Affordable Housing: Can You Sell 10-Year LIHTC at Once?

In the realm of affordable housing and specifically dealing with Low-Income Housing Tax Credits (LIHTC), the process of selling and capitalizing on these credits is indeed nuanced. Here's a breakdown based on the WSO dataset:

1. Selling LIHTC: The LIHTC program allows developers to receive tax credits for the development of affordable housing. These credits are typically allocated over a 10-year period. The developer can sell these credits to investors to generate equity for the project. However, the credits are not sold in a lump sum for the entire 10-year period upfront. Instead, they are allocated annually, based on the project maintaining compliance with the LIHTC program requirements.

2. Equity Funding: The sale of these tax credits to investors is a critical component of the project's capital stack. Investors pay for these credits, providing the developer with the necessary equity to fund the project. The price at which these credits are sold can vary based on market demand, location, and other factors. For instance, in high-income areas, credits might trade for higher prices (e.g., $1.10 per dollar of credit) compared to rural markets where the price could be lower (e.g., $0.82 per dollar).

3. Yearly Basis: The nature of the LIHTC program requires that the project remains compliant with affordable housing regulations over the 10-year credit period. This compliance is essential for the investors to claim the tax credits annually. Therefore, the financial structure is set up to ensure that the project adheres to the program's requirements over time, rather than allowing for a one-time sale of all future credits.

4. Investor Considerations: Investors in LIHTC projects are typically looking for the tax benefits associated with the credits, along with contributing to community development. Their return on investment is closely tied to the project's compliance and the annual allocation of credits, reinforcing the importance of a yearly basis approach.

In summary, while the concept of selling 10-year LIHTC credits at once might seem appealing for immediate capital generation, the structure of the LIHTC program and the necessity for ongoing compliance mean that credits are effectively sold and allocated on an annual basis to investors. This approach aligns the interests of developers, investors, and the goals of the LIHTC program in promoting long-term affordable housing solutions.

Sources: Q&A: Affordable Housing Acquisitions, Explain Affordable Housing?, Economics of building affordable housing?, LIHTC during the next recession