WASHINGTON, D.C. – May 7, 2015 – (RealEstateRama) — Anyone who has been following recent activities at TDHCA has likely noticed that the federal Housing Tax Credit Program is receiving a lot of attention these days.
So, what exactly is a housing tax credit?
The Housing Tax Credit (“HTC”) Program is the state’s primary means of directing private capital toward the development or rehabilitation of affordable rental housing.
Here’s how the program works: A housing developer and his or her private investment partner, typically a large financial services firm, apply for an allocation of tax credits.
If the partnership receives an award of credits, the investor – or a “syndicator” acting as a broker for a group of investors – buys the credits from the developer.
Investors may apply the credits against their federal tax liability each year for ten years on a dollar-for-dollar basis in return for their investment in the rental property.
The developer, meanwhile, uses the proceeds from the sale of the credits as equity financing for the development. Credits allocated through the “competitive” (9%) HTC Program are designed to cover approximately 70 percent of eligible development costs.
This leaves the developer only needing to secure other sources of lending for the remaining 30 percent (plus or minus) of the total development costs. This financing structure allows the developer to build attractive, high-quality housing that can offer a reduced rent.
TDHCA, for its part, has compliance authority over these developments often for as long as 40 years to ensure units are occupied only by eligible tenants, rents are capped at proper levels, and the buildings and grounds are maintained in a safe and healthy manner.
