LIHTC: Low-Income Housing Tax Credits

How it works

A LIHTC project means a 15-year compliance period sitting inside a 30-year-or-longer extended use period, a partnership structure with sophisticated equity investors, restrictive covenants recorded against the property, and an annual compliance regime administered by the Iowa Finance Authority.

Conveyance Law represents developers and property owners on LIHTC transactions across Iowa. Our work covers competitive 9% and bond-financed 4% deals, partnership and operating agreement negotiation, the closing documents that move equity into the project, the regulatory documents that bind the property for decades, and the Year 15 transactions that resolve LIHTC partnerships at the end of the compliance period.

9% and 4% credits in Iowa

The federal program under IRC Section 42 is administered in Iowa by the Iowa Finance Authority (IFA), which awards credits annually under a Qualified Allocation Plan (QAP) defining scoring criteria, set-asides, and procedural requirements. Each path has its own documentation, deal calendar, and pitfalls. The QAP and the 4% / bond rules together determine which path a given project should pursue, and the analysis benefits from being done before site selection rather than after.

Income, rent, and compliance

LIHTC properties must serve income-qualified tenants at restricted rents under one of three federal set-aside elections (20-50, 40-60, or the post-2018 average income test). Rents are capped at restricted levels tied to the unit’s AMI designation. The set-aside election is made early and is not modifiable after the fact, so getting it right at structuring is consequential.

Every LIHTC project signs a Land Use Restriction Agreement (LURA) recorded against the property, binding successors for the extended use period, at least 30 years under federal law and often longer in Iowa under QAP requirements. The 15-year compliance period inside the extended use period is the federal recapture period: failures during compliance can trigger credit recapture, IFA enforcement, and investor disputes.

Partnership structure and documentation

A typical LIHTC partnership includes a general partner or managing member that controls the partnership and provides operating guaranties; a tax credit investor limited partner that holds the substantial equity interest and receives the bulk of the credits; sometimes a co-GP or special LP separating control from economics; and operating agreements with detailed allocation, distribution, capital contribution, and consent provisions.

Investor side letters address reporting, indemnity, and consent rights not appropriate for the operating agreement. Construction completion guaranties, operating deficit guaranties, and tax credit recapture guaranties from the GP, often backstopped by a credit-worthy sponsor, round out the structure.

Negotiating these documents is most of the front-end legal work on a LIHTC transaction.

Year 15 and exit

The end of the 15-year compliance period is the point at which most LIHTC partnerships resolve. The investor has received the credits and any tax losses; the partnership has accumulated capital account positions that drive the exit math; and the underlying property continues to be subject to the LURA’s extended use restrictions.

Common Year 15 paths include investor exit through a put right exercisable starting at Year 15 (often at a defined price), a right of first refusal under IRC §42(i)(7) for qualified nonprofit or government purchasers, a qualified contract request in limited circumstances, resyndication with a new LIHTC allocation, or a refinance and reposition.

Investors and developers often have substantially different views about exit value and procedure. We have negotiated and closed Year 15 transactions on both sides, and the operating agreement provisions drafted at closing (put pricing, ROFR mechanics, capital account adjustments) frequently become the contested terms.

Coordinating with the capital stack

LIHTC projects almost always require a layered stack: tax-exempt bonds for 4% deals, federal and Iowa historic tax credits when the project includes a historic component, Tax Increment Financing in eligible urban renewal areas, Federal Home Loan Bank Affordable Housing Program grants, HOME, CDBG, and other federal and state soft funding sources, and conventional permanent debt at takeout.

Stacking requires careful attention to ordering, basis, and the entity structure that allows each source to flow correctly, typically through carefully negotiated subordination, intercreditor, and consent documentation.