Action Campaign Highlights Importance of Enacting a Minimum 4 Percent Credit Rate
According to the ACTION Campaign, the Low-Income Housing Tax Credit (Housing Credit) is “our nation’s most successful tool for encouraging private investment in the production and preservation of affordable rental housing.”
In fact, since its creation in 1968, the Housing Credit has developed and or financed 3 million apartments in the United States, therefore providing about 7 million households with affordable homes.
The Action Campaign released a new fact sheet explaining how the 4 percent Housing Credit works. You can also visit the Advocacy Toolkit to access this fact sheet.
- The fact sheet explains how the LIHTC is not supposed to cover the full costs of development but cover a portion of these costs as determined by the Housing Credit rate.
- The credit rate is a percentage that is applied to eligible project costs.
- There are two different Housing Credit rates that are separate from one another, dependent on the nature of the construction project.
- The four percent credit “yields an approximate subsidy of 30 percent of the eligible low-income unit costs for the acquisition of the existing properties and new development or rehabilitation in conjunction with tax-exempt private-activity bonds.”
- The nine percent credit “yields an approximate subsidy of 70 percent of the eligible low-income unit costs for new construction and substantial rehabilitation projects that do not use tax-exempt bond financing.”
There is about 15 to 20 percent less equity available than the original rates provided via the Housing Credit.
Due to the declining rates, Congress created a provision in the Affordable Housing Credit Improvement Act which established a permanent 4 percent credit rate.
The benefits of establishing a minimum 4 percent credit rate include:
- Filling critical financial gaps
- More market certainty in Housing Credit financing
- More flexibility and discretion for states to finance high-priority developments
The Action Campaign fact sheet provides an example of financing a 4 percent housing credit property. Without the 4 percent floor, $2.039 million was going to have to be covered by sources other than equity and bonds. However, with the 4 percent floor, only $1.4 million was left as a financing gap.