Incorporating LIHTC Equity into Affordable Housing: A Financial Snapshot

The Low-Income Housing Tax Credit (LIHTC) is a cornerstone of affordable housing financing, providing developers with federal tax credits to offset the cost of building or rehabilitating low-income rental units. These credits attract private investors who purchase them to reduce their tax liability, injecting equity into the project. For accounting and finance professionals, understanding LIHTC equity is key to structuring viable projects. Firms like SoFla Prime Consulting (www.soflaprimeconsulting.com) (www.soflaprimeconsulting.com), led by Douglas Kohn CPA, MBA, offer expertise in optimizing LIHTC-driven financing for sustainable outcomes.

LIHTC Equity in the Example Scenario

Let’s revisit the 20-unit affordable housing project from the previous article, with annual revenue of $192,000, operating expenses of $120,000, and debt service of $50,000. Here, we’ll focus on how LIHTC equity fits into the project’s capital structure.

Project Assumptions:

• Total Development Cost: $3,000,000 (land, construction, and soft costs).

• LIHTC Allocation: The project qualifies for $200,000 in annual tax credits for 10 years (total $2,000,000 in credits).

• Investor Equity Contribution: Investors purchase the credits at $0.90 per dollar, providing $1,800,000 in upfront equity ($2,000,000 x 0.90).

• Financing Mix:

  • LIHTC Equity: $1,800,000 (60% of total cost).

  • Bank Loan: $1,000,000 (30-year term, 4% interest, annual debt service $50,000).

  • Local Grants: $200,000 (no repayment required).

The $1,800,000 in LIHTC equity reduces the need for debt or developer capital, lowering financial risk and enabling below-market rents for tenants earning 60% of the area median income ($800/month per unit).

Updated Mini Cash Flow with LIHTC Context

The LIHTC equity primarily impacts the project’s upfront financing, but its benefits ripple through the cash flow by reducing debt burden. Here’s the annual cash flow, incorporating the financing structure:

• Revenue: 20 units x $800/month x 12 months = $192,000

• Operating Expenses: $120,000

• Net Operating Income (NOI): $192,000 - $120,000 = $72,000

• Debt Service: $50,000 (supported by lower debt due to LIHTC equity)

• Cash Flow Before Taxes: $72,000 - $50,000 = $22,000

Investor Perspective:

• Investors receive $200,000/year in tax credits for 10 years, totaling $2,000,000 in tax savings.

• For their $1,800,000 investment, they achieve an effective return, often measured as an Internal Rate of Return (IRR), typically 6-8% annually, depending on project performance and residual value.

• The developer benefits from stable cash flow and potential long-term appreciation, while fulfilling affordable housing mandates.

Why LIHTC Matters

LIHTC equity bridges the gap between high development costs and low rental income, making affordable housing feasible. However, navigating LIHTC compliance, investor agreements, and tax implications requires specialized knowledge. Douglas Kohn CPA, MBA, at SoFla Prime Consulting, helps clients structure LIHTC deals, ensuring financial viability and regulatory adherence.

By leveraging LIHTC equity, developers and investors can create win-win scenarios: affordable homes for communities and attractive returns for stakeholders. For expert guidance, visit www.soflaprimeconsulting.com.

Note: This is a simplified model. Actual LIHTC projects involve complex compliance, allocation formulas, and market variables. Consult Douglas for detailed analysis.