What You Need to Know About Surety Bonds for Low-Income Housing Tax Credit (LIHTC) Projects

Low-Income Housing Tax Credit (LIHTC) projects are crucial for expanding affordable housing across the country. Developers and contractors working on these projects often encounter a unique set of funding requirements, compliance obligations, and government oversight. If you plan to bid on LIHTC projects, one of the most common requirements you’ll encounter is the need for surety bonds. 

As you try to prepare your bid, find out more about the primary bonds required for LIHTC projects and how to put your company in the best position to receive them. 

What Are Surety Bonds in LIHTC Projects?

Surety bonds on LIHTC jobs guarantee contract performance and payment, protecting owners, lenders, and public funds if a contractor defaults.

These types of bonds are three-party agreements in which a surety guarantees that a contractor will meet the obligations under a construction contract. If the contractor defaults, the surety steps in to protect the party requiring the bond, and the contractor is typically obligated to reimburse the surety for covered losses. 

On LIHTC developments, bonding requirements usually come from the project’s other stakeholders and funding sources. These requirements help keep schedules and drawdowns predictable while protecting taxpayer-backed resources from avoidable delays and disputes.

What Surety Bonds Are Typically Required for LIHTC Projects?

Common surety bonds required in LIHTC projects include:

  • Bid Bonds: A bid bond provides financial protection if a bidder is awarded the job but fails to sign the contract or provide the required final bonds. On projects subject to Uniform Guidance minimums, the bid guarantee is usually set at 5% of the bid price, and it can be satisfied by a bid bond, certified check, or other negotiable instrument. For LIHTC schedules that depend on coordinated funding, this helps reduce the risk of a rebid and related delays.
  • Performance Bonds: A performance bond guarantees that, if the contractor defaults, the surety will complete or cause completion of the contract, or compensate the owner for covered loss. In LIHTC deals, that backstop helps protect construction timelines tied to draws, inspections, and lease-up targets, and it can be a key risk control for both lenders and investors. 
  • Payment Bonds: A payment bond ensures that certain subcontractors and suppliers will be paid for labor and materials incorporated into the project. These bonds can reduce the chance of payment disputes escalating into work stoppages or lien-related complications. The reduced risk is especially helpful on multi-stakeholder LIHTC jobs where delays can ripple through the financing.
  • Warranty/Maintenance Bonds: A warranty bond (often called a maintenance bond) guarantees the owner that workmanship and material defects found in the original construction will be repaired during the warranty period. Owners may require it to keep closeout and early operations from turning into a budget issue after substantial completion.

Who Are the Main Parties in a LIHTC Surety Bond?

A construction surety bond is a three-party agreement. Understanding who each party is helps you read bond forms more confidently and avoid confusion during bid, contract, and closeout.

  • Obligee: The party that requires the bond and is protected by it. In a LIHTC construction contract, the obligee is usually the project owner entity (or the developer acting as owner). However, the obligee can also be a public agency that is administering funds or contracting directly for the work.
  • Principal: The contractor (most often the prime or general contractor, and sometimes a key subcontractor on a separate bond) that purchases the bond and is responsible for meeting the bonded obligations, such as completing the work per the contract and paying eligible subs and suppliers. If the principal defaults, the bond gives the obligee and other protected parties a defined remedy.
  • Surety: The surety company that issues the bond through a surety agent or broker. The surety prequalifies the principal, then guarantees the principal’s obligation to the obligee up to the bond amount. If a valid claim is made, the surety investigates and may provide financial support, arrange completion, or pay covered losses. After, they’ll seek reimbursement under the indemnity agreement.

Unique Challenges in Bonding LIHTC Projects

While bonding is common in public construction, LIHTC projects often present added complexity. Some common bonding challenges for LIHTC projects include the following:

  • Multiple Funding Sources: Many LIHTC developments rely on layered financing, which can bring separate contracting and risk-control requirements from public agencies, lenders, and investors. If federal financial assistance is part of the project’s funding mix, the project may also need to meet Uniform Guidance bonding minimums for bid guarantees, performance bonds, and payment bonds. 
  • Stringent Underwriting: Sureties underwrite LIHTC work the same way they underwrite any bonded job, but they often pay close attention to the contractor’s relevant project history, project management depth, history with HUD, financial capacity, and experience meeting affordable housing guidelines to handle a compliance-heavy project without cash-flow strain. 
  • Prevailing Wage Requirements: LIHTC projects that pair tax credits with HOME or other HUD funding can trigger Davis-Bacon prevailing wage requirements on certain construction contracts. These requirements can change labor budgets, payroll documentation, and job costing, which impacts schedules and the financial assumptions sureties review.

When you flag these items early in the bid and preconstruction process, you give your surety team time to underwrite the job, confirm bond form requirements, and avoid last-minute surprises at closing.

Tips for Contractors Seeking Bonds on LIHTC Jobs

Bonding requirements can vary from one LIHTC deal to the next. If you treat bonding as a project task and not a last-minute formality, you can reduce bid-day stress and keep award and closing on track.

  • Start Early: Surety prequalification takes time because your bond producer needs to gather documents, answer underwriter questions, and match the account to the right surety. If it’s your first LIHTC job or your first job at this size, start the conversation well before bid day.
  • Provide Clear Financials: Expect the surety to review your balance sheet and income statement, plus interim updates if your year-end statements are dated. Hiring a construction-oriented CPA to help you prepare your financials can make a big difference, especially when your statements need to align with your work-in-progress reporting.
  • Keep an Accurate Work-in-Progress Schedule: A WIP schedule helps the surety understand your current backlog, how jobs are tracking to budget, and whether your team and cash flow can handle another project at the same time.
  • Show Project Experience: As you apply for a bond, highlight similar multifamily projects, along with resumes for key leaders, field supervision, and project accounting. If you have a strong track record with subs and suppliers, include references that show you manage the work and the paperwork well.
  • Be Ready for Labor and Community Requirements: If the LIHTC deal is paired with HUD funding, you may see Davis-Bacon prevailing wage requirements and Section 3 requirements. When that applies, it helps to show how you handle certified payroll, documentation, and any required contracting or reporting.
  • Plan for Cash Flow, Not Just the Bid Number: LIHTC projects can involve more review steps on pay apps, lien waivers, and change orders. Walk your surety team through your billing plan, how you’ll manage retainage, and how you’ll keep subs paid on time.
  • Work with a Specialist: A surety bond producer acts as the link between you and the surety, and that ongoing communication matters when questions come up during the surety’s review. Your producer can also help you spot bond form issues early, so you are not renegotiating documents right before closing.

What to Do Before You Bid on a LIHTC Project

If you plan to bid on an LIHTC Project, take the following steps to set your bid up for success: 

  • Confirm with the developer or public agency if bonding is required.
  • Ask your surety agent to prequalify you.
  • Get a bid bond in place.

Are Surety Bonds Always Required for LIHTC (Low-Income Housing Tax Credit) Projects?

No, surety bonds are not always required for LIHTC projects, but they are frequently required or strongly recommended depending on the project's funding sources, stakeholders, and risk tolerance.

🔍 When Are Bonds Typically Required for LIHTC Projects?

1. Public Funding is Involved

If a LIHTC project involves federal, state, or municipal funding, then it will often trigger bonding requirements under:

These require the contractor to furnish:

  •  Performance Bonds (guaranteeing contract completion)
  •  Payment Bonds (guaranteeing payment to subcontractors and suppliers)

2. Required by Lenders or Syndicators

Tax credit investors and institutional lenders often mandate bonding to protect their investments.

3. Developer or Owner Requires It

Even if not legally required, developers may require surety bonds for peace of mind when hiring new or unproven contractors.

When Are Bonds Not Required for LIHTC Projects?

1. Privately Funded Projects

If the LIHTC development is entirely privately funded and the owner is comfortable with the contractor, they may choose to waive bonding.

2. Alternate Risk Protections Used

In place of a surety bond, developers may use:

  • Letters of Credit (LOCs)
  • Parent Guarantees
  • Escrows or Retainage Agreements

These can sometimes replace the need for bonds, depending on the stakeholders.

How ProSure Group Can Help You Receive LIHTC Bonds

At ProSure Group, we specialize in helping contractors secure bonds for complex and regulated projects like LIHTC developments. Our team understands the layered funding, compliance, and bonding needs these deals require. We partner with both small and large contractors, tailoring bond solutions that align with your capacity and project goals.

Learn more about our surety bonds for LIHTC projects today.

 

  • 📞 Call us at: 800-480-3883
  • 📈 Visit us: www.prosuregroup.com
  • 💬 Chat with us online for after-hours quote requests

We make bonding for LIHTC projects simple, affordable, and fast—so you can focus on building affordable housing that matters.