Blogs| The Financial Life Cycle of LIHTC Property
Written by
Priya Gupta
Published
Mar 5, 2025
Topics
LIHTC
The Low-Income Housing Tax Credit (LIHTC) program, introduced in 1986, is the cornerstone for financing affordable housing in the United States. Through this program, private investors receive tax incentives to fund developments for low-income families. Over 3 million affordable housing units have been built under LIHTC, demonstrating its success in addressing the national housing crisis.
By reducing reliance on high-interest loans, developers can maintain affordability while ensuring financial feasibility.
LIHTC developers start projects by identifying potential sites, developing plans to build affordable housing, and competing for tax credits through a state housing agency. Each state agency issues credits according to its Qualified Allocation Plan (QAP), which specifies the priorities of addressing local housing needs and particular goals for projects.
Funding LIHTC developments requires a combination of three key elements –
Equity from tax credits is the first of these. Investors buy these credits to reduce their federal tax liabilities while providing upfront capital that developers use to finance the project.
Fund debt financing as a complement to equity. Such funding is frequently sourced through loans from private lenders or public agencies to ensure developers have enough to meet major construction or rehabilitation costs.
Lastly, subsidies add another layer of funding. These usually come from federal programs such as HOME and Community Development Block Grants (CDBG) or contributions from local governments. Together, these components form the “capital stack,” a structure that ensures both the development and long-term operational viability of LIHTC properties.
Combining these sources—known as the “capital stack”—is necessary to pay for both development and operational costs. However, complexity in managing those sources can be introduced as sources of inefficiency, extending timelines, and increasing costs on a project.
Over the 15-year compliance period, properties are bound by strict federal and state requirements intended to retain an affordable status. Property owners should ensure that rents are still within the affordable reach of low-income families to make them accessible to those most in need. Tenancy is further limited to people who earn less than 60% of the AMI. The owner must also periodically report to the housing agency and submit themselves for inspections to verify the program’s observance of the standards.
This phase is critical as it requires good property management to keep the business in financial health while balancing operations costs with reserve funds to meet future expenses. Some of the possible risks include fluctuating market forces, increasing operating costs, and unanticipated repair expenses.
The first 15 years are very crucial since most properties operate on thin margins. Developers use detailed financial planning and reserve funds to cover any shortfalls. If not well monitored, properties may not meet LIHTC compliance standards, and there is a penalty or credit recapture.
Following this initial 15 years, properties enter extended use periods in which affordability must be maintained for another 15 years. In this crucial moment, property owners must make important decisions concerning the future of their properties.
Recapitalization is an option whereby property owners obtain additional funding through other tax credits or loans. They can then proceed to modernize the property while extending its affordability period and making it feasible and useful to meet housing demands.
Another choice is maintaining the status quo, where owners continue operations without significant changes. In this case, they rely on existing reserves and operational income to sustain the property’s financial health and compliance with regulations.
Some owners will choose to leave the program. This includes transferring properties to market-rate housing if state and federal laws allow it. The decision is usually based on market conditions and the property’s financial future.
The most important factors that influence owners are:
The financial lifecycle of the LIHTC property is complex and impactful. From the initial development phase to post-compliance decisions, each stage calls for careful planning and execution.
Intuitive and advanced LIHTC software can significantly ease the processes involved in these stages. Such tools aid in financial modeling, compliance tracking, and reporting, thus lightening the administrative burden on the stakeholders.
Through these processes, integration of the latest software solutions, and overcoming related issues, stakeholders will ensure LIHTC remains a lifeline for affordable housing nationwide.