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 allocation from the state's Section 42(h)(3) housing-credit ceiling under the QAP	Outside the competitive 9% allocation; subject to bond volume cap, issuer approval, housing-agency QAP and underwriting requirements, Form 8609 certification, and Section 42
Bond financing required	Not for the standard qualifying 9% structure	Yes — generally 50% of aggregate building-and-land basis, or 25% only if the post-2025 issue-date, 5% financing, and placed-in-service conditions are all satisfied
Credit percentage	Statutory 9% minimum applicable percentage for qualifying new non-federally subsidized buildings; credit generally claimed over 10 years	Statutory 4% minimum applicable percentage for qualifying new federally subsidized and existing buildings; credit generally claimed over 10 years
Equity generated	Generally more credit per dollar of qualified basis; actual equity depends on basis, allocated credit, investor pricing, and structure	Generally less credit per dollar of qualified basis; the remaining capital stack depends on debt capacity and other public and private sources
Primary federal allocation constraint	The state's limited Section 42(h)(3) housing-credit ceiling	Private-activity-bond volume cap and issuer and agency approvals; outside the competitive 9% housing-credit ceiling
Common uses	New construction or substantial rehabilitation projects that secure a competitive allocation	Acquisition-rehabilitation, preservation, and new-construction projects using qualifying tax-exempt bonds
Closing complexity	High — competitive commitments and layered public or soft financing are common	High — bond issuance adds parties, documents, approvals, and timing requirements

The 9% Credit in Depth

The 9% credit is the higher-value category and is commonly used for qualifying new non-federally subsidized buildings that receive a competitive allocation. Section 42 provides a 9% minimum applicable percentage for qualifying new non-federally subsidized buildings. Existing-building acquisition basis generally falls within the 4% category, while rehabilitation expenditures are treated as a separate new building and must be analyzed under the applicable subsidy and credit-rate rules.

Because competitive credits are limited by the state's annual housing-credit ceiling, demand commonly exceeds available authority. The housing credit agency awards credits under its current QAP and application materials, which may evaluate readiness, feasibility, site control, affordability commitments, location, development-team capacity, and other state priorities. Applicants should rely on the QAP and guidance in effect for the applicable cycle.

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, sized from qualified basis, the allocated credit amount, investor pricing, and the transaction structure
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

For qualifying buildings in a Qualified Census Tract (QCT) or Difficult Development Area (DDA), eligible basis may be increased to as much as 130% of otherwise eligible basis, subject to Section 42 and the housing credit agency's feasibility determination. State agencies may also designate certain qualifying non-federally subsidized buildings for a discretionary basis increase where necessary for feasibility. The available increase is not automatically a full 30% in every transaction.

The 4% Credit in Depth

The 4% credit is outside the competitive allocation of the state's 9% housing-credit ceiling, but it is not automatic. A qualifying project generally must obtain private-activity-bond volume cap and issuer and housing-agency approvals, satisfy the applicable QAP and underwriting requirements, receive Form 8609 certification, and comply with Section 42. The historical aggregate-basis threshold is 50%. A 25% threshold may apply only when at least 25% of aggregate building-and-land basis is financed with qualifying bonds, one or more bonds from an issue dated after 2025 finance at least 5% of that aggregate basis, and the building is placed in service in a taxable year beginning after 2025. Tax counsel should confirm which threshold applies.

The 4% category generally applies to qualifying new federally subsidized buildings and existing buildings. Section 42 provides a 4% minimum applicable percentage for qualifying buildings placed in service after 2020 that satisfy the statutory conditions. Rehabilitation expenditures are treated as a separate new building, so the applicable percentage for rehabilitation basis depends on whether that separate building is federally subsidized and otherwise qualifies for a statutory floor.

Tax-Exempt Bond Financing

The bond requirement adds a governmental issuer and a separate financing and tax-compliance structure. Bond proceeds may finance acquisition, rehabilitation, or construction. Depending on the transaction, bonds may remain outstanding, be remarketed or restructured, or be redeemed from permanent financing or other sources after construction.

In Illinois, potential issuers include IHDA and other state or local governmental issuers authorized to issue private-activity bonds. The issuer, bond counsel, underwriter or placement agent, purchaser, trustee, and any credit enhancer vary by transaction, and each participant may have its own approval and closing requirements.

The aggregate-basis test is determined under federal tax law and includes the building and the land on which it is located. The 25% threshold is not triggered solely because a bond is issued after 2025; all statutory issue-date, minimum-financing, and placed-in-service conditions must be satisfied. Bond and tax counsel should confirm the calculation and continuing compliance requirements.

Capital Stack in a 4% Transaction

A 4% capital stack combines tax credit equity with tax-exempt bond financing and frequently additional permanent debt, subordinate financing, grants, deferred developer fee, or other gap sources. The amount and mix of each source are transaction-specific.

Tax-exempt bond financing used during construction and, depending on the structure, retained, restructured, or redeemed at permanent conversion
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

Bond financing may be sized in part to satisfy the applicable aggregate-basis threshold rather than to fund the entire development cost. The remaining sources are determined by the project's debt capacity, credit equity, public and subordinate financing, grants, deferred developer fee, and other available capital.

4% Credits in Acquisition-Rehabilitation

Four-percent credits paired with tax-exempt bonds are commonly used for acquisition-rehabilitation and preservation transactions, including some RAD conversions. Existing-building acquisition basis and rehabilitation basis are calculated separately. Rehabilitation expenditures are treated as a separate new building under Section 42(e), and the applicable percentage for each basis category depends on the statutory requirements and financing structure. The rehabilitation expenditure test generally requires qualifying expenditures during the applicable measuring period to equal at least the greater of 20% of adjusted basis or the annually inflation-adjusted per-low-income-unit amount.

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
Investor equity is often a larger share of the capital stack than in a comparable 4% transaction, but the share varies by basis, pricing, and other sources
Construction and permanent lenders underwrite the timing, availability, and conditions of each equity and soft-debt source
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
The applicable 50% or 25% aggregate-basis threshold, including every condition for the 25% rule, must be confirmed by tax and bond counsel
Permanent financing may use agency, FHA, bank, CDFI, or other sources, each adding its own program-specific requirements
Intercreditor arrangements between bond trustee, permanent lender, and subordinate lenders

Choosing Between Credit Types

The choice between 9% and 4% credits is a feasibility and program-strategy decision driven by eligible basis, credit availability, bond volume, project costs, debt capacity, affordability commitments, investor pricing, timing, and agency requirements.

Nine-percent credits can produce more equity per dollar of qualified basis but require a competitive allocation. Bond-financed 4% credits are outside the competitive 9% ceiling but require private-activity-bond authority and the applicable issuer, agency, QAP, underwriting, and Section 42 approvals. Neither structure is categorically faster or preferable; the appropriate structure depends on the project and the current allocation environment.

Some sponsors evaluate both alternatives during predevelopment so that financing strategy can respond to the competitive-credit result, bond availability, and project feasibility.

Counsel for 9% and 4% LIHTC Transactions

The firm advises developers, sponsors, and nonprofit organizations in both 9% and 4% LIHTC transactions, including new construction, acquisition-rehabilitation, and preservation deals. This 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.

Illustrative Example

Consider a project with aggregate building-and-land basis of approximately $20 million. Under the historical 50% test, at least approximately $10 million must be financed with qualifying tax-exempt bonds. The newer 25% threshold would reduce that amount to approximately $5 million only if all statutory conditions are met: at least 25% of aggregate basis is bond-financed, one or more bonds from an issue dated after 2025 finance at least 5% of aggregate basis, and the building is placed in service in a taxable year beginning after 2025. Tax counsel must confirm the calculation and applicable threshold. If the bond-financing requirements and other Section 42 and agency requirements are met, the project may receive 4% credits without a competitive allocation from the state's 9% housing-credit ceiling.

This example is a simplified illustration of transaction structure and mechanics. It does not describe an actual engagement, is not legal advice, and does not predict any outcome.

9% vs. 4% LIHTC: Comparing Credit Types