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Public-Private Partnerships: Developing Quality Affordable Housing with Tax Credits

Posted By Administration, Monday, October 29, 2018
Updated: Thursday, October 25, 2018
By Crystal LaTier, El Paso County, Colorado Economic Development Department 

When examining the production of affordable housing within the United States, it is clear that driving forces behind development include the complex financial tools known as Low Income Housing Tax Credits (LIHTC) and Private Activity Bonds (PABs). Both of these tools are federal subsidies that incentivize affordable rental housing. In the current housing market, subsidiaries from multiple sources are crucial to making properties financially feasible.

The LIHTC program was established as part of the Tax Reform Act of 1986. It provides tax incentives which encourage investments in the development, acquisition, and rehabilitation of affordable rental housing. Investors are able to claim tax credits on their federal income tax returns. The equity raised with the investments can then be used for newly constructed or substantially rehabilitated affordable housing properties for low-income households. LIHTCs provide equity equal to the present value of either 30 percent (referred to in this report as the 4 percent credit) or 70 percent (referred to as the 9 percent credit) of the eligible costs of a low-income housing project, depending in part on whether tax-exempt bonds are used to finance the project.

There are requirements that must be met to ensure the project qualifies for the credits. Those requirements include minimum unit set-asides and rent restrictions. There are a variety of ways a project can ensure they are meeting the requirements:

  • Either through the 40/60 test: meaning 40 percent of the units are set aside for renters earning no more than 60 percent of the area’s median income;
  • Or the 20/50 test: meaning 20 percent of the units are set aside for renters earning no more than 50 percent of the area’s median income;
  • Or the income averaging test: meaning that 40 percent of the units are set for anyone earning up to 80 percent of the area’s median income, provided the average income/rent limit in the property is 60 percent or less of the area’s median income

In El Paso County, Colorado, Inland Group (an experienced affordable housing developer based in Washington) was able to not only effectively use LIHTC and PABs, but layer in a third subsidy: 4% state tax credits. This third subsidy was especially significant, as it was not only very competitive, but the first development ever to receive state tax credits in the region.  The feat was likely gained due to Inland Group’s ability to recognize the need for senior housing in El Paso County, execute thorough and thoughtful development plans, clearly demonstrate their capacity through successful past performance with tax credit developments, and their ability to secure robust local financial and political support for the project.

So how did tax credits really impact the finances of the development? Total development costs for this 180 unit senior complex were just over $31M. $21M in PAB were issued, which allowed for nearly $10M in tax credit equity with another $1.7M in state tax credit equity. Additionally, the project was able to leverage nearly $2M in local soft funds—those funds came from federal entitlement programs and a local housing trust fund. Legal costs, initial operating costs and developer fees were also factored in.

So what does this complex financial deal actually mean for a community? Well, on October 24, 2018, Inland Group held a ribbon cutting event to show local civic leaders and residents what benefit tax credits can bring to a community. El Paso County, Colorado, like many other areas in the nation, is facing an affordable housing crisis. And with a rising senior population priced out of the current market, many of our long-standing citizens are left with very few affordable housing choices. Inland developed a beautiful complex with state of the art amenities including: a theater room, library, and internet café, raised garden beds and welcoming gathering and common areas. But most importantly, the development contains 180 units of housing eligible to those over the age of 55 making less than 60% of the area’s median income.

This new and affordable housing, not only offers on-site amenities, but is also walking distance to a grocery store and several other shopping options, less than 3 miles from a major hospital and medical provider complex, and right on the public transit bus route. The development has given 180+ seniors in our region access to housing choice within an area that offers all the services and amenities they may need. Every day brings new choices, and today in El Paso County, low-income seniors now have one more housing choice thanks in part to Low Income Housing Tax Credits.

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Samantha Whitley says...
Posted Monday, October 29, 2018
Great write-up on a fantastic project! Thanks Crystal!
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