How does tax credit recapture risk affect bridge lender underwriting?

Recapture risk allocation between sponsor, equity investor, and bridge lender

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.

LIHTC recapture: §42(j) imposes a 15-year compliance period during which recapture can occur if (a) the project ceases to qualify (income-restriction violations, vacant unit treatment, etc.), or (b) ownership change disqualifies the property. Recapture amount is calculated based on years remaining in the 15-year period. The economic burden falls on the LIHTC investor, who took the credits; the sponsor's risk is contractual indemnity to the investor.

HTC recapture: §50(a) imposes a 5-year recapture period from placed-in-service. If the property is sold or ceases to be a certified historic structure within 5 years, the credit recaptures on a sliding scale (100% in year 1, 80% in year 2, etc.). Master-lease structures isolate recapture between the lessee tax-equity investor and the lessor sponsor, the lessee bears the credit recapture but the lease structure can pass economic exposure back to the sponsor through indemnity.

NMTC recapture: §45D imposes a 7-year compliance period. Recapture triggers include the CDE failing the substantially-all qualifying-investment test, the QALICB failing the four-part test, or various other compliance failures. Recapture amount equals 100% of credits taken plus interest, regardless of which year of the compliance period the failure occurs.

Bridge lender protections: typical bridge loan documents include (a) sponsor-level indemnity backstopping the bridge lender against recapture-related losses, (b) equity-investor indemnity protecting the project against syndicator-driven failures, (c) intercreditor structures making the tax-credit investor responsible for compliance reporting and primary recapture exposure, (d) defined cure periods for compliance failures.

Sponsor playbook: at LOI stage, layer the indemnity stack so the right party bears the right risk. Tax-credit investor takes credit eligibility risk; sponsor takes operational compliance risk; bridge lender takes timing-of-pay-in risk. Mismatched indemnities can leave one party with risk they didn't price, leading to disputes if recapture occurs.