LIHTC (Low-Income Housing Tax Credit)
A federal tax credit program administered by state housing agencies that incentivizes the development of affordable rental housing. Developers receive tax credits over a 10-year period in exchange for maintaining income and rent restrictions for 15-30 years. The credits are typically sold to investors (often through syndicators) to generate equity for the project, reducing the amount of debt required. LIHTC is the primary driver of affordable housing production in the United States and is frequently combined with tax-exempt bonds, C-PACE, and conventional debt in complex capital structures.
Related Terms
Tax-Exempt Bonds
Debt instruments issued by state or local government entities where the interest income is exempt from federal (and sometimes state) income taxes. Tax-exempt bonds allow borrowers to access lower interest rates because investors accept reduced yields in exchange for the tax advantage. In commercial real estate, tax-exempt bonds are commonly used for affordable housing (often paired with LIHTC), healthcare facilities, and other projects with a public benefit component. Bond-financed projects must comply with specific regulatory requirements throughout the bond term.
C-PACE (Commercial Property Assessed Clean Energy)
A financing mechanism that allows commercial property owners to fund energy efficiency, renewable energy, water conservation, and seismic improvements through a voluntary property tax assessment. C-PACE financing is repaid over 20-30 years through the property's tax bill, survives transfer of ownership, and is senior to the mortgage in the tax lien position. It requires consent from existing lenders and is available in states with enabling legislation. C-PACE can reduce the equity required in a capital stack by funding eligible building components that would otherwise come out of the construction or renovation budget.
Construction Loan
Short-term financing used to fund the development of new commercial real estate projects. Construction loans are disbursed in draws as work is completed, with interest accruing only on funds advanced. They typically feature floating rates, 18-36 month terms, and require personal guarantees. Upon completion, the loan is paid off through permanent financing or sale.
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