Developer’s Guide to LIHTC Financing

The United States enormously relies on the Low-Income Housing Tax Credit (LIHTC) program to develop affordable houses for families falling under the low to moderate-income bracket.

In this blog, we aim to enlighten developers about the strategies and resources needed to handle LIHTC financing mazes efficiently. We shall look at the types of LIHTC finance, vital partnerships, alternative financing methods, and ways of managing risks to ensure successful projects. 

 

Understanding LIHTC Funding Types 

9% Tax Credit 

The 9% LIHTC option is considered one of the most competitive and covers about 70% of the cost of a project. This percentage varies from state to state, with each state having its own scoring system. 

Developers interested in qualifying for this credit should be well-informed about their state’s QAP. The QAP is an acronym for the Qualified Allocation Plan, which is the document that spells out the specific requirements and scoring criteria . 

4% Tax Credit 

The 4% LIHTC, despite being less competitive, supports almost 30% of qualifying project expenses. This could arise through tax-exempt bonds and is strictly tied to the respective state’s bond cap. 

Developers who meet the set state qualification and score requirements can choose this credit. Therefore, developers need to learn about the given state QAP through this fundraising path. 

Our article can help you understand the difference between the 9% and 4% tax credits.  

 

Key Partnerships and Relationships 

Housing Finance Authorities (HFAs) 

Establishing strong ties with state and city Housing Finance Authorities (HFAs) is crucial. They are crucial collaborators in the process involved in the Low-Income Housing Tax Credit (LIHTC). This connection should be made even before any project begins, as it enables them to comprehend the company’s philosophy and project objectives clearly, increasing the likelihood that funding will be successful. 

Land Use Attorneys and Civil Engineers 

Problems with zoning and features peculiar to a site might significantly affect the timetable and cost of a project. Working closely with the best land-use legal practitioners and geotechnical experts can make it easier to navigate these issues. These people are very important when dealing with entitlements management and addressing grading changes, wetlands protection requirements, or flood-risk areas. 

Community Organizations and Local Government 

A great way to get the public’s support or to get a green light at your local council is by engaging them (city councils, neighborhood planning units, and community organizations). Such associations often make the process of approving projects easier, besides increasing community acceptance and enabling affordable housing projects to be realized. 

 

Alternative Funding Sources 

HUD Section 108 Loans 

Apart from the LIHTC, developers should also look into HUD Section 108 loans, which help finance infrastructure expenses. This way, the available resources can be pooled to bridge funding deficits and enhance the financial feasibility of other housing initiatives . 

Tax Abatements and Exemptions 

Municipal tax reductions and exemptions are useful tools for cutting down on project costs. To make affordable housing projects financially viable, developers must collaborate with local authorities to capitalize on these incentives. 

Middle-Income Housing Tax Credits 

Even though middle-income housing tax credits are not common, they are starting to be seen as a possibility for encouraging the construction of homes for working people and the elderly. These credits are intended for residents whose earnings are within the 80% to 120% AMI range. At this point, developers should keep track of any bill changes regarding this credit. 

 

Efficiency and Cost Reduction in LIHTC Funding 

Streamlining Processes 

Increasing LIHTC funding efficiency is essential when attempting to cut costs and speed up completion times. Adequate preparation, knowing exactly what is needed from each state, and using technology to shorten application and follow-up processes can yield the best outcomes. Various pieces of research conducted at the Terner Center for Housing Innovation have demonstrated why these are necessary strategies for enhancing funding efficiency. 

Complexity Management 

Managing the hassles linked with LIHTC monetary resources requires a profound comprehension of management and regulatory demands. Developers should ensure adherence to the rules related to LIHTC funding because it is difficult.  

Have a look at our article to learn how LIHTC software can help mitigate investment risks associated with affordable house funding approaches.  

 

Risk Management and Project Sustainability 

Structuring Capital Stack 

A well-structured capital stack is crucial to avoid conflicts between different sources of funding. This means that developers must ensure that the rules of each financing source are compatible and do not create issues that could delay or derail the project. Proper structuring also helps in effectively managing project risks. 

Planning for Variable Interest Rates and Rising Costs 

Project sustainability may be impacted by issues such as variable interest rates and growing costs like increased insurance premiums and security expenditures. To address these risks, developers need to incorporate contingencies into their financial models and maintain flexibility in their project plans. 

Exit Strategies 

Comprehending the financial and operational consequences of various exit strategies is imperative for the long-term success of LIHTC projects. To guarantee the optimum results for their investments, developers must examine alternatives such as selling the project, refinancing or maintaining long-term ownership. 

 

Conclusion 

Financing LIHTC projects requires negotiating through an increasingly intricate tangle of funding options, partnerships, and legal requirements. Understanding various LIHTC funding types, building critical partnerships, exploring alternative funding options, and ensuring robust risk management through effective and modern LIHTC software enhances the possibility of successful projects for developers. Access to credible and genuine resources and updated information about state-specific QAPs and funding opportunities will greatly help future developments.