Behind the credit

With a shortage of approximately 7 million housing units for low-income families, the importance of available, affordable housing in the U.S. is undeniable.

The most common type of affordable housing is funded through the Low-Income Housing Tax Credit (LIHTC) program—responsible for financing approximately 90% of all affordable housing developments in the U.S. Affordable housing also includes rent-restricted units supported by outside subsidies and naturally occurring affordable housing (NOAH), where rents are low due to suppressed demand or market conditions. 

Despite its significance, the LIHTC program is frequently misunderstood. Let’s explore its background and shed light on why it remains a powerful yet increasingly complex tool for asset managers, developers, and housing advocates alike.

A brief history

Created as part of the 1986 Tax Reform Act, the LIHTC was designed to incentivize private development of rent-restricted housing. The program gives developers federal tax credits, which they can claim over a 10-year period to reduce their tax liability dollar for dollar. Unlike tax deductions, which reduce taxable income, tax credits directly reduce the amount of tax owed, which makes them a far more powerful financial instrument.

However, because these tax credits often exceed the developer’s own tax burden, they are frequently sold to investors in exchange for equity that is then used to fund the development. In essence, developers trade future credits for up-front capital, creating a private-sector funding source for the public good.

The real power of the program lies in the fact that tax credits can be bought and sold. This capability enables investors of all types, whether motivated by financial return or a desire to invest in socially minded causes, to directly own affordable housing through an equity investment in this type of housing. There remains a debate as to whether or not those legislators back in 1986 foresaw the impact their change to the tax code would have. But with more than 3.7 million units of affordable housing developed since the inception of the program, the results speak for themselves. 

The mechanics and misconceptions

Tax credits in the tens of millions of dollars can attract large-scale investors but also introduce complexity. Developers must assemble financing from multiple sources, with LIHTC equity being a major pillar. Navigating this financial puzzle has become more challenging due to rising interest rates, inflationary pressures, and market volatility.

According to Kevin Nowak, executive director of CHN Housing Partners in Cleveland: “So many times in the last five years, we’ve heard the word ‘unprecedented,’ but for the affordable housing industry, we truly have not seen the confluence of so many headwinds at once.”

Nowak, who has been developing or financing affordable housing for nearly 20 years, added, “We are faced with everything from soaring construction costs and tariff-related price increases to elevated debt service from higher interest rates.”  

The increased financial complexity and rising construction costs are adding more challenges to—and putting even more pressure on—this already-stressed housing solution.

What property managers and asset managers need to know

Affordable housing property managers and asset managers have always needed to be creative with operating budgets. Even with a more restrictive budget than conventional, market-rate housing, managers must ensure that properties deliver on the promise of high-quality housing. Nowak acknowledges this challenge. “Once properties convert from construction to permanent financing, operating costs—ranging from payroll to insurance—continue to escalate, shrinking available cash flow and increasing strain on asset performance,” he says.

For those in asset management, the LIHTC landscape requires more than a working knowledge of tax credits. Deal sizes are growing—often exceeding $35 million—as developers seek economies of scale. But these larger deals pose their own risks: reduced investor appetite, absorption challenges in saturated markets, and limited placement opportunities for syndicators.

As Stacie Nekus, senior vice president of KeyBank’s Community Development Lending and Investment, notes, “Market analysis, capture rates, and thoughtful deal structure have only become more important, but it is economic vacancy trends that have become more critical than ever. While underwriting, due diligence, and deal structure are essential, our internal data shows the most effective mitigation for economic vacancy is strong, engaged property management.”

Another key consideration is tenant affordability. Nekus explains that “even if developers underwrite to the maximum allowable LIHTC rents, stagnant wages and rising costs mean tenants may still be rent-burdened. Asset managers must assess whether income from rents can sustain operations without compromising long-term stability or resident well-being.”

These developmental and operational challenges require our industry to rise to the occasion, work together, and ensure that low-income Americans are not left behind.

Looking ahead

The current political environment has brought many funding sources, such as grants or subsidized loans, under review. It is incumbent on all of us, regardless of our own need for affordable housing, to encourage our leadership to preserve housing for low- and moderate-income Americans.

Despite current challenges, LIHTC remains one of the few federal programs with long-standing bipartisan support. While it represents less than 1% of the $6.5 trillion federal budget, its impact on low-income families is profound. In a nation facing a shortage of more than 7.3 million affordable homes, the need for effective, scalable housing solutions is more pressing than ever.

In this environment, partnerships among developers, lenders, asset managers, and property managers are essential. Programs like LIHTC show that when private expertise aligns with public purpose, we can create housing that truly changes lives.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity. Banking products and services are offered by KeyBank National Association. All credit products are subject to collateral and/or credit approval, terms, conditions, and availability and subject to change.