> ## Content Index > Fetch the complete content index at: https://blog.phadevelopment.com/llms.txt > Use this file to discover other available public pages before exploring further. # Predevelopment Funding for LIHTC Projects: 5 Dos and 5 Don'ts for Housing Authorities - URL: https://blog.phadevelopment.com/predevelopment-funding-for-lihtc-projects-5-dos-and-5-donts-for-housing-authorities/ - Published: 2026-09-23T20:38:33.000Z - Updated: 2026-09-23T20:38:33.000Z - Author: Brian West Every LIHTC deal has a stretch of time when the project is real enough to spend money on but not real enough for anyone to lend against it. Market studies, Phase I environmental reports, surveys, architectural drawings, zoning counsel, application fees, and bond inducement costs all come due before the tax credit award, before an investor signs on, and long before the construction loan closes. That stretch is the **predevelopment period**, and it is where a lot of good housing authority projects stall. The money involved is small next to total development cost. It is usually 3% to 7% of the budget. But it is the riskiest money in the deal: if the project never closes, it may never come back. The timing matters more now. The One Big Beautiful Bill Act permanently raised state 9% credit ceilings by 12% and, for projects placed in service after 2025, cut the private activity bond test from 50% to 25% of aggregate basis (as long as at least 5% is financed with bonds issued after December 31, 2025). More 4% bond deals will pencil out in 2026 and 2027, and more PHAs will be trying to get several projects application-ready at once. How you fund, protect, and recover predevelopment dollars will decide how many of those deals you can take on. Here are five things to do and five things to avoid. --- ## The 5 Dos ### 1\. Do build a predevelopment budget that is tied to milestones A single lump-sum "soft cost" line is not a predevelopment budget. Break spending into gated phases, each tied to a go/no-go decision: - **Phase 1: Feasibility** (roughly 10–20% of predev spend). Site control analysis, preliminary title, zoning review, a conceptual capital stack, and a desk-level market read. - **Phase 2: Application readiness** (roughly 40–50%). Full market study, Phase I ESA, survey, schematic design, a cost estimate, the HFA application, and, for bond deals, the inducement resolution and bond counsel engagement. - **Phase 3: Closing readiness** (the remainder). Construction documents, permits, investor and lender due diligence, and legal work. Each phase should have a trigger that releases the next tranche: a scoring self-assessment, a feasible 4% sources-and-uses, or a reservation letter. This approach protects the agency's own money. It is also what CDFI and HFA predevelopment lenders expect to see before they commit. ### 2\. Do layer your predevelopment sources the way you layer your permanent capital stack Predevelopment has its own capital stack, and the cheapest money should take the most risk. Common layers include: - **PHA non-federal or unrestricted funds.** These include business-activity reserves, developer fee earned on earlier deals, and COCC-related funds, subject to the agency's own policies and any restrictions on their source. This is usually the most flexible money a PHA has. - **CDFI predevelopment loans and recoverable grants.** National intermediaries such as LISC and Enterprise, along with regional CDFIs, lend against a project's pipeline value, often unsecured or with limited security. Recoverable grants are forgiven if the project fails, which makes them the best at-risk capital you can find. - **State and local predevelopment programs.** Many states run dedicated products. Examples include California HCD's Predevelopment Loan Program, Texas TDHCA's predevelopment NOFAs, and Colorado's Proposition 123 LIHTC predevelopment finance. Local housing trust funds and city housing departments often have smaller pools as well. - **Foundation and philanthropic capital.** This money is often mission-driven, especially for supportive housing or deals tied to health outcomes. - **Public Housing Capital Funds.** These are allowed for proposal development and soft costs under 24 CFR 905.612, subject to the approvals described under Don't #1 below. A layered approach keeps any one lender from carrying all the risk. It also keeps your developer fee from being the plug. ### 3\. Do negotiate reimbursement at closing into every agreement now Every predevelopment dollar should have a written path back. In practice, that means: - **Predevelopment loans are sized to be repaid from construction loan proceeds** or from the investor's first equity installment at closing. Confirm that the construction lender and the syndicator will both recognize the payoff as a use of funds. - **PHA-advanced funds are documented as a loan to the project**, or as a reimbursable cost under the development agreement, not as an informal contribution. If the agency is co-developing with a private partner, the development agreement should say who fronts what share of predev, how it is repaid, and how it counts in the developer fee split. - **Cost certification is planned for from the start.** Some predevelopment costs, such as architecture, engineering, and certain legal and financing costs, may be includable in eligible basis. Others, such as land, syndication costs, and tax credit application and monitoring fees, generally are not. Coding costs correctly from day one avoids having to reclassify them at cost cert. Money that goes out informally is often never recovered. ### 4\. Do lock down site control before the big spending starts Predevelopment lenders and HFAs alike will ask for evidence of site control, and scoring often depends on it. For PHA-owned land, that means board authority and a ground lease or option structure ready for the ownership entity. For acquisition sites, it means an option or purchase agreement that runs well past your expected award and closing dates, with extension rights. Line up option expirations with the HFA calendar, the bond volume cap calendar, and a realistic closing timeline. Then add a buffer. Losing a site six weeks before closing wipes out every dollar spent on it. ### 5\. Do plan for more than one application round Most competitive 9% applications do not win on the first try. Most bond deals do not get volume cap at the first request either. Your predevelopment plan should assume at least one resubmission and budget for: - Updating the market study and appraisal - Keeping third-party reports current, since Phase I ESAs and some other reports have shelf-life limits - Extending site control - Carrying interest on predev loans for another 9–12 months With the 25% bond test making 4% execution more viable, it is worth running a parallel 4%/9% feasibility analysis early. A project that loses a 9% round may be ready to move as a 4% bond deal if the predevelopment work was scoped for both. --- ## The 5 Don'ts ### 1\. Don't spend federal public housing funds without the right approvals Capital Funds can pay for predevelopment, but only on HUD's terms. Under 24 CFR 905.612: - The development must first be included in an approved **CFP 5-Year Action Plan**. - Eligible uses are **materials and services related to proposal development and project soft costs**, plus demolition on proposed sites. Site work, infrastructure, construction, and other hard costs require HUD approval. - For non-mixed-finance projects, predevelopment spending **up to 5% of total public housing funds** needs no separate approval. Amounts above that are decided case by case. - For **mixed-finance projects, all predevelopment funding must be reviewed and approved by HUD before it is spent.** Most LIHTC deals involving public housing funds are mixed-finance transactions. Spending first and asking HUD later can create unallowable costs and audit findings. ### 2\. Don't take choice-limiting actions before environmental review clears If HUD assistance will be in the deal, including RAD, Section 18, Capital Funds, project-based vouchers, or HOME and CDBG, environmental review rules apply. Under 24 CFR Part 58 and Part 50, you generally cannot acquire, demolish, start site work, or otherwise commit funds in a way that limits choices before the environmental review is complete and funds are released. Predevelopment work that does not limit choices, such as studies, design, and environmental reports, is fine. Closing on a land purchase or clearing the site with project funds before clearance can put the federal funding at risk. Build the environmental review timeline into your predevelopment schedule from the start. ### 3\. Don't let predevelopment lender terms conflict with your permanent structure Predev lenders sometimes ask for security, cross-default provisions, or repayment terms that later collide with the construction lender, the investor, or HUD. Watch for: - **Liens on public housing property.** Encumbering property under a Declaration of Trust requires HUD approval. A predev lender cannot simply take a mortgage on it. - **Repayment triggers tied to milestones you don't control**, such as a date-certain maturity that lands before a realistic HFA award. - **Participation or right-of-first-refusal terms** that conflict with the ownership structure your syndicator will require. Have your transaction counsel review predevelopment loan documents with the closing structure in mind, not just the current phase. ### 4\. Don't use the developer fee as your predevelopment piggy bank It is tempting to fund predev out of "future developer fee." Doing so has three problems: - Developer fee is often **deferred** to fill gaps at closing. The cash you were counting on may not arrive until years into operations. - HFAs cap developer fees, and **investors scrutinize fees that look inflated** to cover prior-period spending. - For PHAs in partnerships, fee that was spent in advance often gets **renegotiated away** during the closing crunch. Treat developer fee as the agency's earned return and a source for its next pipeline, not as a revolving line for the current deal. ### 5\. Don't treat predevelopment as a single-deal decision The agencies that close LIHTC deals consistently treat predevelopment as a **program**, not a one-time expense. A few practices: - Set up a **board-approved revolving predevelopment fund** capitalized with non-federal resources and replenished from fees and reimbursements. - Maintain a **pipeline ranking** so predev dollars go to the projects most likely to score and close. - Track **write-offs honestly**. Some projects will die, and that is expected. What you want is a win rate and recovery rate that let the fund sustain itself. A PHA that can fund three projects through application at the same time can move with the 4% bond market as it expands instead of waiting for it. --- ## The Bottom Line Predevelopment funding is a small share of a LIHTC capital stack and the largest share of its risk. Housing authorities that plan it by phase, layer their sources, write down how the money comes back, and stay within HUD's approval and environmental rules will get more projects to closing and lose less money on the ones that don't make it. Whether you are preparing a first 9% application, restructuring a stalled bond deal, or building a revolving predevelopment fund for a multi-site repositioning, the right structure early on will save time and money at closing. [**Schedule a Consultation →**](https://phadevelopment.com/?ref=blog.phadevelopment.com#contact)