Low-Income Housing Tax Credits and Private Activity Bonds: A Guide to Affordable Housing Development

In order to make development of multifamily affordable housing financially feasible, lowincome housing developers must be able to access various layers of equity and low-interest debt. Some common sources of debt and equity for multifamily affordable housing includes HOME and Affordable Housing Program (AHP) loans, HUD 202 moneys, local city grants and loans, the sale of Low-Income Housing Tax Credits (LIHTC), and proceeds from Private Activity Bonds. HOME, AHP, HUD 202, and local grants and loans are typically used to fill gaps in a development budget, whereas the sale of tax credits and bond proceeds typically cover at least fifty percent of a given development budget. Most low-income housing developers are either strictly tax credit developers (those using the LIHTC program, mainly 9% credits), or strictly bond developers (those using Private Activity Bonds), or sometimes, large development groups are divided into tax credit specialists and bond specialists. However, the exciting thing is that Low Income Housing Tax Credits and Private Activity Bond proceeds can be used together to finance individual projects. Thus, it would seem advantageous for low-income housing developers to learn how both programs work in an effort to understand when and why these programs should be used individually or together. This paper is divided into three sections. The first two sections provide detailed explanations of how the LIHTC and Private Activity Bond programs work individually in multifamily low-income housing development transactions. These sections provide information on the history of each program, the purpose behind each program, the parties involved in carrying out a development under the auspices of each program, the steps a developer should take to successfully develop a project under each program, and the basic concepts and federal regulations behind each program. The third section of the paper provides an explanation of how the LIHTC and Private Activity Bond programs can be used together under a single development. Through an analysis of five North Carolina developments that received both bonds and tax credit awards in North Carolina in 2003, this section will also discuss some advantages and disadvantages to combining these two programs and illustrate market situations in which combining the two programs may prove favorable or unfavorable.