Leyton is an international consulting firm that helps businesses leverage financial incentives to accelerate their growth and achieve long-lasting performance.
The Low-Income Housing Tax Credit (LIHTC) was introduced in 1986 and has been by far the most used incentive in the creation of affordable housing across the country. Every year over 100,000 new affordable units are built using LIHTC.
Now, with recent changes to the 45L Efficient Home Tax Credit, there is a massive benefit to strategically leveraging Energy Efficiency certifications like Energy Star and Zero Energy Ready Homes programs in LIHTC Multifamily Developments. Now project investors can capture the 45L credit (up to $5000 per unit potentially) without reducing any basis in the project. Additionally, they can qualify for reduced mortgage insurance premiums through the Housing and Urban Development (HUD) loan programs. It’s a win-win-win for any Developer or Syndicate looking to maximize their financial benefits from utilizing LIHTC. If you have any questions for our experts, schedule a call!
45L and the Inflation Reduction Act – Then and Now
First introduced in 2005, the 45L Efficient Home Tax Credit incentivized energy-efficient residential home building with a $2,000 credit per qualifying unit. To qualify, buildings had to be three stories or less, and units had to be modeled, showing a 50% reduction in heating and cooling loads. This reduction percentage was compared against a reference home based on the 2006 International Energy Conservation Codes (IECC), with at least 10% of the reduction coming from the building envelope.
The Inflation Reduction Act (IRA) took effect in 2023 and changed the qualifying criteria to include Energy Star or Zero Energy Ready certification to receive the credit. With those changes, the tax credit amounts were increased to $2,500 per unit and $5,000 per unit respectively for single family homes. The IRA removed the height limitations for Multifamily buildings to qualify but did add prevailing wage requirements to receive the full credit amounts for multifamily buildings. Under the new rules, without prevailing wage, the credit values $500 per unit for Energy Star and $1,000 per unit for Zero Energy Ready Homes. With Prevailing Wage, there is a 5x multiplier that brings the credit value in line with that offered for single family homes,
Low Income Housing Tax Credits
For developers to meet LIHTC requirements, there is criteria based rent values, occupancy metrics and tenant incomes. The tax credit itself is determined by the total basis of the qualified units that meet these requirements. The credit can be either the “4 Percent Credit” (which in practice is a 30% present unit basis value credit) for rehab projects or projects funded by non-taxable bonds, or the “9 Percent Credit” (with 70% present value in practice) for new construction or substantial rehabs. The credits are paid out over a 10-year period so long as all requirements are met.
To maximize the credit, about 70% of all LIHTC projects have 100% of units meeting the tenant income and unit rent requirements. The credits are transferable, but non-refundable. Many LIHTC projects a syndicated, where the credits are transferred to 3rd party investors in exchange for project funding. This factor plays into 45L’s utility with these efforts.
LIHTC and 45L
The IRA did add one more important change to 45L that significantly improved its value to LIHTC developers. As of 2023, 45L no longer reduces the basis for LIHTC projects.This allows developers to receive full credit amounts for both LIHTC and 45L. While LIHTC takes 10 years to fully pay out its credits, the 45L credit is usable as soon as the project is completed. While the 45L tax credit is non-transferable, many syndication schemes for LIHTC give investors part or majority equity in the project, so the credit can be passed through directly based on their ownership of the project.
In addition to taking advantage of LIHTC and 45L, projects can gain even more advantages if they are using HUD loans. As of 2016, HUD loans offer lower Mortgage Insurance Premiums for getting certain Green Building Certifications, which includes the Energy Star Homes program. Many HUD assisted projects also require prevailing wages to be paid on the project, meaning the developer can receive full 45L credit amounts in addition to lower MIPs and LIHTC.
Take Advantage, Maximize Value
Navigating all the potential tax credits and incentives on any project can be complex and overwhelming at times. At Leyton, we have a team of CPAs, Professional Engineers and Energy Star raters that will be able to find all the best available financial incentives for any project. To learn more about 45L and how it can impact LIHTC projects, drop a line to any of Leyton’s 45L Tax Experts and let us maximize your engagement’s value.
