LIHTC’s minimum affordability requirements detail the rental rate at which a unit can be offered to be considered “affordable,” who can qualify for affordable housing, and what percentage of a project’s units must be affordable to qualify for the credit. The first requirement is commonly used in HUD programs: a unit is affordable if the tenant is spending 30 percent or less of their monthly adjusted gross income (AGI) on housing costs (i.e., rent plus utilities). Additionally, using HUD’s Area Median Income (AMI) measurements, a project must provide either 20 percent of units at an affordable rate for tenants at or below 50 percent of AMI or 40 percent of units at an affordable rate for tenants at or below 60 percent of AMI. The second and third requirements are evaluated together and can be satisfied in several ways.
Additionally, the 2018 Consolidated Appropriations Act reformed LIHTC by allowing an additional affordability metric: a household earning up to 80 percent of AMI can qualify for an affordable unit if the average income of all subsidized units is below 60 percent of AMI. This change was made to prevent clustering of incomes around the upper AMI limit. Currently, projects can house tenants from lower income levels without losing revenue, as they can now be subsidized by higher-income tenants.
These affordability criteria must be maintained for 30 years, enforced by owners reporting their compliance to the IRS and their state HFA. Enforcement is backed by the potential for the IRS to reclaim the tax credits. The first 15 years are known as the “initial compliance period.” The last 15 years are called the “extended use period.” The extended use period brings about several changes to compliance. While owners are still required to maintain affordability during the extended use period, they are no longer obliged to report affordability compliance to the IRS and their state HFA and are no longer at risk of having their tax credits reclaimed.