Low-Income Housing Tax Credits and Mortgage Lending: What MLOs Need to Know

The Low-Income Housing Tax Credit program funds the construction and rehabilitation of affordable rental housing by providing federal tax credits to developers who agree to rent to income-qualified tenants at restricted rents for a compliance period (typically 15 to 30 years). MLOs rarely originate individual loans for these properties since they are typically owned by partnerships, but understanding the structure is relevant for borrowers involved in LIHTC transactions.

How LIHTC Properties Are Financed at the Development Level

LIHTC developments typically use a combination of tax credit equity (from syndicators who purchase the credits), permanent first mortgage debt, and government soft loans. The first mortgage on a LIHTC property is sized to the property's income as restricted by the compliance agreement -- not to market rents. This means the loan-to-value ratio at market value appears very low, but the property may carry significant debt relative to its restricted-income capacity.

Appraisal Complexity

• ✦LIHTC properties require specialized appraisers who understand restricted rent analysis
• ✦Appraisal approaches use the income approach with restricted rents as the basis, not market rents
• ✦The hypothetical market value (as if unrestricted) may substantially exceed the restricted use value
• ✦Fannie Mae and Freddie Mac both have specific guidelines for appraising LIHTC properties

When a Borrower Wants to Purchase a LIHTC Unit

Individual units within a LIHTC project cannot typically be sold to individual owner-occupants because the compliance agreement requires rental occupancy by income-qualified tenants. Condominiums developed under LIHTC may be an exception if the project was designed for homeownership. In practice, this restriction means most LIHTC properties are not individually purchasable during the compliance period.

Compliance Period Exit and Refinancing

After the compliance period expires, the owner may convert the property to market rate or sell individual units. Refinancing at compliance period exit requires a full market appraisal since restricted rents no longer apply. MLOs who encounter clients transitioning LIHTC properties out of the compliance period should work with lenders experienced in affordable housing exits.