By Jennifer M. Galasso, CPA, Partner
Key Takeaways
- Affordable housing developments increasingly rely on layered financing that blends federal, state and local sources beyond Low-Income Housing Tax Credits.
- Understanding the regulatory requirements tied to each funding source is essential, as long-term tenant eligibility restrictions impact rent structures and overall project financial viability.
- Early planning, strategic partnerships and a long-term operational outlook are key to underwriting success in affordable housing projects.
Low-Income Housing Tax Credits (LIHTCs) have played a central role in financing affordable housing for decades. The recently passed One Big Beautiful Bill Act (OBBBA) included two material changes to the tax code that directly affect the financing of these projects:
- Increasing the amount of 9% credits allocated to each state by 12%.
- Changing the 4% credit landscape by moving the required utilization of related bonds financing from 50% of aggregate basis to 25% of aggregate basis.
While these changes are predicted to directly and dramatically expand the availability of LIHTCs, they will possibly result in a reduction of the equity pricing in the LIHTC market.
These credits were once a primary funding source, but today’s developments require a more layered approach. To make financing viable, projects typically depend on a combination of federal, state and local funding sources. With the pending sunset of other housing related tax credits (energy efficiency credits) the federal focus for affordable housing appears to be shifting heavily to LIHTC.
Development teams often face complex financing structures right from the start. Think of it like a puzzle: the image on the box reflects the completed vision, while the border pieces represent the known development costs. The remaining pieces – funding – must be strategically placed through careful underwriting. While creative approaches are important, success often hinges on understanding the fine print tied to each funding source.
Debt Structuring and Compliance
Federal programs like those funded by the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Agriculture (USDA) Rural Development as well as various state and city programs can be leveraged with LIHTCs. At the same time, these sources can come with significant compliance obligations. Different government lenders may impose long-term regulatory requirements which typically focus on tenant eligibility. These may prioritize groups like veterans, older adults, or those facing homelessness, mental health conditions or economic hardship.
Evaluating these requirements early is crucial for managing long-term operations, particularly around rent adjustments. Projects that include multiple regulatory agreements – whether by unit or building – may face complex compliance challenges. Proactive planning and monitoring can help preserve cash flow and reduce the potential need for restructuring or, in worst cases, foreclosure.
Strategic Partnerships and Long-Term Planning
Engaging advisors early in the process and bringing diverse perspectives to the table are essential to long-term planning, but underwriting isn’t just about getting through construction – it needs to account for how the property will operate over time.
The OBBBA also included provisions that could have a direct impact on the ongoing operations of new projects with changes to the bonus depreciation rules and increases to the business interest deduction limitations (163j).
Partnering with nonprofits or faith-based organizations can offer strategic advantages. These groups may contribute land or buildings and may use grant funding to support inter-entity loans with favorable terms. Their community connections may help reduce opposition, strengthen tenant services and increase access to additional credits and financing.
Affordable Housing and Sustainable Success
As the affordable housing landscape evolves, it will require more innovative approaches and strategic planning. LIHTCs remain foundational, but success today depends on a layered approach to funding, deep knowledge of compliance requirements and collaboration with trusted partners. Careful planning and upfront coordination can help projects stay financially stable while serving their intended communities.
Contact Us
At PKF O’Connor Davies, our professionals support clients across every stage of the development lifecycle: from structuring deals to meeting long-term reporting requirements. With a deep understanding of public and private funding programs, we help teams move projects forward with confidence and financial clarity.
If you have questions or need assistance, please contact your client service team or:
Jennifer M. Galasso, CPA
Partner
jgalasso@pkfod.com | 914.341.7067