The Low-Income Housing Tax Credit (LIHTC) is the largest source of affordable housing financing in the United States. The program provides federal tax credits to developers who build or rehabilitate affordable rental housing. Texas allocates LIHTC credits through the Texas Department of Housing and Community Affairs (TDHCA). Understanding the difference between 4% and 9% credits is essential for Texas developers pursuing affordable housing projects.
How LIHTC Works
LIHTC provides tax credits to investors who provide equity to affordable housing projects. Developers sell the tax credits to investors (usually through syndicators) in exchange for equity that reduces the amount of debt the project needs. The credits are claimed annually over a 10-year period.
9% LIHTC Credits
Key Characteristics
- Higher credit rate, subsidizing approximately 70% of eligible project costs
- Competitively allocated by TDHCA through an annual Qualified Allocation Plan (QAP)
- Limited annual supply (each state receives a per-capita allocation)
- Highly competitive application process with scoring criteria
- Used for new construction and substantial rehabilitation projects
- Provides significantly more equity per unit than 4% credits
4% LIHTC Credits
Key Characteristics
- Lower credit rate, subsidizing approximately 30% of eligible project costs
- Non-competitive: available to any project that qualifies and uses tax-exempt bonds
- Must be used in conjunction with tax-exempt bond financing (at least 50% of project costs)
- No annual cap (supply is limited only by bond volume cap)
- Faster timeline because there is no competitive allocation process
- Used for new construction, rehabilitation, and acquisition/rehabilitation
Key Differences
Competition
- 9%: Highly competitive. Many more applications than available credits
- 4%: Non-competitive. Available to qualifying projects on an ongoing basis
Equity Generated
- 9%: Generates more equity per unit, reducing the need for other financing
- 4%: Generates less equity, requiring more debt or additional subsidy sources
Financing Structure
- 9%: Can be combined with conventional debt and other subsidies
- 4%: Must use tax-exempt bonds as the primary financing, which adds complexity
Project Size
- 9%: Often used for smaller projects where the higher equity covers most costs
- 4%: Often used for larger projects where bond financing makes economic sense
Texas-Specific Considerations
TDHCA administers the competitive 9% allocation through its annual QAP, which includes scoring criteria for location, population served, development team experience, local support, and other factors. Texas has strong demand for 9% credits, making the process highly competitive. The 4% bond program provides an alternative path for developers willing to work with tax-exempt bond financing.
Find Programs That May Fit Your Business
LIHTC development involves complex financing structures. Developers should also evaluate other programs including property tax abatements, opportunity zones, historic tax credits, and local incentives.
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