Affordable Housing: State of the Industry

By Gina Citrola  |  February 19, 2020

Affordable Housing: State of the Industry

If you look beyond the daily barrage of political news headlines, you will hear the muffled but persistent cry for more af­fordable housing in the United States. Home ownership has been a key component of the American Dream since the end of World War II, when several factors effectively fueled a global economic expansion that lasted for almost three decades. After a recession in the early 1980s, federal legislation has not been able to completely solve the problem. Today, housing prices consistently increase from lack of supply, making it difficult for lower- and middle-income Americans to find affordable housing.

According to the U.S. Department of Housing and Urban Development (HUD), families who spend more than 30% of their annual income on housing are considered “cost-burdened.” The national median rent for a one-bedroom apartment in 2019 approximated $1,200. A 40-hour workweek at minimum wage almost covers this cost, with nothing left for food, transportation or medical care.

This article delves into the federal government’s primary program for incentivizing private investment in affordable housing, known as the Low-Income Housing Tax Credit (LIHTC).


The LIHTC, commonly pronounced “lie-tech,” was introduced in the Tax Reform Act of 1986 and is found in Section 42 of the Internal Revenue Code. Today, it remains the primary federal incentive for investment in affordable housing and has resulted in the construc­tion or rehabilitation of over 100,000 affordable rental units per year since its inception. Its purpose is to encourage developers to create affordable housing in underserved communities by providing low-income families a safe and decent place to live, while reducing their monthly costs. The credits are administered and regulated as follows:

  • The Internal Revenue Service allocates federal credits to state housing agencies based on population density
  • Each state determines its local needs and awards its share of the credits to private sponsors/ developers of affordable rental housing proper­ties through a competitive application process, which considers how well the sponsor/develop­er’s project will satisfy the state’s housing needs.
  • Upon receipt of the credits, the sponsor/ developer may sell them to investors or use them to raise capital. The capital may be used for new construction or acquisition and sub­stantial rehabilitation. The influx of capital provides for less borrowed debt, thereby permitting the project to charge lower rents.
  • Upon receipt of the credits, the sponsor/ developer may sell them to investors or use them to raise capital. The capital may be used for new construction or acquisition and sub­stantial rehabilitation. The influx of capital provides for less borrowed debt, thereby permitting the project to charge lower rents.
    • Meet the 40/60 test, whereby at least 40% of the units are set aside for renters earning no more than 60% of the area’s median income, as determined by HUD annually.


    • Meet the 20/50 test, whereby at least 20% of the units are set aside for renters earning no more than 50% of the area’s median income.
  • Sponsors/developers are encouraged to provide more affordable units than the mini­mum set-aside. Properties are permitted to be 100% use, i.e., all units are available to eligible low-income tenants.
  • Rents charged may not exceed a maximum of 30% of an eligible tenant’s qualifying income, as mandated by HUD.
  • Sponsors/developers generally structure the investment through a limited partnership or limited liability company. Investors’ federal tax liabilities are reduced by the operational losses attributed to interest and depreciation, in addition to the tax credits claimed.
  • The credit is calculated as a percentage of the cost incurred to build or acquire and rehabilitate the property and is claimed annually on the owner’s federal tax return.
  • Two types of credits can be allocated:
    • 9% credit – projects with a standard mort­gage that are not federally subsidized are eligible for this credit, which yields tax credits over a 10-year period with a present value of 70% of eligible costs to construct the project (qualified basis).
    • 4% credit – projects typically financed with state bonds; yields 4% credit over a 10-year period with a present value of 30% of qualified basis.
    • If a project is not placed in service during the year it received a tax credit allocation from the state, it must prove it incurred at least 10% of the cost of the expected basis within 12 months. Assuming the project can prove that, it then has until the end of the next calendar year to be placed in service, or a portion of the credits will be forfeited.
    • Once the building is fully occupied, the devel­oper proceeds to claim the credits over a 10-year period. The project must maintain compliance for a 15-year period and must remain affordable for a 30-year period.
    • Noncompliance, monitored by the IRS, could result in the recapture of previously claimed tax credits. Noncompliance includes failing to meet the minimum set-aside previously defined.
    • Generally, investors exit the transaction after the 15-year compliance period has ended, and their interests are purchased by the general partner.


In June 2019, the Affordable Housing Credit Improve­ment Act of 2019 was introduced in the U.S. House of Representatives. The bill proposed the following:

  • a 50% increase in the amount of credits allocated to states, promising to preserve approximately 380,000 affordable homes over the next 10 years;
  • stabilize the value of the 4% tax credit, eliminat­ing uncertainty for developers juggling addi­tional acquisition costs and other subsidies;
  • permit “recycling” of multifamily housing bonds, a financing mechanism that allows for the reuse of tax-exempt bonds, thereby creating 100,000 additional units;
  • permit the credits to be used to provide more robust housing for veterans, Native Americans, rural communities, victims of domestic violence and low-income students; and
  • change the name of the LIHTC to the Affordable Housing Tax Credit.

While the bill had strong bipartisan support, it was omitted at the last minute from the 2020 spending package in December as Congress continued to iron out the details. The bill may resurface this year as the housing crisis continues and becomes a talking point in the 2020 presidential campaigns.


While the LITHC is complex, it remains the primary investment vehicle in the affordable housing industry. Having a professional guide you through the process is crucial in winning the credits and obtaining compli­ance. Housing Credit Certified Professionals (HCCP), a professional certification designated by the National Association of Homebuilders, are well versed in the federal regulations and compliance requirements of the LIHTC and can help you make the best decisions for your investment in affordable housing.

About Gina Citrola

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Gina Citrola, CPA, HCCP is a Partner in the Real Estate Group at Marks Paneth LLP. Since joining the firm in 2002, Ms. Citrola has provided audit services to a wide range of clients in the real estate and commercial business industries, including residential and commercial rental properties, condominiums and service-based corporations. Ms. Citrola’s broad experience also includes audit and tax work for nonprofits and professional service firms. Ms. Citrola specializes in the audit of... READ MORE +

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