a repercussion. If the property falls out of compliance after they have already received all their credits, then they can be forced to repay their credits retroactively in a process called recapture.

Selling LIHTC Properties

In most cases, LIHTC developers can sell a project after 14 years. For this process, the developer typically requests that the state HFA locate a suitable buyer who will maintain the project’s affordability for the remaining duration of its EUP. If the HFA is successful in finding a willing buyer, but the buyer and developer cannot reach an agreement on terms, then the developer must continue keeping the property affordable for the rest of the EUP. If for any reason the HFA cannot locate a buyer, the developer can usually be released from their LURA agreement/EUP.