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The Role of Developers and Investors in LIHTC Projects

Written by

Anuj Pratap


July 1, 2024



Article Contents

    The Tax Reform Act 1986 created the Low-Income Housing Tax Credit (LIHTC) program. It provides federal tax credits to offset income tax liability to incentivize private sector investments to build more affordable housing units.  

    Every year, the LIHTC program sets aside $9 billion in tax credits to create affordable housing. Affordable housing developers monetize these tax credits by selling them to investors or tax credit syndicators who aggregate tax credits from different projects into a single fund and solicit investments from other private investors.  

    This article explains the different kinds of LIHTC stakeholders and how the developer-investor relationship works. 

    How the LIHTC Program Works 

    Before exploring nuances of the LIHTC ecosystem and its stakeholders, it’s essential to have some context.   

    The federal government allocates LIHTC funds for each state as a proportion of its population. There is also a floor for the minimum LIHTC allocation for each state.   

    Each state administers and distributes LIHTC funds according to a Qualified Action Plan (QAP) it prepares through its Housing Finance Agency (HFA). The HFA awards a 4% or 9% tax credit to an affordable housing project, covering 30%-70% of the construction costs. 

    Eligibility for LIHTC 

    To be eligible for LIHTC, developers must meet specific requirements. These can be found in each state HFA’s QAP. 

    • Minimum Set Aside of 20-50 or 40-60: An election to reserve at least 20% of units for families who earn below 50% of the Area Median Income (AMI) or 40% of units for families earning less than 60% of AMI. 
    • Rent Capping: Building owners will not ask families to pay more than 30% of their income as rent.  
    • Compliance Period: Building owners must comply with these affordability requirements for 15 years. HFAs may also enforce an additional 30-year compliance period. 

    Structure of LIHTC Projects 

    Each LIHTC investment is structured as an LLC or a limited partnership. It comprises a Limited Partner – the developer – who does not assume any risk and a General Partner.  

    The Limited Partner receives almost all the tax credit to monetize and construct the building, and the General Partner eventually gets full responsibility for the management and maintenance of the project. 

    The Role of Developers in LIHTC 

    Developers apply for tax credits to HFAs. They must make sure that their application conforms to the state’s QAP.   

    It is the developer’s responsibility to calculate the amount of tax credits that the project will earn every year and the financial viability of the project.   

    The developer also calculates the total cost of the project and the government subsidies they will need to create a ‘capital stack’ that can viably fund the affordable housing project.   

    If the HFA approves the tax credit application, the developer can approach investors to raise equity for constructing the affordable housing project by monetizing the tax credit.  

    Once the developer completes the project, they hand it over to the investor.    

    The Role of Investors in LIHTC 

    Investors provide the cash equity that developers need to begin constructing the affordable housing project in exchange for the tax credits the HFA allots to the LIHTC project. 

    Once the developer hands over the completed project, the investor calculates the tax credits and claims them from the IRS annually. Often, they use LIHTC software to track these complicated tax calculations. 

    Investors take on monitoring and operations of the affordable housing project and ensure that the project is compliant with affordable housing regulations for at least 15 years. Any non-compliance can result in a loss of tax credit and, therefore, a loss on equity investment already spent in developing the affordable housing project.  

    This is just a summary of the role of investors in LIHTC. In truth, it is more nuanced than this. There are different types of investors, each with different roles in functioning a LIHTC project. 

    Equity Investors for LIHTC Projects 

    LIHTC investments have many stakeholders, such as corporations, tax credit syndicators, and private investors, like institutional investors and large banks.  

    The tax credit is useful to corporations the most. However, corporations generally steer clear of lumpsum equity investment in LIHTC projects since the risks to their investments span the entire compliance period (at least 15 years). Corporations usually invest through special LIHTC investment funds. 


    A syndicator is a LIHTC stakeholder claiming tax credits yearly from the IRS and selling these tax credits to corporations and individual investors.  

    Syndicators prepackage LIHTC projects into separate equity funds that corporations and individual investors are comfortable investing in. Tax credit syndicators assume the risk with investments in LIHTC. They often use compliance tracking features of LIHTC software to ensure their entire investments matches affordability regulations.  

    Syndicators underwrite their equity funds and invest in many LIHTC projects with one fund. They also create geographic or building-specific funds depending on investor sentiment.  

    Monitoring compliance in this portfolio of LIHTC buildings is one of the main tasks of the asset management teams they hire. 

    Private Investments 

    Private investments, or Private Placements, are usually made by banks or large institutional investors who are looking for alternative investment vehicles.  

    Banks invest in LIHTC projects because LIHTC projects are sound long-term investments. They generate consistent and reliable returns over ten years if investors meet the state’s affordability requirements.   

    LIHTC investments are also eligible for Community Reinvestment Act (CRA) credits, which help banks increase their CRA ratings. Since the Federal Reserve mandates banks to maintain a specific floor for their CRA score, banks find directly investing in LIHTC projects attractive.    

    The Developers-Investors Relationship is Symbiotic 

    With the LIHTC program, the federal government shifted the burden to subsidize affordable housing development from annual budget outlays, which are subject to Congressional approvals, to the Federal Reserve.  

    Since these government subsidies are essentially lost revenue for the Fed, not direct cash, this model requires multiple stakeholders to work together to access LIHTC. 

    The model is the reason developers and investors in the LIHTC ecosystem have a symbiotic relationship.  

    Due diligence and compliance by investors ensure that the LIHTC program stays relevant to changing housing needs and the value developers create for investors and residents ensures more business and their continuation in the LIHTC program. 

    The LIHTC program’s success depends on a good working relationship between them. Neither can survive without the other. 

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