How does a tax credit bridge differ from a construction loan?

Construction loan vs. tax credit bridge, sources, uses, and take-out timing

Tax credit programs change with IRS, Treasury, NPS, and CDFI Fund guidance. This page is sponsor-POV process commentary, not tax or legal advice. Engage tax counsel and a tax-credit syndicator for every transaction before relying on the mechanics described.

Construction loan basics: a senior secured loan funded against a defined draw schedule that follows hard and soft costs. Typical structure: 60% to 80% LTC sizing, 12-to-36-month term, interest reserve to cover construction-period interest, completion guaranty from the sponsor, take-out by permanent debt or sale at stabilization.

Tax credit bridge basics: a senior or junior loan secured by future tax-credit equity contributions. Sized to the gap between cumulative construction outflows and cumulative equity pay-ins at peak working-capital need. Take-out by the syndicator's funded equity tranches, not by perm debt.

Why both exist on LIHTC deals: a typical 9% LIHTC project has multiple capital sources funding asynchronously. Construction loan funds hard costs; LIHTC equity funds tranched at lease-up and 8609; deferred developer fee bridges some of the gap; soft funding (HOME, AHTF, state grants) lands at various stages. The tax credit bridge fills the residual timing gap.

Coordination at closing: both loans typically close concurrently with all of the equity sources and soft funding in a single coordinated closing event. The intercreditor agreement governs cash flow priority, typically construction loan first on collateral, tax credit bridge subordinated, with carve-outs making sure equity pay-ins flow first to retire the bridge.

Take-out sequencing: a typical LIHTC deal: (a) construction loan retires at COO from permanent debt (HUD 223(f), agency, or bank perm); (b) tax credit bridge retires from equity pay-ins as syndicator funds tranches; (c) some bridges remain outstanding through 8609 issuance and final equity true-up.

Sponsor playbook: model the construction loan and tax credit bridge as parallel tracks, not stacked layers. Each has different sizing, pricing, and take-out logic. The placement firm coordinates both lender comparisons simultaneously to align term sheets, intercreditor structure, and closing timeline.