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As of late, the‘ little engine that could’ and low-income housing developers have a lot more in common than some might like to admit. Despite optimism and perseverance, the climb toward project closings on the other side of the mountain is being met with hesitation from investors and the tightening of budgets. Developers, much like the determined little engine, continue to push forward, repeating the refrain,‘ I think I can,’ even as the grade steepens and the obstacles multiply.
At the peak of this uphill climb is the Low-Income Housing Tax Credit( LIHTC), a key mechanism that enables developers to finance and build affordable housing projects nationwide. It is divided into two categories- the four percent credit and the nine percent credit- each tailored to different financing models, project sizes, and construction needs. Typically, the four percent credit is paired with tax-exempt bond financing while the nine percent credit is more often applied to new construction or rehabilitation projects that do not rely on certain federal subsidies.
Both credit types operate within a similar framework. State housing finance agencies award the credits, which developers claim over a ten-year period once the property is completed and available for rent. Because construction requires significant up-front capital, more often than not developers partner with outside investors. In exchange for the ten-year stream of credits, investors purchase an equity interest in the project, and these funds provide immediate equity financing, reducing the project’ s reliance on debt. Additional funding sources often include support from the U. S. Department of Housing and Urban Development, state mental health agencies, and contributions from the developers themselves- either through loans or by deferring a portion of their fees to cover early construction costs.
Historically, eligibility for the four percent credit required at least 50 percent of a
project’ s financing to come from tax-exempt bonds. Recent legislation permanently lowered that threshold to 25 percent, easing access for developers. Meanwhile, nine percent credits are distributed to states based on population; beginning in 2026, allocations will rise by 12 percent to encourage more affordable housing development.
Despite these enhancements, challenges remain. Rising construction costs and tariff-related uncertainty make accurate budgeting difficult. Furthermore, the legislation rescinds all uncommitted funds previously allocated to the Green and Resilient Retrofit Program( GRRP) under the Inflation Reduction Act. The GRRP was intended to support energy efficiency and climate-resilience improvements in HUD-assisted multifamily housing. With that funding withdrawn, developers must now seek alternative sources to bridge financing gaps.
In addition to developers struggling to close funding gaps, there is also a widespread reluctance on the part of equity investors to participate in projects at the previously competitive prices. As a result, the offered pay-in rates have been lower than those offered in recent years, causing more stress
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