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Low Income Housing Tax Credits in the USA

Low Income Housing Tax Credits in the USA. Vic O’Brien Development Director GreenSquare Group. Study supported by. Context of the research. Low Income Housing Tax Credits in the USA. Study supported by. Context of the research. HCA grant reduced to c. £25k per unit

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Low Income Housing Tax Credits in the USA

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  1. Low Income Housing Tax Credits in the USA Vic O’Brien Development DirectorGreenSquare Group Study supported by

  2. Context of the research Low Income Housing Tax Credits in the USA Study supported by

  3. 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

  4. 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?

  5. 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

  6. The Study Low Income Housing Tax Credits in the USA Study supported by

  7. 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

  8. 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)

  9. Funding structure - project Investor A Investor B Investor C 99.99% Upper Tier Syndicator (General Partner) Limited Liability Company (LLC) 0.1% 99.99% Limited Liability Company(LLC) Developer(General Partner) Lower Tier (Development Project) 0.1%

  10. Funding market FUND FUND FUND Upper Tier Syndicator Syndicator Syndicator Syndicator Lower Tier

  11. State HFAs • Prepare Qualified Allocation Plans • Quality requirements • Cap allocations per scheme • Allocate tax credits • Manage programme • Organise compliance

  12. State support • Grant as loans (Groans) • Free and discounted land • Section 8 • Linkage

  13. Rents • Average Median Income • Maximum income 60%, 50%, 40% of AMI • Housing costs = 30% of Income • Issue of Extremely Low Income (ELI)

  14. Quality • Larger floor areas • Apartments • High quality finishes • Property manager and residents’ lounge

  15. Compliance • State compliance assessments • Syndicator • Investor • Operator • Breaches reported to IRS = Tax Credit reduction • Failure rate very low at less than 0.7%

  16. Developers • Neighbourhood Development Corporations • Larger non-profit developers • Private developers

  17. How the system works Low Income Housing Tax Credits in the USA Study supported by

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. Recommendations Low Income Housing Tax Credits in the USA Study supported by

  25. 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

  26. 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

  27. Study supported by

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