Key Takeaways

  • The federal government recently passed legislation and implemented regulatory changes intended to increase the supply of and access to rental housing.
  • Generous tax credits and tax credit bonuses are now available to affordable property sponsors that invest in renewable energy systems and battery storage. These renewable energy tax credits are especially advantageous for properties in the development phase that will qualify for Low-Income Housing Tax Credits.
  • Pursuant to executive action, developing mixed-income tax credit properties using income averaging, obtaining a forward loan commitment, and levering unspent Covid relief funds are now materially easier.
  • Each of the following initiatives can facilitate affordable housing development but requires prompt and concerted action to bring into fruition.

The recently passed Inflation Reduction Act and the Housing Supply Action Plan are designed to expand the supply of housing in America and promote energy efficiency. The initiatives offer significant tangible benefits for the industry, especially the affordable housing segment.

Inflation Reduction Act

In August, Congress passed, and the president signed into law the Inflation Reduction Act (IRA) authorizing $369 billion of expenditures on programs to enhance residential energy efficiency and provide for climate resilience and energy security. The legislation increases the Federal Renewable Energy Tax Credit (FRETC) and extends bonus credits to affordable multifamily rental communities.

In most cases, FRETCs will be used to subsidize the cost of solar panel system investments, but they are not limited to this purpose. The credits also apply to wind turbines, geothermal heat pumps and battery storage capacity.

Prior to enactment of the legislation, the FRETC was scheduled to step down in 2023 from 26 percent of solar installation costs to 22 percent. The IRA returns the credit to the 30 percent of cost basis level that was applicable in 2019 and extends the program through 2032.

Notably, the IRA also provides generous new incentives for affordable housing communities. Federally subsidized properties qualify for a 20 percent bonus credit, and an additional 10 percent bonus is available for properties located in low-income communities.

Low-Income Housing Tax Credit (LIHTC), Section 202, and Section 8 communities and properties participating in most federal housing programs are eligible for the bonus credits. A property also may be eligible if at least 50 percent of the economic benefit accrues to households earning less than 80 percent of area median gross income, suggesting that many market rate workforce housing communities may qualify as well.

The renewable energy tax credit promises to be of greatest benefit to new LIHTC developments. Renewable energy systems are eligible for both Federal Renewable Energy Tax Credits and Low Income Housing Tax Credits. LIHTC basis no longer excludes costs that are eligible for the FRETC pursuant to a statutory exception for such properties.[i] The combination of the FRETC, available affordable bonus credits, and the additional 4 percent or 9 percent LIHTC allocations related to the investment may offset a substantial portion of upfront system costs.

The renewable energy tax credit promises to be of greatest benefit to new LIHTC developments. Renewable energy systems are eligible for both Federal Renewable Energy Tax Credits and Low-Income Housing Tax Credits. 

Certain limitations apply. The most significant is the requirement that “the financial benefits of electricity produced… are allocated equitably among the occupants…” The practical application of this standard is uncertain pending IRS interpretation. Potential beneficiaries also should be aware that annual bonus credit allocation is limited by a capacity constraint. Bonus credits may only be allocated in years 2023 and 2024 to systems generating total annual direct current capacity of 1.8 gigawatts. Moreover, the statutory language implies that no credits will be allocated after 2024, so prompt action is called for.    

Housing Supply Action Plan

In October, the Biden Administration unveiled a list of steps intended to promote increased supply of affordable housing in America. The executive actions in the Housing Supply Action Plan (HSAP) facilitate construction of mixed-income properties, extend deadlines applicable to LIHTC development projects delayed by public health and supply chain issues, increase the capacity of Fannie Mae and Freddie Mac to extend forward mortgage commitments for affordable properties, and authorize the use of appropriated but unspent state and local American Rescue Plan funds for affordable housing.

Income Averaging and Mixed-Income Properties

In 2017, Congress created a new approach to LIHTC unit set asides called “income averaging” designed to expand the range of tenant incomes permitted in tax credit communities. Typically, LIHTC rules require that all tenants earn no more than 60 percent of the Area Median Income (AMI). Electing income averaging treatment allows owners to lease up to 60 percent of qualifying LIHTC units to tenants earning up to 80 percent of AMI, provided that the average household income in the community is 60 percent or less. The reform was intended to encourage development of mixed-income multifamily properties that house both low- and moderate-income residents and to make more economically feasible inclusion of units targeted to households earning less than 40 percent of AMI.  

The IRS determined that to comply with the statute properties must permanently set aside specific units for renters with incomes falling below certain maxima in 10 percent increments (30 percent, 40 percent and so on). The requirement proved to be difficult to satisfy from a property management perspective and thus a potential obstacle for investors who fear the loss of credits due to non-compliance.

The HSAP ends these complexities and risks. Under the new income averaging rule compliance is determined by the average of LIHTC unit income levels, rather than requiring each unit to have a discrete permanent income ceiling. This flexibility facilitates leasing, as units can be rented according to need (bedroom count, ADA compliance, etc.) rather than income bucket and allows for cross-subsidies of very low-income units by others with higher rents.

Extension of LIHTC Deadlines

To earn federal low-income housing tax credits properties must meet certain construction deadlines. The most important of these is the date on which the property is placed-in-service, defined as the date the property is deemed ready for occupancy. The HSAP directs the IRS to extend several of the deadlines to ensure that projects delayed by the public health emergency can be completed and still qualify for tax credits.

Forward Commitments

Among the most complex challenges facing housing developers is obtaining a construction loan. Lenders often will not extend construction financing unless the borrower receives a forward loan commitment for a permanent loan take-out when the construction phase is complete, and the property stabilized. 

To expand liquidity in the forward commitment market, the HSAP permits both Fannie Mae and Freddie Mac to extend $3 billion of forward loan commitments per year to developers pledging to set aside at least 20 percent of units for lower income households, irrespective of lending caps. In other words, forward loan commitments to affordable sponsors under this dollar threshold will not be included as loan volume for cap accounting purposes.

Authority to Employ Unused American Rescue Plan Funds for Affordable Housing

In 2021, the federal government under the American Rescue Plan (ARP) distributed $350 billion to states, localities, and tribal governments to mitigate the economic costs of the Covid public health emergency. Some of the distributed funds remain unspent. The Biden Administration and the Treasury Department expanded the allowable uses of the ARP funds to include extending long-term loans to finance affordable housing, including projects expected to receive tax credits.

Access to ARP funds may be especially valuable to sponsors seeking to convert downtown office buildings to affordable housing. Conversion projects are likely to have considerable appeal for municipal authorities as they simultaneously address affordable housing shortages in high opportunity neighborhoods and address the negative impact of high office vacancy on municipal real estate tax collections and the vibrancy of downtown streets.

Practical Ramifications: Act Now!

The Biden Administration has taken several actions that may benefit affordable housing developers but taking advantage of them requires decisive action. Developers of Low-Income Housing Tax Credit properties are advised to apply for renewable energy tax credits at the earliest opportunity as the supply of bonus credits is limited and application period short. Likewise, the advantages associated with income averaging, expanded access to forward loan commitments and levering residual state and local ARP funds require early action by affordable sponsors and expert assistance from capital partners and consultants to bring to fruition. Lument welcomes the opportunity to discuss how your projects can take maximum advantage of these timely initiatives.         

[i] The statutory language in Section 45L(e) states that “(t)his subsection shall not apply for purposes of determining the adjusted basis of any building under section 42.”


  1. What is a federal renewable energy tax credit (FRETC)?  A FRETC is an indirect method by which the federal government subsidizes purchases of systems for production of cleaner renewable energy by individual and corporate taxpayers. Pursuant to the Inflation Reduction Act, tax filers can deduct up to 30 percent of the cost of a system that generates solar, wind or geothermal power from their federal tax liability.
  2. Will FRETCs be available in 2023? Yes, the 30 percent FRETC is available for projects placed into service in 2023. The 30 percent credit will be available through 2032.
  3. Are affordable housing properties eligible for additional FRETCs? Yes, properties that participate in almost every federal affordable housing program are eligible for bonus credits. Participating properties are eligible for a 20 percent bonus credit, and an additional 10 percent credit if they are in a low-income community. It is important to be aware, however, that bonus credits are not available for the full ten-year period of the FRETC initiative. Bonus credits currently are set to expire in 2024.
  4. How will the addition of a renewable energy system using FRETCs impact the basis of a LIHTC property? Applicants for these credits should seek advice from tax council on this question, however, it is our understanding that the purchase price of the system adds to project basis, but the receipt of the credit does not reduce it. This is one of the principal benefits of the legislation for LIHTC-eligible projects currently under development.