Smart Growth: The Economic Impact of LIHTC Development

The Low Income Housing Tax Credit program does more than provide affordable housing to families in need. In fact, the economic benefits of LIHTC developments cannot be ignored.

By Scott Harrold, Lancaster Pollard

Low-income housing tax credits (LIHTC) are arguably the most important resource for creating affordable housing in the United States today. Created by Section 42 of the Tax Reform Act of 1986, the LIHTC program gives state and local LIHTC-allocating agencies nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation or new construction of affordable rental housing targeted to low-income households.

A Quarter Century of Success

The spirit of the LIHTC program is based on competition. Each year, states are allocated a certain amount of tax credits from the federal government based on population. State and local officials award those tax credits to competing developers who sell them to investors in exchange for equity to build affordable housing. The application process rewards developers who build LIHTC projects in areas of significant need, use sustainable building practices and demonstrate a solid track record of success within the program, among other criteria.

To date, the LIHTC program has succeeded in facilitating private investment to support the development and preservation of affordable rental housing for America’s low-income families. According to a report from Reznick Group, for the last 15 years, the demand for housing tax credits has exceeded supply almost every year. Reznick believes this imbalance between the supply and demand for housing credits has resulted in a highly efficient use of tax credit dollars as a tool to finance the construction of additional affordable housing. The same report revealed that over the course of the past decade, the occupancy level in LIHTC properties has consistently been approximately 96 percent. Additionally, a report by Novogradac & Company referenced the LIHTC program’s significantly low foreclosure rate relative to other real estate asset classes. In a survey of 15,174 properties, respondents indicated that only 129 of the properties had been foreclosed between 1991 and 2006, which translates to a 0.08 percent on an annualized basis. The same study revealed that, in comparison, the foreclosure rate for non-LIHTC apartment properties was 0.27 percent.

The LIHTC program is a significant public policy success story; however, the development of LIHTC properties is not without opposition. It is a widely held notion that affordable housing contributes to neighborhood blight, low property values and poor community economies. A survey conducted by Housing Illinois, a coalition of over three dozen housing and community advocate groups, revealed that two-thirds of people surveyed believed low-income housing is poorly maintained, half agreed that developing low-income housing would lower property values and just over half agreed that crime increases in neighborhoods with low-income housing. This “not-in-my-backyard” attitude has led to growing resentment against the construction and rehabilitation of affordable housing in neighborhoods across the county. It is well recognized that this important housing program plays an important role in improving the economic welfare of low-income households throughout the United States, but its positive impact on local income, taxes and jobs is rarely highlighted.

Small Investment, BIG Return

Since 1987, when it began, the LIHTC program has become the primary federal subsidy instrument for supporting the production of new and rehabilitated rental housing for low-income households. The exact number of units actually preserved and newly developed under the program, however, is difficult to determine. Given the dispersed nature of the program, no single federal source of information on LIHTC housing production exists. State and local allocation agencies collect more information on the nature of the LIHTC housing through the state’s competitiveapplicationprocess.

The following analysis uses the 2009 U.S. Department of Housing and Urban Development’s (HUD) LIHTC Database and The National Association of Home Builders (NAHB) model to estimate the local economic benefits of LIHTC development. The LIHTC database, first created by HUD in 1997, contains information on 33,777 projects and almost 2,203,000 housing units placed in service between 1987 and 2009. The NAHB model captures the effect of the construction activity (Phase I), the ripple impact that occurs when income earned from construction activity is spent in the local economy (Phase II), and the ongoing impact that results from the LIHTC units being occupied (Phase III). According to the HUD LIHTC Database, on average, between 1995 and 2009 nearly 103,000 units were placed into service each year with the average project containing 75 units. Placed-in-service projects are those that have received a certificate of occupancy and for which the state has submitted theIRSForm 8609, indicating the property owner is eligible to claim LIHTCs on their tax return.

Using the NAHB model, the one-year impact (Phase I and II) of 103,000 placed-into-service LIHTC units creates 125,660 jobs, injects $8.1 billion in income to local economies and generates $1.3 billion in federal, state and local taxes, fees and charges. The additional, annually recurring impact of 103,000 placed-into-service LIHTC units (Phase III) creates 30,900 jobs, injects $2.4 billion in income to local economies, and generates $454 million in federal, state and local taxes, fees and charges. The per-unit data used to calculate the one-year and recurring impacts were estimated by NAHB under the assumptions that tax-credit apartments: had an average market value of $120,000 per unit; had an average raw land value of $12,000 per unit; incurred an average of $3,043 per unit in impact, permit and other fees to local governments; and incurred an average annual property tax of $1,200 per unit.

Developed by economists, NAHB’s economic-impact models have been used by outside universities, state housing authorities, and affordable housing agencies. The Illinois Housing Development Authority used the NAHB model to determine that the one-year employment impact of the authority’s lending for new construction resulted in 4,256 full-time jobs and about $70 million in federal, state and local taxes and fees.

School is Back in Session

Franklin School Apartments

An example of the LITHC program in action is Franklin School Apartments in Great Falls, Mont. Originally an elementary school built in 1913, the property was expanded and converted to tax-credit apartments in 1990. In a city known for its historical architecture, the apartment project was one of Great Falls’ success stories; however, over recent years the project had been physically deteriorating and was due for a makeover.

The developer applied for and received LIHTCs from the Montana Board of Housing, which positioned the project to restore its physical quality and improve living conditions for residents. Lancaster Pollard provided a permanent loan through the fixed-rate, nonrecourse Fannie Mae Affordable Housing product. As a result, the property will benefit from $48,000 worth of repairs per unit, including updated kitchens, bathrooms and common areas as well as energy-efficient improvements.

The economic impact from the Franklin School Apartments project will be substantial for Great Falls. For the development cost of $4 million, the NAHB one-year local income estimate is more than $3.1 million and the one-year estimate of local taxes and fees is nearly $331, 000.

Improve Your Community

The economic benefits of LIHTC developments cannot be ignored. The LIHTC program does more than just provide affordable housing to families in need; it creates jobs for millions of Americans and injects recurring capital in the U.S. economy. When using the NAHB model and HUD statistics, LIHTCs generate one-time annual income of $8.1 billion for local economies and recurring annual income of $2.4 billion.

The LIHTC program represents public-private partnership at its best─combining closely monitored compliance and public stewardship with private-sector discipline, investment and leadership. Additionally, because LIHTC projects serve the economy, the community and the environment, they are considered smart-growth development. Developers, communities and planners would be wise to consider both the social and economic benefits that LIHTC development can bring to a local economy.

Scott Harrold is an associate with Lancaster Pollard in Columbus. He can be reached at [email protected].