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What Property Managers Should Know About the Low Income Housing Tax Credit Program

September 13, 2023

Last modified on May 16th, 2023
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Affordable housing typically refers to housing units that receive a government subsidy to allow the property owner(s) to price these units below market rates. But with a national shortage of approximately 7 million affordable rental homes for low-income families, there is a significant need for investors and property managers to focus their attention on new affordable housing projects that will serve those who need it most. According to the National Low Income Housing Coalition, “only 36 affordable and available rental homes exist for every 100 extremely low-income renter households.” 

One federal program aimed at increasing the supply of affordable housing is the Low Income Housing Tax Credit Program (LIHTC). Since the LIHTC program began in 1987, it has resulted in the creation of an additional 2.5 million affordable housing units and has been responsible for financing the construction of more affordable housing units than any other federal housing program. In comparison, Project-Based Rental Assistance accounts for 1.2 million affordable units while 970,000 public housing units remain in the US, down from the program’s peak of 1.4 million units in 1994.   

The ongoing affordable housing shortage presents unique opportunities for investors and property managers to create a new revenue stream by managing properties in this category, one that comes with some financial incentives and programs worth exploring. 

Those who don’t currently have any LIHTC properties under management may wonder if the extra work is worth it. Others who are currently managing one or more LIHTC properties may be looking for ways to streamline the tenant certification process to improve productivity and profitability. Read on for answers to both.

What is LIHTC & how does it work?

LIHTC is a tax credit that subsidizes the acquisition, construction, and rehabilitation of affordable rental housing. State housing agencies receive these tax credits, and then award them to private developers of affordable rental housing projects. Developers typically sell the credits to private investors to obtain funding. Once the housing project receives a Certificate of Occupancy, investors can claim the LIHTC over a 10-year period. The tax credits come in two forms: A 9% tax credit to incentivize new development and a 4% tax credit for the rehabilitation and preservation of existing properties. Awards may be combined with other programs to increase the overarching financial benefit of program participation. 

For a prospective LIHTC renter, qualifying for the credit award is complex, and the process is highly competitive. Applying and qualifying for affordable housing requires a mountain of paperwork to fill out and reams of supporting documents to file. And since residents must re-certify each year, the process has to be repeated.

Much of the complexity and additional work for the property manager revolves around LIHTC tenant certification. Property managers must prequalify renters using a rigorous, often time-consuming screening process to eliminate anyone who is not qualified to receive subsidized housing. Managing rental properties under LIHTC may be easier for people who complete LIHTC certification training before opening their communities to low-income earners. The National Center for Housing Management for example, offers an online Tax Credit Specialist (TCS) course that instructs property managers “how to determine an applicant’s eligibility and how to keep a LIHTC property in compliance with the many rules and regulations of the IRS and HUD, as spelled out in HUD Handbook 4350.3 REV 1 and other federal notices.”

The priority for property managers is certifying a renter meets all eligibility requirements under state guidelines. Industry credentials are valuable for building credibility with owners and investors, but optional as far as program administrators are concerned.

Reasons to add LIHTC to your portfolio

Aside from the many benefits for low-income families in need of affordable housing, the LIHTC program also carries a wide range of benefits for investors and property managers. Here are a few reasons to consider expanding your portfolio to include LIHTC units.

For property managers

For property managers who operate as fee managers, offering expertise in LIHTC management means that your company can provide additional value for the owners you manage on behalf of. With the ability to efficiently manage complex LIHTC program requirements, not only are you creating an additional revenue opportunity, but you may also gain additional market-rate units since you also offer owners the proficiency to effectively manage their full portfolio. 

For developers and owner-operators 

For owner-operators, there are numerous revenue advantages associated with entering the affordable housing sector. Some sources report that over time, the tax credits can offset up to 70% of the investment in adding an affordable housing complex to the asset portfolio. According to the Urban Institute, it’s not uncommon to see 75-80% of the total project cost covered by the equity raised from 9% tax credits. Local governments may even further reduce tax burdens to encourage the development of new affordable housing projects. 

Staying compliant with LIHTC program requirements

The LIHTC tenant certification process can be complex and time-consuming. And, compliance throughout program participation is mandatory to avoid sanctions or disqualification.

Although it is almost unheard of for an agency to demand a full repayment of an award due to non-compliance, some states, such as California, impose hefty fines for a variety of compliance issues.

LIHTC certification for renters includes interviewing every adult that will live in a rental home designated as an affordable housing unit. And, renters must be re-certified every year in order for a multifamily community to continue to receive annual awards. Should a LIHTC tenant income certification lapse, there could be fines or penalties imposed for each unit out of compliance or for each unit in a project, depending on the type of property and the state requirements. 

There are three types of tenant certification: Initial Certification (Move-in), Renewal Certification (Annual) and Other Certification, which covers events such as moving to another unit, adding or removing family members, or state-requested certification.

The certification form documents vital information on all persons that currently reside or that may live in the household during the certification term, including unborn children, live-in caretakers and anticipated foster children. Along with full name, birth date, and social security numbers of each occupant, the form lists amounts and sources of all income and assets. There are special income rules that apply to the initial application and subsequent renewals, with formulas and instructions included in relevant sections of the Low Income Housing Tax Credit Certification Form.

Using technology to streamline Tenant Income Certification (TIC)

Property management teams can use either a paper-based or software solution to manage the tenant certification process. However, there are some major benefits to using cloud-based, automated systems that reduce the risk of human error, ensure compliance, and keep the certification process moving. 

By establishing reminders and alerts that trigger re-certification reviews, you can help ensure important deadlines are not missed. 

Administering income and rent limits at the property or unit level can ensure your business stays compliant with LIHTC program requirements, and these limits should automatically load when your team creates a new certification. 

Finally, by managing the tenant certification process directly within the same property management system you use to run the rest of your business, you can easily convert a certification into a move-in without double data entry, and you can manage a tenant’s certification data, verification documents, and internal team discussion in one place.

Maximizing your affordable housing investments

At its core, successfully maximizing affordable housing investments for property managers and their stakeholders requires a two-pronged approach: reduce costs and increase profit. For those who plan to expand their asset portfolio to include LIHTC properties, knowledge is power. 

Learning everything about the LIHTC process through independent training and credentialing courses is a great first step. Start by looking into the agencies responsible for allocating funds in your state, and federal organizations such as the IRS and HUD that monitor compliance.

Rethinking the business operating model, which includes human and tech assets, is the next logical step. Exploring cutting-edge property management solutions designed to boost efficiency and productivity while reducing costs, benefits everyone – developers, property managers, renters, investors, front-line customer service staff and asset managers.

Managing LIHTC properties can be complicated, but with the right technology backing you up, you can maximize the value of your affordable housing investments. To learn more about how you can overcome affordable housing challenges, download the free guide below.

Affordable housing guide

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