This article was originally published in the January 2026 issue of Modern Home Builders.
As of late, the “little engine that could” and low-income housing developers have a lot more in common than some might like to admit. Despite optimism and perseverance, the climb toward project closings on the other side of the mountain is being met with hesitation from investors and the tightening of budgets. Developers, much like the determined little engine, continue to push forward, repeating the refrain, “I think I can,” even as the grade steepens and the obstacles multiply.
At the peak of this uphill climb is the Low-Income Housing Tax Credit (LIHTC), a key mechanism that enables developers to finance and build affordable housing projects nationwide. It is divided into two categories — the 4 percent credit and the 9 percent credit — each tailored to different financing models, project sizes, and construction needs. Typically, the 4 percent credit is paired with tax-exempt bond financing while the 9 percent credit is more often applied to new construction or rehabilitation projects that do not rely on certain federal subsidies.
Both credit types operate within a similar framework. State housing finance agencies award the credits, which developers claim over a 10-year period once the property is completed and available for rent. Because construction requires significant up-front capital, more often than not developers partner with outside investors. In exchange for the 10-year stream of credits, investors purchase an equity interest in the project, and these funds provide immediate equity financing, reducing the project’s reliance on debt. Additional funding sources often include support from the U.S. Department of Housing and Urban Development, state mental health agencies, and contributions from the developers themselves — either through loans or by deferring a portion of their fees to cover early construction costs.
Historically, eligibility for the 4 percent credit required at least 50 percent of a project’s financing to come from tax-exempt bonds. Recent legislation permanently lowered that threshold to 25 percent, easing access for developers. Meanwhile, 9 percent credits are distributed to states based on population; beginning in 2026, allocations will rise by 12 percent to encourage more affordable housing development.
Despite these enhancements, challenges remain. Rising construction costs and tariff-related uncertainty make accurate budgeting difficult. Furthermore, the legislation rescinds all uncommitted funds previously allocated to the Green and Resilient Retrofit Program (GRRP) under the Inflation Reduction Act. The GRRP was intended to support energy efficiency and climate-resilience improvements in HUD-assisted multifamily housing. With that funding withdrawn, developers must now seek alternative sources to bridge financing gaps.
In addition to developers struggling to close funding gaps, there is also a widespread reluctance on the part of equity investors to participate in projects at the previously competitive prices. As a result, the offered pay-in rates have been lower than those offered in recent years, causing more stress on budgets and project timelines to extend. It is no longer a given that a developer will be blessed with multiple investor offers to negotiate among. Instead, several factors — including reliance on relationships, a well-thought-out project, and a history of successful projects — are being considered now more than ever.
Historically, developers have attempted to layer various credits within a project to increase investor interest — for example, combining state low-income housing credits, historic tax credits, or brownfield credits. While this strategy can increase financial feasibility, the current climate of investor hesitation means that multiple credits often complicate and prolong the process rather than streamline it.
Despite these headwinds, mission-driven not-for-profit developers remain undeterred. They are not only advancing their current projects but also actively pursuing new sites to better serve their communities. One successful strategy has been forming partnerships with mental health service providers, integrating supportive housing with affordable units in a single development. This approach diversifies funding sources, strengthens project viability, and provides service organizations with dedicated space to reach their target populations.
Not-for-profit developers are also adjusting expectations to align with the current landscape. They are recalibrating timelines, adapting to lower investor pay-in rates, and finding creative ways to stretch limited resources. Their persistence reflects the same spirit as the little engine — pressing forward not because the climb is easy but because the destination is worth the effort.
LIHTC is more than a financing tool — it is a symbol of resilience and hope. Even when faced with rising costs, policy shifts, and funding gaps, developers continue to climb the steep hill of affordable housing challenges. Like the little engine that could, developers in the affordable housing industry continuously remind us that persistence and collaboration can turn daunting obstacles into achievable victories.
With every “I think I can,” developers, investors, and communities push forward, proving that determination fuels progress. Each project built through LIHTC is not just bricks and mortar but a testament to the belief that safe, affordable housing is possible for all. And just as the little engine reached the top of the mountain, the LIHTC carries the affordable housing industry upward — one project, one family, one community at a time.