A Step-by-Step Guide to LIHTC Development Workflow

The Low-Income Housing Tax Credit (LIHTC) program has been a stalwart in funding affordable rental housing for low- and moderate-income families. This program, enacted through the Tax Reform Act of 1986, offers tax credits to private investors, motivating them to construct affordable housing.

 

Developing the LIHTC project is a long, complicated process that includes various sources of financing, compliance regulations, and regulatory processes that last many years. This article will take you through every step of the LIHTC development process—conceptualization and financing, construction, leasing, and long-term compliance.

Stage 1: Pre-Development – Building the Foundation

Pre-Pre-Development Groundwork

 

Before any LIHTC project, the developer needs to put together the proper team and create the legal and financial structure of the project. The development team involves the Developer who spearheads the project and raises capital, the General Partner (GP) in charge of management, and the Limited Partner (LP), who brings investment capital and earns tax credits in return.

 

Some of the major LIHTC stakeholders comprise architects, builders, asset managers, fund managers, lawyers, accountants (CPAs), lenders, and syndicators, who play fundamental roles in structuring and implementing the project. At this point, Memorandums of Understanding (MOUs) and legal contracts are prepared to establish responsibilities.

 

Pre-Development – Market Feasibility & Site Selection

 

Before applying for LIHTC credits, developers should analyze the feasibility of the project by conducting market studies and financial analyses. A market study establishes housing demand and income eligibility in the target market, and land acquisition secures site control by purchasing agreement or option rights. Environmental studies and surveys guarantee compliance with state and federal laws. Site planning and permitting are done to meet zoning regulations, while obtaining financing commitments from lenders, investors, and state agencies is the priority. Developers also pursue other sources of funding like HOME, CDBG, and tax credits to bridge any financing gaps.

Stage 2: LIHTC Application & Financial Structuring

Understanding 4% vs. 9% LIHTC Credits

 

The LIHTC program works through two main tax credit structures—4% vs. 9% LIHTC Credits. The 9% competitive credit is utilized for new construction and substantial rehabilitation, financing about 70% of the costs of a project. This competitive credit is granted through a Qualified Allocation Plan (QAP) process. However, the 4% non-competitive credit is allowed for acquisition and rehabilitation projects with tax-exempt bonds. Accounting for roughly 30% of project expenses, 4% credits mandate a minimum of 50% of project expenses to be funded with tax-exempt bonds.

 

Qualified Allocation Plan (QAP) & Scoring Criteria

 

The QAP defines project selection criteria: location, affordability levels, sustainability, and community effect. Projects that benefit extremely low-income households or have extended periods of affordability are usually preferred.

Most states score applications on:

• Income Targeting: Additional points for serving lower AMI levels, particularly those serving extremely low-income households (30% AMI or below). Projects that reserve a greater percentage of units for deeply affordable housing earn additional priority in scoring.

• Sustainability & Efficiency: More points for energy-efficient designs, such as LEED certification, Energy Star-rated appliances, and the use of renewable energy sources like solar panels. Projects with water conservation methods and smart building technologies also get extra points.

• Community Impact: Projects in Qualified Census Tracts (QCTs) with a revitalization plan are given additional points, especially within a broader community development plan. Those projects that incorporate workforce housing, availability of public transportation, and proximity to needed services (healthcare, schools, grocery stores) tend to receive preference.

• Tenant Services & Support Programs: Projects that provide on-site services like job training, childcare, health and wellness programs, and financial literacy workshops have extra scoring benefits.
• Extended Affordability Commitment: Projects that voluntarily extend the affordability duration beyond the minimum 30 years are given more preference, thereby providing long-term housing stability to low-income groups.

Financial Feasibility Requirements

 

State agencies review projects at various stages to ascertain financial and operational feasibility:

• Application Stage: This phase verifies that suggested development and operating expenses are acceptable and in line with market norms. Developers must provide a well-documented financial plan showing project viability, projected costs, and expected rental returns. Also, market studies and demand analyses are examined to ensure that the project satisfies local housing requirements.

• Carryover Allocation Stage: During this stage, developers are required to obtain complete financing commitments such as construction loans, tax credit equity, and gap funding as needed. They are also required to produce zoning approvals, give updates on environmental compliance, and indicate development toward construction readiness. If a project cannot obtain the required commitments, it can potentially lose its tax credit allocation.

• Completion Phase (Issuance of Form 8609): This is the last approval and compliance stage, whereby projects need to finish construction, secure certificates of occupancy, and lease to eligible tenants. The developers are required to file a Final Cost Certification, which assures that all project costs meet LIHTC requirements. The state housing agency checks compliance with the affordability obligations prior to issuance of IRS Form 8609, which legally certifies the project’s qualification for LIHTCs.  

Developers must ensure that their credit allocation does not exceed the amount necessary to make the project feasible and that they meet all necessary financial and operational targets.

Stage 3: Finalizing Development Plans & Financing

After LIHTC credits are allocated, developers will finalize the financing arrangements, such as acquiring construction loans, permanent financing, tax credit syndication, and exploring potential gap funding sources in case of shortfalls.

 

 
This stage involves negotiating investor and lender terms to guarantee the project adequate financial support. Developers also finalize legal contracts, upholding state and federal standards. This involves drafting limited partnership agreements, obtaining insurance coverage, and fulfilling any requirements under the Land Use Restriction Agreement (LURA).

 

Also, contractor selection becomes pertinent at this point, with bidding being considered and contracts signed to secure construction costs.

 

Last but not least, developers need to confirm that all regulatory and compliance requirements, such as environmental studies, local zoning permits, and compliance with the state housing agency-established financial feasibility requirements, are fulfilled prior to initiating groundwork.

Stage 4: Construction & Project Execution

Construction Timeline & Compliance Monitoring

 

Strict construction compliance requirements have to be adhered to by LIHTC projects, such as state approval of construction plans and on-site inspections at 33%, 66%, and 100% completion. These visits ensure building codes, environmental requirements, and LIHTC-specific regulations are complied with. Developers must also meet workforce and wage constraints, including Davis-Bacon Act requirements for federally funded developments. For 9% projects, placement in service must occur within two years, while rehabilitation projects have 24 months to complete substantial renovations, with periodic progress reporting to the housing finance agency. Construction delays can impact tax credit allocation, so proactive risk management and contingency planning become critical to completing on time.

Stage 5: Placing in Service & LIHTC Certification

Project Completion & Lease-Up

 

The project is formally “Placed in Service” (PIS) when the units are finished, inspected, and certified habitable for occupancy. This is the stage at which the property must completely comply with LIHTC regulations, such as income and rent limits. At this point, a Land Use Restriction Agreement (LURA) is recorded to impose affordability conditions, requiring that the units be kept affordable for at least 30 years. The LURA specifies rental policies, tenant eligibility, and longer periods of affordability. Developers are also required to provide a final cost certification to the state housing agency, ensuring that construction costs align with early budget approvals and qualify under LIHTC. Subsequently, the agency thoroughly reviews all compliance and financial documents before issuing IRS Form 8609, certifying the official tax credit eligibility of the project. Developers need to take extreme care during this phase to prevent delays that may hamper investor funding and project feasibility.

Stage 6: Long-Term Compliance & Operations

15-Year Compliance Period & Recapture Risks

 

LIHTC properties are kept affordable for at least 15 years, although most go out to 30+ years. Compliance reporting occurs annually through tenant income certification, rent limits, and property upkeep. Noncompliance can lead to LIHTC recapture, where investors should return previously taken credits. Delays in construction and lease-up problems can also affect credit delivery.

 

Post-Year 15: Extended Use Period & Exit Strategies

 

Certain projects depart the LIHTC program at 15 years, while others make affordability commitments longer through state-mandated agreements. With continued affordability, investors can opt to exit ownership or sell ownership to the general partner.

Conclusion

LIHTC development is a complex yet rewarding process that allows developers to construct affordable housing while utilizing tax credits as funding. It calls for solid planning, financial structuring, compliance management, and seasoned partnerships. Following this organized workflow, developers can traverse the LIHTC process efficiently with long-term sustainability and compliance.