LIHTC 101: A Developer’s Guide to Low-Income Housing Tax Credits in Hawaii

If you are developing housing in Hawaii, you know the math doesn’t work with market-rate financing alone. The land costs are too high, and construction costs are the highest in the nation.

Enter the Low-Income Housing Tax Credit (LIHTC).

Created by the Tax Reform Act of 1986, LIHTC is the most powerful tool for creating affordable housing. In Hawaii, it is managed by the Hawaii Housing Finance and Development Corporation (HHFDC). But navigating the application process—and the 15 years of compliance that follow—is complex.

At Hawaii Affordable Properties, Inc. (HAPI), we don’t just manage buildings; we help developers protect the tax credits that fund them. Here is your primer on how LIHTC works in the Aloha State for the 2026 cycle.

What You Will Learn:

1. 9% vs. 4% Credits: Which bucket is right for you?
2. The 2026 HHFDC QAP: Your Rulebook
3. Income Averaging: The New Math
4. Honolulu Incentives: Bill 7 & 201H
5. The Compliance Timeline
6. Developer FAQs

The 2026 HHFDC “QAP” (Your Rulebook)

How to squeeze every point out of your application.

You cannot win tax credits without mastering the Qualified Allocation Plan (QAP). In 2026, competition is fierce, and projects often win or lose by a single point.

How HAPI Helps You Score “Operational” Points: HHFDC awards specific points for the strength of your management team and resident programs.

• Management Experience (Max Points): The QAP awards points for using a management agent that currently manages LIHTC projects.
  • The HAPI Advantage: With 4,000+ units under management, we max out this category automatically. We provide the “Agent Certification Letter” you need for your application binder.
• Tenant Services (Tie-Breaker Points): HHFDC favors projects that provide tangible services, not just housing.
  • Our Strategy: We craft a Tenant Service Plan (TSP) that includes quarterly health screenings, financial literacy workshops, and after-school programs—fully backed by MOUs with local non-profits like Catholic Charities.
• Longer Affordability Commitment: While the federal minimum is 30 years, HHFDC scoring incentivizes applicants to commit to 61 years. We help you underwrite the long-term maintenance costs to ensure the building remains solvent for that extended lifespan.

The “Income Averaging” Strategy

New for Hawaii Developers

Historically, LIHTC projects were stuck with the rigid “40/60 Rule” (every unit must be ≤60% AMI). Recently, Hawaii adopted the IRS Income Averaging (IA) election, offering developers massive flexibility—if you can manage the compliance risk.

The Math: How it Works Instead of capping everyone at 60%, the average of all unit designations in the project must equal 60% or less.

• Example: You can rent Unit A at 80% AMI (Higher Rent / Workforce Housing) as long as you rent Unit B at 40% AMI (Deep Affordability) to balance it out.
  • (80% + 40%) ÷ 2 = 60% Average.

The Risk: The “Cliff Effect” This is the most dangerous compliance trap in the industry. If that 40% unit goes “out of compliance” (e.g., the tenant is found to be over-income at move-in), your project’s average might slip to 60.1%.

• The Consequence: Under strict IRS rules, every single unit in that building could lose its tax credit status.
• HAPI’s Protection: We utilize “Unit Designation Float” software. If a low-income unit fails, we instantly re-designate a different unit to maintain the average, building a “compliance firewall” around your tax credits.

The “Placed in Service” Deadline

It is not just about finishing construction; it is about “Qualified Occupancy.”

Once you win your tax credit reservation, two critical clocks start ticking. Missing either deadline can cause the IRS to recapture or cancel your credits entirely.

• The 10% Test (The First Hurdle): Within 12 months of your reservation, you must incur at least 10% of your project’s reasonably expected basis (land acquisition, architectural fees, etc.).
  • HAPI’s Role: We assist your accountants by providing early operational budgets and staffing cost projections to help substantiate your basis.
• Placed in Service (PIS): You generally have until the end of the second calendar year following your allocation to complete construction and receive your Certificate of Occupancy (C of O).
  • The “Two-Thirds Rule” Risk: This is the trap that catches many developers. If a unit is built but not occupied by a qualified tenant by the end of the first year of the credit period, you cannot claim the full credit. You are forced to defer those credits effectively losing the “Time Value of Money” for your investors.
  • The Fix: HAPI’s “Velocity Lease-Up” strategy ensures that if your building opens in November, we have qualified tenants ready to move in by December 31st, protecting your Year 1 equity installments.

2026 Developer Checklist

Use this to prepare for your HHFDC application.

•  Secure Site Control: Do you have a recorded lease or deed?
• Market Study: Does the data support your rent assumptions?
•  Form the Team: Have you selected a “Tax Credit Certified” management agent? (Required for QAP points).
•  Resident Services Plan: Do you have MOUs from non-profit partners?
•  Capital Needs Assessment (CNA): Required if doing an acquisition/rehab.