The Low‑Income Housing Tax Credit (LIHTC) program is the most significant federal tool for building affordable rental housing, responsible for over 3.65 million units since 1987. If you’re a developer, understanding how LIHTC shapes design, financing, and execution is vital.
Keep reading to learn more about the essentials and how seasoned general contractors like Bacar Constructors expertly navigate these complexities.
Fundamentals & Funding
LIHTC was established under the Tax Reform Act of 1986 to incentivize private investment in affordable housing. Participating developers apply to state housing agencies for either 9% or 4% credits. The more valuable 9% credit is competitive and generally used for new construction or substantial rehab, while the 4% credit is paired with tax-exempt bonds.
Once awarded, tax credits are typically syndicated: sold to investors, generating equity used to fill funding gaps. LIHTC equity usually doesn’t cover all costs, making gap financing (from grants, bonds, or other subsidies) essential.
Understanding credit mechanics informs your financial modeling, avoids surprises, and helps in structuring deals.
Income, Rent & Durability Rules
Once credits are awarded, projects must comply with stringent rules:
- Income restrictions: At least 20% of units must serve households ≤50% AMI or 40% at ≤60% AMI, with most full projects duplicating those minimum thresholds.
- Rent restrictions: Rents, including utilities, must stay within 30% of qualified income thresholds.
- Longevity: A 15-year compliance period is required; many states impose an extended 30-year monitoring period.
- Boosts: Projects in Qualified Census Tracts (QCTs) or Difficult Development Areas (DDAs) receive a 30% increase in credit value.
These regulations influence design decisions (unit mix, utility metering, income tracking) and operational systems (tenant screening, rent documentation, file audits). Overlooking compliance design during planning leads to costly rework or penalties.
Design & Construction Challenges
LIHTC imposes unique design and construction requirements:
- Prevailing wages & local standards: Many jurisdictions mandate Davis‑Bacon or state-level wage rates for LIHTC-funded construction, raising labor costs.
- Efficient unit planning: Units must balance affordability with quality finishes. Efficient layouts reduce cost per square foot while meeting compliance.
- Quality documentation: Construction drawings, cost certifications, and “placed‑in‑service” documentation must precisely record LIHTC eligibility.
- QCT/DDA zoning: Building in special areas can increase credits, so project siting and cost modeling must reflect those boosts.
Financing & Partnering
LIHTC deals are mosaic in structure:
- Syndication mechanics: Selling credits to investors provides upfront equity. Many projects use syndicators like the National Equity Fund.
- Blend in NMTC: Federal New Markets Tax Credits (NMTCs) can pair with LIHTC in mixed-use or community-serving developments.
- Bond financing: 4% LIHTC projects often use tax-exempt bonds combined with private activity bonds.
- Gap funding: Additional subsidy sources (HOME funds, state grant programs, local housing trust funds) are regularly layered.
Accuracy in cost estimates and timing is critical. Bacar’s experience keeps financial models and construction schedules on track.
Developer Pitfalls & Contractor Vigilance
Common challenges in LIHTC projects include:
- Underbudgeting for compliance: Neglecting wage or documentation costs leads to budget overruns.
- Late tenant quality tracking: Incomplete income/rent records can trigger credit recapture.
- Overlooking audits: State audits can uncover issues years later, so thorough file management is critical.
- Ignoring QCT/DDA benefits: Lost credit opportunities can cost millions in capital.
What to Look for in a LIHTC Contractor
Choose a general contractor who brings:
- Compliance-first mindset: understands forms, documentation, and audit triggers.
- Prevailing wage experience: skilled at bridging labor, payroll systems, and state rules.
- Strong reporting systems: project-wide cost tracking, daily compliance logs.
- Financing coordination: relationship with syndicators, bond counsel, and HFA reviewers.
- Collaboration skills: ability to interface with developers, lenders, architects, and agencies.
Partners like Bacar Constructors integrate these strengths across dozens of LIHTC developments, minimizing risk and accelerating timeline certainty.
Bacar Constructors: Your Partner in LIHTC Construction
Bacar Constructors, founded in 1984 and licensed in 35+ states, is a Nashville-based general contractor specializing in multifamily, LIHTC, HUD, and mixed-use developments, deadlines, and QAP audits has been a cornerstone of dozens of successful affordable projects across the Southeast.
Whether you’re pursuing 9% LIHTC in a QCT, layering multiple funding sources, or planning compliance systems from day one, we bring integrity and rigor to every phase.
Contact us at Bacar Constructors today to explore how our hands-on LIHTC expertise can support your vision.