Kentucky's real gap-money sources — and the ones that aren't real yet — Kentucky

The QAP's own scored list: "Permanent Below-Market Sources"

New Supply applications (Urban and Balance of State) can earn points under QAP Section IV.C, "Permanent Below-Market Sources," for layering in outside gap money — but only for rental (not market-rate) developments, and only for sources KHC treats as legitimate soft money rather than ordinary bank debt. The QAP lists eligible sources by name: HOME funds from jurisdictions other than KHC, Community Development Block Grant funds, Federal Home Loan Bank funds, existing local government funding, public housing authority resources, waived or reduced TAP (tap-in/connection) fees, financial institution and philanthropic contributions, and "negligible land costs" — capped at no more than $5,000 of acquisition cost in KHC's underwriting model. KHC may approve other sources before the application deadline, and may disregard a source affiliated with a member of the development team (other than a public housing authority) for scoring purposes.

The "negligible land costs" category has real edge cases KHC has already answered in its own 2027 Questions & Answers: the donated or below-cost land no longer has to come from a government entity specifically (any entity qualifies, so long as underwriting and site control show no more than $5,000 in acquisition cost), KHC will not consider whether the seller is related to the development team, and — critically — the transfer must run directly from the current/original owner to the project-level ownership entity. A structure where a development-team member buys the land first and then re-transfers it to the project entity for under $5,000 does not qualify, because KHC does not consider an interim "middle man" purchase or option a valid form of site control for this scoring category.

KHC's own gap-financing loan programs

Separate from the QAP's scoring language, Kentucky Housing Corporation directly administers a small set of loan programs that supply most of the actual soft money in a Kentucky LIHTC deal. All of them are described in the Multifamily Guidelines, Chapter 5, as "gap financing only" — meaning KHC expects the developer fee and construction contingency to be exhausted first, and none of them are meant to fund the entire remaining cost of a project.

The Affordable Housing Trust Fund: a real fund, funded by a slice of every deed and mortgage recorded in Kentucky

Kentucky Housing Corporation's own materials call this program the "Affordable Housing Trust Fund" or "AHTF" — not "KHTF" — and it is a genuine, decades-old state fund, not a marketing name for a federal pass-through. KRS 198A.710 establishes it as "a separate, revolving, nonlapsing fund" in the State Treasury (created 1992 Ky. Acts ch. 458, effective July 14, 1992), and KRS 198A.715 makes Kentucky Housing Corporation its administering agency.

The funding mechanism is concrete and verifiable, and it is exactly the kind of real-estate recording fee some other states use for their own housing trust funds: KRS 64.012 sets county clerk recording fees, and two of those fees are split by statute. Of the $33 fee charged for recording most deeds, deeds of trust, assignments, and similar instruments, $27 stays with the county clerk and $6 is remitted to the AHTF. Of the $63 fee charged for recording a real estate mortgage of 30 pages or fewer, $57 stays with the clerk and $6 goes to the AHTF. County clerks must remit their AHTF share within ten days after the end of the quarter in which the fee was collected, accompanied by a KHC-prescribed summary report — there is no dedicated real estate transfer tax feeding the fund, just this fixed per-recording carve-out.

AHTF eligibility for a LIHTC deal specifically is written into the statute, not just KHC policy: KRS 198A.715(3)(e) makes "sponsors who work in connection with rental housing developments that receive low-income tax credits under Section 42" an eligible category, but only if a nonprofit organization owns at least a 51% interest in the sponsor and materially participates in developing and operating the housing — the same 51%/material-participation test the QAP uses elsewhere for its own nonprofit adjustment. KRS 198A.720 additionally requires KHC to direct at least 40% of all AHTF funds to rural areas, and rental housing funded from the AHTF must be deed-restricted for a minimum of 30 years under KRS 198A.715(4).

What Kentucky does not have yet: a state housing tax credit, and a dedicated new AHTF revenue stream

Some states pair their federal 9%/4% credits with a state-level LIHTC-equivalent credit or a tax-credit donation program. Kentucky does not currently have one. A 2025 bill, House Bill 583 (2025 Regular Session), would have created both an "affordable housing loan pool fund" administered by KHC and a new "affordable housing credit" under a new section of KRS Chapter 141 — but its last recorded action was referral "to Appropriations & Revenue (H)" on February 21, 2025, and the Kentucky General Assembly's own bill-tracking page shows no further action; it died in committee and was never enacted.

Separately, the AHTF's funding base may look, on paper, like it was about to expand. House Bill 757 of the 2026 Regular Session — an enacted revenue bill, delivered to the Secretary of State April 14, 2026 as Acts Chapter 161 — carried House Floor Amendments (HFA 2 and HFA 7) that would have imposed a new 1% statewide surtax on the rental of accommodations and deposited the receipts into the affordable housing trust fund, amending KRS 142.400 and conforming statutes. That specific transient-room-surtax-to-AHTF provision does not appear in the bill's own "Summary of Enacted Version" as published by the Legislative Research Commission. This research could not confirm whether that amendment was adopted on the floor and simply omitted from the enacted summary, or was not adopted at all — developers and their finance teams should treat AHTF's funding base as unchanged (i.e., dependent on the KRS 64.012 recording-fee split and ordinary state appropriation) unless they confirm directly with KHC that a new dedicated revenue stream is now in effect.

Property tax: a valuation formula and a narrow KHC-only exemption — not a PILOT program

Kentucky has no general property-tax exemption or PILOT (payment-in-lieu-of-taxes) program for privately-owned LIHTC properties. What it has instead is a specialized valuation methodology: KRS 132.191 lets a Property Valuation Administrator (PVA) value "multi-unit rental housing that is subject to government restriction on use" using an income approach based on the property's actual restricted income and a capitalization rate set within 50 to 150 basis points above the most recent quarterly national average multifamily cap rate (published by realtyrates.com or a successor), with the Kentucky Department of Revenue publishing the applicable cap-rate range each year. Critically, the statute requires that "income tax credits received under Section 42 of the Internal Revenue Code or from any state or federal program shall not be included" in that income calculation — meaning the phantom value of LIHTC equity cannot be used to inflate the assessed value. This is a protection against over-assessment, not a tax reduction or exemption, and owners must proactively notify the PVA (in writing, within 60 days) when a property becomes or stops being subject to a government-use restriction, or faces foreclosure, or risk a penalty of up to $200.

Separately, KRS 198A.200 gives Kentucky Housing Corporation itself a broad tax exemption — KHC pays no state or local taxes on its property, obligations, or income, and "real property owned by the Kentucky Housing Corporation shall be exempt from all property taxation." That exemption, however, is scoped to property KHC itself owns; a standard Kentucky LIHTC deal is held by a private limited partnership or LLC (the borrower/owner entity), not by KHC, so this exemption does not extend to a typically-structured Kentucky LIHTC property. This research found no separate Kentucky statute providing a PILOT or ad valorem exemption specifically for privately-owned affordable rental housing outside of the KRS 132.191 valuation formula above.

A layering source developers often miss: the state historic rehabilitation credit's new affordable-housing rate

Kentucky's Certified Rehabilitation tax credit — the state historic rehabilitation credit, codified at KRS 171.396 and 171.397 — is a real, separate incentive that regularly layers into adaptive-reuse LIHTC deals. KHC's own Multifamily Guidelines already assume this: any project using federal and/or state historic tax credits must submit an investor letter of intent identifying each credit and its pricing separately (or a statement that the owner is retaining the state credit itself).

HB 757 (2026 Regular Session, enacted as Acts Chapter 161) substantially restructured this credit, effective April 30, 2026 per the Kentucky Heritage Council's own program page: it defines new terms ("affordable," "commercial residential property," and "median family income"), splits the statewide credit cap 15% to owner-occupied residential property and 85% to all other property, moves to two application rounds per year (each with its own cap, per the enacted bill summary), and — the piece most relevant here — allows a bonus credit rate of 30% of qualified rehabilitation expenses when the "commercial residential property" being rehabilitated is affordable to households earning no more than 80% of median family income. The Kentucky Heritage Council's own overview describes this change simply as adding "a new project category to incentivize affordable housing."

This is a genuinely useful, separate equity source for a historic adaptive-reuse LIHTC deal — but this research could not obtain the fully restated text of KRS 171.396/171.397 (only the Legislative Research Commission's bill summary and the Heritage Council's plain-language program page), so the precise statutory definition of "commercial residential property," the baseline (non-bonus) credit rate for comparison, and the exact per-round dollar cap should be confirmed directly with the Kentucky Heritage Council or the Department of Revenue's Tax Credit staff before underwriting to it.