How Are LIHTC Credits Valued?LIHTC credits are "valued" in two senses: (1) their calculation and amount (statutory "face value"), and (2) their market value when sold to investors (present value based on economic factors). The total credit is tied to the project's "qualified basis," which is the eligible development cost (e.g., construction, site work, but excluding land acquisition and certain soft costs like developer fees) multiplied by the "applicable fraction" (the percentage of the building's square footage or units dedicated to low-income tenants, typically at least 40%).There are two main credit types, distinguished by subsidy level and competitiveness:
9% Credit (70% Present Value Subsidy): For new construction or "substantial rehabilitation" (where rehab costs exceed the greater of $6,600 per unit or adjusted building basis). This is competitive, allocated via state QAPs. The annual credit rate is approximately 9% of the qualified basis, yielding a total of 90% over 10 years—but its present value is calibrated to 70% of the qualified basis to account for the time value of money. The U.S. Treasury sets the exact monthly rate via a formula based on applicable federal interest rates (72% of mid- and long-term Treasury yields), ensuring the 10-year stream's discounted value hits 70%. A permanent 9% floor (enacted in 2015) applies if the formula yields less, protecting developers in low-interest environments.
4% Credit (30% Present Value Subsidy): For acquisition and moderate rehabilitation or projects financed with at least 50% tax-exempt private activity bonds (reduced to 25% starting 2026). This is non-competitive (no cap beyond bond availability). The annual rate is ~4% of qualified basis, totaling 40% over 10 years with a 30% present value. A permanent 4% floor (from 2021) applies similarly.
Example Calculation: For a project with a $10 million qualified basis (100% low-income units) using a 9% credit at exactly 9%:
Annual credit = $10M × 9% = $900,000.
Total over 10 years = $9 million.
Present value ≈ $7 million (70% subsidy), assuming a ~3-4% discount rate.
Credits can receive a 30% "basis boost" in DDAs (high-construction-cost areas) or QCTs (low-income census tracts, at least 50% poverty or 25% low-income households), increasing the qualified basis to 130% and thus the credits by up to 30%.Market Valuation for Sale: Developers rarely use credits directly (most have insufficient tax liability), so they are "syndicated" (sold) to investors. The market price is the present value of the 10-year stream, typically 80-95 cents per dollar of credit (e.g., $8-9.5 million for the above example), influenced by:
Interest rates (higher rates lower present value).
Investor demand (strong from banks for Community Reinvestment Act compliance).
Syndicator fees (2-5% of equity raised).
Additional benefits like depreciation deductions or tax losses. This upfront equity (often 40-60% of total costs) reduces the debt needed, enabling rents 20-40% below market rates.
How Can the Tax Credits Be Used?LIHTC credits are nonrefundable and can only offset federal income taxes (not state taxes, though 30+ states offer parallel credits). Usage follows a structured lifecycle:
Allocation: Developers submit applications to their state's HFA under the QAP, which prioritizes projects serving the lowest-income tenants (e.g., ≤30% of area median income, AMI), longest affordability periods, and special needs (e.g., supportive housing for homeless or disabled). 9% credits are awarded competitively (often twice yearly); 4% credits require tax-exempt bonds issued by the state. Unspent allocations revert to a national pool after two years for redistribution.
Development and Placed-in-Service: Developers have two years to complete the project. Credits begin accruing once the property is "placed in service" (certified complete by IRS Form 8609 and first low-income tenant occupies a unit). At least 10% of costs must be incurred in year one for extensions.
Claiming Credits: Investors claim the annual amount on their federal tax return (Schedule A of Form 1040 for individuals, or corporate forms) for 10 consecutive years starting from placed-in-service. No carryback, but unused credits carry forward 20 years (rarely needed).
Compliance and Affordability:
Tenant Income Tests: At least 20% of units for households ≤50% AMI or 40% ≤60% AMI (or average ≤60% AMI across 40%+ units, none >80% AMI). Incomes verified annually via third-party certification; over-income tenants trigger credit recapture.
Rent Tests: Gross rents (including utilities) ≤30% of 50% or 60% AMI, adjusted annually for inflation.
Periods: 15-year initial compliance (with monitoring); 30-year extended use (non-binding but required for allocation). Non-compliance risks IRS recapture of credits (pro-rata per non-compliant year) plus interest.
Managers use tenant files for IRS audits; HUD's Enterprise Income Verification (EIV) system is optional but recommended for Section 8 layering.
Additional Uses: Credits can stack with other incentives (e.g., historic tax credits, energy efficiency bonuses under IRA). For financial institutions, investing counts toward CRA exams.
If Someone Is Awarded $1,000,000 Each Year for 10 Years?Yes, this is the standard structure: Awards are expressed as annual credits claimed over a 10-year "credit period." If a developer is allocated credits equating to $1 million annually (e.g., via a qualified basis of ~$11.11 million at 9% rate), they (or investors) claim $1 million per year for 10 years, totaling $10 million in credits. This is not "cash" but tax offsets—e.g., reducing a $1 million tax bill to zero. The allocation is a one-time award based on projected basis, but claims are annual and subject to IRS certification. For a 4% credit, the basis would need to be ~$25 million for the same $1M annual.Can These Be Sold to Another Person Without Receiving Ownership in the Apartments?Absolutely— this is the program's hallmark: syndication, where credits are sold to passive investors without conveying direct property ownership or management rights. Here's how it works in detail:
Syndication Process: The developer forms a limited partnership (LP) or limited liability company (LLC). The developer acts as general partner (GP) with 1% nominal interest and full control. Investors buy limited partnership interests (e.g., 99%) as passive limited partners (LPs), contributing equity (cash) upfront in exchange for a pro-rata share of credits, depreciation, and any tax losses. A syndicator (investment bank or fund manager) often intermediates, pooling investors, handling IRS compliance, and charging fees (e.g., 10-15% of equity as acquisition/guarantee fees).
No Direct Ownership: LPs have no say in operations, tenant selection, or sales—they cannot force a property sale or evict tenants. Their "ownership" is purely economic: rights to tax benefits and a preferred return (typically 3-6% annual cash flow from operations, if any). After 15 years, LPs may have a "put option" to sell back to the GP at a nominal price, but the property remains affordable.
Investor Profile: Buyers are tax-liable entities like corporations, banks (for CRA credit), insurance companies, or high-net-worth individuals via funds. Minimum investments start at $100,000-$500,000. Returns: Primarily from credits (80-90% of value), plus depreciation (~20-30% of basis over 27.5 years) and minimal cash flow.
Sale Mechanics: The "sale" is the equity contribution at closing (often 70-90 days post-allocation). Pricing: Based on forward pricing (projected credits) or carryover (post-construction). If non-compliance, investors can sue the developer for recapture damages, but syndicators often guarantee compliance.
Tax Implications: Investors report via Schedule K-1; credits pass through proportionally. No capital gains on the investment itself, but property sale after 10 years could trigger gains offset by remaining depreciation. Except if within an opportunity zone with correct filings.
This structure has raised over $200 billion in private equity since 1986, making LIHTC the most effective affordable housing tool without direct federal spending. For "direct HUD fins" (interpreting as HUD financing), as noted, HUD provides no direct loans for credits but enables layering for holistic financing. If you meant something specific by "FINs" (e.g., financial institutions), note that banks are key buyers, often motivated by regulatory credits rather than pure profit. For the latest allocations or state specifics, consult your HFA or HUD USER datasets.
Syndication Process: The developer forms a limited partnership (LP) or limited liability company (LLC). The developer acts as general partner (GP) with 1% nominal interest and full control. Investors buy limited partnership interests (e.g., 99%) as passive limited partners (LPs), contributing equity (cash) upfront in exchange for a pro-rata share of credits, depreciation, and any tax losses. A syndicator (investment bank or fund manager) often intermediates, pooling investors, handling IRS compliance, and charging fees (e.g., 10-15% of equity as acquisition/guarantee fees).
No Direct Ownership: LPs have no say in operations, tenant selection, or sales—they cannot force a property sale or evict tenants. Their "ownership" is purely economic: rights to tax benefits and a preferred return (typically 3-6% annual cash flow from operations, if any). After 15 years, LPs may have a "put option" to sell back to the GP at a nominal price, but the property remains affordable.
Investor Profile: Buyers are tax-liable entities like corporations, banks (for CRA credit), insurance companies, or high-net-worth individuals via funds. Minimum investments start at $100,000-$500,000. Returns: Primarily from credits (80-90% of value), plus depreciation (~20-30% of basis over 27.5 years) and minimal cash flow.
Sale Mechanics: The "sale" is the equity contribution at closing (often 70-90 days post-allocation). Pricing: Based on forward pricing (projected credits) or carryover (post-construction). If non-compliance, investors can sue the developer for recapture damages, but syndicators often guarantee compliance.
Tax Implications: Investors report via Schedule K-1; credits pass through proportionally. No capital gains on the investment itself, but property sale after 10 years could trigger gains offset by remaining depreciation.
This structure has raised over $200 billion in private equity since 1986, making LIHTC the most effective affordable housing tool without direct federal spending. For "direct HUD fins" (interpreting as HUD financing), as noted, HUD provides no direct loans for credits but enables layering for holistic financing. If you meant something specific by "FINs" (e.g., financial institutions), note that banks are key buyers, often motivated by regulatory credits rather than pure profit. For the latest allocations or state specifics, consult your HFA or HUD USER datasets.Securing a Low-Income Housing Tax Credit (LIHTC) partner who can provide both equity investment and act as a surrogate developer is a strategic move, especially for developers seeking to bridge experience or balance sheet gaps. Such partners not only bring capital but also offer expertise in navigating the complexities of LIHTC projects.
🔑 Understanding the Role of a Surrogate LIHTC Partner
In LIHTC projects, developers often collaborate with equity investors who become limited partners, contributing capital in exchange for tax credits. A surrogate partner goes a step further by also providing development expertise, assuming certain responsibilities typically held by the general partner. This arrangement can be particularly beneficial for developers lacking extensive LIHTC experience or those needing additional support in project call Greystar.
📝 Next Steps for Engaging a LIHTC Partner
To initiate a partnership:
Prepare a Comprehensive Proposal: Include project details, financial projections, and any preliminary approvals or site control documentation.
Highlight Your Needs: Clearly articulate the areas where you seek support, whether it's equity investment, development expertise, or both.
Demonstrate Alignment: Show how your project aligns with the partner's mission and investment criteria.
Initiate Contact: Reach out to us here at Greystar.