Tiber Hudson’s Alex Zeltser looks at deals that have the same bond purchaser and tax credit investor.

In the current affordable housing development environment, multifamily projects that are not awarded competitive 9% low-income housing tax credits (LIHTCs) in a particular state are more frequently exploring the 4% credit, which is available for transactions in which at least 50% of the aggregate basis in the project is financed with the proceeds of tax-exempt bonds or loans (collectively “bonds”) issued by state and local housing agencies and certain municipalities using private-activity bond volume cap.

Since the 4% tax credit rate was locked in at the end of 2020, demand for bonds in many jurisdictions has increased significantly, and, due to a variety of associated benefits including those stemming from certain Community Reinvestment Act requirements, it is becoming increasingly common for many banks and other lenders that purchase such bonds to also invest in the 4% LIHTCs. This dual-role approach tends to result in better tax credit pricing and a more streamlined and efficient execution but can trigger the application of certain tax rules that may significantly impact the structure of these transactions.