The Low Income Housing Tax Credit (LIHTC) program offers apartment investors a dollar-for-dollar income tax credit in exchange for investing in properties that reserve a certain amount of project units for residents earning less than or equal to a certain percentage of the Area Median Income (AMI).

HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) apartment loan both permit up to 87% loan-to-value for affordable properties, with LTV allowances increased up to 90% for properties with 90% or more units set aside for low-income families. HUD loans also offer a discounted 0.45% annual MIP for LIHTC or Section 8 properties while investors of market-rate properties are required to pay 0.65% annually.

Fannie Mae and Freddie Mac also offer a wide variety of loan options for properties with an affordability component, including some apartment financing options specifically geared towards the LIHTC program. For example, the Freddie Mac Bond Credit Enhancement with 4% LITHC is designed to provide forward commitments to both new construction and substantial rehabilitation of LIHTC properties which are able to maintain at least 90% occupancy for a period of no less than 90 days. It also provides preservation rehabilitation funds for projects undergoing moderate rehab with tenants in place.

In addition, the traditional Freddie Mac LIHTC Enhancement provides a safety-net of protection for LIHTC investors in the case that an owner/operator defaults on their loan, in order to make it substantially easier to attract LIHTC investors to a project. And, that's not all Freddie Mac has to offer either. Freddie Mac Tax-Exempt Loans provide up to 30 years of financing for 4% LIHTC projects. If your LIHTC property is also part of the HUD Section 8 program, as is the case sometimes, you may opt to make use of Freddie Mac HUD Section 8 Financing, which permits LTVs of up to 90% and DSCRs as low as 1.15x.

Fannie Mae’s LIHTC-focused products include the Fannie Mae MBS as Tax-Exempt Bond Collateral (M.TEB), which provides up to 35 years of financing for 4% LIHTC projects. Fannie Mae also offers the Fannie Mae LIHTC Enhancement, which provides a safety-net of protection for LIHTC investors in the event that an owner/operator defaults on their loan.

The LIHTC program is available for various property types, including apartment buildings, single-family homes, townhouses, and duplexes. In order for a property to be considered eligible for the program, it must pass at least one of these three affordability tests:

• 20% or more of the units are occupied by (or reserved for) tenants with an income of 50% or less of the area median income (AMI).
• 40% or more of the units are occupied by (or reserved for) tenants with an income of 60% or less of the AMI.
• 40% or more of the units are occupied by (or reserved for) tenants with an income of no more than 60% of the AMI, and the property has no units occupied by tenants with an income greater than 80% of the AMI.

In addition to the above, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.

In order to qualify for the LIHTC program, developers need to set aside a minimum of 40% of a project's units for tenants earning no more than 60% of the area median income, or AMI (40/60). Or, alternatively, they must set aside 20% of a project's units for tenants earning no more than 50% of the area median income (20/50).

In order to qualify for the LIHTC program, a building must reserve a certain number of units for low-income residents. In most cases, they must either follow one of two “rules”: the “20/50 rule” or the “40/60 rule.” The 20/50 rule requires that at least 20% of a property’s units be rented to tenants who earn 50% or less of the area median income, or AMI, while the 40/60 rule requires that at least 40% of a property’s units be rented to tenants who earn 60% or less of the AMI.

The Low-Income Housing Tax Credit (LIHTC) can be utilized for different types of affordable housing projects, including acquisition and rehabilitation, new construction, and rehabilitation of a currently owned property. Additionally, the LIHTC can be used to preserve existing affordable housing (without any rehabilitation) in certain situations.

Common apartment loan options for LIHTC properties include HUD multifamily loans, as well as Fannie Mae® and Freddie Mac® multifamily loans. Bank and CMBS loans can also be used, but they don’t include additional affordability incentives as do agency and HUD financing.

For instance, HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) both permit LTVs of up to 87% for affordable properties, with LTVs up to 90% for properties with 90% or more low-income units. They also offer a discounted 0.45% annual MIP for LIHTC or Section 8 properties (market rate properties pay 0.65% annually).

In addition, Fannie Mae and Freddie Mac also offer a wide variety of loan options for properties with an affordability component, including some apartment financing options specifically geared towards the LIHTC program. For example, the Freddie Mac Bond Credit Enhancement with 4% LITHC is designed to provide forward commitments to both new construction and substantial rehabilitation of LIHTC properties which are able to maintain at least 90% occupancy for a period of no less than 90 days. It also provides preservation rehabilitation funds for projects undergoing moderate rehab with tenants in place.

In addition, the traditional Freddie Mac LIHTC Enhancement provides a safety-net of protection for LIHTC investors in the case that an owner/operator defaults on their loan, in order to make it substantially easier to attract LIHTC investors to a project. And, that's not all Freddie Mac has to offer either. Freddie Mac Tax-Exempt Loans provide up to 30 years of financing for 4% LIHTC projects. If your LIHTC property is also part of the HUD Section 8 program, as is the case sometimes, you may opt to make use of Freddie Mac HUD Section 8 Financing, which permits LTVs up to 90% and DSCRs as low as 1.15x for LIHTC properties.

In comparison, Fannie Mae offers LIHTC-focused products including Fannie Mae MBS as Tax-Exempt Bond Collateral (M.TEB), which can be utilized for existing bond refunding and new issues for 4% LIHTC properties. This financing product allows LTVs up to 90%, and even permits interest-only financing for eligible borrowers. Another similar option is the Fannie Mae Credit Enhancement of Variable Rate Tax-Exempt Bonds (Index Bonds), which provides a credit enhancement for variable rate tax-exempt bonds.

The Low Income Housing Tax Credit (LIHTC) program offers apartment investors a dollar-for-dollar income tax credit in exchange for investing in properties that reserve a certain amount of project units for residents earning less than or equal to a certain percentage of the Area Median Income (AMI). The LIHTC program is sometimes, but not always, used in concert with properties utilizing the HUD Section 8 program. Section 8 allows local public housing authorities (PHAs) to distribute federal subsidies to approved landlords for housing pre-approved low-income tenants at a heavily discounted rate. HUD provides special benefits, like increased leverage, for multifamily borrowers who utilize either of these programs.

LIHTCs don’t provide a tax deduction, which would reduce a borrower’s taxable income. Instead, the credit provides a tax discount of a specific dollar amount that can be applied to the investor or developer’s tax bill. Once the housing project is made available to tenants, investors are then able to claim the LIHTC over a 10-year period.

Apartment Financing Options for LIHTC Properties include HUD apartment loans, as well as Fannie Mae and Freddie Mac apartment loans. While Bank loans and CMBS loans can also be used, they don’t include the additional affordability incentives that agency and HUD financing offer.

For instance, HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) apartment loan both permit up to 87% loan-to-value for affordable properties, with LTV allowances increased up to 90% for properties with 90% or more units set aside for low-income families. HUD loans also offer a discounted 0.45% annual MIP for LIHTC or Section 8 properties while investors of market-rate properties are required to pay 0.65% annually.

Fannie Mae and Freddie Mac also offer a wide variety of loan options for properties with an affordability component, including some apartment financing options specifically geared towards the LIHTC program. For example, the Freddie Mac Bond Credit Enhancement with 4% LITHC is designed to provide forward commitments to both new construction and substantial rehabilitation of LIHTC properties which are able to maintain at least 90% occupancy for a period of no less than 90 days. It also provides preservation rehabilitation funds for projects undergoing moderate rehab with tenants in place.

In addition, the traditional Freddie Mac LIHTC Enhancement provides a safety-net of protection for LIHTC investors in the case that an owner/operator defaults on their loan, in order to make it substantially easier to attract LIHTC investors to a project. And, that's not all Freddie Mac has to offer either. Freddie Mac Tax-Exempt Loans provide up to 30 years of financing for 4% LIHTC projects. If your LIHTC property is also part of the HUD Section 8 program, as is the case sometimes, you may opt to make use of Freddie Mac HUD Section 8 Financing, which permits.

The Low-Income Housing Tax Credit (LIHTC) program offers apartment investors a dollar-for-dollar income tax credit in exchange for investing in properties that reserve a certain amount of project units for residents earning less than or equal to a certain percentage of the Area Median Income (AMI).

Advantages of LIHTC apartment financing include:

• Increased leverage - HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) can be used for both for-profit and nonprofit development, and in both instances, these loans work particularly well with the LIHTC program. For each of these loan types, affordable properties are permitted Loan-to-Value (LTV) ratios of up to 87%, while properties with 90% or more low-income units may have LTVs even higher: up to 90%.
• Discounted MIP - Section 8 and LIHTC properties only need to pay 0.45% MIP compared to the 0.65% required for market-rate properties.
• Lower DSCR requirements - DSCR requirements are significantly lower for affordable housing properties, at just 1.15x, compared to the DSCR requirement of 1.20x for market-rate properties.

Disadvantages of LIHTC apartment financing include:

• Additional paperwork - LIHTC properties require additional paperwork and documentation to qualify for the tax credit.
• Longer closing times - LIHTC properties typically take longer to close than market-rate properties.
• Lower returns - LIHTC properties typically generate lower returns than market-rate properties.