The positive impacts of US LIHTC investing


The positive impacts of US LIHTC investing

Investments in US Low-Income Housing Tax Credits (LIHTC) are an excellent example of impact investing. Impact investing seeks to create positive social or environmental benefits in addition to financial returns. To call an investment an “impact investment”, it is necessary to have an agreed upon understanding of what benefits are generated in addition to financial returns, as well as a mechanism for measuring those positive impacts. The affordable housing industry is just beginning to work towards building a shared system of metrics, which will be necessary for investors looking to measure and compare the impacts of investment opportunities. In the meantime, to recognize LIHTC’s impact, it is necessary to understand the fundamental aspects of how the program works. In this paper we explain the basic workings of the program, investigate some of the positive effects it has on lower-income residents and society, and discuss ways these impacts could be quantified. 

 

Introduction

The Low-Income Housing Tax Credit (LIHTC) program is the most significant resource for creating affordable housing in the United States. Created by the Tax Reform Act of 1986, the LIHTC program gives state and local LIHTC-allocating agencies tax credits worth an estimated average of $10.9 billion a year for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.1 Between 1995 and 2018 the program produced an average of almost 1,400 projects and 106,400 units of affordable housing annually.2 The LIHTC program would not work without the investors that provide equity capital to the projects in order to receive the tax credits (and other tax benefits) and the syndicators that facilitate those investments.3 The LIHTC program helps the US government address its goal of providing safe and affordable housing for its citizens and clearly has a positive impact. 

 

Understanding, identifying, and measuring that impact is a complicated and daunting endeavor. These impacts are the result of the rent savings, healthier living environments, access to opportunity, and prevention of housing instability and homelessness. The California Housing Partnership has devised a methodology for estimating the value of LIHTC impacts by using existing research to quantify the social and economic benefits of affordable rental housing in California.4 We include their metrics in the paragraphs below.

 

Overview of the LIHTC Program

The LIHTC program uses federal tax incentives, rather than subsidies, to promote the development of affordable housing. The tax credits are administered by the Internal Revenue Service (IRS), distributed to the states based on population, and allocated to projects by each state’s housing finance authority (HFA) according to the needs and priorities of each state. State HFAs are required to create qualified allocation plans (QAPs) as part of a public process. These QAPs describe the process of applying for the tax credits and any requirements and priorities the state has in addition to the federally determined requirements and priorities.

 

The federal requirements include tenant income limits, maximum rent levels, and long-term agreements of at least 30 years that require the property to remain as affordable housing. Federal law requires that the states give priority to projects that serve the lowest-income households and that remain affordable for the longest amount of time.1 State QAPs can include additional requirements and priorities based on aspects of the project such as location, subpopulations served, characteristics of the development team, energy efficiency, etc. 

 

The developers of LIHTC properties do not usually have enough of a tax liability to be able to use the tax credits awarded to their projects. Therefore, investors that can use the tax credits, such as banks and insurance companies, enter into a partnership structure with the developer and invest equity in the project in return for the tax benefits. The price of the tax credit equity investment can vary depending on investor demand, location, deal structure, etc. The equity investments are often managed by syndicators, which put together funds and act as an intermediary between developers and investors. The syndicators also monitor the developer/general partner’s operation of the project. The tax credits are typically delivered over a 10-year period, but the IRS can recapture a portion of the tax credits if compliance is not maintained for at least 15 years. 

 

The US Department of Housing and Urban Development (HUD) defines affordable housing as housing, including utilities, that does not cost more that 30 percent of the occupant household’s gross income.5 Therefore, the LIHTC program is designed to provide housing with maximum allowable rent levels at 30 percent of various household incomes, minus utility allowances. 

 

To qualify for LIHTC, a property needs to have a minimum percentage of rent restricted units occupied by tenants with incomes that do not exceed certain percentages of the area’s median income (AMI). This minimum percentage is dependent on the mix of targeted AMI levels, which have historically varied from 30% to 60% of AMI. Recent rule changes now allow the use of average income, which means units targeted up to 80% of AMI qualify as well, if they are balanced out by other units that provide a deeper level of affordability. 

 

Each year, HUD publishes the AMI and corresponding income limits by percent of AMI and household size for metro areas and counties. Maximum rents are then calculated based on 30 percent of these income limits less utility allowances.

 

LIHTC impacts

The beneficial impacts of LIHTC investments accrue to both the people living in the properties and the public at large. The residents of LIHTC properties benefit the most directly, primarily in the forms of increased financial prosperity and improved health and wellness. The benefits to residents also create positive spillover effects for the public, primarily in the forms of increased economic productivity and reduced public spending. Providing people access to stable, safe, and affordable housing creates these benefits through rent savings, a healthy-living environment, greater access to opportunity, and avoiding the harms caused by housing instability and homelessness.

 

Rent savings

The most straightforward benefit to people living in LIHTC properties is rent savings. This benefit is also the easiest to measure. The amount of the rent saving depends on income level of the tenants and the market rents in the surrounding community. 

 

For example, the table below illustrates the estimated rent savings for a property in California with a 2022 metro-area median income of $102,2006 for a family of four using the corresponding income limits by family size published by HUD.7 By subtracting the gross rents (estimated at 30% of the income limit) from the market rents (estimated as the small area fair market rents established by HUD8) we can calculate the estimated rent savings per household per month and year and for the entire property per year, which is $2,053,800. By escalating both LIHTC rent limits and market rents by 2% a year we can estimate total rent savings of $83,318,721 for the 30-year time span that the property is required to remain affordable. 

 

Unit Type

# Units

Income Limit as % of AMI

Income Limit

Gross Rent

HUD Small Area Fair Market Gross Rents

"Monthly Rent Savings Per Unit"

"Yearly Rent Savings Per Unit"

"Yearly Rent Savings Per Property"

2 Bdrm
(3 People)

42

50.0%

$45,600

$1,140

$1,850

$710

$8,520

$357,840

2 Bdrm
(3 People)

42

60.0%

$54,720

$1,368

$1,850

$482

$5,784

$242,928

3 Bdrm
(4 People)

9

50.0%

$50,650

$1,266

$2,630

$1,364

$16,368

$147,312

3 Bdrm
(4 People)

67

60.0%

$60,780

$1,520

$2,630

$1,110

$13,320

$892,440

4 Bdrm
(6 People)

4

50.0%

$58,800

$1,470

$3,150

$1,680

$20,160

$80,640

4 Bdrm
(6 People)

20

60.0%

$70,560

$1,764

$3,150

$1,386

$16,632

$332,640

 

 

 

 

 

TOTAL YEARLY RENT SAVINGS:

$2,053,800

 

Instead of paying for rent, this $83 million will be saved or spent elsewhere by the tenant households. Monthly rent savings of $482 to $1,680 are extremely meaningful to households with limited incomes. When households pay more than 30% of their income on rent and utilities, they have less money to pay for other necessities, requiring cutbacks on food, clothing, healthcare, childcare, education, transportation, and other critical expenses. The ability to spend more on necessities improves health outcomes and future earning potential. These rent savings also lead to greater economic security for tenants who can use that extra money to pay off or avoid debt and perhaps save money for the future. 

 

The public also benefits from these rent savings because at least a portion of those saved dollars will be spent in the surrounding communities, which supports businesses and creates jobs.9 Additionally, the improved health outcomes and future earnings potential of the residents also translate into reduced healthcare costs and greater economic productivity for society.

 

Healthy-living environment

LIHTC properties can improve the lives of residents by providing housing at a higher standard of living than they could otherwise afford and by offering the supportive services and accessibility features that some people need. These benefits translate into greater physical and mental health for residents and the ability to live independently for senior and disabled residents. Once again, these benefits to residents spill over to the wider society by reducing healthcare costs and Medicaid expenditures for institutional care.10 

 

LIHTC properties are sometimes located in neighborhoods where the market does not support new construction or significant rehabilitation without some type of subsidy or incentive. The existing rental housing may be “affordable” but is often in poor condition with possibly unhealthy living conditions. On the other end of the spectrum, LIHTC properties are sometimes located in higher-cost areas where the only housing accessible to people with limited incomes is substandard at best. 

 

There is a significant amount of research on how improved housing conditions can lead to improved health outcomes for children such as decreased instances of the specific childhood asthma11 and lead poisoning.12 For example, the Affordable Housing Map and Benefits Calculator created by the California Housing Partnership found that affordable housing in California led to medical cost savings due to fewer pediatric asthma emergency department visits by an estimated $2 million in 2020.13

 

There is also research supporting the idea that affordable housing can help seniors live independently longer, particularly if there is access to supportive services and community activities. Low-income seniors that are able to live independently longer avoid costly institutional care that is paid for by Medicaid. Research has shown that older adults living in housing with an on-site service coordinator had lower hospitalization rates than those living in housing without such services, creating significant Medicare savings.7

 

Opportunity

The LIHTC program can help low-income households live in areas they otherwise would not be able to afford, giving them greater access to opportunities, services, and community amenities. Safety, jobs, schools, access to goods and services, parks and recreation are all more abundant in higher cost communities. There are also benefits to the community as well, such as providing employers access to workers and decreasing the public cost of transportation that would otherwise be necessary for those workers to travel to work. 

 

Children especially benefit from the greater access to opportunities that LIHTC housing can provide. One study found that children who move to low-poverty neighborhoods before the age of 13 are more likely to attend college.14 A related study found that children who grew up in higher-opportunity neighborhoods went on to receive an average of $198,000 (in 2015 dollars) in additional lifetime earnings than children who grew up in lower-opportunity neighborhoods in the same region.15

 

Preventing housing instability and homelessness

Lower income households that have severe housing cost burdens (which is defined as paying more than 50% of income toward rent) are at risk of housing instability, insufficient housing, and possibly homelessness.16 There has been a significant amount of research done on the costs that the public incurs due to housing instability and homelessness. 

 

A lack of stable housing results in higher usage of crisis services such as shelters, emergency healthcare, jail, prison, detox programs and psychiatric institutions. The child welfare and criminal justice systems are also more heavily burdened by people and families without stable housing. Additionally, the education system faces many challenges associated with serving students that do not have stable housing. 

 

Much of the research on the costs of homelessness has centered around the high costs of emergency healthcare incurred by the homeless population, particularly the chronically homeless. This research is helpful in advocating for public policy changes that would allow for Medicaid dollars to be spent on housing. Healthcare institutions have a vested interest in finding funding for housing the homeless that are often heaviest users of their emergency care – a relatively small number of people that drive a disproportionately large portion of the costs – and have been working collaboratively with affordable housing providers to create demonstration projects and supporting research. Medical care providers are increasingly recognizing stable, decent, and affordable housing as a critical determinant of health. 

 

Conclusion

The positive impacts of the LIHTC program are many and varied. Measuring that impact can be daunting. It would be impossible to prove and measure every positive impact of LIHTC properties. However, much work has been done to begin using established research findings to create metrics that lead to greater understanding. The detailed work being done by organizations such as California Housing Partnership provide a great roadmap for future endeavors. Affordable housing industry organizations are beginning to work towards creating standard metrics of impact that will help investors evaluate and compare affordable housing investment opportunities and industry standard measurements are expected to be established within approximately two years.17 Though there may not be definitive, agreed upon methods of measuring impact at this point, there is an abundance of research that supports the multitude of positive impacts that investments in LIHTC properties create. 

 

These impacts are the result of the rent savings, healthier living environments, access to opportunity, and the prevention of housing instability and homelessness. The residents of LIHTC housing reap the benefits of increased financial prosperity and increased health and wellbeing. Society also benefits from the positive spillover effects in the form of reduced public expenditures and increased economic productivity. The federal government, developers, lenders, investors, and syndicators all have a role to play in producing affordable housing through the LIHTC program and creating the subsequent positive impacts.

 

Providing people access to stable, safe, and affordable housing creates these benefits through rent savings, a healthy living environment, greater access to opportunity, and avoiding the harms caused by housing instability and homelessness.

 

References

1Congressional Research Service. An Introduction to the Low-Income Housing Tax Credit. January 26, 2021

2US Department of Housing and Urban Development. Low-Income Housing Tax Credit (LIHTC). January 31, 2021 

3US Government Accountability Office. Low-Income Housing Tax Credit: The Role of Syndicators. February 16, 2017

4California Housing Partnership. Quantifying Social and Economic Benefits of Affordable Rental Housing in California. October 2021

5US Department of Housing and Urban Development. Glossary of Terms to Affordable Housing. August 18, 2011

6US Department of Housing and Urban Development. FY 2022 Income Limits Documentation System

7US Department of Housing and Urban Development. FY 2022 Multifamily Tax Subsidy Project Income Limits Summary

8US Department of Housing and Urban Development. FY 2022 Fair Market Rent Documentation System

9Forbes. How Whole Communities Benefit from Affordable Housing. January 6, 2020

10Joint Center for Housing Studies of Harvard University. Housing America’s Older Adults. 2019

11National Library of Medicine. Association of Childhood Asthma with Federal Rental Assistance. June 1, 2020 

12US Department of Housing and Urban Development. Childhood Lead Poisoning: Solving a Health and Housing Problem. September 1996

13California Housing Partnership. Affordable Housing Map & Benefits Calculators. 2022

14Chetty, Raj, Nathaniel Hendren, and Lawrence F. Katz. 2016. "The Effects of Exposure to Better Neighborhoods on Children: New Evidence from the Moving to Opportunity Experiment." American Economic Review, 106 (4): 855-902

15National Bureau of Economic Research. The opportunity Atlas: Mapping the Childhood Roots of Social Mobility. October 2018

16US Department of Housing and Urban Development. Worst Case Housing Needs. 2021 Report to Congress

17Michael J. Novogradac. “ESG Investing: Where it is Now; Where it’s Headed; What to Do.” Novogradac Journal of Tax Credits. June 1, 2022

Important disclosures

AegonAM_Positive_Impacts_of_US_LIHTC_Investing.pdf

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More about the authors

Caitlin Ritter Director of Applied Research

Caitlin Ritter is director of applied research responsible for real estate market analysis applied to real assets debt and equity portfolios as well as credit risk management and monitoring.



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