Low-Income Housing Tax Credit (LIHTC) Glossary of Terms

Navigating the world of Low-Income Housing Tax Credits (LIHTC) means understanding various terms and concepts. This comprehensive glossary provides clear and concise definitions for key terms related to LIHTC, from accelerated credit portions to volume caps.  

Whether you’re a developer, investor, or simply curious about affordable housing initiatives, this resource will help you navigate the intricacies of LIHTC programs.  

- A - 

• Accelerated Portion of the Credit - Excess of the aggregate allowable credit during the 10-year credit period over the aggregate credit that would have been allowable over the 15-year compliance period. 

• Additions to Qualified Basis - Increases in qualified basis after the end of the first year of the credit period because more residential units qualify as low-income units. 

• Acquisition Cost - Cost of acquiring an existing building. 

• Adjusted Basis - Cost basis of a building adjusted for capital improvements minus depreciation allowable. 

• Applicable Fraction - Percentage of a building treated as low-income use and generally eligible for the LIHC. The applicable fraction is the lesser of the unit fraction or the floor space fraction. 

• Applicable Percentage - Credit percentage that a qualified low-income housing project is eligible for. 

• Arbitrage Yield Restriction - Arbitrage occurs when tax-exempt bond proceeds are invested in securities that yield a greater return than the interest charged. Restrictions exist on the amount of arbitrage bonds can earn without risking their tax-exempt status. Exceptions allow the bonds' tax-exempt status to remain intact when the restriction is violated. 

• Area Median Gross Income (AMGI) - The gross income level of half the families in an area is below. 

• Available Unit Rule - If an existing tenant's income rises above a specified amount, the next available comparable unit in the building must be rented to an income-qualified tenant. 

• Average Income Test - The Average Income test is a minimum set-aside test used to determine if a project qualifies for low-income housing tax credits.  Under the test, a project is generally a qualified low-income project if at least 40 percent of the units are both rent-restricted and are occupied by tenants whose income is less than or equal to the unit’s designation and that units are designated in increments of 10% (from 20% to 80%) in a manner that the average of the unit’s designation does not exceed 60%. 

- B - 

• Bond Issuance Costs - Costs incurred to issue the bonds, including legal fees, underwriting fees, rating agency fees, trustee fees, printing, etc. 

• Building Identification Number (BIN) - The state agency assigns BIN to every building receiving an allocation of LIHTC. 

• Bond Issuer - Governmental or non-profit entity responsible for issuing bonds. 

- C - 

• Carry-Over Allocation - An allocation of credit for a qualified building placed in service not later than the close of the second calendar year following the calendar year in which the allocation is made. 

• Common Areas - Property in a residential rental project subject to depreciation and (1) used in common areas or (2) to provide comparable amenities to all the residential units in the building(s). 

• Compliance Period - The 15-year period over which a project must continue to satisfy the various LIHTC requirements to avoid tax credit recapture. The compliance period begins with the first taxable year of the credit period. 

• Credit Enhancer - Guarantees, for a fee, that the bondholders will receive scheduled bond payments. 

• Credit Period - The 10-year period over which the LIHC is claimed. This period generally begins when a property is placed in service. Still, a taxpayer may elect to start the credit period at the beginning of the year following the year the LIHC property is placed in service. 

• Credit Recapture Amount - The amount of credit that is recaptured upon disposition of the LIHC project during the compliance period. The maximum recapture is two-thirds of the previously claimed credit, and an interest charge applies. 

- D - 

• Deep Rent Skewing Set-Aside - Deep rent skewing set-aside is a special set-aside test determining whether existing tenants qualify as low-income tenants. This special test is elective and must be met in addition to the general set-aside test (i.e., 20-50, 40-60, and 25-60). 

• Defeasance - Retirement of bonds through the issuance of new bonds. 

• Deferred Fee - The portion of developer fee that is paid over a 12-to-15-year period from cash flow 

• Developer Fee - A fee that a developer earns based on the total development cost of a project. 

• Difficult Development Area - Area designated by the U.S. Department of Housing & Urban Development, which has high construction, land, or utility costs relative to the area's median gross income. 

- E - 

• Eligible Basis - A component of the qualified basis of a LIHTC project. It is generally equal to the adjusted basis of the building, excluding land but including amenities and common areas. 

• Existing Building - A building that has been previously placed in service. 

• Extended Low-Income Housing Commitment - An agreement between the taxpayer and the housing credit agency extending the low-income housing requirements for 30 years. 

• Extended Use Period - The period beginning on the first day that the building is part of a qualified low-income housing project and ending on the date specified by the agency or 15 years after the close of the compliance period. 

- F - 

• Federally Assisted Building - Any building substantially assisted, financed, or operated under laws in effect on the date of enactment of the Tax Reform Act of 1986. 

• Federally Subsidized - A building financed with a below-market federal loan or a loan for which the interest income earned by the loan holder is exempt from tax under Internal Revenue Code Section 13. 

• Floor Space Fraction - Obtained by dividing the total floor space of the low-income units in the building by the total floor space of all residential units (whether occupied or not). 

- G - 

• Grant - Funds received from a private foundation or charitable group, federal, state, or local government that does not have to be repaid. 

• Ground Lease - A long-term lease of land.  The tenant of the ground lease constructs and owns a building on the property for a specified period (generally up to 99 years). 

• Gross Rent - Gross rent excludes any amounts received from a rental assistance program, utility allowance, or fee paid to the owner of the unit owner by any governmental assistance program. 

- H - 

• Housing Credit Agency - State or local housing agency with the authority to allocate and commit federal low-income housing tax credits to a building. 

- L - 

• Low-Income Unit - A low-income unit is (1) rent-restricted and (2) has individuals occupying it who meet the income limitation applicable under the elected minimum set-aside test. 

- M - 

• Minimum Set-Aside Test- This test determines a qualified low-income housing project. There are four different minimum set-aside tests with varying applicability: the 20-50 test, the 40-60 test, the Average Income test, and the 25-60 test (See 20-50 test, 40-60 test, Average Income, and 25-60 test). 

• Mortgage-Backed Security (MBS) - Collateral provided by credit enhancers that are used to guarantee the bonds. 

- N - 

• Negative Arbitrage - Occurs when undisbursed bond proceeds earn a lower interest rate than the bond interest rate. 

• Non-profit Set Aside - The portion of the state’s housing credit ceiling is set aside for projects involving qualified nonprofit organizations so that no more than 90 percent is allocated to projects involving qualified nonprofit organizations. 

• Nonqualified Nonrecourse Financing - Nonrecourse financing that is not qualified commercial financing. This definition is used for the low-income housing tax credit at-risk rules. 

- P - 

• Placed-In-Service Date - Marks the beginning of the credit period. It is defined as the date the property is ready for occupancy. 

- Q - 

• Qualified Allocation Plan (QAP) - State agencies are required to have a QAP in place to determine which housing projects should receive allocations of LIHTCs. The QAP must identify the selection criteria. 

• Qualified Basis - The Base is multiplied by the credit percentage to determine the annual credit. The qualified basis equals the applicable fraction times the eligible basis. 

• Qualified Census Tract—Any census tract in which 50 percent or more of the households have incomes less than 60 percent of the area median gross income. 

• Qualified Contract - Contract to acquire a LIHC project for the sum of the existing debt, adjusted investor equity, and other capital contributions, with fewer project cash distributions. 

• Qualified Low-Income Building - A qualified low-income building is part of a qualified low-income housing project throughout the compliance period and for which prior law depreciation rules do not apply. 

• Qualified Low-Income Housing Project - A qualified low-income housing project is a residential rental project that satisfies the elected minimum set-aside test. 

- R - 

• Recapture Amount - The portion of the accelerated credit recaptured from each prior year of the 15-year compliance period plus interest. 

• Rehabilitation Expenditures - Amounts incurred in improving or making additions to property in connection with the rehabilitation of an existing building. 

• Rent-Restricted Unit - A unit in which the rent charged to tenants is limited to 30 percent of the income limitation applicable under the elected minimum set-aside test. 

- S - 

• Scattered Site Project - A qualified low-income housing project on multiple sites. 

• State Housing Credit Ceiling - A state's maximum LIHTC amount in a year. It is calculated at $1.75 per resident. 

• Substantial Improvement - This determines an existing building's eligibility for the LIHC. It is an amount incurred during 24 months equal to or exceeding 20% of the adjusted basis of the building as of the first day of such period. 

- U - 

• Unit Fraction - The fraction obtained by dividing the number of low-income units in a building by the total number of units (occupied or not). 

• Utility Allowance - The amount determined by the Secretary of the Department of the Treasury to be the average cost of tenant utilities. 

- V - 

• Volume Cap - The maximum amount of LIHTCs and tax-exempt bonds each state can allocate annually. The tax credit volume cap is $1.75 per state resident. The bond volume cap is $75 per person per state, with a $225 million minimum per state. Beginning in 2003, the volume cap will be indexed to inflation. 

-  # -  

• 4% Credit - This credit percentage is available for existing housing or federally subsidized new construction or rehabilitation (30% credit). 

• 9% Credit - The credit percentage available for new construction or rehabilitation (70% credit). 

• 30% Credit - The 30% credit is the credit percentage available for existing housing or federally subsidized new construction or rehabilitation (4% credit). 

• 70% Credit - The 70% credit is the credit percentage available for new construction or rehabilitation (9% credit). 

• 10-Year Rule - Requirement that a building can’t have been placed in service in the ten years before a new acquisition if the building is to qualify for acquisition credits. 

• 40-60% Test - Minimum set-aside test used to determine if a project qualifies for low-income housing tax credits. Under the test, a project is generally a qualified low-income project if at least 40% of the units are rent-restricted and occupied by tenants whose income is less than or equal to 60% of the area's median gross income. 

• 50% Test - The requirement that a project must be financed at least 50% by the proceeds of tax-exempt obligations to qualify for LIHTCs if it hasn’t gotten an allocation of 9% LIHTCs from the state where the project is located. 

Learn More About LIHTC and Affordable Housing

Whether you’re exploring investment opportunities, evaluating project feasibility, or simply seeking to contribute to affordable housing initiatives, familiarizing yourself with the terms and concepts outlined in this glossary will help you understand the nuances of LIHTC programs and make informed decisions.  

If you have questions about these LIHTC terms or concepts, connect with our team below or explore additional affordable housing and tax incentives resources.