How Affordable Housing Gets Financed: The Capital Stack

Affordable rental housing gets financed by stacking several sources of money until they add up to the full cost of the building. The base is usually a modest first mortgage, sized to what the property’s restricted rents can repay. On top of it sits equity from investors who buy federal Low-Income Housing Tax Credits. Then come low-interest “soft” loans and grants from federal, state and local programs. Last, the developer often agrees to collect part of its own fee later. Practitioners call this layered arrangement the capital stack.

The stack is needed because an affordable building costs about as much to build as a market-rate one, but it is designed to collect less rent. Lining up five, eight or even a dozen funders, each with its own rules and calendar, is the main reason affordable projects so often take years to go from idea to opening day.

Why Affordable Deals Need a Stack

Every development has to balance what developers call sources and uses. The uses are the total development cost: land, construction, and “soft costs” such as architecture, permits, legal work, financing fees, reserves, and the developer fee. The sources are the money that pays for them. As a 2025 Shelterforce primer puts it, sources must equal uses.

In conventional real estate, two sources usually suffice: a bank loan and investor equity. The Shelterforce primer notes that the senior loan in a market-rate deal typically covers 60% to 80% of the financing. Affordable housing breaks that model. A lender sizes its loan by the property’s net operating income, the rent left after operating expenses, and requires a cushion measured by the debt service coverage ratio. When rents are capped at what lower-income households can pay, net income is lower, so the supportable loan is smaller. The difference between cost and what a loan can cover is the funding gap, and the rest of the stack exists to close it.

The Layers of the Stack

1. The first mortgage (senior debt)

The senior loan has first claim on the property’s cash flow and on the property itself if the owner defaults. It may come from a bank, a state housing finance agency, or a lender using FHA multifamily mortgage insurance. In bond-financed deals, the loan is funded by tax-exempt private activity bonds (see tax-exempt multifamily housing bonds).

Projects usually have two loans in sequence. A construction loan pays contractors as work proceeds. A permanent loan replaces it once the building is finished and occupied.

2. Tax credit equity

In a 9% credit deal, the largest layer is usually tax credit equity. A developer that wins credits from its state brings in investors, mostly banks and other financial institutions, who join the partnership that owns the property and claim the credits against their federal taxes over 10 years. The Congressional Research Service (CRS) reports that in normal economic conditions investors typically pay from the mid-$0.80s to the low-$0.90s per dollar of credit. Arranging these investments, often through pooled funds, is called syndication.

How much equity a project raises depends on which credit it gets:

• 9% credits are designed to deliver a subsidy worth up to about 70% of a project’s eligible costs, measured in present value. They are scarce and awarded competitively under each state’s Qualified Allocation Plan.
• 4% credits are designed to deliver up to about 30%. They come with tax-exempt bond financing and do not count against the state’s annual credit cap. Through 2025, at least 50% of a building’s land and building costs had to be bond-financed to qualify. Public Law 119-21, enacted in July 2025, lowered that threshold to 25% starting in 2026, for deals that include bonds issued after 2025.

Investors typically pay in stages, not all at once. A hypothetical schedule in a 2014 guide from the Office of the Comptroller of the Currency (OCC) releases 30% at closing, 40% when the building is placed in service, 20% at 90% occupancy and final cost certification, and 10% after the first tax filings. Because so much equity arrives late, projects need construction and bridge loans to carry them in the meantime.

Equity prices move with the market. In roundtables the Federal Reserve Bank of Kansas City held from July through December 2025, developers reported price drops as large as 10 to 15 cents per dollar of credit, from the low-to-mid $0.90s to the low-to-mid $0.80s. On a hypothetical deal with $15 million of credits, a 10-cent drop removes $1.5 million from the stack.

3. Soft debt: HOME, HTF, and state and local funds

Soft debt is the main form of gap financing. These are loans, usually from public agencies, with low or no interest and payments due only when the property has surplus cash flow, or at sale or the end of a long term. The OCC describes state and local gap financing as entering projects as soft loans “for which payment is due only when there is sufficient cash flow.”

Common sources include:

• HOME Investment Partnerships Program. Federal formula money to states and localities. Under 24 CFR 92.205, it can be invested as loans, deferred payment loans, grants, equity, or interest subsidies. Newly built HOME rental units must stay affordable for at least 20 years.
• National Housing Trust Fund. Federal formula grants to states, aimed mainly at housing for extremely low-income renters. Assisted rental units must stay affordable for at least 30 years.
• State and local housing trust funds, along with bond programs, Community Development Block Grant money, and city or county housing loans.

Terms vary by agency. Delaware’s 2025–2026 LIHTC guidelines, for example, list deferred permanent loans from the Delaware State Housing Authority at 1% interest, with accrued interest due from cash flow. Every public dollar also brings its own strings, such as rent limits, affordability terms, and reporting.

4. Grants

Some money never has to be repaid. The Federal Home Loan Bank Affordable Housing Program, foundations, and some state and local programs make grants. Grants are the simplest money in a stack, but they are usually small and competitive, and they still carry conditions. A rental project that receives an AHP subsidy, for example, must stay affordable for 15 years.

5. The deferred developer fee

The developer fee pays the developer for its staff time, overhead, guarantees, and risk. It is a use of funds, and state agencies generally cap it. When a stack comes up short, developers often defer part of the fee and collect it later from the property’s cash flow. That part of the fee is at risk if the property underperforms.

States regulate this closely. Delaware’s 2025–2026 guidelines cap the deferred share of the fee in 9% deals at 50%. In 4% bond deals, they require 40% of the fee to be paid only from cash flow. In those deals the developer must also show that the cash-flow portion and any other deferred fee can be paid within the first 15 years of operations, or else take a smaller fee.

An Illustrative Capital Stack

Suppose a nonprofit developer plans a 60-unit apartment building with competitive 9% credits. Every number below is invented for illustration and does not describe a real project.

Uses: land $1.5 million, construction $16.5 million, soft costs and reserves $3.6 million, and a developer fee of $2.4 million, for a total of $24 million.

To size the mortgage, suppose the restricted rents leave $380,000 a year in net operating income. If the lender requires a debt service coverage ratio of 1.15, the property can afford about $330,000 a year in loan payments. At a hypothetical 6% interest rate over 35 years, that supports a loan of roughly $4.8 million, which is only 20% of the cost.

Now suppose the same building could get only 4% credits. Its credits would be worth less than half as much, and equity might fall to about $6.8 million. That would open an additional gap of roughly $8.5 million to fill with more debt and gap funding. This is why the OCC notes that 4% deals often need several extra sources.

Why Deals Take Years

Assembling a stack is a long, sequential process. A typical path looks like this:

1. Predevelopment. The developer secures a site, designs the building, obtains zoning approvals, and commissions a market study. All of this is paid with at-risk money before any major funder commits.
2. Local and state soft funding. Many funders want to see others commit first. A developer interviewed by the Terner Center described a “leveraging game”: local money comes before state money, and all other money comes before tax credits.
3. The tax credit round. CRS notes that many states hold two allocation rounds a year. A project that misses a round, or loses, may wait months for the next one, while its cost estimates go stale.
4. Closing. The sources generally close at the same time, each with its own lawyers and documents.
5. Construction and lease-up. Credit rules impose deadlines. Under Section 42 of the tax code, a 9% project that will not be finished in the year of its award must incur more than 10% of its expected costs within one year of the allocation. It must then be placed in service by the end of the second calendar year after the year of the award.
6. Conversion. After occupancy stabilizes, the permanent loan replaces the construction loan and the remaining equity arrives.

The Kansas City Fed’s summary of its roundtables notes that each source “often has a separate application process,” and that the resulting time lags increase a project’s holding costs. Developers described navigating “12 sources of financing for one project,” with requirements that frequently conflicted.

What the Complexity Costs

Layering is not free. The Terner Center studied 678 new construction projects awarded 9% credits in California from 2008 to 2019:

• Only 11.5% used fewer than four outside funding sources, counting tax credit equity.
• About 80% combined four to eight.
• Nearly 10% used more than eight.

On average, each additional source was associated with about $6,400 more per unit (in 2019 dollars), or 2%, in total development cost. The study cautions that costlier projects may also simply need more sources. Developers pointed to added legal, consulting, and syndication fees, and to delays that raise construction costs and interest.

The trade-off is real on both sides. Each funder’s conditions are how public money reaches deeper affordability, longer terms, or particular populations. But the same fragmentation spends money on transactions rather than homes. That is why ideas such as common applications, aligned deadlines, and shared compliance monitoring come up often in housing policy debates.

What This Means for Workforce Housing

Most of the stack described here is built for households at or below 60% of area median income, or up to 80% for some units. Projects aimed at workers earning more often cannot use tax credits or most federal soft money at all. Their stacks lean more heavily on local trust funds, donated or discounted land, fee waivers, employer contributions, and investors willing to accept below-market returns. See how workforce housing is financed.

The Bottom Line

An affordable apartment building is paid for by a stack: a small mortgage that restricted rents can carry, a large layer of tax credit equity, soft loans and grants from public programs, and a slice of fee the developer agrees to wait for. Each layer makes lower rents possible, and each also adds rules, cost, and time. That is why financing, more than construction, often determines how long it takes to get affordable housing built.