Blogs| Why Nonprofits Are Essential to LIHTC Success
Written by
Sajan Sharma
Published
Jun 16, 2025
Topics
LIHTC
Affordable housing development in the United States often comes down to one program: the Low-Income Housing Tax Credit (LIHTC). It’s the most critical tool the federal government uses to encourage private investment in housing for low-income families. While much attention is given to for-profit developers and investors in LIHTC deals, nonprofit organizations are equally instrumental. These mission-driven entities not only bring community perspective and accountability but also unlock special provisions within the LIHTC ecosystem that enable deeper impact.
Nonprofits bring more than community goodwill. They directly influence project ownership, financing, service delivery, and long-term affordability. From unlocking competitive scoring in LIHTC applications to stewarding housing beyond the compliance period, their contributions can make or break a deal.
This article explains how nonprofit organizations engage with LIHTC and why their involvement matters at every stage.
Nonprofits aren’t limited to just one function in a LIHTC deal. Depending on their capacity, they may take on operational, financial, or support roles—sometimes all at once. Each role comes with specific responsibilities and benefits.
When a nonprofit acts as the general partner (or co-GP), it’s responsible for overseeing the entire project—from construction to ongoing operations. This role is key to accessing the federally mandated 10% nonprofit set-aside under the LIHTC program. It also allows the nonprofit to help shape the development according to its mission. In many cases, the nonprofit retains a right of first refusal to purchase the property at the end of the 15-year compliance period, ensuring long-term affordability.
Some nonprofits lead development, managing everything from site control and financing to construction oversight. Others may co-develop with a for-profit entity, especially when they lack in-house capacity. These joint ventures allow nonprofits to gain hands-on experience while still earning developer fees and preserving influence over the project’s direction.
As a sponsor, a nonprofit backs up the financial commitments of the general partner, which is particularly important when the GP entity is newly formed or lacks assets. Sponsors are often responsible for covering funding gaps or shortfalls in tax credit delivery. In exchange for taking on this risk, they typically receive a share of the developer fee, other financial returns, and potential ownership benefits after the compliance period.
Nonprofits frequently contribute as service providers, offering resident support such as job training, after-school programs, financial literacy, or health and wellness services. In some cases, they also serve as the manager. These roles not only support residents but also help the project score better in competitive LIHTC allocations, especially in states that value wraparound services.
In certain deals, nonprofits function as special limited partners. They may not be deeply involved in operations, but they bring political credibility, access to funding, or a positive community reputation. In return, they often receive a modest share of development fees or input into tenant selection, design decisions, or service planning.
Nonprofits aren’t just helpful partners—they often increase a project’s chances of success.
In many states, involving a nonprofit improves a project’s score during the LIHTC application process. Some localities even require nonprofit participation to access specific funding sources, such as HOME, CDBG, or housing trust funds. In addition, nonprofit-led projects are often eligible for local incentives like tax exemptions or payment-in-lieu-of-taxes (PILOT) agreements.
More than that, nonprofits bring a deep understanding of the communities they serve. Their local networks, relationships, and lived experience can help resolve zoning and entitlement challenges, reduce community opposition, and design housing that actually meets resident needs. Their involvement often builds public trust, improves project stability, and ensures long-term affordability even beyond the 15-year LIHTC compliance window.
While nonprofits can’t directly use tax credits, they benefit in other important ways.
Being part of a LIHTC deal creates opportunities to earn revenue through developer fees, asset management fees, and other distributions. These funds can support the organization’s operating costs, new initiatives, or future projects. If the nonprofit is interested in the ownership entity, it may also acquire the property after the compliance period, especially if a right of first refusal is in place. That opens the door to permanent affordable housing ownership.
Involvement also builds capacity. By participating in LIHTC deals, nonprofits gain real development experience, improve their credibility, and build relationships with public and private sector partners. It’s a chance to scale impact while staying mission-aligned.
Of course, LIHTC deals aren’t simple, and they’re not risk-free.
One major concern is financial liability. Nonprofits that act as guarantors may be required to step in if there are shortfalls in tax credit delivery, project income, or construction completion. These guarantees can pose serious financial risks if not managed carefully.
Another challenge is regulatory. The IRS closely monitors joint ventures between nonprofits and for-profit entities. The organization’s tax-exempt status could be at risk if a nonprofit’s involvement looks more like a business deal than a mission-driven activity. Documenting that participation aligns with charitable purposes and that private benefit is limited is critical.
There are also practical challenges. Many nonprofits lack in-house development expertise, which can slow down timelines or introduce costly mistakes. Zoning, community opposition, and long permitting processes can add even more complexity, especially without strong political or institutional backing.
To reduce risk and ensure long-term success, nonprofits should take a thoughtful approach to structuring their involvement.
Start with a detailed Memorandum of Agreement (MOA). This document should clearly outline responsibilities, decision-making authority, developer fee splits, cash flow allocations, and long-term ownership plans. It sets expectations early and helps avoid misunderstandings during legal structuring.
In many cases, it’s smart to create a separate entity like a nonprofit-controlled LLC or for-profit subsidiary to serve as the general partner. This helps limit financial exposure and simplifies compliance with tax regulations. The nonprofit should also maintain meaningful control over the project, especially if it relies on its charitable status to qualify for set-aside allocations.
Where long-term control is important, build a right of first refusal or purchase option at Year 15. This gives the nonprofit a clear pathway to acquire the property and continue affordability beyond the tax credit period.
Finally, the project should be surrounded by the right advisors. An experienced tax attorney, a LIHTC-savvy accountant, and a development consultant can make a major difference in structuring the deal correctly and navigating investor requirements.
What really sets nonprofits apart is their commitment to people—not just properties.
Many nonprofit developers approach housing as more than just a place to live. They bring services supporting residents’ well-being, such as health programs, education initiatives, employment support, or financial coaching. This “housing plus” approach recognizes that affordability is just one part of stability and that long-term success depends on strong, supportive communities.
Nonprofits also play a critical role in advocacy. They push for fair housing laws, anti-displacement measures, tenant protections, and zoning reforms that promote equity. They don’t just build affordable housing—they protect it, shape the policy landscape around it, and organize communities to have a voice in the process.
Nonprofits are essential to the success and sustainability of the LIHTC program. They make projects more competitive, bring community insight, unlock funding, and ensure affordability lasts beyond tax credit timelines. Whether acting as developers, partners, guarantors, or service providers, they keep the mission at the center of the work.
For any developer, syndicator, or agency working in the LIHTC space, involving a nonprofit isn’t just a compliance strategy—it’s a smart, values-driven move that can lead to better outcomes across the board.
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