Katelynn Harris Walker: Navigating LIHTC Equity–Challenges, Solutions, and the Road Ahead

Katelynn Harris Walker is Associate Director of Affordable Housing Initiatives with the Mortgage Bankers Association

The Low-Income Housing Tax Credit (LIHTC) program has long been one of the most important tools for creating affordable housing across the United States. However, recent years have seen significant challenges in ensuring the equitable distribution of LIHTC equity, raising concerns among developers, investors, and policymakers alike.

LIHTC equity deals have become increasingly difficult due to a variety of factors, including pricing volatility, investor uncertainty, and regulatory complexity. These challenges not only impact the developers trying to create affordable housing but also those who rely on the program for housing stability.

“Tax credit equity dollars is the primary driver for affordable housing developers when trying to structure their deal for liftoff. It’s generally the first piece of the puzzle both in terms of equity dollars raised and the investor they opt to select as a limited partner,” said Daron Tubian, Head of Affordable Housing Investments, Barings Global Real Estate and Chair of the MBA Affordable Rental Housing Advisory Council. “Quite often their investor will also require to be the construction lender and more frequently (these days), the permanent lender as well. Hence, until developers figure out their equity strategy, the rest of their capital structure is pretty much on standstill. Once a limited partner is selected, then they work to identify the lender that best meets their capital market needs. Investors that tie their equity to debt does limit the best debt options developers may have among lenders, but that’s an element they have to work with if their investor also requires the debt.”

In addition to the market-driven challenges, broader economic conditions such as interest rate increases and overall market uncertainty have made it harder for investors to in credit allocations and funding gaps due to tax credit reductions, further complicating project timelines.

“Most investors are expecting bank growth to pick up in 2025. As loan volume increases, net interest income is forecasted to increase, which will drive more demand for credits,” said Stacie Nekus, Head of Equity for Key Community Development Lending and Investing and member of the Affordable Rental Housing Advisory Council. Unfortunately, the short-term outlook is that tax credit equity pricing will continue to remain flat as interest rates on loans remain stubbornly high, and there are alternative investments with higher yields that are creating an environment where economic investors are demanding higher yields for LIHTC funds.

 Nekus noted that putting the capital stack together is taking longer which drives longer closing timelines, “but investors are holding their pricing commitments,” she said. “We haven’t seen any deals that have been brought to us over the last six months where an investor has walked or repriced the developer, which is a strong indicator of investor commitment to affordable housing.”  

To address the equity challenges developers face, it’s crucial to focus on financial structures that can help stabilize pricing. This can be achieved through innovative underwriting practices and flexible deal structuring that better accommodate the changing market landscape.

“As a balance sheet lender that holds perm loans for their full term, we look to structure each deal based on its specifics, which often requires structured financing to meet the specific needs of a project to be compelling but yet credit compliant,” Tubian said. “There is a lot of capital that banks and institutions are looking to deploy in multifamily affordable housing, and that certainly helps in the production of more units.  At the same time, the immense need for more housing units in our country is a reality that the entire industry, both public and private, should embrace and work to continue to harvest products and programs that help finance them.”        

Public-private partnerships are essential in addressing LIHTC equity challenges. By aligning federal, state, and local resources with investor interests, these partnerships can help bridge the gap between policy constraints and market-driven needs. Creating incentives for consistent equity pricing and access will ensure long-term project viability.

“Public private partnerships allow for risk sharing, community engagement and policy alignment as we seek to find solutions to the housing crisis and create more housing units through the LIHTC program,” Nekus said. “At Key, as a lender and investor participating in all parts of the capital stack with our partners across the country, we strive to add efficiencies and innovate solutions to housing challenges. For developers seeking to maximize financing and equity available to them, it’s helpful to work with one finance partner who can provide as many solutions as possible.

Nekus called public-private partnerships the most efficient way to create housing in our country. “Developers, state and local agencies, bond issuers, investors, lenders, syndicators, soft funding providers, have all been creating solutions to overcome these challenges for almost 40 years,” she said.

Moving forward, it is critical that stakeholders across the LIHTC landscape collaborate to address the ongoing challenges in equity pricing and access. Actionable steps include continued innovation in deal structuring, policy reforms to encourage more stable investment, and increased dialogue between the private and public sectors.

“Collaboration, increased incentives for investors and lenders along with creative financing solutions are all key components that can help address the nation’s housing crisis” said Tubian.  “Unlike other real estate asset classes, the lack of housing or homelessness impacts cities and communities in the most undesirable manner, thus addressing this crisis is not an option but a must.”

Nekus agreed that the LIHTC industry is the most efficient method and least risky program to address the creation of affordable housing across the country. “It’s estimated that over three million housing units have been built since the program’s inception, and the program along with state allocating agencies have developed provisions to maintain affordability well beyond the 15-year compliance period associated with LIHTC, ensuring long-term affordability for people that need it most,” she said. “Investors and lenders have shown their commitment to the asset class, and the program has proven to be adaptable and nimble in challenging economic times.”  

The role of the LIHTC program will only become more critical as the affordable housing crisis deepens. Addressing the equity challenges that have emerged is a shared responsibility among developers, investors, and policymakers. By working together, we can ensure the ongoing success of this vital program and, in turn, create more opportunities for affordable housing nationwide.

Learn more about MBA’s affordable housing initiative, CONVERGENCE, here.