Affordable housing is an integral part of a healthy, mixed-income community—and a topic on everyone’s lips these days.
According to the City of Pittsburgh, there is a shortage of 8,200 units affordable to households at or below 30% of the Area Median Income (AMI) (about $28,440 a year for a household of four). Though everyone agrees there’s a need, funding affordable housing is easier said than done.
In previous posts, we explored different creative funding mechanisms for affordable housing, like New Markets Tax Credits and Federal Home Loan Bank grants, which ELDI has used to fund affordable, for-sale homes. In this post, we want to take a closer look at a widely used tool for affordable rental housing: the Low-Income Housing Tax Credit (LIHTC)—a program that has emerged as one of the most effective means of financing affordable rental housing across the United States.
What is the Low-Income Housing Tax Credit?
The LIHTC, established in 1986 as part of the Tax Reform Act, provides a federal tax incentive for the development and rehabilitation of affordable rental housing. It offers developers a tax credit in exchange for committing to keeping a portion of their rental units affordable for a certain number of years. Once the housing project is made available to tenants, investors can claim the LIHTC over a 10-year period.
Projects generally must meet certain requirements for low-income use for 30 years. The program operates as a public-private partnership, leveraging private sector investment to fund affordable housing initiatives.
How the Low-Income Housing Tax Credit works
The LIHTC program offers two types of tax credits: the 9% credit and the 4% credit.
- The 9% credit covers approximately 70% of the qualified construction or rehabilitation costs of new affordable housing projects, and it’s awarded competitively to projects that meet specific criteria.
- The 4% credit covers approximately 30% of the qualified costs and is generally used for rehabilitation projects or for new construction with other subsidized funding sources.
States receive an annual allocation of tax credits based on population, which they distribute to developers who apply for them through a competitive process. Once developers secure the tax credits, they typically sell them to investors, generating equity to help finance their projects.
The impact of the Low-Income Housing Tax Credit in East Liberty and beyond
Since the mid-1990s, the LIHTC program has supported the construction or rehabilitation of about 110,000 affordable rental units each year (though there was a steep drop-off after the Great Recession of 2008-9)—nearly 3 million units in all since its inception. Both for-profit and non-profit developers can apply for LIHTCs with the state housing agency.
“The majority of affordable housing in Pittsburgh, including East Liberty, has been developed using this funding source,” explained Juan Powell, regional vice president of real estate development at The Community Builders, an East Liberty developer and property manager. “It benefits communities in the sense that it facilitates the creation of affordable housing in places where there are no other capital structures available to do so. Since it is a well-established program, individuals in that community can feel a certain level of confidence that the projects will come to fruition once funding is awarded.”
Pittsburgh’s 2022 Housing Needs Assessment report showed that East Liberty has the second highest concentration of LIHTC units in the city, at 509 units.
Combining Low-Income Housing Tax Credit units with other kinds of housing in East Liberty
When we began our work at ELDI to revitalize East Liberty in the early 90s, the community recognized the need to balance affordable housing with market-rate units to avoid concentrations of poverty and bring new economic opportunity to the area. They laid out their vision of a vibrant mixed-income community where people of all incomes could interact and benefit from each other in the 1999 East Liberty Community Plan, A Vision for East Liberty.
While we worked to gain control of the neighborhood’s problem properties in order to reverse crime trends and reduce blight, maintaining the neighborhood’s LIHTC units and other permanently affordable units was key to ensuring that new development would not result in displacement. While we could not control for all displacement, we were able to maintain 38% of East Liberty’s rental housing as permanently affordable.
The Pittsburgh Housing Needs Assessment backs this up, showing that despite the influx of higher income households to East Liberty, the neighborhood lost less than 5% of households earning under $25K since 2015, placing East Liberty right in line with the City’s population loss at that income level during the same time period.
“There were some really key lessons that we figured out in East Liberty: from going through the traumatic displacement of the three high-rises to the successful redevelopment efforts of East Liberty Garden Apartments without displacement, which led to the Choice Neighborhoods development in Larimer, to the successful efforts to buy out absentee landlords,” said Kendall Pelling, ELDI’s former director of land recycling and current executive director of Rising Tide Partners. “All of these experiences showed us that if we do the right intervention in the community—if community partners, government, and philanthropy work together—we can actually prevent displacement and enable a community to control its own destiny.”
