LIHTC development feasibility: tracing tax-credit equity through sources and uses

Build the basis calculation separately

The IRS low-income housing credit guide explains the relationship: eligible basis multiplied by the applicable fraction gives qualified basis, which is multiplied by the applicable percentage to calculate annual credit. The guide also describes first-year timing and ongoing compliance issues.

For this simplified illustration, assume $12m total uses, including $2m of land and other amounts excluded from the assumed $10m eligible basis. Assume a 90% applicable fraction, giving $9m qualified basis. These are fictional inputs; no basis boost, allocation limit or eligibility determination is being asserted.

Sources: Internal Revenue Service: Publication 5913: Low-Income Housing Tax Credit Audit Guide

Translate assumed credits into investor proceeds

Assume a 9% annual credit percentage and ten full years at $810,000, giving $8.1m nominal credits. At an assumed investor price of $0.90 per credit dollar, indicative equity is $7.29m. This deliberately simplified bridge excludes first-year adjustments, fees and other pricing effects.

The 9% input is an assumption for the example, not a claim that every project can obtain that rate or allocation. Actual eligible basis, fraction, available credits and investor terms need project-specific tax and programme analysis.

Show when the equity is contributed

Assume the investor contributes 20% at closing, 30% at completion and 50% after the specified stabilisation conditions.

Reconcile the interim funding need

A $4m permanent loan, $7.29m investor equity and $710,000 sponsor funding balance the $12m uses. If all uses must be funded by completion, only the first half of investor equity is available, and the assumed permanent loan is available at that date, a $3.645m interim gap remains.

At an illustrative 8% simple annual rate for six months, bridging that gap costs $145,800. This incremental cost is outside the initial $12m and needs additional funding. If the permanent loan also arrives later, its delay creates another gap.

Identify what this illustration cannot establish

Underwriting must address allocation or bond requirements, placed-in-service dates, rent and income restrictions, credit delivery, investor adjusters, operating guarantees and recapture exposure. A fall in delivered credits can reduce equity after construction commitments are fixed.

This guide is an educational mechanics example and has not received specialist tax or legal review. It cannot establish project eligibility or investment suitability. Obtain the relevant agency documents, partnership agreement and specialist validation before using the bridge for a real transaction.