How LIHTC financing works: the capital stack, with a worked deal

The money in a tax credit deal comes from four places, in roughly this order of size on a 4% deal: credit equity, a first mortgage, public soft money, and the developer’s own deferred fee. Each one is sized by a different rule, and the deal closes only when the four add up to total development cost.

The four layers

Layer	What sizes it	Who provides it	Repaid from
Tax credit equity	Annual credit x 10 years x investor share x price per credit	Bank or insurance investor, usually through a syndicator fund	Tax credits and losses, not cash
First mortgage	Net operating income on restricted rents divided by the lender’s coverage ratio	Bank, Fannie Mae, Freddie Mac, FHA-insured lender, USDA-guaranteed lender, bond buyer	Property cash flow
Soft or gap money	Whatever is left; capped by program rules	HOME, Housing Trust Fund, CDBG, state and city trust funds, FHLB AHP, seller notes	Residual receipts or never (grants, deferred loans)
Deferred developer fee	The developer’s earned fee left in the deal	Developer	Cash flow after debt service, over 10 to 15 years

Two features make this stack unusual. First, debt is limited by rents that the law caps at 30% of an income limit, so a LIHTC building supports far less debt than a market-rate building of the same cost. Second, the largest source, equity, is paid in installments over construction and lease-up, so a deal also needs construction financing and often an equity bridge.

Step 1: compute the credit

The annual credit is the applicable percentage times qualified basis, every year for 10 years (IRC 42(a), 42(f)(1)).

• Eligible basis is the depreciable cost of the residential building: construction, soft costs that attach to the building, common areas and tenant amenities. Land, permanent loan fees, syndication costs and reserves are out. See eligible basis and the 130% boost.
• The boost. In a HUD-designated qualified census tract (QCT) or difficult development area (DDA), eligible basis is multiplied by 130% (42(d)(5)(B)). Check an address.
• Applicable fraction is the lesser of the low-income share of units or of floor space. Most deals are 100% low-income because every market unit reduces the credit.
• Applicable percentage. New buildings that aren’t federally subsidized get at least 9% (42(b)(2)). Bond-financed and existing buildings get at least 4% (42(b)(3)). The IRS-computed rates for November 2026 are 8.24% and 3.53% (Rev. Rul. 2026-21), so the floors apply. The applicable percentages page tracks each month.

Step 2: turn credits into equity

Investors price credits in cents per dollar of credit. CohnReznick’s Tax Credit Advisor reported a median net equity price of $0.823 across 93 surveyed properties for June and July 2026, the lowest in its recent surveys (Housing Tax Credit Monitor, September 2026). Price varies with the investor’s CRA needs, the market, the deal’s risk and the pay-in schedule; see equity pricing.

Equity = annual credit x 10 x investor ownership share (typically 99.99%) x price.

Step 3: size the debt from restricted rents

The lender starts from net operating income at restricted rents, divides by its minimum debt service coverage ratio, and converts the allowable annual payment into a loan amount at its rate and amortization. Freddie Mac’s Tax-Exempt Loan term sheet (dated 02/25) sets a 1.15x minimum coverage and up to 40-year amortization for 4% deals (Freddie Mac TEL term sheet). The loan is then cut to the lesser of that figure and the lender’s loan-to-value or loan-to-cost limit. The supportable debt calculator runs this math.

Step 4: fill the gap

Whatever cost the equity and first mortgage don’t cover is the gap. Developers fill it with public soft loans, which usually accrue interest and get paid only from surplus cash, plus a slice of their own fee. Each soft source has its own rent and income rules that stack on top of LIHTC. See gap financing and soft funds.

A worked 4% bond deal

Assumptions for illustration only, not quotes: 120 units, all low-income, new construction in a QCT. Total development cost $48,000,000, of which land is $3,000,000. Eligible basis $40,000,000. Aggregate basis for the bond test (depreciable basis plus land) $46,000,000. Equity price $0.82. Stabilized NOI $1,450,000. Permanent loan at an assumed 6.00% with 40-year amortization and 1.15x coverage.

Line	Math	Amount
Eligible basis		$40,000,000
Boosted basis (QCT, 130%)	40,000,000 x 1.30	$52,000,000
Qualified basis (100% low-income)	52,000,000 x 100%	$52,000,000
Annual credit	52,000,000 x 4%	$2,080,000
Ten-year credits	x 10	$20,800,000
Equity	20,800,000 x 99.99% x $0.82	$17,054,294
Allowable debt service	1,450,000 / 1.15	$1,260,870
Permanent loan (rounded)	1,260,870 / 6.603% annual constant	$19,100,000
Deferred developer fee	assumed	$2,500,000
Gap to fill with soft funds	48,000,000 - 19,100,000 - 17,054,294 - 2,500,000	$9,345,706

The final sources and uses:

Sources	Amount	Share
Permanent loan	$19,100,000	39.8%
Tax credit equity	$17,054,294	35.5%
Soft loans and grants	$9,345,706	19.5%
Deferred developer fee	$2,500,000	5.2%
Total = TDC	$48,000,000	100%

Three things in that table drive most real negotiations:

1. The bond test. Because this is a 4% deal, tax-exempt private activity bonds must finance enough of the aggregate basis. Under the 25% test in 42(h)(4)(B)(ii), that is $11,500,000 of bonds, with at least $2,300,000 (5%) from an issue dated after December 31, 2025, for a building placed in service in a taxable year beginning after 2025. Under the older 50% test it would be $23,000,000. The permanent loan here is larger than the 25% minimum, so the bonds can be sized to the test and the rest of the debt can be taxable. See the 25% bond test and the bond test calculator.
2. The gap. A $9.3 million gap on 120 units is about $78,000 per unit of soft money. That is why 4% deals cluster where cities or states have trust funds, or where the deal can win HOME or Housing Trust Fund dollars.
3. The agency’s sizing. The housing credit agency may allow only the credit necessary for feasibility (42(m)(2)). If the gap closes with room to spare, the agency can reduce the credit, and on a 4% deal it can also refuse to treat the deal as feasible at the requested level.

Build your own version in the capital stack builder, starting from the credit figure in the credit estimator.

The same building as a 9% deal

At 9% the annual credit on $52,000,000 of qualified basis is $4,680,000 and the 10-year total $46,800,000. At $0.82 that raises about $38.4 million, which, with the same $19.1 million loan, overfunds the $48 million cost. In practice the agency would award less credit, the developer would carry less debt to deepen affordability, or both. That is the core trade: 9% credits are scarce and competitive under the state’s qualified allocation plan, while 4% credits come with bond cap but leave a gap. See 4% vs 9% credits and the 2026 credit ceilings.

How the money arrives

Sources don’t all fund at closing:

Period	Funding
Closing	First equity installment, soft loans (often), construction loan or bond proceeds begin funding draws
Construction	Construction loan draws; some equity installments tied to completion milestones
Completion and lease-up	Further equity installments; permanent loan conversion once the property meets the lender’s occupancy and coverage tests
After Forms 8609 are issued	Final equity installment, often tied to receipt of 8609s and a cost certification

Because so much equity arrives late, the construction lender lends against it, or a separate equity bridge loan does. The permanent loan is usually locked in advance through a forward commitment.

Where deals break

• Cost overruns after the credit is fixed. The credit is sized at application and can rise only if the agency awards more. Overruns usually land on the deferred fee.
• Rate moves before the permanent loan locks. At 1.15x coverage, a half-point rise in the rate cuts the loan by several percent. Forward rate locks exist to remove this risk.
• Equity pricing slips between letter of intent and closing. A one-cent drop on $20.8 million of credits is $208,000.
• Soft money conditions conflict. HOME, HTF and local funds each carry rent, income and affordability-period rules. The strictest rule governs each unit.

When the stack is close, the Janover Capital desk can size the construction loan, bridge and permanent debt against the actual rents.