Is Your Low-Income Housing Project a New Possibility?

June 21, 2022

In late 2020, the 4% credit floor for Low-Income Housing Tax Credit (LIHTC) projects was fixed for projects that receive an issuance of private activity tax-exempt bonds. As a result, projects that may have not been financially feasible with a floating rate, now have sufficient sources of funds to move forward. Whether you are new to a tax-exempt bond project or have been out of the space for a while, it is critical to understand several tests applicable to tax-exempt bond projects.

Let’s use a simplified sample project to walk through each test. For each test below, presume we have a tax-exempt bond financed project where total costs are expected to be $7.5 million and the project has received a tax-exempt bond allocation of $4 million. 

The 50% Test

At least 50% of the project’s aggregate basis or, simply, land and depreciable assets, must be financed with tax-exempt bonds. In the example above, if the $7.5 million project cost was all aggregate basis, the bonds would have financed 53.3% of the project and the test would be met. However, if the project had significant cost overruns and aggregate basis increased to $8.1 million, only 49.4% of the project would have been financed with tax-exempt bonds. 

What happens if the test fails? Only the percent of the project financed with tax-exempt bonds is eligible for the 4% credit. In our example above, only 49.4% of the project’s eligible basis would be eligible for the 4% credit. This test is often called a cliff test because if the test is not met, the project is likely not financially feasible.

The 2% Test

While not as complicated at the above-described 50% Test, the 2% Test is also important. Only 2% of the bond proceeds may be used to pay for bond issuance costs. Bond issuance costs can exceed 2%, but costs over the 2% threshold must be paid with a different source, such as equity. Using our example, bond costs in the amount of $80,000 can be funded with bond proceeds.

The 95% Test

Another percentage test is the so-called Good Cost/Bad Cost Test or the 95% Test. At least 95% of the bond proceeds must be used to pay for “Good Costs.” Good Costs include land and depreciable basis. Conversely, “Bad Costs” include, among other things, intangible assets, bond issuance costs, and perm loan origination fees. Continuing with our simple example, Good Costs in the amount of $3.8 million must be funded with bond proceeds.

Additional Tests

Additional tests exist that are too numerous to detail here including tests surrounding the inducement resolution, public hearings, minimum set-aside of units, and the portion of acquisition funded with the bonds. States may also have state-specific tests that are outlined in the qualified allocation plan. 

The tax-exempt bond tests are complex and can be penalizing. It is important to speak to a professional early in the process to discuss strategies that can be used to meet and monitor the tests. The team at MarksNelson can help.


Kari leads a team of auditors within the tax credit practice of MarksNelson. She is a key member of the firm’s real estate industry niche and specializes in cost certifications and audits for historic and low-income housing tax credits, HUD projects, and commercial real estate developments.... >>> READ MORE

Woman rejoices at cliff


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