As explained in this module's Topic 2: Calculating Housing Tax Credits, there are two rates for housing tax credits - the 9 percent and the 4 percent rates. New construction and substantial rehabilitation projects that are not otherwise subsidized by the Federal government are eligible for the 9 percent credit each year for a 10-year period.
Prior to the Omnibus Budget and Reconciliation Act of 1993 (OBRA), HOME funds were treated the same as other Federal funds when calculating the LIHTC. This meant that using HOME funds often limited developers to the 4 percent credit rate. To qualify for the 9 percent credit rate, developers either had to:
- Exclude HOME funds from the project's eligible basis, or
- Borrow the HOME funds at the market rate of interest.
Since OBRA, projects using HOME funds at a below market rate of interest can receive the 9 percent tax credit rate IF they meet stricter occupancy requirements. As a result, developers and PJs have more flexibility in using HOME funds in LIHTC projects. There are four common ways to use HOME funds in a LIHTC project.