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About the Housing Tax Credit Program
Funding Source & Background
The Housing Tax Credit (HTC) Program was created by the Tax Reform Act of 1986. Section 42 of the Internal Revenue Code of 1986, as amended (the Code), is the federal law that governs the HTC program. Section 42 authorizes tax credits in the amount of $2.15 per capita for each state as adjusted for inflation. For 2011, that inflation adjusted amount generated approximately $54 million in annual tax credit availability. The Texas Department of Housing and Community Affairs (TDHCA) is the only entity in the state of Texas with the authority to allocate tax credits under this program.
Since 1987, the HTC Program has provided for the construction or renovation of over 120,000 units of affordable multifamily housing throughout Texas, and is generally recognized as the single most effective incentive for the development of new and affordable multifamily housing.
The tax credit program is one of the primary means of directing private capital toward the creation of affordable rental housing. The tax credits provide investors of affordable rental housing with a benefit that is used to offset a portion of their federal tax liability in exchange for the production of affordable rental housing. The value associated with the tax credits allows residences in HTC developments to be leased to qualified families at below market rate rents.
To qualify for tax credits, the proposed development must involve new construction or substantial rehabilitation of existing residential units (at least $12,000/unit in direct hard costs). The amount of tax credits that may be applied for depends on: the amount and type of additional funding sources, the total amount of qualified development costs to be incurred, the percentage of rent restricted units set aside in the development for eligible tenants, and location in communities designated as Difficult Development Areas and Qualified Census Tracts.
Each qualified tax credit development must include a minimum percentage of rent restricted units to be set aside for eligible tenants. Pursuant to the Code, a qualified housing development means any development approved by the Department for residential rental occupancy if the development meets either of the following requirements:
- Twenty percent (20%) or more of the residential units in such development are both rent restricted and occupied by individuals whose income is fifty percent (50%) or less AMFI; or
- Forty percent (40%) or more of the residential units in such development are both rent restricted and occupied by individuals whose income is sixty percent (60%) or less of AMFI.
Tax credits may only be claimed on the units that have been set-aside for participation under this program. It is possible, but not required, for development owners to set aside one-hundred percent (100%) of any development for consideration under the tax credit program and in doing so claim the maximum amount of tax credits eligible for the development.
For a more detailed description of the program see our Information Guide for the most current year.
Pursuant to Section 42 of the Code, the Department must develop a plan for the selection of eligible developments; this plan is known as the Qualified Allocation Plan and Rules (QAP). The QAP is revised annually and is formalized for the following year when it is signed by the Governor. This revision process includes a public comment period. It is the goal of TDHCA to encourage diversity through broad geographic allocation of tax credits within the state, and to promote maximum utilization of the available tax credit amount. The criteria utilized to realize this goal includes a point based scoring system and an evaluation of other non-point based factors that may include each application's:
- cost and financial feasibility;
- geographic location within the state as compared to other developments applying for tax credits;
- impact on the concentration of existing tax credit developments and other affordable housing developments within specific markets and sub-markets;
- site conditions;
- development team experience; and
- consistency with the goal of awarding credits to as many different applicants as possible
Those applications which are deemed to have a high priority in their regional area based on the review criteria, are subject to an underwriting and portfolio management review which evaluates the development's projected construction costs and financial feasibility, and the applicant's past performance. Applications which pass the underwriting process and are determined to have the highest priority will be presented to TDHCA's Board of Directors for consideration.
HTC Program Funding: Set Asides and Regional Allocation
Tax credits are allocated in accordance with Section 2306.111 of the Texas Government Code, which requires that the credits be allocated on a regional basis. There are thirteen state service regions; each of the thirteen state service regions is further divided into Rural and Urban/Exurban areas each of which is targeted to receive a pre-determined amount of the tax credits for each year. The amount per area is based on a regional distribution formula which is generated, with public input, by the Housing Resource Center of TDHCA. Upon finalization of the formula, the targeted allocations will be released. Additionally, the HTC Program has several allocations and/or set-asides which it strives to meet: at least 10% of all credits must be awarded to Qualified Nonprofits, at least 15% of each region's credit allocation is targeted to At-Risk Developments and at least 5% of each region's credit allocation is targeted to developments funded by the U.S. Department of Agriculture.
Efforts are made in the allocation of funds and the planning process to ensure the involvement of housing advocates, community-based institutions, developers, local municipalities and other interested parties. The Department encourages local cities to support and contribute funds toward the development of tax credit developments. The Department also encourages the participation of elected officials and neighborhood-based groups. The Department requires recipients of tax credits to document the participation of minority owned businesses in the development and management of tax credit developments. The QAP also defines a series of point based selection criteria items to ensure that the housing proposed in the applications is consistent with the program's goals.
For additional information on the program, please contact the HTC staff.