The Low-Income Housing Tax Credit (LIHTC), created under IRC §42 in 1986, is the primary federal mechanism for incentivizing private investment in affordable rental housing construction and rehabilitation in the United States. The program allocates credits through two tracks: the 9% credit, which is competitive, allocated by each state's housing finance agency under a Qualified Allocation Plan (QAP), reserved for new construction and substantial rehabilitation without federal subsidy; and the 4% credit, which is non-competitive and available automatically to projects that pair with tax-exempt bond financing under IRC §42(h)(4), provided at least 50% of project costs are bond-financed.
The 9% credit generates substantially larger credit amounts and is used for most ground-up affordable developments; the 4% credit is widely used for preservation and bond-financed new construction.
LIHTC equity is raised through syndication: a syndicator assembles a limited partnership where corporate investors (banks satisfying Community Reinvestment Act (CRA) obligations and insurance companies) purchase the 10-year stream of tax credits at a price of roughly $0.85 to $0.95 per dollar of credit, a rate that rises and falls with corporate tax rates and investor demand. The after-tax investor IRR on LIHTC equity is typically in the 3-6% range, low by CRE standards but attractive as a tax-efficient vehicle for highly taxed corporations.
The developer receives the equity proceeds upfront to fund construction costs, effectively monetizing a future tax benefit today. Syndicators such as Boston Capital, Raymond James Tax Credit Funds, and national bank CRA programs are the primary market-makers for LIHTC equity.
The compliance mechanics are non-negotiable: each project is subject to a minimum 15-year compliance period under IRC §42(j), with an extended use restriction typically running to 30 years or beyond as required by the state QAP. Qualified low-income units (QLAUs) must be occupied by tenants at or below 60% of Area Median Income (AMI), or at deeper affordability levels if the project elected the Income Averaging election under IRC §42(g)(1)(C).
Noncompliance triggers credit recapture with interest, and the developer remains liable through the extended use period. The qualified basis (the portion of eligible project costs allocable to low-income units) determines the annual credit amount, and maintaining that basis in continuous qualified use is the central compliance obligation.
Developer economics on LIHTC deals require a fundamentally different underwriting lens than market-rate construction. Because rents are capped relative to AMI, income is constrained from the outset, and yield-on-cost analysis must account for a permanently restricted revenue stream.
Most LIHTC projects require multiple subsidy layers to pencil: HOME funds, Community Development Block Grants (CDBG), soft loans from housing finance agencies, and deferred developer fee (the portion of developer fee not paid at closing, which is recognized as a source of equity). The deferred developer fee is often the difference between a feasible and infeasible deal; sophisticated sponsors track their deferred fee balance against projected operating cash flow to confirm payback within the compliance period.
For appraisers, IRC §42 requires restricted-rent income to be capitalized on an as-restricted basis, not at market rents, per USPAP Advisory Opinion 33.