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Determining the Value of Housing Tax Credits: An Example

Let's look at an example of a calculation for a typical housing tax credit property.

A local developer has proposed to use housing tax credits to construct 70 units of low-income rental units in Anytown, USA. No other Federal funds will be used. The development will not be located in a QCT or DDA. Forty percent (40%) of the units (and forty percent (40%) of the square footage) will be set-aside for income- and rent-restricted households. The total development costs for the project are estimated as follows:

Land Acquisition
Dwelling Construction
Site Improvements
Architectural/Engineering
Other Eligible Soft Costs
Total Development Costs
$1,000,000
3,400,000
535,000
40,000
25,000
$5,000,000

In general terms, the amount of equity that can be raised from the sale of tax credits is calculated as follows:

  • Eligible Basis = $4,000,000 (Total Development Costs - Land Cost)
  • Qualified Basis = $1,600,000 (Eligible Basis x Applicable Fraction: $4,000,000 x 40%)
  • Annual Credit = $144,000 ($ 1,600,000 x 9% Credit Rate)
  • Total Amount of Housing Tax Credits = $1,440,000 ($144,000 x 10 years)

Potential limited partners have offered to purchase the tax credits at $.75 for every dollar of future tax benefit. Thus, in this case, the limited partners are willing to contribute equity of $1,080,000 today for future tax benefits of $1,440,000 (claimed at $144,000 per year for ten years). Thus the value of the housing tax credits, in this example, is $1,080,000.

We see from the above example that restricting 40 percent of the units to low-income households will produce approximately $1 million in equity from the sale of the housing tax credits. The difference between this amount and the total development cost must be covered by other funding sources, including loans, grants, or developer equity. Because the developer has used 9 percent credits, the other sources, including HOME Funds, may not include "Federal funds." (Note that "Federal funds" has a specific definition in the LIHTC regulations, and that HOME funds are not always considered "Federal funds" under this definition).

In the example, the affordable units (40%) probably account for $2 million of the $5 million total development costs. The value of the housing tax credits $1,080,000) is slightly more than half of that amount. It is typical for "LIHTC equity" to cover roughly half of total development costs, in new construction projects utilizing the "9 percent" credit rate.


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