Since it was established by the Tax Reform Act of 1986, the Low-Income Housing Tax Credit (LIHTC) program has produced more than 3 million homes, making it the most important source of funding for affordable housing in the United States. The program was designed to leverage tax credits to provide a much-needed source of equity for developers building affordable housing. By bringing private capital to the table through the credits, developers can take on less debt, which in turn translates into lower rents.

However, the equity generated from the tax credit is rarely sufficient to close the gap between the costs of development and the rents that would be affordable to households with low to moderate incomes. Since the program’s inception, developers have made LIHTC work through a complex system of financing, where multiple sources of funding are “stacked” to make a deal financially feasible. Analysis in the early years of the program found that nearly a third of LIHTC developments had six or more separate sources of funding in their “capital stack.” Decades later, our analysis of LIHTC properties in California found that between 2008 and 2019, 80 percent of developments layered between four to eight sources of funding (including equity), while another almost 9 percent relied on more than eight funding sources.

The multiple sources of financing that LIHTC properties often require to make the math work can impose inefficiencies that add to a development’s total costs in both direct and indirect ways. The price tag of LIHTC development has come under increasing scrutiny in recent years, especially as it has continued to climb in already high-cost states such as California. While funding complexity is not a primary driver of development costs, the costs and inefficiencies that stem from managing multiple funding sources work against the need to stretch limited production subsidies to maximize new affordable housing production. In addition, the costs of financing complexity are difficult to quantify because detailed, consistent, and comprehensive data on the costs of LIHTC developments are not publicly available, and costs associated with identifying and layering funding sources are often not explicitly tracked.

In this brief, we draw on multiple sources of project-level data as well as interviews with dozens of stakeholders across the country to better understand financing complexity across different markets and types of properties and to identify challenges associated with the fragmentation of funding. We also explore promising approaches that can help to streamline the ways in which the capital stack gets built. The brief concludes with a discussion of implications and key takeaways from our quantitative and qualitative analysis as well as recommendations for steps federal, state, and local actors can take to help increase efficiencies and minimize unnecessary costs associated with funding LIHTC development.

Despite the fact that LIHTC has been in place for over 30 years, there is still no comprehensive database that tracks LIHTC development costs or key characteristics that influence those costs (e.g., materials used, LEED certification, presence of prevailing wage). Part of the challenge in assembling this information—which is critical for assessing the implementation of the program—lies in the way the tax credit is \ administered. Although LIHTC is run through the Department of the Treasury, the credits are distributed by state agencies (and in some cases counties and cities) that have control over both the policy priorities for the credit—which are established through each state’s Qualified Allocation Pla—as well as the application materials.

As a result, there is little consistency in the data collected as part of the application process. While a few states provide significant detail on applications and funded developments online (including California), the majority do not, making it difficult to build a comprehensive database on LIHTC costs and financing.