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The low-income housing tax credit and historic rehabilitation tax credit are two federal tax incentives that can help raise private capital for affordable housing and historic commercial projects involving local housing agencies. Both are governed by the federal tax code and IRS regulations. The housing credit helps fund production of rent-restricted apartments limited to low-income households - generally 60% or less of median income. The historic rehabilitation tax credit is a federal income tax credit equal in size to 20% of virtually all of the hard and soft costs of the qualified rehabilitation of an eligible building.

The low-income housing tax credit and historic rehabilitation tax credit are two federal tax incentives that can help raise private capital for affordable housing and historic commercial projects involving local housing agencies (LHAs). Both are governed by the federal tax code and IRS regulations.

The housing credit helps fund production of rent-restricted apartments limited to low-income households-generally 60 percent or less of median income. Credits are available for new construction, substantial rehabilitation, or acquisition/ rehabilitation. State housing finance agencies allocate the credits to developers in competitive application cycles. While states usually have more demand for credits than their limited annual supply, they can also be obtained "outside" the cap for certain bond-financed projects.

The housing credit is a flexible program. State agencies set their own rules and project preferences within broad federal parameters. As a result, the credit has been used for diverse rental housing projects, including garden apartments, town houses, high-rises, scattered-site development, lease-purchase homes, and single-room occupancies intended for different residents, such as families, seniors, and special needs populations.

Housing credit projects must be privately owned. Typically, a limited partnership owns a project that has a developer as the general partner with a 1 percent interest, and one or more investors as the limited partner(s) with a 99 percent interest. This structure enables developers to "sell" the housing credits to investors (usually corporations), which provides equity capital in exchange for receiving tax benefits. With this equity, a large share of the credit project's total development cost is financed, enabling developers to obtain a smaller first mortgage and less gap financing. For-profit or nonprofit developers, or joint ventures may sponsor housing credit projects.

Only a fraction of LHAs have made use of housing credits to date-most notably larger metro authorities for HUD HOPE VI projects. However, the program offers potential benefits to agencies of all sizes.

With the housing credit, LHAs can access private capital to expand the supply of affordable rental housing in their communities. In addition, the use of the credit can be "financially rewarding" to housing authorities, says Perry O'Malley, executive director of the Housing Authority of the County of Butler, Pa. These rewards, he notes, include extra income-from fees for the development and/or management of housing credit propertieswhich LHAs can use for other purposes. The Butler authority, now on its fourth housing credit project, manages all of its credit properties and has shared in the development fees for several, acting as the co-developer through a non-profit subsidiary. LHAs can participate in the housing credit program in different ways. They can act as the developer-or, more likely, the co-developer-of a project. In a less direct role, they might retain or solicit a private developer for a particular housing credit project that they want done-such as one that will use vacant buildings or land owned by the LHA. Third, the authority might lend support for a credit project proposed by a developer by providing or helping secure other public funds that the authority possesses, controls, or can help access. Possible resources here include project-based Section 8 rent subsidies, HOME [Home Investment Partnerships], and CDBG [Community Development Block Grants] dollars.

Finally, LHAs can manage credit properties. It should be noted, though, that management here requires specialized knowledge and skills to ensure long-term, continuous compliance with complex credit program rules.

O'Malley advises housing authorities that want to participate in the housing credit program to "find a partner." Such a partner, for instance, might be a private developer with past experience in building housing credit projects.

Historic Rehabilitation Credit

The historic rehabilitation tax credit is a federal income tax credit equal in size to 20 percent of virtually all of the hard and soft costs of the qualified rehabilitation of an eligible building.

Buildings must be certified as historic by the National Park Service or located in a designated historic district. In addition, rehabilitation plans must meet certain federal standards, and be approved by the National Park Service. Renovations for commercial, industrial, or residential rental use are permitted. Like the housing credit, developers normally sell the historic credit to raise equity capital from investors to help pay for the development costs.

Housing and development authorities are less likely to act as developers or co-developers of historic commercial projects, but they may wish to provide support to such projects to preserve certain buildings or spur revitalization of particular neighborhoods.

The historic credit can also be combined with the low-income housing credit in the same project, provided the rehabilitated structure will be used as affordable rental housing.