Low Incoming Housing Credit Term Paper
- Length: 6 pages
- Subject: Urban Studies
- Type: Term Paper
- Paper: #82994061
Excerpt from Term Paper :
Low Income Housing Credit
The low income tax credit has been an issue of debate since it was created. Many believe that the federal government should do more to help the working poor gain access to affordable housing and that the current plan is extremely convoluted making it difficult for developers and tenants to comply with. The purpose of this discussion is to define and describe the low income housing tax credit and to explore the advantages and disadvantages presented by such a system.
Defining the Low Income Tax Credit
According to an article entitled "The Low Income Tax Credit" published by the Internal Revenue Service the low-income housing tax credit was created by Congress to promote the construction and rehabilitation of existing rental housing for the working poor in various neighborhoods throughout the United States.
Congress also believed that the credit would raise the quantity of rental housing for individuals whose income is at or below certain income levels. ("Low Income Housing Credit") The article also states that another purpose behind the advent of the tax credit incentive, was the realization that it may be difficult for a private developer to collect rental income that was adequate enough to, pay the expenses associated with the development and maintenance of the housing, or to generate a return on investment adequate enough to produce the capitol needed to fund real estate projects. ("Low Income Housing Credit")
In an effort to combat these conflicts Congress allowed all 50 states to provide tax credits to low income housing development. The Internal Revenue Service stipulates that, "the credits may be shared among the owners of a project (equity investors), much as income and losses are shared among business partners for tax purposes." The system operates through the recruitment of investors by syndicators ownership rights are managed by partnership agreements. ("Low Income Housing Credit")
An article published by Novogradac & Company explains that the Low Income Housing Credit allows investors involved in low income housing a dollar-for-dollar cut in their federal tax liability on the pretense that they provide capital to create affordable rental housing. ("About the Low Income Housing Credit") This exchange allows the investors' equity investment to subsidize the creation and management of low-income housing. The subsidy allows some units to be rented out to low income individuals or households who cannot afford average market rates. The low income housing credit allows such investors to gain tax credits which are paid in annual allocations over the span of 10 years. ("About the Low Income Housing Credit") Housing development that are financed in this manner must maintain rental units for low income tenants over a period of thirty years.
However, when the thirty years is over the rental property is controlled by the real estate owner. ("About the Low Income Housing Credit")
The article goes on to explain that there are certain rules that apply to the Low Income Housing Credit program. For example, as a rule either 30% or 70% of low-income unit costs in a housing development has to be subsidized. ("About the Low Income Housing Credit") The 30% subsidy, also called the automatic 4% tax credit, refers to the new construction of low income housing that utilizes supplementary subsidies or the cost associated with the purchase of already existing real estate. While the 70% subsidy, called the 9% tax credit, is used when there is only new construction and no need to acquire additional real estate that is already in existence. ("About the Low Income Housing Credit")
In addition to the subsidy rules rental properties that qualify for the Low Income Housing Credit usually have lower debt service payments and lower vacancy rates than regular housing. ("About the Low Income Housing Credit") These properties also have short-term leases and have the potential to provide investors with good returns. These good returns are thought to exist because of the amount of credit that these properties provide. In addition, the fact that Low Income Housing Credit properties are controlled by limited partnerships provides limited liability for those who choose to invest. ("About the Low Income Housing Credit")
The article "About Low Income Housing Credit" also states that, broad economic principles influence where LIHC-financed affordable housing will be built. Tax credit housing is generally located where the land costs are lower and the tax credit allowable rents are sufficient to allow for market-rate rents. Economics generally make it more difficult to build LIHC-financed housing in major cities because land costs are higher and low-income rents are substantially below market rate." ("About the Low Income Housing Credit")
The Internal Revenue Service dictates that, state agencies must review tax credit applications that are presented by developers and grant the Low Income Housing credits. ("About the Low Income Housing Credit") The IRS also necessitates that states place the most emphasis on housing development and maintenance that aids tenants with the lowest income over the longest period of time first.
About the Low Income Housing Credit") After the developer is granted a tax credit, they must have control over the financial resources of the housing project. Most projects dictate that the developer secures a traditional loan from a mortgage lender or public lending institution. Developers can also opt for gap financing and equity from the developer or investor as an exchange for the Low Income Housing tax credits. ("About the Low Income Housing Credit")
After the construction of the housing, states must ensure that they meet the Low Income Housing Credit requirements set forth by the Internal Revenue Service. If the property does not meet the requirement over the 15-year period developers will loose some of the tax credits. ("About the Low Income Housing Credit") To prevent the recapture of the tax credits housing agencies within the individual states must monitor the Low Income Housing Credit property owners by ensuring that they are renting properties out to low income households that meet the requirements of the program in that state. ("About the Low Income Housing Credit")
As you can see the Low Income Housing Credit is a very complex plan that very few investors are willing to contend with. However the need for low income housing is very real and in the years to come the government will be faced with the dire need to provide housing for low income individuals. Now let's look at some of the statistics concerning the need for low income housing.
Need for Low Income Housing
An article from the magazine America writes that according to a report conducted by the National Low Income Housing Coalition, "5.4 million renter households are experiencing worst-case housing needs. That is, they are either paying over half their income on housing alone or are living in housing that is severely inadequate."(Anderson)
The article alludes to the fact that many Americans fall into a class of citizens known as the working poor.
People who are classified as the working poor are often employed in minimum wage jobs or jobs that pay far below the living wage. When an individual or household has income that is this low it makes it very difficult for them to find affordable housing.
When people cannot find affordable housing it forces them to live in places that are inadequate and that can be dangerous to their health. For instance a young mother in this situation may be forced to live in a place that has led-based paint which can be detrimental to her children. In addition many are forced to live in neighborhoods that are plagued with crime and violence.
America writes that the problem is increased because there is a decline in the number of units that are available to low income tenants and the National Low Income Housing coalition believes that "families classified as very low income are especially liable to face worst-case needs when they live in the suburbs."(Anderson)
Investors are also alarmed at the need for low income housing throughout the country. Lend Lease Real Estate Investments, Inc. warned law makers that additional step must be taken to eliminate the rising shortage of affordable housing for low income households. Investors like Lend Lease worry that the shortage will lead to more families living in poverty.("Affordable Housing Needs Boost")
According to the article, Jenny Netzer, who leads the company's Housing and Community Investing group, stated that "the newly-enacted legislation increases the formula for the first time since 1986, and should increase the development of affordable housing units by approximately 30,000 units per year." "Affordable Housing Needs Boost") On the other hand, she stated that over five million U.S. households have worst-case housing needs, according to HUD statistics. Netzer stated that the situation affects families on welfare and the working poor. ("Affordable Housing Needs Boost") She went on to say that" The passage of H.R. 4577 represents a great start, but many of the concerns we have expressed in the past have yet to be fully addressed,"..."We hope that President-elect Bush and the new Congress recognize the need for more affordable…