Every LIHTC deal structure, explained by a practitioner.

The two credits and what triggers each

Section 42 of the Internal Revenue Code authorizes two distinct tax credits, commonly called "9%" and "4%" by their nominal percentages. In practice, neither is a flat 9% or 4% — they're calibrated each month by Treasury so that the credit's present value equals either 70% or 30% of the eligible basis of the qualified low-income housing units.

Until 2021, the 4% rate floated and was usually well below 4%. The Consolidated Appropriations Act of 2021 established a floor of 4%, making the credit considerably more valuable. The 9% rate has had a floor since 2008.

The most important distinction is not the percentage. It's how each credit is allocated:

• 9% credits are allocated by state Housing Finance Agencies (HFAs) through a competitive process governed by the state's Qualified Allocation Plan (QAP). Most states run one or two competitive rounds per year. Total state allocation is capped at the per-capita formula: $3.416 per resident for 2026 (IRS Rev. Proc. 2025-32), with a small-state minimum of $3,953,600. OBBBA made the 12% increase from December 2020 permanent, effective for 2026 forward.
• 4% credits are issued automatically alongside qualifying tax-exempt private activity bonds (PABs). There is no competitive 4% round; if your project is financed with sufficient PAB volume, you receive 4% credits on the qualifying basis. The constraint is the bond cap, not the credit cap.

This distinction shapes the entire deal. A 9% deal involves nail-biting waits for QAP scoring results. A 4% deal involves coordination with the state's private activity bond cap and an investment bank.

The 9% competitive deal anatomy

A 9% deal lives or dies on the state's QAP scoring. The structure is roughly:

1. QAP study (often 6-9 months pre-application). Developers read the QAP and design the project around the scoring categories. QAPs vary wildly state to state — some emphasize geographic distribution, some emphasize service-enriched housing, some emphasize cost containment. The QAP is the most important document in the deal.
2. Application. States typically open one or two competitive rounds per year. Application includes detailed pro forma, site control, market study, environmental review, design plans, and evidence of supplementary funding commitments.
3. Reservation. If awarded, the state issues a reservation letter committing a specific dollar amount of annual credits over 10 years. The total credit value is the annual credit times 10.
4. Carryover allocation. If the building won't be placed in service by year-end, the developer must spend at least 10% of total project costs by the earlier of (a) the close of the next year, or (b) six months after the carryover allocation is issued. This is the "10% test."
5. Construction. Construction debt funds the build. Equity (LIHTC investor capital) typically funds in stages: at closing, at construction completion, at 100% qualified occupancy, and at the close of the credit period.
6. Placed in service. When the building is ready for occupancy, it's placed in service. Credit period begins. State issues IRS Forms 8609 documenting the credit allocation per building.
7. Compliance period. The initial compliance period is 15 years. Extended use restrictions usually run another 15 years (or longer, depending on QAP).

Equity pricing on 9% deals

9% LIHTC equity is typically priced as cents-per-credit-dollar. Recent national pricing has ranged from approximately $0.78 to $0.93 per credit dollar, depending on investor demand, deal size, geography, and CRA pressures on bank investors. A deal with $10 million of annual credit allocation over 10 years equals $100 million of total credit; at $0.90 pricing, that's $90 million of equity raised.

Pricing is highly geographic. Some markets routinely price above $0.95 because of CRA bidding wars among banks; others struggle to clear $0.80. State-specific equity letter pricing data is available on a quarterly basis from Novogradac and through syndicator surveys.

The 4% bond-financed deal anatomy

4% deals are over-the-counter — there's no competitive scoring, but there is a separate gauntlet: the state's volume cap allocation of private activity bonds.

1. Bond cap allocation. Each state has a per-capita PAB cap. Multifamily housing competes with other PAB uses (industrial development, student loans, single-family mortgage bonds). State volume cap agencies prioritize and allocate.
2. Inducement. The state or local issuer issues an inducement resolution authorizing the bonds and reserving cap.
3. Bond structuring. An investment bank structures the bonds — typically tax-exempt and federally subsidized at construction, often draw-down structured. Post-construction, bonds may be refunded with permanent debt.
4. Financed-by test. The qualifying threshold under Section 42(h)(4)(B): the bonds must finance at least 25% (post-OBBBA, was 50%) of the aggregate basis. Crossing this threshold automatically generates 4% credits on the qualifying basis.
5. Closing & construction. Bonds close concurrent with equity investor admission. Construction proceeds.
6. Placed in service. Bonds usually convert from construction-phase to permanent at this point. 4% credit period begins.
7. Compliance. Same 15-year initial compliance plus extended use as 9% deals.

Why 4% deals are surging post-OBBBA

The 25% financed-by threshold means a $50M deal can now generate full 4% credits with just $12.5M of bond cap. Pre-OBBBA, the same deal required $25M of bond cap. State cap agencies effectively get 2x the deal flow per dollar of cap. Combined with the permanent 4% credit floor established in December 2020, the 4% deal is the cheapest and fastest path to LIHTC credits in most states.

Eligible basis, qualified basis, and the boosts that matter

The credit calculation has three intermediate concepts you must understand:

• Eligible basis. Depreciable property used for residential rental purposes. Excludes land, certain fees, financing costs, and amounts attributable to commercial space.
• Applicable fraction. The lesser of two fractions: (a) low-income units divided by total units, or (b) floor space of low-income units divided by total floor space. Calculated per building.
• Qualified basis. Eligible basis multiplied by the applicable fraction. The qualified basis is what generates credits.

The 30% basis boost

Section 42(d)(5) allows a 30% increase in eligible basis for buildings located in:

• Difficult Development Areas (DDAs): Areas with high construction costs relative to area median income. HUD designates DDAs annually.
• Qualified Census Tracts (QCTs): Census tracts where at least 50% of households earn less than 60% of AMI, or where poverty rate exceeds 25%. HUD designates QCTs annually.
• State HFA discretionary boost: States may designate up to 30% additional basis for buildings the HFA determines need the boost to be financially feasible. Many states use this discretion for rural deals, supportive housing, or extreme-affordability projects.

The boost multiplies eligible basis. A $20M eligible basis with 30% boost becomes $26M, generating proportionally more credits.

The partnership structure (LP + GP)

Nearly every LIHTC deal is structured as a limited partnership (or LLC taxed as a partnership) with two types of partners:

• The Investor Limited Partner (Investor LP) — usually 99.99% of the partnership. This is the LIHTC equity investor: typically a bank, insurance company, or other corporate taxpayer with passive income to offset.
• The General Partner (GP) — usually 0.01% of the partnership. This is the developer/sponsor. The GP runs the project, signs the construction contract, holds the operating responsibilities, and is the partnership's tax matters partner.

The 99.99/0.01 split allocates substantially all tax credits and tax losses to the Investor LP, who has the tax capacity to absorb them. The GP receives modest cash distributions during operations (often deferred until permanent stabilization) and the bulk of any residual value at exit.

The Asset Management Fee and Developer Fee

Two fees are essentially universal:

• The Developer Fee (typically 10-15% of qualifying development costs) compensates the GP for development services. A meaningful portion is usually deferred — paid only from cash flow after operations stabilize. The deferred developer fee functions as a soft second to fill capital stack gaps.
• The Asset Management Fee (typically $5K-$15K per year, sometimes indexed) compensates the Investor LP's management of its investment. Paid from cash flow ahead of distributions to the GP.

Twinning structures: stacking LIHTC with other credits

LIHTC alone rarely funds a deal completely. Practitioners frequently combine LIHTC with other federal tax credit programs:

LIHTC + Historic Tax Credit (HTC)

For projects involving rehabilitation of a certified historic structure, the federal Historic Tax Credit (Section 47) can be combined with LIHTC. The structure is more complex because Section 50(d)(5) imposes a basis adjustment that reduces LIHTC eligible basis by the amount of HTC claimed. Most practitioners use a master lease structure in which a special-purpose master tenant entity holds the operating leasehold and claims the HTC, while the underlying ownership entity claims the LIHTC. The two credits flow to different equity investors with different timing.

LIHTC + New Markets Tax Credit (NMTC)

NMTC (Section 45D) primarily supports community development in low-income census tracts. Combining NMTC with LIHTC is less common because LIHTC already addresses affordable rental housing, but works well for mixed-use deals where the housing component takes LIHTC and the commercial or community facility component takes NMTC. Requires careful basis bifurcation and separate investor structures.

LIHTC + Opportunity Zone (OZ)

OZ deferral and basis step-up benefits can be layered onto an LIHTC deal located in a designated OZ tract. The complexity is whether the investor base for LIHTC equity (typically corporate taxpayers seeking credit-based returns) also has the capital gains to defer that motivate OZ investing. In practice, the cleaner approach is sometimes to bring a separate OZ Investor as an additional capital provider rather than expecting one investor to wear both hats. OBBBA's permanent extension of OZ and creation of Rural OZ designations may revive interest in twinned structures starting 2027.

Acquisition + Rehab deals

LIHTC supports rehabilitation of existing affordable properties in addition to new construction. The rules are stricter:

• The acquisition basis only generates the 30% present-value (4%) credit, never the 70% present-value (9%) credit, regardless of bond financing
• The rehabilitation basis can generate either 4% or 9% depending on bond financing
• The minimum rehabilitation expenditure must equal the greater of 20% of acquisition cost or a specified per-unit amount (currently $9,000 per low-income unit, indexed)
• Related-party prohibitions: the seller cannot have owned the property within the prior 10 years (with limited safe harbors for federally assisted housing acquisitions)

Preservation deals — acquiring and rehabbing existing LIHTC properties at the end of their compliance periods — are increasingly common as the first wave of LIHTC properties from the 1980s and 1990s reach Year 15 and beyond.

Income averaging: the mixed-income structure

Pre-2018, LIHTC required either 20% of units at 50% AMI (the 20/50 test) or 40% of units at 60% AMI (the 40/60 test). The 2018 income-averaging election added a third option: average 60% AMI across designated units, with individual units between 20% AMI and 80% AMI.

This unlocked a new structure: true mixed-income deals where higher-AMI units (e.g., 80% AMI) generate higher rents that cross-subsidize deeper-affordability units (e.g., 30% or 40% AMI) within the same building. Pre-2018, deep-affordability units required separate buildings or layered soft subsidies. Income averaging allows it within one tax credit transaction.

For a detailed walkthrough of the AMI mechanics, see our AMI Calculation explainer.

The 15-year compliance period (and extended use)

The initial LIHTC compliance period is 15 years from the building's placed-in-service date. During this period:

• The applicable fraction must be maintained at or above the level claimed
• Units must remain rent- and income-restricted
• Annual tenant income recertifications are required
• Non-compliance discovered during this period triggers credit recapture (with interest)

Beyond the 15-year compliance period, an additional 15-year extended use period runs under the state-administered restrictive covenant (the "LURA" or extended use agreement). State QAPs typically require even longer extended use — 30 or 40 years total is common. Recapture risk falls dramatically after Year 15, but rent and income restrictions continue.

Year 15 disposition: the most important deal decision

At the end of the compliance period, the partnership reaches a structural inflection point. The Investor LP has received its tax credits and is typically eager to exit. The GP, depending on the deal, may want to take ownership and continue operating, sell, or recapitalize. There are three main paths:

Right of First Refusal (ROFR) buyout

Most LIHTC partnerships include a ROFR allowing the GP (or a designated nonprofit) to acquire the Investor LP's interest at the end of Year 15 for a formula price. Under Section 42(i)(7), the formula price is typically the lesser of fair market value or a specified statutory floor — often set quite low. This is the most GP-friendly path but requires careful structuring at closing and good investor relationships at exit.

Qualified Contract

Section 42(h)(6)(F) allows the owner to request a "qualified contract" from the state HFA after Year 14. If the state cannot find a buyer within one year, the extended use restrictions terminate. The qualified contract price formula is statutory and often produces a price higher than ROFR but lower than open-market FMV. This is essentially a controlled-conversion path that some sponsors use to exit the affordable housing program entirely.

Resyndication / refinance & hold

The most preservation-oriented path: at or near Year 15, refinance the property, recapitalize, and pursue a new LIHTC allocation for the rehab basis. State QAPs increasingly include set-asides for resyndication. The deal effectively starts over with new tax credits and new debt, often without changing ownership.

State QAP overlays you must understand

Federal Section 42 sets the floor. Every state's QAP imposes additional rules. Common state overlays:

• Deeper affordability targeting — most QAPs require some units below 60% AMI, often at 30% or 40% AMI, for scoring points or as a hard requirement
• Set-asides — preservation, rural, supportive housing, tribal, or nonprofit set-asides reserve portions of state allocation
• Cost caps — per-unit cost limits, sometimes by region
• Local approval requirements — many states require evidence of municipal support before scoring
• Geographic distribution — formulas allocating credits across regions of the state
• Extended affordability — many states require 40+ years of extended use beyond the federal 15-year period

The QAP is the single most important state-level document for any LIHTC practitioner. Read the current QAP — and the prior QAP for context — before designing a deal.

Closing thoughts: structuring choice flowchart

If you're trying to decide which structure fits a specific project, the rough decision tree:

1. Is the project new construction or substantial rehab? Both qualify for either 9% or 4%, with appropriate basis treatment for acquisition components.
2. What's the deal size? Smaller deals (e.g., under $15M) often work better as 9% competitive — easier to land a single 9% allocation than to assemble bond financing. Larger deals (over $25M) often work better as 4% bond — capital stack scales more cleanly.
3. How competitive is the state's 9% round? In hot 9% states (CA, NY, TX, FL), winning is unlikely without strong scoring. 4% becomes the default.
4. Do you have bond cap available? Some states have ample 4% bond cap; others have multi-year waiting lists.
5. What other credits or programs apply? Historic structure? Add HTC. OZ-designated tract? Consider OZ. Mixed-use commercial space? Consider NMTC for the commercial component.
6. How deep does the affordability need to go? Deep affordability (30% AMI or lower) almost always requires soft money — HOME, HTF, AHP, or state soft loans — layered on top of LIHTC.

Every deal has unique constraints. The point of this guide is not to prescribe a single structure, but to give you the vocabulary and decision tree to think through structures with your team and your investors.