3-minute read
Here’s a risk many affordable housing developers overlook: What happens if your property is hit by a fire, flood, or other disaster — and you can’t meet the rules tied to your tax credits?
For most owners using Low-Income Housing Tax Credits (LIHTC), those credits aren’t just nice to have — they’re a vital part of the project’s financing. If something goes wrong and you lose those credits, the financial impact can be serious. You might face penalties, upset investors, or even see a strong deal start to fall apart.
A simple question to ask yourself: Have you insured your tax credit exposure?
What Tax Credit Insurance Covers
Also known as credit recapture insurance, this coverage is built to protect you if you lose LIHTCs due to physical damage. Say your building is severely damaged and people can’t live there — you might no longer meet the occupancy or habitability rules set by your tax credit agreement. If that happens, your credits could be reduced or taken away entirely.
Tax credit insurance steps in to reimburse you for that loss. It can’t help with every situation — for example, it won’t cover problems tied to paperwork mistakes or tenant eligibility — but when the cause is something like a fire or hurricane, this policy can be a financial lifesaver.
Why More Owners Are Taking a Second Look
For years, many affordable housing providers skipped this coverage. With property insurance premiums climbing and carriers pulling back from certain markets, most owners were just trying to hold onto their core coverage. Optional policies — no matter how valuable — were hard to justify.
But things are starting to shift. In some regions, insurance rates are beginning to level out. That’s giving owners a chance to revisit coverage options they might’ve dismissed before.
This isn’t just about recovering from a loss. It’s also about confidence, especially if you work with investors or syndicate your deals. A single uncovered event can trigger legal obligations or damage relationships. Having this protection in place shows that you’re planning ahead and taking your responsibilities seriously.
Managing Risk Across Portfolios
If you own multiple LIHTC properties, the stakes get higher. One major event at one property can ripple across your entire portfolio — especially if you’re relying on shared financing or investor partnerships. Without tax credit insurance, you’re potentially exposed in ways that aren’t always obvious until something goes wrong.
Credit recapture insurance helps manage that concentration of risk. It gives you some breathing room in the event of a disaster and protects the financial base of your deals.
What to Expect from the Process
Applying for tax credit insurance takes more time than a typical policy. Carriers will want to know how your tax credits are structured, how you stay in compliance, and what your recovery plan looks like if a property becomes uninhabitable. You’ll need to share documentation and walk underwriters through your operations.
It’s not fast — and it’s not for everyone. But if you qualify, it can be a smart way to close a serious gap in your risk strategy.
The Mahoney Group, based in Chandler, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.