Understanding Low Income Housing Tax Credits (LIHTC): How Affordable Housing Gets Built

For many families across North Carolina, the gap between what they earn and what housing costs is wide, and unfortunately, that gap continues to grow. A key element in the funding stack for an affordable housing development is a federal program called the Low Income Housing Tax Credit, or LIHTC (often pronounced "lie-tech"). Since its creation in 1986, LIHTC has financed the construction or preservation of millions of affordable rental homes nationwide.

What Is LIHTC?

LIHTC is a federal tax incentive administered at the state level. Rather than providing direct grants to developers, the federal government allocates a pool of tax credits to each state based on population. In North Carolina, that allocation is managed by the North Carolina Housing Finance Agency (NCHFA). These credits are then awarded competitively to housing developers — nonprofits, for-profits, and public housing authorities alike — who use them to finance the construction or rehabilitation of affordable rental housing.

The developer doesn't use the credits directly. Instead, they sell the credits to private investors — typically large banks or corporations — who can use them to reduce their federal tax liability dollar-for-dollar. That sale generates equity capital that dramatically reduces the amount of debt a project needs to carry, which in turn makes it financially viable to charge rents that low- and moderate-income households can actually afford. In essence, without LIHTC, developers could not afford to develop affordable housing because the math just doesn’t work; the reduced rental income would not be sufficient to cover the cost of the construction and maintenance.

Who Qualifies to Live in a LIHTC Project?

LIHTC properties must serve households earning at or below certain income thresholds, typically 50% or 60% of the Area Median Income (AMI) for the local area. (In Winston-Salem, the AMI is around $57,750, which puts 60% AMI at $34,650.) Rents are capped at levels affordable to those households, generally not exceeding 30% of their income. In exchange for these affordability restrictions, developments must remain affordable for at minimum 30 years — and often longer under North Carolina's standards.

LIHTC Credit Categories

There are two main categories of LIHTC:

• 9% Credits are more competitive and more valuable. They're generally used for new construction and can finance roughly 70% of a project's eligible costs through equity alone. These are awarded through a competitive annual cycle.

• 4% Credits are paired with tax-exempt bond financing and, while less competitive to obtain, are typically used for acquisition and substantial rehabilitation of existing properties. They generate less equity per dollar of credit but can be a powerful tool for preserving at-risk affordable housing.

The LIHTC Process: Step by Step

The path from concept to ribbon-cutting is long and requires coordinating many moving parts — financing, regulatory compliance, construction, and ongoing management. Here's how the process typically unfolds for a North Carolina nonprofit developer like ANCHOR.

• Phase 1 — Pre-Development: The project begins with finding the right site, assessing community need, and conducting a feasibility analysis to understand whether a project is financially viable. Strong projects are built on strong foundations: letters of support from local government, a documented housing need, and site control (typically an option to purchase the land).

• Phase 2 — Studying the QAP: North Carolina's Qualified Allocation Plan (QAP) is the rulebook for LIHTC in our state. Published annually by NCHFA, it defines how applications are scored and what the agency's current housing priorities are — such as geographic balance across urban and rural areas, proximity to transit, serving special populations, or energy efficiency. A developer must understand the QAP deeply before designing a project.

• Phase 3 — Application: The LIHTC application is substantial. Developers must submit a full financial pro forma, evidence of site control, a third-party market study demonstrating demand, architectural plans or design narratives, letters of support, and documentation of all other funding sources. Applications are submitted to NCHFA once a year, typically in the spring, and the cycle is both intense and highly competitive.

• Phase 4 — NCHFA Review and Award: NCHFA scores and ranks applications against each other, awarding credits to the highest-scoring projects within available funding. Not every applicant receives an award — this is genuinely competitive. Projects that are not selected can revise their applications and reapply in a future cycle.

• Phase 5 — Credit Reservation and Carryover: Awarded projects receive a reservation of tax credits from NCHFA. The developer must then meet a "10% test" — demonstrating that at least 10% of the project's total costs have been incurred within 12 months — to receive a carryover allocation, protecting the credit award while the project moves through financing and permitting.

• Phase 6 — Syndication and Equity: Here's where the tax credits are converted into cash. A syndicator or direct investor — often a major bank with Community Reinvestment Act (CRA) obligations — purchases the tax credits from the developer. They pay an amount based on the market rate for credits (typically $0.85–$0.95 per dollar of credit), and that equity flows into the project. The structure typically involves forming a limited partnership, with the investor as the limited partner and the nonprofit as the general partner managing the property.

• Phase 7 — Financing Stack: LIHTC equity rarely covers 100% of project costs. Most affordable housing developments layer multiple funding sources: construction and permanent loans, federal HOME Investment Partnerships Program funds, Community Development Block Grant (CDBG) funds, local government subsidies, and deferred developer fees. Getting all these sources to "close" simultaneously is one of the most complex parts of the process.

• Phase 8 — Construction and Cost Certification: Construction typically takes 12–18 months. Once complete, a certified public accountant performs a cost certification to calculate the exact amount of tax credits the project qualifies for. NCHFA then issues IRS Form 8609, which formally places the credits and begins the 10-year credit delivery period.

• Phase 9 — Lease-Up and Long-Term Compliance: The property opens and begins renting to income-qualified households. Annual income certifications, rent limit enforcement, and inspections ensure the property remains in compliance with LIHTC rules for the full compliance period — at least 30 years in North Carolina.

Why This Work Matters

The LIHTC process is long, complex, and demanding. It typically takes three to five years from initial concept to a family moving in the door. But for nonprofits committed to community development, it is one of the most powerful tools available. By leveraging private investment through the tax code, LIHTC allows organizations like ANCHOR to build quality, affordable homes that serve working families, seniors, and people with special needs — without relying solely on shrinking public subsidies.

Every affordable unit built through this process represents an individual or family with a stable, safe place to call home. That’s why we at ANCHOR are willing to navigate the complexity.