FAQs about the LIHTC program
Is there really a need for a state LIHTC program? Can’t the market supply housing?
According to Harvard’s Joint Center for Housing Studies, 50% of U.S. renters are now in moderate crisis, and 25% are in severe crisis, spending over half of their income on rent. Of the tens of millions in crisis, only half qualify for rental assistance, and less than 20% receive aid because the resources are scarce – waiting lists for rental assistance are 12-18 months long throughout Missouri. Today, waiting lists for assistance from the St. Louis City, St. Louis County, and Kansas City Housing Authorities range from 4,000-15,000 people; lists in smaller counties often exceed 1,000. Nearly all of the state's waitlists are so full that they are closed to new applicants.
A recent state study counted 16,000 homeless schoolchildren, excluding kids age 0-5. According to Harvard's Joint Center for Housing Studies, homeless children are less likely to complete high school and more likely to cost the state money throughout their lives. Affordable apartments help struggling families provide stability for them.
Why is Missouri’s program so big? Don’t other states build non-LIHTC affordable housing?
- Yes, they do. But a lot of other states subsidize affordable housing using other programs that we don’t have. For instance, we hear constantly that Missouri has one of the nation’s largest LIHTC programs $144M in redemptions last year); what we don’t hear is that some other states spend far more money on the same objective. For instance, though their LIHTC program is smaller than Missouri’s, it costs New York City alone approximately one billion dollars annually to subsidize rents. During the past decade, California has spent an average of a half million dollars a year on state housing bonds.
How does the LIHTC program work?
- The federal LIHTC encourages private individuals and corporations to invest in affordable housing by providing a tax credit over a 10-year period. The Internal Revenue Service (IRS) allocates federal housing tax credits (both 9% and 4%) to the states based on a per-capita calculation. The states allocate federal credits to developers through a competitive process. The developers sell the tax credits to investors in exchange for equity for an eligible rental housing project. The infusion of equity reduces the amount of money a developer has to borrow and pay interest on, thereby permitting the reduction in rent for the project to be affordable. In MO, the state program mirrors the federal program.
Auditor Schweich claimed LIHTC is inefficient in his audit – is he right?
- The audit and its recommendations contain errors. First of all, it contends that using a certificated model would make the program more efficient. But according to Missouri statute, (135.363), this model is already available.
- Second, the audit suggests using state grants as a more efficient way to build affordable housing. But tax credits are the most efficient means of providing capital for affordable housing as they're less taxable than grants. Grants would cost the state up-front, creating a huge short term fiscal note. Also, importantly, the state would incur 100% of the risk. Under program rules, credits don't flow until units are leased according to stringent guidelines, and credits are recaptured from projects that fail or are in violation. Since one-third of approved projects are not ultimately built and others fall out of compliance, the state could be out a lot of money - a risk currently borne entirely by investors.
- Also, grants would remove the private oversight/market discipline that comes with a tax credit program. LIHTC is preferable to the old system which suffered from tremendous waste and mismanagement, and which saw taxpayers spending money to tear down structures just 2-3 decades after they were built. Compared to that, a state tax credit is a very efficient alternative.
- It’s inaccurate to say that 42-55 cents goes into project and the rest is profit. This excludes two major expenses: 1) federal taxes, typically 35%; and 2) decreased value of credits in years 2-10 due to inflation (i.e., time value of money). That is, before investors receive a return, typically concluding 13-14 after the award, inflation has eaten up about 30 cents of the dollar.
- Put simply: if someone asked you to give him $100 today and offered to pay you back $10/yr for 10 years, starting in 3 years, and ending in 13 years, would you do it? Probably not. Neither would affordable housing investors.
You cite cost savings from LIHTC that don’t show up in the audit? I’m skeptical; explain.
- According to a state study, LIHTC reduces rents by an average of $288 month for elderly and disabled people who would otherwise not be able to afford their own apartment. Given how much it costs local governments to provide emergency care for feeble seniors/disabled people in dilapidated homes, there are large savings: expenses never incurred, and lives saved when people have emergencies that are spotted earlier in a large community with on-site support services.
- Senior projects are an especially wise use of tax dollars because of Medicaid savings as a result of reduced nursing home use. Over the past five years, LIHTCs have helped build an average of 831 new senior units. Of those, 40% of seniors are detoured from nursing homes due to special services provided in tax credit units. Thus, an average of 332 units annually utilize LIHTC vs. a Medicaid-funded nursing home unit. The average annual nursing home costs the state $29,871 per unit. Assuming 332 units annually, this would mean an annual cost to the state of $9.9M.
- Conversely, the annual LIHTC allocation per elderly resident is $7,773, which multiplied by 332 units costs the state $2.5M. Thus, tax-credit senior housing brings $7.4M of annual savings to the state, a 10-year savings of $74M and a 74% savings over a scenario without tax credits.
- Homeless vets are another key constituency LIHTC supports. Returning vets - who may suffer from PTSD and substance abuse issues - face challenges finding affordable housing. LIHTC allows groups like The Salvation Army to build affordable housing that includes on-site support, sparing government from delivering costly mental health and medical services.
Who are these “syndicators” and why do they make money?
- Syndicators are more than just "middlemen." They provide private oversight to the project, ensuring compliance so the state doesn't have to. Because of the market discipline imposed in part by syndicators, approximately 35% of all LIHTCs awarded are never redeemed. The state incurs no risk b/c investors provide up-front money and additional capital if the project becomes distressed. If the project doesn’t adhere to standards, then credits are recaptured.
But why do we spend so much on this, when there are needs in other areas, like education?
- LIHTC spending has grown by $144M since 1992. Since 1992, K-12 education spending has risen over $2B from $1.3 billion to $3.5B; Medicaid spending has seen a similarly large increase. Thus, the actual spending increase on education and Medicaid has been 15-20 times as large as that on affordable housing.