Low Income Housing Tax Credits in the USA Vic O’Brien Development Director GreenSquare Group Study...
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Low Income Housing Tax Credits in the USA
Vic O’BrienDevelopment DirectorGreenSquare Group
Study supported by
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Study supported byLow Income Housing Tax Credits in the USA
Context of the research
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Context of the research
• HCA grant reduced to c. £25k per unit• Pressure on HA asset cover• HA production limited• UK housing crisis/ low house production
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Solutions?
• Can a way be found of developing without recourse to asset cover?
• How do we fund affordable housing in the context of reducing grant and s106 opportunities?
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The USA approach
• Alternative funding systems using equity investment and tax credits
• Not much UK information on this form of funding
• Winston Churchill Memorial Trust
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Study supported byLow Income Housing Tax Credits in the USA
The Study
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The Study
• How does US system work?
• Are their elements of the US funding system we could apply in the UK?
• Visited 60 contacts in Boston, Washington DC, New York North Carolina and New Haven
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Low Income Housing System Structure• Developers • Syndicators• Investors• State Housing Finance Agencies• US Department of Homes and Urban
Development• Lobbyist, advisors and trade bodies• Inland Revenue Service (IRS)
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Funding structure - project
Investor CInvestor A Investor B
99.99%
Limited Liability Company (LLC)
0.1%
Syndicator (General Partner)0.1%
99.99%
Developer(General Partner)
Upper Tier
Lower Tier (Development Project)
Limited Liability Company(LLC)
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Funding market
FUND FUND FUND
Syndicator Syndicator Syndicator Syndicator
Upper Tier
Lower Tier
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State HFAs
• Prepare Qualified Allocation Plans
– Quality requirements– Cap allocations per scheme– Allocate tax credits– Manage programme– Organise compliance
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State support
• Grant as loans (Groans)• Free and discounted land• Section 8• Linkage
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Rents
• Average Median Income• Maximum income 60%, 50%, 40% of AMI• Housing costs = 30% of Income• Issue of Extremely Low Income (ELI)
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Quality
• Larger floor areas• Apartments• High quality finishes • Property manager and residents’ lounge
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Compliance
• State compliance assessments• Syndicator• Investor• Operator• Breaches reported to IRS
= Tax Credit reduction• Failure rate very low at less than 0.7%
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Developers
• Neighbourhood Development Corporations • Larger non-profit developers• Private developers
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Study supported byLow Income Housing Tax Credits in the USA
How the system works
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How the system works
• Tax Credits – reduction in tax $1 for $1• Congress distributes LIHTC to each state on
per head basis• HFAs create QAP and call for bids• Tax Credits allocated to winning bids• Developers build project and lets• Investor claims Tax Credits from IRS
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Community Re-investment Act
• Response to ‘red lining’
• Banks rated on community banking performance
• Banks need high CRA rating
• LIHTC way of supporting CRA rating
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Pricing of LIHTC
• LIHTCs are ‘priced’ through competition under QAPs
• Price in urban coastal areas is high and low in central continental areas
• Market crash and corporate investors• The role of Freddie Mac and Fannie Mae
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Issues
• Inefficient• Taxable income required for 10 years• Affordable housing not permanent• Focus on assets rather than customer
service• Housing industry fragmented and with
limited assets
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UK LIHTC
• LIHTC creates equity investment in affordable housing
• no requirement to service LIHTC investment from rent
• Creates first loss funding so no pressure on HA asset bases
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UK LIHTC
• Improve on USA system– Minimise inefficiency– Permanent LIHTC affordable homes– Aggregate how funds are raised– Channel through HCA?
• Further research on the net tax revenue impact required
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Study supported byLow Income Housing Tax Credits in the USA
Recommendations
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Recommendations
• Assessment of LIHTC in the UK • Review of how HCA could support a UK
LIHTC system• NDCs – could we create a UK version?• Learning: large apartment blocks of
affordable housing in US
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Recommendations
• Set up first loss investment funds to support affordable housing development
• Create market for tradable equity and debt in HAs
• Promote and invest in Community Development Funding Institutions
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Study supported by