4% vs 9% LIHTC: bond compliance, allocation, and OBBBA.

The applicable percentage: 9% vs 4%

The naming convention “9%” and “4%” refers to the applicable percentage — the share of qualified basis that becomes a tax credit each year for 10 years. Together over the 10-year credit period, these add up to approximately 70% (for 9% credits) or 30% (for 4% credits) of qualified basis in present-value terms.

Section 42(b) of the Internal Revenue Code provides the formal rates:

• 9% credit: applicable percentage equal to the rate that yields credits with a present value equal to 70% of qualified basis. Since 2008 (the Housing and Economic Recovery Act), a permanent statutory floor of 9% applies to 9% deals.
• 4% credit: applicable percentage equal to the rate that yields credits with a present value equal to 30% of qualified basis. Since the Consolidated Appropriations Act of 2021, a permanent statutory floor of 4% applies to 4% bond-financed deals.

Before the 2008 and 2020 floor legislation, both rates floated month-to-month based on Treasury’s rate methodology. The floors meaningfully changed deal economics: the 4% credit, which had often run at 3.0–3.4% under floating rates, became reliably 4.0%, increasing equity per dollar of qualified basis by 20–30%.

Two allocation tracks

9% competitive allocation

9% credits are allocated by state Housing Finance Agencies (HFAs) through annual competitive rounds governed by each state’s Qualified Allocation Plan (QAP). The total 9% credit available in each state is capped by the IRS’s annual per-capita allocation: in 2026, $3.416 per resident under Rev. Proc. 2025-32, with a small-state floor of $3,953,600 for states with population below approximately 1.16 million. OBBBA made the 12% increase to the per-capita formula permanent (effective January 1, 2026).

Most states run one or two competitive 9% rounds per year. Selection is via QAP scoring: applications compete on cost reasonableness, depth of affordability, set-aside compliance, developer experience, site control, and similar criteria. Demand for 9% credits substantially exceeds supply in most states — typical award rates run between 30% and 50% of submitted applications, sometimes lower in high-cost markets.

4% non-competitive (bond-financed)

4% credits are not allocated competitively. Instead, 4% credits are triggered automatically when a project is financed in part by tax-exempt private-activity bonds (PAB) that meet the “financed-by” threshold in IRC § 42(h)(4). When the threshold is met, the 4% credit applies to the qualified basis of the project, and the project is exempt from the state’s 9% per-capita allocation cap.

The non-competitive 4% track is rationed by a different scarcity: the state’s annual private-activity bond volume cap under IRC § 146, calculated at $135 per capita in 2026 with a small-state floor. The state allocates its annual bond cap among competing uses (multifamily housing, single-family mortgage revenue bonds, exempt facility bonds, small-issue manufacturing). Where the state has bond cap available, a 4% deal can proceed without competing through the QAP scoring round — though most HFAs apply their own bond program scoring to ration their multifamily bond allocation.

The bond “financed-by” test — 50% to 25% under OBBBA

The 4% credit is only available where the project is “financed by” tax-exempt private-activity bonds. IRC § 42(h)(4) defines “financed by” using a percentage threshold:

• Pre-OBBBA (bonds issued through Dec 31, 2025): 50% threshold — at least 50% of the aggregate basis of the project (including land) must be financed by tax-exempt bonds.
• Post-OBBBA (bonds issued after Dec 31, 2025): 25% threshold — at least 25% of aggregate basis financed by tax-exempt bonds. Subject to OBBBA’s requirement that at least 5% of the bonds in the issuance must be issued after Dec 31, 2025.

This change dramatically expanded 4% deal capacity. Under the 50% test, a $30 million project required at least $15 million of bonds to access 4% credits — effectively limiting 4% deal volume to the rate at which states allocated bond cap. Under the 25% test, that same project requires only $7.5 million in bonds. The same volume cap can now finance roughly 2× the number of 4% deals (subject to the bonds-financing-something rather than supplying full project cost).

The practical implication: bond cap is no longer the binding constraint on 4% deal flow in most states. Instead, equity demand, debt capacity, and HFA application capacity are likely to become the new bottlenecks. Many states are revising their multifamily bond program guidelines and 4% application processes to handle the increased deal flow.

Capital stack patterns by credit type

Typical 9% capital stack

A 9% deal generates substantially more credit equity per dollar of qualified basis. Practitioners typically use 9% credits for newly constructed deals in markets where deep affordability and high-cost site characteristics make the lower-credit (4%) economics unworkable. A representative 9% stack might be:

• ~60% LIHTC equity (purchased by syndicator at typical pricing of $0.90–$1.00 per credit dollar)
• ~25% permanent debt (conventional, sized to debt-service coverage and supportable rents)
• ~10% soft sources (HOME, HTF, state HFA gap loans, AHP)
• ~3–5% deferred developer fee

Typical 4% capital stack (post-OBBBA)

A 4% deal generates substantially less credit equity. The bond debt — required for the credit to qualify — provides much of the project’s financing. Post-OBBBA, the 25% test reduces the required bond share, but most 4% deals still use a substantial bond debt layer. A representative 4% stack:

• ~30% LIHTC equity (at similar syndicator pricing)
• ~45–55% tax-exempt bond debt (long-term permanent, sized to DCR and supportable rents; under the new 25% test, this can be reduced if other sources cover more of total basis)
• ~10–15% soft sources (HOME, HTF, state gap, AHP)
• ~3–5% deferred developer fee

4% deals are most economically viable in markets with strong rent fundamentals where the bond debt can absorb a meaningful share of total project cost. Substantial-rehab and preservation projects often work especially well on the 4% track because of relatively modest hard-cost requirements compared to ground-up new construction.

Compliance regime: 4% bond-specific obligations

All LIHTC projects (whether 9% or 4%) face the same Section 42 compliance regime: minimum set-aside elections (20/50 or 40/60 or income-averaging), rent restrictions, tenant income qualification, the 15-year compliance period, the 30-year extended use period, recapture risk on credits, and standard reporting (Form 8609, Form 8610, annual certifications, etc.).

4% bond-financed deals layer additional compliance obligations on the bond side that 9% deals never see:

• Arbitrage and rebate (IRC §§ 103, 148): excess investment earnings on bond proceeds (above the bond yield) must be rebated to the federal government. Bond counsel typically requires arbitrage rebate calculations every five years and final rebate calculation at bond defeasance. Form 8038-T is used to report rebate liability.
• Use of proceeds restrictions: bond proceeds must be spent on qualified residential rental project costs within prescribed time limits (typically the 3-year temporary period). Failure to spend within the timeframe risks the tax-exempt status of the bonds.
• Bond covenants: the bond indenture imposes ongoing project covenants (continued affordable use, reporting, occupancy testing) typically running for the life of the bonds.
• Set-aside election timing: the 95% “qualified residential rental project” income test under IRC § 142(d) is set at the bond level and runs from bond issuance. The LIHTC set-aside election under § 42(g) is separate and made at the LIHTC level. The two elections must work together — usually the 142(d) and 42(g) elections are coordinated so the bond test never falls below the LIHTC commitment.
• Refunding considerations: if the bonds are refunded during the compliance period, the refunding bond must meet bond-side tests independently. Pre-OBBBA refundings of pre-2026 bonds do not get the 25% test benefit; practitioners should consult bond counsel for refunding transactions.
• Final allocation timing: 4% credits are claimed annually on the project’s tax return; the IRS Form 8609 issued by the HFA at placed-in-service establishes the per-year credit. Bond-related events (such as transfer or pledge of bonds during compliance) can affect credit claims.

The bond-side compliance burden is a substantive cost on 4% deals that 9% deals avoid. Bond counsel and the bond trustee typically handle these obligations, with costs running $40,000–$120,000 in annual professional fees per project depending on deal complexity.

Compliance period architecture (common to both)

The Section 42 compliance and extended-use architecture is the same for both 9% and 4%:

• Year 1–15: federal compliance period. Failure to maintain set-asides, rent restrictions, or tenant income qualification triggers recapture of credits already claimed plus interest.
• Year 1–30: extended use period (15 years beyond compliance) required by IRC § 42(h)(6) for the project to qualify for credits. Extended use commitment is recorded against the property.
• Year 14–30: Year 15 exit planning. Practitioners can pursue partner buyouts, refinancing, qualified contract requests (subject to state policy), or resyndication. State QAPs increasingly require waiver of the qualified contract right at allocation, effectively locking in the full 30-year affordability commitment.

Income elections

All LIHTC projects elect one of three minimum set-asides at placed-in-service under IRC § 42(g):

• 20/50: at least 20% of units restricted to households at or below 50% AMI
• 40/60: at least 40% of units restricted to households at or below 60% AMI
• Income averaging (40/60 average): at least 40% of units restricted at varying levels averaging 60% AMI, with individual units ranging from 20% to 80% AMI

Income averaging, enacted in the 2018 Consolidated Appropriations Act and refined since, has become the predominant election for new deals because it allows mixed-income unit mixes within a single LIHTC project. The full set of compliance issues with income averaging is beyond this article’s scope; practitioners should consult their HFA’s income averaging guidance.

Decision tree: when to choose 9%, 4%, or twin

Practitioners typically apply the following decision framework when evaluating a site for LIHTC:

Choose 9% when:

• Site requires deep affordability (high share of units below 30–50% AMI) where rental income is too low to support meaningful debt
• Total development cost is moderate ($15–$35M) and supportable debt won’t fill the gap
• State 9% per-capita is competitive but you can score well on the QAP
• You can absorb the timing risk of a competitive allocation cycle
• Project does not generate enough qualified basis to make the bond compliance burden worthwhile for 4% economics

Choose 4% (bond-financed) when:

• Project is preservation, substantial rehab, or larger-scale new construction where supportable rents can amortize meaningful bond debt
• Total development cost exceeds the 9% credit capacity (e.g., $30M+ deals where the 9% allocation per project would be too small)
• State has available bond cap and is willing to allocate to your deal
• You can absorb the bond-side compliance burden (arbitrage rebate, ongoing covenants) economically
• Post-OBBBA: especially favorable for deals where the 25% test allows lower bond share and more flexibility in capital stack mix

Twin 9% + 4% on a single site when:

• Project is large enough to warrant splitting (typically 100+ units) and the site allows scoping into two distinct buildings or building-mode sections
• You can structure two separate qualified low-income buildings (QLIBs) under § 42 each electing different credits
• Some units need deep 30% AMI affordability (9% portion) and others can support 50–60% AMI with bond debt (4% portion)
• You have an HFA willing to allocate both 9% and bond cap to the same project

Twinning is moderately complex but is increasingly common in larger urban deals. The key structural decision is how to allocate basis, debt, and equity across the two QLIBs to optimize the combined credit pool.

Putting it together

The choice between 9% and 4% is rarely just about “which has more equity.” It’s about scale, timing, depth of affordability, and operational comfort with bond compliance. 9% deals are typically simpler operationally (no bond compliance burden) but harder to access (competitive QAP). 4% deals are non-competitive but require navigating a parallel bond compliance regime that adds 5–10% to project soft costs.

Post-OBBBA, the 25% “financed-by” threshold has materially shifted the calculus toward 4% deals for many project profiles. Practitioners working in states with available bond cap should evaluate whether projects previously sized for 9% allocation could now work on the 4% track with reduced bond debt — freeing up scarce 9% credits for the deals that truly need them.

Sources & further reading

• LIHTC Program Guide — full federal program treatment on this site
• P.L. 119-21 (One Big Beautiful Bill Act), enacted July 4, 2025, effective January 1, 2026
• IRS Rev. Proc. 2025-32 — 2026 LIHTC per-capita and bond volume cap
• IRC § 42 (LIHTC), § 142(d) (qualified residential rental projects), § 146 (PAB volume cap), § 148 (arbitrage rebate)
• 26 CFR §§ 1.42-1 through 1.42-19 (LIHTC regulations)
• NCSHA Recommended Practices in Housing Credit Administration
• Every LIHTC deal structure, explained — companion practitioner guide on this site
• Sources & Attribution — full source catalog