https://orcid.org/0000-0002-7681-5260
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Abstract
The paper utilizes actual Low-Income Housing Tax Credit (LIHTC) rents rather than federally mandated maximum rents to evaluate LIHTC rent savings in 12 diverse housing markets across the United States. Monthly rent savings are greatest in large cities with strong housing markets (Chicago, Illinois; Miami, Florida; San Jose, California; and Washington, DC), ranging from $708 for a new one-bedroom unit in Miami to $1,114 for a new two-bedroom unit in San Jose. Monthly rent savings in mid-sized cities with weaker housing markets (Albuquerque, New Mexico; Buffalo, New York; Indianapolis, Indiana; and Louisville, Kentucky) and small cities with stronger housing markets (Manchester, New Hampshire, and Midland, Texas) are comparable, ranging from $108 for a new one-bedroom unit in Midland to $725 for a new three-bedroom unit in Indianapolis. Rent savings are considerably less in small cities with weak housing markets (Sioux Falls, South Dakota; and Billings, Montana). Meanwhile, nationwide, rent savings decline as properties age.
Disclosure Statement
No potential conflict of interest was reported by the authors.
Notes
1 In the context of the LIHTC program, rental housing is considered affordable if a household earning 50 (or 60)% of area median income, adjusted by family size, spends 30% of household income on rent.
2 The estimate is consistent with the average of 2.3 persons per household reported for the Section 8 Housing Choice Voucher (HCV) program at https://www.huduser.gov/portal/datasets/assthsg.html. This is pertinent as, based on data reported from 23 states, half of the households residing in LIHTC properties also receive rental assistance through Section 8 HCVs or reside in units receiving additional project-based rental subsidies (Scally et al., Citation2018).
3 See and the section titled Cities Examined for a discussion of how the cities were categorized into three market tiers.
4 The amount of tax credits awarded per project was equal to the applicable federal rate (AFR) multiplied by eligible basis (costs). AFRs are published monthly for both categories of tax credits by the Internal Revenue Service. Since 2015, a permanent floor was established for the 9% LIHTC. Developers now receive the greater of 9% or the AFR multiplied by a project’s eligible costs. A permanent floor has yet to be established for the 4% LIHTC, although it was proposed in the FY 2021 Omnibus Bill.
5 Five U.S. territories, namely Puerto Rico, US Virgin Islands, Guam, American Samoa, and Northern Mariana Island, also receive LIHTC allocations from the IRS.
6 Each state or locality can issue tax-exempt bonds annually subject to a private activity bonds (PAB) volume cap. In 2021, the PAB volume cap was $110 multiplied by the state or local population, subject to a minimum of $324,995,000 (IRS Revenue Procedure, 2020). Every year, most jurisdictions utilize approximately 10% of their volume cap (Driessen, Citation2016). Developers who are issued tax-exempt bonds also receive an allocation of 4% LIHTCs, hence the latter is perceived to be readily available to qualified developers.
7 Tax credit prices tend to be higher in markets where more financial institutions (LIHTC investors) compete for the limited supply of tax credits to satisfy their CRA needs (Copeman et al., Citation2013). Financial institutions receive favorable consideration toward their CRA ratings for purchasing tax credits [Office of the Comptroller of the Currency (OCC), Citation2014; Cohn Reznick LLP, Citation2014]. During the early years of the LIHTC program, investors paid less than $0.50 for each dollar of tax credits, leaving very little equity available to develop affordable housing. After the LIHTC program became permanent in 1993, investors paid up to $0.80 per dollar, and by 2006, prices were above $0.90 per dollar (Schwartz, Citation2014), and regularly priced between $1.04 and $1.05 per dollar by 2016 (Novogradac, Citation2020). The Tax Reform Act of 2017 reduced top corporate tax rates from 35% to 21%. Tax credit prices have since stabilized at between $0.91 and 0.95 per dollar (Novogradac, Citation2020), and in the high $0.90s to $1 per dollar in competitive CRA markets (Kincer & O’Meara, Citation2020).
8 26 C.F.R. §42g1 is available at https://www.law.cornell.edu/uscode/text/26/42.
10 The income limit for a 1½ person household is calculated as follows:
11 We thank an anonymous peer reviewer for highlighting the significance of this contribution to existing literature on LIHTC rent savings.
13 A LIHTC property is placed in service upon completion (newly constructed or rehabbed) and an eligible low-income family initially occupies a unit.
16 Please note that the average distances in Table 3 are based on actual distances between the LIHTC and market-rate developments.
17 Owners of LIHTC properties serve low-income groups and other special needs populations, such as the elderly and disabled, and some LIHTC property owners are nonprofit entities.
18 We thank Alex F. Schwartz, professor at the Milano School of Policy, Management and Environment, New School of New York, for his additional insight on this point after a courtesy review of this paper.
20 Thanks to Alex F. Schwartz, Professor at the Milano School of Policy, Management and Environment, New School of New York for his additional insight on this point after a courtesy review of this paper.
Additional information
Notes on contributors
Uche Oluku
Uche Oluku is on the adjunct faculty of Florida International University’s Master’s in Public Administration program where he teaches a course on U.S. housing policy. He has over 22 years of extensive housing industry experience in the U.S. public and private sectors. He earned graduate degrees at Johns Hopkins University (MS in applied economics); University of South Florida (MBA, specializing in finance); and University of Missouri–St. Louis (MA & PhD in political science, specializing in housing policy). He also earned an undergraduate degree from the University of Benin, Nigeria, in economics and statistics.
Shaoming Cheng
Shaoming Cheng is an associate professor at the Department of Public Policy and Administration, Florida International University. He received his PhD in public policy from George Mason University. His research interests center on entrepreneurship and small business development policy, spatial econometric modeling, firm location decisions responding to various policy incentives and locational conditions, and regional economic health, performance, and development. He has been engaged in a wide variety of funded research projects with support from the National Science Foundation, the U.S. Economic Development Administration, the U.S. Department of Agriculture, the Kauffman Foundation, and the Lincoln Institute of Land Policy.