Blogs| An Overview of Eligibility for Tax Credit Financing and How to Apply for LIHTC

An Overview of Eligibility for Tax Credit Financing and How to Apply for LIHTC

Written by

Anuj Pratap

Published

July 1, 2024

Topics

Featured

Article Contents

    Financing for Low Income Tax Credit (LIHTC) projects is complex. It has many stakeholders and moving parts.   

    The LIHTC ecosystem has developers, investors, tax credit syndicators, asset managers, and property owners among its stakeholders. Coordinating and meeting the priorities of each stakeholder can be a tricky balancing act.  

    Developers need to navigate a complex web of compliance and application procedures, and asset managers need to stay in step with the local compliance regulations for the properties in their portfolio.  

    This blog post outlines the eligibility criteria and how to apply for LIHTC. These general requirements are standard across states and are location-agnostic. 

    Financing for LIHTC Projects 

    LIHTC development financing is a nebulous concept. Developers of LIHTC properties need to bring together many different financing sources.   

    If developers used traditional mortgage financing to construct affordable housing projects, there would be a gap between the rent caps and the mortgage repayments, which the building owner would have to pay out of pocket.   

    Government programs, like LIHTC, fill this gap and make building affordable housing possible for the private sector. Developers typically monetize LIHTC to get cash for developing the project.  

    Developers then hand over the completed project and its debt to investors. Investors hire asset managers who use LIHTC property management software to monitor the performance of the building and ensure that it earns consistent returns. 

    However, monetizing LIHTC alone cannot give developers the funds necessary to begin construction on a multi-family housing project.   

    Developers often choose to club LIHTC with other government subsidies, like HOME funds or independent financing, to secure the funds necessary to see a project through to its end. 

    State Administered LIHTC 

    Throughout the history of the LIHTC program, decentralization has been its motto. Even though the federal government allocates cash dollars for affordable housing programs like the LIHTC program, individual states administer these funds.   

    Individual states own and disburse funds and tax credits through affordable housing agencies, such as the Housing Credit Allocation Agency (HCA) or Housing Finance Agency (HFA).   

    States also verify the ongoing compliance with affordability regulation of developed projects. States report any violation to the IRS, which assesses and enforces compliance penalties. 

    Who can apply for LIHTC? 

    Not-for-profit, public developers, or private entities can apply for and be awarded LIHTC. However, to qualify, developers must meet the minimum threshold eligibility requirements for LIHTC that each state’s affordable housing agency has set out.  

    Threshold Eligibility Requirements for LIHTC 

    The threshold requirements for LIHTC usually include the election of minimum set-aside units, which the developer commits to reserving as affordable housing units.   

    It also includes the rent caps for these affordable housing units and the definition of income or the average income caps for people who qualify for these affordable housing units.   

    Threshold eligibility requirements also cover the geographic area and other demographics associated with low-income households the state wants to support through the affordable housing project. 

    Financial Viability of the Project 

    Developers must also demonstrate that the development project is viable and that a building owner can operate it safely and hygienically once it is operational.   

    Developers usually need to show how they will meet the financing costs of the construction project without relying too heavily on traditional mortgages. This is called the capital stack of the project.  

    A capital stack ensures the offset of risk and gaps in financing since mortgages from conventional institutional lenders are susceptible to repayment adjustments during refinancing and fickle economic downturns.  

    Qualified Allocation Plan (QAP) 

    The QAP is a document that a state’s affordable housing agency creates. It’s meant to be a roadmap for developers applying for LIHTC and to address the specific requirements of the state.  

    The QAP includes the allocation criteria for LIHTC (the threshold eligibility for developers). It also sets out the minimum set aside the acceptable combinations of affordable housing units to regular housing units that the developers can elect in their application.  

    It also qualifies the minimum operation standards by which developers can understand how the state agencies will measure compliance over the project’s 15-year compliance period. 

    Understanding a state’s QAP is critical for developers to successfully apply for and secure LIHTC. 

    The LIHTC Online Application Lifecycle 

    Developers can apply for LIHTC financing through individual affordable housing agencies of states.   

    Most state agencies accept LIHTC finance applications through their online portals. State HFAs invite applications for LIHTC funds yearly according to preset timelines.   

    Developers should check each state’s QAP and HFA websites to navigate the application process and know when the following application process starts, the application fees, and the qualifying criteria. 

    Pre-application 

    To be eligible to apply for LIHTC bidding rounds in many states, developers must first contact state affordable housing agencies and express interest in the program. There is usually a pre-application signup fee.   

    Developers must demonstrate willingness and credibility to execute LIHTC projects.   

    Once a developer completes this pre-application process, the Housing Finance Agency will invite eligible developers to apply for upcoming LIHTC bidding cycles. 

    Application 

    Once the state’s HFA invites a developer to apply for LIHTC financing, the developer can submit competitive bids or online applications on its online portal. After the developer applies, the HFA carries out a threshold review of the application.   

    The threshold review verifies if a LIHTC application conforms with the QAP, which the state agency has released.   

    The state agency notifies the developer if an application needs to include some element. The state agency declares a deadline by which notified developers must address threshold review notifications. This date is called the threshold deficiency correction deadline. For an application to be eligible for LIHTC, the submitting developer needs to update all the information the threshold review notifications highlight. 

    Post-application 

    Once the HFA completes the LIHTC application review, conditional approval will be issued to the selected developer. The developer must submit all the documentation outlined in their application.  

    These documents include proof of syndication, environmental site assessments, proof of funding sources in their capital stack, accessibility certificates, etc.  

    After receiving conditional approval, the developer raises equity from LIHTC investors or investment funds to monetize the tax credits the project will receive. It is the asset manger’s responsibility to claim the project’s tax credits by ensuring compliance with affordability criteria. Little wonder then, that compliance tracking is one of the main features of LIHTC software that asset managers look for.  

    Online LIHTC Application is State Specific 

    After receiving conditional approval for tax credits, developers must apply for Carryover Allocation and 10% Test Certification.   

    When the building is completed, the developer submits the cost certification, after which the investor takes over the project, and the LIHTC claim and compliance period begins.  

    LIHTC is a state-specific topic. Developers must follow state affordable housing agencies to know which LIHTC applications and projects are in the works.  

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