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.
Related Terms
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.
Permanent Financing
Long-term debt (5-30 years) secured by stabilized commercial real estate, underwritten primarily on current cash flow. Permanent loans offer lower rates than transitional financing and are available from life companies, banks, agencies, and CMBS lenders. They are the typical "take-out" financing after construction or bridge loans.
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