Four Ways to Add HOME Funds to Your LIHTC Project

Information by State  Print version   In This Section Using LIHTC with HOME Funds   Receiving the 9 Percent Credit Rate in A HOME-LIHTC Project   Four Ways to Add HOME Funds to Your LIHTC Project   Gap Financing   Monitoring

HOME funds can be incorporated into a LIHTC project in a variety of ways, the most common of which are discussed below. Practitioners are encouraged to consult with LIHTC experts to determine the optimum way to structure HOME funds in a particular LIHTC project.

REMEMBER The eligible basis is the sum of a project's total development costs that may be included in the calculation of tax credits. The qualified basis is the portion of eligible basis attributable to the rent restricted units.

1. HOME Grant With Reduced Eligible Basis. Although HOME funds may be provided as a grant, LIHTC program rules require that eligible basis be reduced whenever grant funds are used in the project -- and that, in turn, reduces housing tax credits to which the project owner would otherwise be entitled. Because of this, developers typically prefer that HOME funds be a loan rather than a grant.
   
   
   • Deferred payment loans are generally allowed, provided the unpaid interest accrues and there is a reasonable expectation that the loan can be repaid.
     
     
2. Below Market Interest Rate HOME Loan with 4 Percent Tax Credit Rate. Some projects may only qualify for a 4 percent tax credit regardless of the way HOME funds are invested in the project. For example, a project with other Federal or tax-exempt mortgage revenue bond funds included in the basis is only eligible for the 4 percent credit under any circumstances. This means that HOME funds can be lent at any below market interest rate, without affecting the tax credit calculation.



3. Below Market Interest Rate HOME Loan with 9 Percent Tax Credit Rate But No "Basis Boost". HOME funds can be provided at an interest rate below the Applicable Federal Rate and be counted in the eligible basis - and the project can receive a 9 percent credit rate - IF the project meets stricter occupancy requirements of:
   
   
   • At least 40 percent of the units must be occupied by tenants at or below 50 percent of the HUD-determined area median income.
   
   
   
   • However, these projects are not eligible for the "basis boost" for projects in QCTs or DDAs.
   
   
   
4. Market Interest Rate HOME Loan with 9 Percent Tax Credit Rate. If the HOME funds are provided as a loan with an interest rate at or above the Applicable Federal Rate then the funds are not treated as "Federal funds" for LIHTC purposes. These projects can qualify for the 9 percent credit rate.
   
   
   • These projects also can qualify for the "basis boost" for projects in QCTs or DDAs.

There are other ways to provide HOME funds to a LIHTC project (for example, as a loan guarantee), but the four ways described above are the most commonly used approaches.