How to Stack LIHTC with State Incentives in New Jersey

The Challenge: Making Affordable Housing Pencil

Affordable housing development in New Jersey faces a fundamental challenge: construction costs continue to rise while allowable rents remain constrained by Area Median Income (AMI) limits. Low-Income Housing Tax Credits (LIHTC) provide critical equity, but rarely close the entire financing gap on their own.

The solution? Strategic incentive stacking – layering federal LIHTC with state and local programs to maximize subsidy and improve project returns.

Understanding the LIHTC Foundation

Before discussing stacking strategies, it's essential to understand how LIHTC works:

Two Types of Credits

• 9% Credits (Competitive) – Awarded annually through NJHMFA competitive allocation process. Provide ~70% of eligible basis in tax credits.
• 4% Credits (Non-Competitive) – Available to projects using tax-exempt bond financing. Provide ~30% of eligible basis in tax credits.

LIHTC Compliance Requirements

LIHTC projects must maintain affordability for minimum 30 years and meet strict ongoing requirements:

• Minimum of 20% units at 50% AMI OR 40% units at 60% AMI
• Annual income certification for all tenants
• Rent restrictions tied to AMI limits
• Physical inspection compliance

State Incentive Programs Compatible with LIHTC

1. NJEDA Economic Redevelopment and Growth (ERG) Program

ERG provides tax credits for projects in certain municipalities creating jobs or making substantial capital investments. For affordable housing developers:

Coordination Requirement: ERG credits cannot be used to offset the same costs claimed for LIHTC basis. Careful allocation planning is critical.

2. Brownfield Remediation Tax Credits

Many urban LIHTC sites involve environmental remediation. New Jersey offers tax credits for qualified remediation costs:

• Up to 50% of remediation costs as tax credits
• Can be applied to sites requiring cleanup before development
• Works particularly well with adaptive reuse LIHTC projects

3. Historic Preservation Tax Credits

Adaptive reuse LIHTC projects involving historic structures can layer federal and state historic tax credits:

• Federal HTC: 20% of qualified rehabilitation expenses
• NJ HTC: Additional 20-40% of qualified expenses (varies by project type and location)

Example: A historic mill conversion to affordable housing can potentially capture LIHTC (30-70% of eligible basis) + Federal HTC (20%) + NJ HTC (20-40%) on qualified rehabilitation costs.

4. Municipal Tax Abatements and PILOTs

Perhaps the most impactful incentive for LIHTC projects: long-term municipal tax abatements.

The Compliance Balancing Act

Incentive stacking requires careful navigation of overlapping compliance requirements:

Avoiding Basis Reduction Issues

Key principle: Credits and grants that reduce the developer's out-of-pocket costs also reduce LIHTC eligible basis.

Strategic approaches:

• Separate cost buckets: Apply state incentives to costs excluded from LIHTC basis (e.g., land acquisition, certain soft costs)
• Timing strategies: Structure incentive receipt to minimize basis reduction
• Below-market loans: Consider below-market financing rather than grants to preserve basis

Job Creation Requirements

Programs like ERG and ASPIRE require job creation/retention. LIHTC projects can meet these through:

• Ground-floor commercial or community space tenants
• On-site management and maintenance staff
• Service coordinator positions (for senior or supportive housing)

Income Restriction Conflicts

Ensure state incentive income restrictions align with LIHTC requirements. Some programs have conflicting definitions of "affordable" or "low-income."

Case Study: Optimal Incentive Stack

Consider a hypothetical 80-unit mixed-income project in an NJ Opportunity Zone:

This stacked approach reduces equity required from the developer and improves project cash flow, making the deal feasible.

Application Timing and Coordination

Successful incentive stacking requires coordinated applications across multiple agencies:

1. Pre-Development (12-18 months before construction)
   • Municipal approvals and PILOT negotiations
   • NJHMFA LIHTC preliminary reservation
   • Brownfield determination (if applicable)
2. Financing Period (6-12 months before construction)
   • LIHTC carryover allocation
   • Bond issuance and 4% credit allocation
   • NJEDA program applications
3. Construction and Lease-Up
   • LIHTC placed-in-service requirements
   • State incentive compliance monitoring begins

Common Pitfalls to Avoid

• Late incentive planning: Apply for state incentives concurrently with LIHTC, not after
• Overlooking basis reduction: Failure to account for basis impacts can sink LIHTC applications
• Ignoring municipal incentives: PILOTs and abatements often provide more value than state programs
• Poor compliance coordination: Conflicting reporting and certification requirements create administrative nightmares
• Underestimating legal/consulting costs: Complex stacking requires experienced legal, tax, and development advisory support

Final Thoughts

Affordable housing development in New Jersey requires creative financing solutions. By strategically stacking LIHTC with state and municipal incentives, developers can:

• Close financing gaps on challenging sites
• Improve project returns and cash flow
• Serve deeper affordability levels
• Create financially sustainable affordable communities

The key is early strategic planning – ideally during site selection and before making firm development commitments. Understanding how various incentive programs interact, where conflicts may arise, and how to structure your capital stack for maximum efficiency can mean the difference between a marginal project and a home run.