Why LIHTC Projects Often Cost More to Build And What Lenders Can Do to Close the Gap

A comparison highlighted in The Real Deal reveals a striking paradox in Chicago’s development costs: a luxury market-rate tower in Fulton Market is being delivered at roughly $380,000 per unit, while an affordable LIHTC development across the city approaches $790,000 per unit. The building with the rooftop pool costs less than the one with modest finishes.

This counterintuitive structure is driven not by design choices, but by the regulatory, financing, and compliance ecosystem surrounding LIHTC development. Layered funding sources, protracted approvals, and program-driven design requirements all contribute to a cost environment that consistently outpaces market-rate construction.

Recent federal policy changes, including expanded LIHTC allocation and lower bond-financing thresholds, represent a major opportunity for affordable housing. However, unless we address the operational and structural inefficiencies driving LIHTC cost inflation, much of that opportunity will be absorbed by soft costs and delays.

Why LIHTC Developments Have Become So Expensive

Rising construction costs, including labor and materials, impact all development. However, LIHTC projects face a structural cost disadvantage that goes far beyond general market conditions. 

As The Real Deal article illustrates, affordable housing deals are burdened by layers of requirements, reviews, and complex financing that push soft costs and timelines significantly past their market-rate counterparts. These cost drivers are not due to poor management or extravagant design; they are built into the LIHTC program’s financing and regulatory framework.

Soft costs are 2–3x higher than market-rate projects

In California, LIHTC developments carry soft costs of roughly $187 per square foot, more than double the square foot cost typical in market-rate construction. This disparity is driven by the need for:

• Compliance and regulatory consultants (environmental, prevailing wage, sustainability)
• Extensive legal and financial structuring work
• Expanded architectural and engineering documentation
• Rigorous documentation to satisfy multiple funding sources
• Detailed ongoing reporting for agencies and investors

These layers are embedded in the qualification and oversight process of LIHTC, resulting in significant administrative overhead that compounds across the life of the project.

Multi-layered capital stacks inflate transaction costs

Most LIHTC projects are financed through a fragmented capital stack, often combining: federal tax-credit equity, state/city soft funds, tax-exempt bonds, subordinate loans, grants, and conventional debt.

Since each source imposes its own underwriting, compliance, and reporting cadence, this leads to:

• Higher legal and closing costs.
• Additional consultant fees for sequencing.
• Protracted sequencing and review periods.
• Recurring documentation reconciliation across fragmented systems.

The more fragmented the stack, the more expensive the project, and LIHTC is almost always the most fragmented stack in the market.

QAP requirements increase costs without increasing revenue

State Qualified Allocation Plans (QAPs) guide how LIHTC credits are awarded. To compete successfully, developers often include features that:

• Increase unit size or overall square footage
• Add supportive service areas
• Incorporate high-cost sustainability certifications
• Expand accessibility requirements
• Provide family-oriented unit mixes (e.g., 3BR and 4BR units)

While these requirements support essential social goals, they increase total project cost while rents remain capped, creating a widening feasibility gap.

Slow timelines expose projects to inflation risk

Perhaps the most damaging structural issue is time. LIHTC developments often take years to:

• Secure credit allocations
• Assemble complex capital stacks
• Complete environmental and multi-agency reviews
• Obtain necessary local approvals
• Finalize underwriting across various funders

During this time, inflation in labor and materials can dramatically alter the pro forma. With costs rising $20–40 between early planning and breaking ground in some markets, many projects must be rebid or restructured, adding even more time and cost.

Limited contractor competition further increases bids

The compliance-heavy nature of LIHTC work (certified payrolls, reporting, inspections, wage rules, documentation audits) causes many general contractors to price risk into their bids, or avoid LIHTC projects entirely. When fewer contractors are willing to engage, bids come in higher and cost discipline erodes.

Taken together, these structural realities explain why LIHTC projects routinely cost more than market-rate developments, even without upgraded amenities or premium locations. 

Policy reform can help, and several cities and states are moving in that direction. But even the strongest policy shifts won’t eliminate the operational drag that makes LIHTC projects slower, riskier, and more expensive to deliver. That’s where lenders and developers have an immediate opportunity to reduce costs, by addressing the operational inefficiencies inside their own workflows.

Policy Shifts That May Help (But Won’t Solve It Alone)

Across the country, policymakers are working to bring more affordable housing online by reducing barriers that make LIHTC projects expensive and slow to deliver. These reforms matter, and many are already showing early signs of promise.

Streamlined approvals

Cities such as Chicago are targeting bureaucratic delays head-on. The city’s “Cut the Tape” initiative consolidates processes across more than a dozen departments to shorten permit timelines and reduce duplicative reviews. 

Similarly, select housing projects in California now benefit from CEQA exemptions and simplified environmental pathways. These changes aim to shrink the long development cycles that expose LIHTC projects to inflation and re-bidding risk.

Ground-lease models lower upfront costs

Institutional players like Safehold and the Shidler Group are leveraging ground-lease structures to help developers avoid high land acquisition costs. By removing land from the capital stack upfront, projects become more financially feasible, particularly in high-cost markets. While not new, their resurgence reflects the need for capital-efficient approaches to LIHTC development.

Revolving loan funds reduce borrowing costs

Cities are also experimenting with ways to reduce reliance on expensive private debt. Chicago’s $135 million revolving loan fund is a standout example: the city issues low-interest construction loans to affordable housing developers, with interest payments replenishing the fund for future projects. Lower borrowing costs directly reduce per-unit totals and help bridge LIHTC feasibility gaps.

Federal enhancements to the tax credit

Federal policy has also moved in a pro-housing direction:

• The move from a 9% to a 12% LIHTC in 2026 increases the equity available per project.
• Basis boosts continue to help deals pencil in high-cost and high-need areas.
• Bond-financing reforms reduce the threshold for tax-exempt bond qualification, allowing more projects to secure the 4% credit.

These enhancements increase subsidy efficiency and reduce the pressure to assemble complex, multi-layered funding stacks.

Parking, zoning, and land-use reforms

Cities and states are increasingly rolling back cost-driving zoning requirements, including: reduced or eliminated parking minimums, expanded as-of-right density, more flexible Accessory Dwelling Unit (ADU) rules, and design mandate simplification. These changes lower hard costs and enable more streamlined site development.

But policy alone won’t solve the real cost problem

All of these reforms reduce friction, lighten the regulatory load, and improve financial feasibility. But even the best policy shifts won’t solve the core drivers of LIHTC cost inflation, because those drivers are fundamentally operational, not just regulatory:

• Fragmented workflows across lenders, developers, contractors, and agencies
• Heavy documentation requirements tied to every funding source
• Slow draw processes that delay payments and trigger schedule slippage
• Capital stack reconciliation challenges that require constant administrative oversight

These operational realities add months to project timelines, compound soft costs, and increase the risk of compliance errors. Unlike state or federal policy, these are problems lenders can act on today.

The Operational Cost Problem in LIHTC Lending

Even with policy reforms aimed at streamlining development, LIHTC projects still face operational challenges that add cost, slow timelines, and increase compliance risk. 

These are the day-to-day realities inside lending and construction workflows, and unlike regulatory mandates or funding rules, they are issues lenders can directly influence.

Fragmented documentation increases soft costs

A single draw can involve fifteen or more documents that arrive from different people, at different times, and in different formats. Lenders often receive incomplete packages, outdated files, or multiple versions of the same document. 

Each clarification requires follow-up, and each correction adds friction. This back-and-forth, while seemingly small in isolation, becomes a significant contributor to soft costs over the life of a project and slows progress in ways that policy change cannot address.

Slow draw processing creates schedule risk

When approvals stall, work on site slows with them. Contractors wait, inspectors reschedule, and subcontractors shift to other jobs. Even short interruptions can push activity into periods with higher labor or materials costs, which is especially damaging in an inflationary environment. 

Predictable and efficient draw processing helps stabilize the construction schedule and protects the budget from these time-related risks.

Complex capital stacks increase the chance of error

LIHTC projects require careful coordination of multiple funding sources, each with its own rules. Allocating every draw across equity, bond proceeds, soft funds, and loans demands precision. Manual tracking increases the likelihood of mistakes that can delay equity pay-ins or trigger compliance reviews. 

These errors take time to unwind, adding pressure to already tight project timelines and introducing risk that can be avoided with better operational structure.

Placed-in-service documentation creates late-stage bottlenecks

Throughout construction, key documents accumulate across emails, shared folders, and internal systems. When the project reaches completion, teams often face a scramble to gather the final certificates, reports, affidavits, and cost data needed for placed-in-service approval and Form 8609 issuance. 

This end-of-project bottleneck can stall stabilization and delay the final delivery of tax credits, even when construction itself is otherwise complete.

A practical, immediate opportunity

These operational pain points are workflow issues that lenders can improve today. Refining these processes can shorten timelines, reduce soft costs, and make LIHTC projects more feasible without waiting for legislative action.

What Lenders Can Improve Today, And How Built Helps

Policy changes can make LIHTC projects easier to build, but they cannot eliminate the operational friction that slows down draws, creates cost overruns, or complicates compliance. 

Those challenges sit inside the lending workflow, and lenders have immediate opportunities to improve them. Strengthening these processes reduces soft costs, shortens timelines, and helps projects stay on track.

The following areas are where operational improvements make the most impact, and where Built supports lenders with the structure needed to execute them consistently.

Improve and standardize draw workflows

A consistent draw process keeps construction moving and protects budgets from schedule-related cost increases. Lenders benefit when every draw follows the same review path, uses the same required documentation, and moves through approvals without unnecessary back-and-forth. 

Built supports this by providing a structured environment for draw submission and review. Documents arrive in one place, approvals follow defined steps, and teams work from the same information so the process moves more predictably.

Maintain a single source of truth for the capital stack

LIHTC projects depend on accurate allocation of every dollar to the right source of funds. Coordinating tax credit equity, bonds, soft funds, and loans across separate spreadsheets or folders increases the chance of inconsistencies that later require correction. 

Built helps lenders manage these allocations within a unified system, so draw activity remains aligned with the capital structure throughout the project. This reduces reconciliation work and creates a clear audit trail when funders or regulators need verification.

Automate document intake and version control

Chasing documents across emails and shared drives slows down reviews and increases the likelihood of missing or outdated files. When documents accumulate from multiple stakeholders, version control becomes difficult and teams spend time sorting through duplicates. 

Built centralizes documents and organizes them as they arrive, which helps prevent version issues and reduces the time spent collecting and verifying files. This creates cleaner documentation and supports regulatory readiness without additional manual effort.

Collaborate in real time across stakeholders

Most delays inside LIHTC lending happen because stakeholders are waiting on each other. Developers wait for clarifications, inspectors wait for access, and lenders wait for corrected documents. When communication moves through inboxes, timelines stretch. 

Built offers role-based access so each participant sees the information relevant to their part of the process. This reduces email traffic, limits bottlenecks, and helps draw reviews progress without unnecessary interruptions.

Prepare placed-in-service documentation throughout construction

The final documentation required for placed-in-service approval and Form 8609 often becomes a late-stage scramble. Certificates, reports, and cost information gathered at the end of a project take weeks to assemble, even when the building itself is ready. 

Built keeps documentation organized throughout construction, so the materials needed at the end of the project are already in order. This reduces delays in final approvals and helps projects transition more quickly into stabilization.

A practical path forward

Operational improvements like these do not depend on policy cycles or new incentive structures. They are changes lenders can make today to lower soft costs, keep schedules intact, and support the successful delivery of LIHTC developments. 

Built provides the connected system that helps lenders execute these workflows with clarity and consistency across their affordable housing portfolios.

If LIHTC Is Going to Scale, Operations Must Scale First

The cost gap that makes an affordable unit more expensive to build than a luxury one will not close through policy alone. Rising soft costs and long timelines are already constraining production, even as federal programs expand and more capital becomes available.

The most immediate and controllable lever sits inside the lending workflow. When lenders strengthen how they manage documentation, draw reviews, capital stack tracking, and placed-in-service preparation, LIHTC projects move faster, carry fewer soft costs, and make better use of each tax-credit dollar.

Built helps lenders put this operational foundation in place so LIHTC projects can be delivered with greater speed, clarity, and confidence.

If you’re ready to improve efficiency across your affordable housing portfolio, book a demo to see how Built supports LIHTC lending from start to finish.