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The LIHTC Program the New Derivative (Junk Bond)


The LIHTC program was established as part of the Tax Reform Act of 1986 to encourage the development of affordable rental housing for low-income households.  Each year, Congress allocates federal tax credits to states based on population, which are then paid out to developers over the subsequent ten years. In 2007, the allocation was $1.95 per state resident per year.4 Developers apply for tax credits by proposing a specific project to a state, which then selects the projects to fund from these applications. Potential projects must meet one of two criteria to be eligible for the

tax credit. Either at least 20 percent of the units must be occupied by tenants earning below 50 percent of the Area Median Gross Income (AMGI) or at least 40 percent of units must be occupied by tenants earning below 60 percent of the AMGI.  Annual rents on these units cannot exceed 30 percent of the relevant income limit. Since the program’s inception, over 95 percent of units in projects supported by the program qualified as low income. The rent requirement binds for 15 years, after which some less restrictive rent restriction is required for an additional 15 years. The cost of constructing or rehabilitating the rent restricted units (excluding land) is known as the “qualified basis".


The base level of the tax credit is intended to have a discounted value of 30 percent of the qualified basis for existing projects without substantial rehabilitation or any projects receiving other federal subsidies and 70 percent for new construction or substantial rehabilitation.  In 1989, Congress passed legislation to increase the tax credit by 30 percent for projects developed in “qualified census tracts" (QCTs) or “difficult development areas" (DDAs). A census tract counts as qualified if 50% of its households have incomes below 60% of AMGI, with the restriction that no

Congress allocated $1.25 per state resident all years 1986 to 2001 except 1989 when it allocated $0.93. In 2001, funding was increased to $1.75 per resident, and has been indexed to inflation since 2003. These figures are annual commitments for 10 years. Therefore the total cost is about 10

times greater.


The AMGI is calculated by the Department of Housing and Urban Development for all metropolitan areas and counties using data from the Internal Revenue Service, the American Housing Survey and the decennial Census of Population and Housing. The income limits are adjusted

for family size on a base of four family members. The 50 percent figure is adjusted upward by 4 percentage points for each additional family member and downward by five percentage points for each family member short of four. The 60 percent figure is obtained for each family size by multiplying the 50 percent income limit by 1.2.  A household’s income may grow over time to exceed the income limit. When this happens in buildings where there exist market-rate units, the next vacancy created by the departure of a market rate tenant must be filled by a low-income tenant. When a building is entirely composed of low-income units, no action is needed.







Part I

Part II

Part III

 Ginnie Mae Enhances USDA   Multifamily MBS Program

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