Tax Credit Equity

What Is Tax Credit Equity?

Tax credit equity is the money investors put into an affordable housing development in exchange for the federal tax credits it generates. The term is used most often with the Low-Income Housing Tax Credit (LIHTC). A state awards credits to a property, but the developer usually cannot use them itself. Instead, it brings in investors, most often banks and other corporations with large federal tax bills. They contribute cash and then claim the credits against their taxes, often through a syndication fund.

Equity is not a loan, and the property makes no monthly payments on it. Every dollar of equity is a dollar the property does not have to borrow, and lower debt payments make lower, restricted rents possible.

How It Works

LIHTC credits are claimed each year for 10 years. The property must also follow the program’s rules for a 15-year compliance period, during which the IRS can take back credits for violations. Investors wait years for the benefit and carry that risk, so they usually pay less than face value. The result is quoted as a price per credit dollar.

According to the Office of the Comptroller of the Currency (OCC), the price depends on:

• the perceived risk of the deal
• competition among investors for the project
• the tax losses, such as depreciation, that come with the investment
• the value of the investment to a bank under the Community Reinvestment Act

Prices have swung widely over time. The OCC notes that they fell sharply in 2008, when Fannie Mae and Freddie Mac left the market during the financial crisis.

Equity usually arrives in installments tied to milestones such as finishing construction, so developers rely on construction or bridge loans in the meantime.

Example

Suppose a property is awarded $1 million of credits a year for 10 years, or $10 million in total. If an investor pays $0.85 per credit dollar, the project raises $8.5 million in equity. If the price fell to $0.80, the same award would raise only $8 million. The developer would then have to find another $500,000, typically through gap financing, more debt, or a deferred developer fee.

Why It Matters for Workforce Housing

The equity price decides how many affordable homes a fixed credit allocation can produce. When prices drop, deals that once “penciled out,” meaning they worked financially, can stall. Tax credit equity is only available for homes that meet LIHTC income limits. Those limits are 50% or 60% of area median income (AMI), or up to 80% for individual units under income averaging, as long as the property’s average limit is 60% or less. Housing for moderate-income workers above those limits usually has to raise equity from somewhere else, such as conventional investors, employers, or public partners.