Affordable Housing/MA Low Income Housing Tax Credit-MA LIHTC

---

MA LIHTC

The need for safe, affordable, low-income rental housing has never been greater. The Low-income Housing Tax Credit (LIHTC) provides equity to owners and investors that enable them to complete these important projects. Addressing financial goals and ensuring that compliance requirements are met requires expert planning, structuring, construction, operation, and exit strategy.

Dorfman Capital is a leader in providing tax credit equity for affordable housing. Our non-profit and for-profit developer clients rely on us to provide this critical project equity. Our investor clients benefit from the ability to utilize these credits to reduce MA income tax as well as MA premium tax liabilities. 

The benefits and features of MA LIHTC investments include:

• Low risk, relatively short term, high yield
• Fulfills Environmental, Social and Governance (“ESG”) goals
• Funding occurs after construction is complete, i.e., no construction risk for investor
• Lease up requirement for EOHLC certification mitigates lease up risk; risk is further mitigated because apartments are “affordable” compared to market rate housing
• Extraordinary performance of this stable asset class as evidenced over a 35-year period results in minimal re-capture risk, further enhanced by developer guarantee
• Provides a 5-year stream of MA tax credits usable against MA income tax and MA premium tax, along with CRA’s for local and regional banks
• Typically structured as a transferable certificated tax credit
• Purchase does not require a partnership
• Carry forward available for 5 years

Dorfman Capital has extensive experience and expertise with the MA Low Income Housing Tax Credit (MA LIHTC). Having closed over 50 MA LIHTC transactions and many more in process, Dorfman Capital is expert at maximizing the benefits and minimizing the risks for both developers and investors, while successfully navigating pitfalls and employing industry resources. We consistently deliver results that our clients are pleased with.

ABOUT THE LIHTC PROGRAM

Created by the Tax Reform Act of 1986, Internal Revenue code section 42, the Federal Low Income Tax Credit (“LIHTC”) Program provides tax credits for the acquisition, rehabilitation/preservation, or new construction of rental housing targeted to lower-income households. Both for profit and nonprofit developers may apply for the tax credits.

Since its inception, LIHTC has become the largest affordable housing production program in the country and funds the production or preservation of approximately 130,000 affordable housing units each year.

Under federal guidelines, each participating state has its own rules, process and governing structure for the LIHTC program. In Massachusetts, the Executive Office of Housing and Livable Communities (“EOHLC”), formerly Dept of Housing & Community Development (DHCD) is responsible for allocating awards of LIHTC and MA LIHTC and overseeing compliance for qualifying projects for both LIHTC and MA LIHTC.

The MA LIHTC have been authorized under M.G.L. c.62 sec. 6I and M.G.L. c.63 sec. 31H (the “State LIHTC Statute”) and 760 Code of Massachusetts Regulations Section 54.00 et seq. (the “State LIHTC Regulations”).

On January 14, 2021, Governor Baker doubled the MA LIHTC program from $100 million to $200 million. On Oct 4, 2023, Governor Healey signed into law the bill increasing the allocation of MA LIHTC from $200 million to $300 million.

The equity raised with LIHTCs can be used for new construction and substantial rehabilitation of affordable rental-housing properties for low-income households, and for the acquisition of such properties in acquisition/rehabilitation deals. LIHTC provides equity equal to the present value of either 30 percent (referred to in this report as the 4 percent credit) or 70 percent (referred to as the 9 percent credit) of the eligible costs of a low-income housing project, depending in part on whether tax-exempt bonds are used to finance the project.

To qualify for the credit, a project must meet the requirements of a qualified low-income project. Project sponsors/developers (project sponsors) are required to set aside at least 40 percent of the units for renters earning no more than 60 percent of the area’s median income (the 40/60 test) or 20 percent of the units for renters earning 50 percent or less of the area’s median income (the 20/50 test).6 These units are subject to rent restrictions such that the maximum permissible gross rent, including an allowance for utilities, must be less than 30 percent of imputed income based on an area’s median income.

Low-income housing tax credit (LIHTC) properties continue to improve on their performance, according to a report by CohnReznick. In 2016, LIHTC portfolios, on a median basis, had a 97.9% occupancy rate, a 1.40 debt-coverage ratio (DCR), and a $688 per-unit per annum net cash flow (cash flow available after paying expenses, mandatory debt services, and required replacement reserve contributions), reported the firm, which recently examined data collected from about 23,000 properties with nearly 1.7 million LIHTC apartments. As a result, housing credit properties are operating better than any period in the program’s 32-year history.

An average of over 1,515 projects and 104,000 units were placed in service annually between 1987 to 2022. Foreclosures have occurred in less than 1 percent of all LIHTC properties since 1986, better than all other classes of real estate.