Navigating Tax-Exempt Bonds and 4% LIHTC: Key Tests and Considerations for Affordable Housing Projects

January 17, 2024

The utilization of tax-exempt bonds paired with 4% low-income housing tax credits (LIHTCs) has witnessed a significant surge, thanks to the fixed credit rate of 4% introduced in December 2020. The fixed percentage has unlocked substantial financial benefits for affordable housing projects. Further, developers can now obtain these tax credits without going through the competitive process with housing agencies, thereby expediting the development of affordable housing units.

While leveraging tax-exempt bonds provides financial advantages, it also introduces complexities. The program requires actively meeting several bond tests:

95% of Proceeds Requirement

Ninety-five percent  or more of the bond proceeds must be used for “good costs.” Good costs are costs chargeable to the project’s capital account, including land. “Bad costs” include syndication, organization costs, financing fees, cash reserves, or other intangible assets.

Bond Issuance Costs

Bond issuance costs are allowed to be paid by bond proceeds. However, only 2% of the issuance costs can be paid, or the bonds lose their tax-exempt status. 

25% Land Acquisition Limit

Generally, bonds are not considered qualified if 25% or more of the bond proceeds are used to acquire land. 

50% Test

At least 50% of the project must be financed with tax-exempt bonds to receive the 4% LIHTC credits. If less than 50% of the project is financed with tax-exempt bonds, then the 4% LIHTC is only received on that percentage, rather than 100%. Failing the test likely results in a project that is no longer financially feasible. There are substantial planning and ongoing monitoring opportunities to ensure the project satisfies this test.

Further tests exist for preliminary expenditures limitations, acquisition of existing facilities, related party profit limitations, and mixed-use developments. The tax-exempt bond tests are complex and can be penalizing. It is important to speak to a professional early in the project to discuss strategies that can be used to meet and monitor the tests. 

In navigating the intricate landscape of tax-exempt bonds and LIHTCs, seeking professional guidance is not just advisable; it's imperative. MarksNelson stands ready to be your partner in ensuring your affordable housing project maximizes the financial benefits available. Our team of experts understands the nuances of these requirements, and we are committed to formulating strategies to meet and monitor these stringent tests. Don't let the intricacies hinder your project's financial feasibility. Reach out to MarksNelson today, and let's unlock the full potential of your affordable housing endeavor.

Contact Kari Wolff at or Crystal Calvert at or 816-743-7700.  


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

Crystal has a wealth of experience as a Certified Public Accountant (CPA), providing invaluable expertise in the real estate industry. She is a reliable auditor that delivers professional cost certifications and audits for a variety of projects, from historic and low-income housing tax credits, to Housing and Urban Development (HUD), and commercial... >>> READ MORE
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