The Low-Income Housing Tax Credit (pronounced “Ligh-TECK”) program provides a dollar-for-dollar reduction in federal income tax liability for investors in rental housing that serves very low-income and low-income households. LIHTC is administered by the Internal Revenue Service, which allocates tax credits to designated agencies based on a formula set by legislation. There are two types of LIHTCs: 9-percent credits and 4-percent credits, which refer to the percentage of allowable development costs (eligible basis) that may be credited against the taxes of investors. Nine-percent credits are awarded to affordable housing developers on a competitive basis. Four-percent credits are provided as-of-right when a project is financed with tax-exempt bonds. Tax credits are further allocated based on criteria specified in the jurisdiction’s Qualified Allocation Plan. Once awarded LIHTCs, the developer is able to syndicate (or sell) tax credits to corporate investors to raise equity that is used towards the construction of the project. Tax credit investors receive a reduction in corporate federal income taxes for ten years; as a result, they usually make payments over time and these payments are capitalized by a bridge loan that represents the investor equity expected from the tax credits. Thus, the result of a tax credit investment is usually a significant percentage of equity in the project development that reduces the remaining development costs that require financing.
Although New York State Homes and Community Renewal (HCR) is the main allocating agency of tax credits in New York State and supports projects in New York City, it sub-allocates LIHTCs to New York City’s Department of Housing Preservation and Development (HPD) and Housing Development Corporation (HDC) to administer the program in New York City. During annual funding rounds, developers apply competitively to HPD for allocations of tax credits.