Since it was established by the Tax Reform Act of 1986 , the Low-Income Housing Tax Credit ( LIHTC) program has produced more than 3 million homes, making it the most important source of funding for affordable housing in the United States.

The program was designed to leverage tax credits to provide a much-needed source of equity for developers building affordable housing. By bringing private capital to the table through the credits, developers can take on less debt, which in turn translates into lower rents. However, the equity generated from the tax credit is rarely sufficient to close the gap between the costs of development and the rents that would be affordable to households with low to moderate incomes.

Since the program’ s inception, developers have made LIHTC work through a complex system of financing, where multiple sources of funding are “ stacked” to make a deal financially feasible.

Unique Dislocation in Due Diligence :

Despite the fact that LIHTC has been in place for over 30 years, there is still no comprehensive database that tracks LIHTC development costs or key characteristics that influence those costs ( e. g., materials used, LEED certification, presence of prevailing wage). Part of the challenge in assembling this information— which is critical for assessing the implementation of the program — lies in the way the tax credit is administered.

Although LIHTC is run through the Department of the Treasury, the credits are distributed by state agencies (and in some cases counties and cities) that have control over both the policy priorities for the credit— which are established through each state’ s Qualified Allocation Plan— as well as the application materials. As a result, there is little consistency in what data are collected as part of the application process. While a few states provide significant detail on applications and funded developments online, the majority do not, making it difficult to build a comprehensive database on LIHTC costs and financing.

Determinants of the Capital Stack for a LIHTC Deal :

How many additional sources of funding, and how much, goes into the capital stack for a project is influenced by a number of factors, including total development costs, the price a developer can get for their allocated tax credits, the targeted resident population, and the affordability levels for the project. It is also contingent on the availability and policies that govern other sources of subsidy. All of these factors can affect the size of the capital stack “gap” developers need to fill and how they do so, as are moving pieces that make it difficult to pin down a “typical” LIHTC deal. In this section, we consider each of these factors in more detail. Part of the reason for greater funding complexity is that it has gotten more expensive to build LIHTC housing. A report by the federal Government Accountability Office (GAO) found that typical development costs for new LIHTC developments in 12 states under review rose by about 7% 2017 and 2020, after adjusting for inflation.

Due diligence inspections are a must i f you are acquiring or have just acquired an affordable property or a conventional property with affordable units. For owners and managers, reducing the risk of non- compliance and mitigating the l iabilities via inspections can save millions of dollars in f ines and penalties. That risk is high because there are many routes to non- compliance that owners and operators might not be aware of.

A physical, on- site inspection is a critical part of multifamily due diligence reviews. This is true even though inspections mostly revolve around ensuring that the property is in good fiscal condition, the files are in compliance, the residents are qualified to live there and the management company is following good practices. But nothing highlights the importance of reviews quite like physical reality.

jhme was founded by Engineers, scaled with Capital Markets professionals and cultivated with Construction Management experts. All of whom define the culture and repertoire to support most of the LIHTC capital stack due diligence deliverables.

Technical Due Diligence for Capital and Sponsorship, real asset inspection, and construction monitoring are common services provided to our Affordable Housing partners.