9% vs 4% LIHTC: Comparing Credit Types

The LIHTC program produces two categories of credit, commonly referred to as 9% credits and 4% credits. Both generate investor equity for affordable housing development by providing a federal tax credit against the investor's income tax liability, but they differ significantly in how they are allocated, how much equity they generate, what financing they require, and what projects they are best suited for. Understanding those differences is essential to structuring an affordable housing transaction — and to understanding the legal work each requires.

At a Glance

	9% Credit	4% Credit
Allocation process	Competitive — awarded through QAP scoring	Non-competitive — available as of right with qualifying bonds
Bond financing required	No	Yes — at least 50% of aggregate basis
Credit percentage	~9% of eligible basis annually for 10 years	~4% of eligible basis annually for 10 years
Equity generated	Higher — typically 60–75% of total development cost	Lower per dollar of basis — offset by bond proceeds
Subject to state credit cap	Yes — limited annual per-state allocation	No — outside the state credit cap
Typical use cases	New construction; smaller deals; deals with deep affordability	Acquisition-rehab; large new construction; preservation
Closing complexity	High — layered soft debt sources common	High — bond issuance adds participants and timing constraints

The 9% Credit in Depth

The 9% credit is the higher-value of the two credit types and the primary financing tool for new construction of affordable rental housing in markets where tax-exempt bond volume is limited or unavailable. The credit percentage is fixed at 9% for most new construction (it floats for acquisition and certain rehabilitation costs, but is effectively capped at 9% for new construction by statute).

Because 9% credits are drawn from a finite annual state allocation — roughly $2.70 per capita per year in Illinois, indexed for inflation — demand routinely exceeds supply. Allocation is awarded through a competitive application process scored under IHDA's Qualified Allocation Plan, which prioritizes factors such as geographic distribution, income targeting, community needs, developer capacity, site readiness, cost efficiency, and alignment with state housing priorities. Competition for 9% credits requires a project to be well-developed before application — with site control, financing commitments in place or near-final, community support, and a detailed development budget.

Capital Stack in a 9% Transaction

Because 9% credits generate more equity per dollar of eligible basis than 4% credits, and because they do not require bond financing, the 9% capital stack typically relies heavily on tax credit equity supplemented by soft debt. A representative 9% capital stack might include:

Tax credit equity (60–75% of total development cost in favorable markets)
A permanent loan from a mission lender, CDFI, or agency program
HOME Investment Partnerships Program funds
State or local housing trust fund loans
CDBG or other gap financing
Seller financing or deferred developer fee where needed

Each soft debt source carries its own regulatory requirements, approval process, and closing conditions. Managing the sequencing and conditions of those sources — and keeping them aligned with the investor funding schedule and the construction timeline — is one of the primary legal coordination challenges in a 9% closing.

Basis Boost

Projects in Qualified Census Tracts (QCTs) or Difficult Development Areas (DDAs) designated by HUD are eligible for a 30% basis boost — an increase in eligible basis that effectively increases the amount of credit the project can generate. The basis boost is a significant structuring consideration for projects in eligible areas and can affect the sizing of investor equity and the feasibility of the overall deal.

The 4% Credit in Depth

The 4% credit is non-competitive — it is available as of right to any project that meets the requirements of the program, provided the project is financed with qualified tax-exempt bonds and at least 50% of the project's aggregate basis is financed with bond proceeds (the "50% test"). Because 4% credits are not subject to the state per-capita credit cap, they can be used to finance a larger volume of affordable housing than the 9% credit program alone would support.

The 4% credit percentage is technically a floating rate set monthly by the IRS, though it has been fixed at a floor of 4% for new construction by the Consolidated Appropriations Act of 2021. For acquisition costs and certain rehabilitation expenditures, the rate remains floating and is applied separately from new construction basis.

Tax-Exempt Bond Financing

The bond requirement in a 4% transaction adds a participant — a bond issuer, typically a state or local housing authority — and a distinct financing instrument to the closing. Bond proceeds are used to finance construction (or acquisition and rehabilitation), and the bonds are typically sold to investors in the capital markets or placed with a bank or other financial institution. After construction and stabilization, the bonds may be converted to permanent financing or redeemed with permanent loan proceeds.

In Illinois, bonds for affordable housing transactions are commonly issued by IHDA, the City of Chicago (through the Department of Housing), or Cook County. Each issuer has its own underwriting process, bond documents, and approval timeline. Bond issuance requires coordination among the bond issuer, bond counsel, underwriter or placement agent, and credit enhancer or bond purchaser — adding complexity and lead time to the transaction.

The 50% test — requiring that bond proceeds finance at least 50% of the project's aggregate basis — is determined under federal tax rules and must be confirmed by tax counsel. The calculation includes land, so land-heavy projects may qualify more easily; the test applies to the aggregate of building and land basis rather than construction costs alone.

Capital Stack in a 4% Transaction

The 4% capital stack is built around bond debt and tax credit equity, and typically requires more debt financing than a 9% deal to achieve feasibility. A representative 4% capital stack might include:

Tax-exempt bond construction financing converting to permanent bond debt
Tax credit equity (lower percentage of total development cost than in a 9% deal)
Agency permanent financing (Fannie Mae, Freddie Mac, FHA) or CDFI/bank permanent loan
Subordinate soft debt — HOME, trust funds, local programs
Seller financing or deferred developer fee

Because the bond construction financing is often sized to satisfy the 50% test rather than to cover the full construction cost, equity and soft debt must fill the remainder. The interaction between bond sizing, the 50% test, investor equity pricing, and the overall sources-and-uses budget is a central feasibility question in every 4% deal.

4% Credits in Acquisition-Rehabilitation

The 4% credit is the standard financing tool for acquisition and rehabilitation of existing affordable housing — including preservation of expiring affordability restrictions, recapitalization of aged properties, and public housing conversions under the RAD program. In an acquisition-rehab deal, separate credit percentages apply to acquisition basis (approximately 4%) and rehabilitation basis (also approximately 4% for bond-financed projects). The total credit is the sum of the two, applied to their respective eligible basis amounts. Minimum rehabilitation expenditures — currently $7,500 per unit — must be met for the rehabilitation costs to qualify.

How Credit Type Affects the Legal Work

The choice between 9% and 4% credits does not change the fundamental legal structure of a LIHTC transaction — the investment entity, the investor documents, the regulatory framework, and the lender requirements are all present in both. But it does affect the complexity and composition of the closing in meaningful ways.

9% Closings

Multiple soft debt sources, each with distinct loan documents and regulatory agreements
Sequencing of soft debt approvals and commitments around QAP application and award timeline
Higher investor equity as a percentage of total cost — investor documents are the primary financing instrument
Construction lender underwriting often more conservative given reliance on soft debt for takeout
QAP commitments and scoring criteria may impose design, targeting, or operational requirements reflected in the legal documents

4% Closings

Bond documents — indenture, loan agreement, bond regulatory agreement — added to the closing package
Bond counsel opinion required as a closing deliverable
Bond issuer approval process and timeline must be coordinated with construction start
50% test calculation must be confirmed before closing
Permanent financing often agency-based (Fannie, Freddie, FHA), adding program-specific document requirements
Intercreditor arrangements between bond trustee, permanent lender, and subordinate lenders

Choosing Between Credit Types

The choice between 9% and 4% credits is primarily a function of feasibility, deal size, and market conditions — not a purely legal question. But understanding the legal implications of each structure is relevant to how the transaction is structured from the outset.

Nine-percent credits are generally preferable when available — the higher equity contribution reduces debt burden and improves long-term financial performance. But 9% credits are scarce. A developer who cannot win a 9% allocation, or whose project is too large to be feasible with the credit volume a competitive award would generate, will turn to 4% credits. Four-percent transactions require bond volume (which, like 9% credits, is a finite resource allocated by the state), and they require a deal large enough to support the overhead of bond financing — but they are not subject to the competitive QAP process and can be structured more quickly once bond commitment is secured.

Many experienced developers pursue both tracks simultaneously, preparing a 9% application while also assessing 4% feasibility, so that a project can move forward regardless of the competitive outcome.

Counsel for 9% and 4% LIHTC Transactions

Snow LLP advises developers, sponsors, and nonprofit organizations in both 9% and 4% LIHTC transactions, including new construction, acquisition-rehabilitation, and preservation deals. The practice handles investment entity formation, investor and syndicator documentation, loan documentation across the full capital stack, regulatory agreements, and closing coordination — in both credit structures.

9% vs. 4% LIHTC: Comparing Credit Types