Tax equity converts federal tax credits into upfront capital. The 9% LIHTC is the 70% present-value credit and the 4% LIHTC is the 30% present-value credit; those figures are not the percentage of project cost the equity check funds. HTC equity finances 15% to 25% of historic-rehab basis; NMTC subsidizes low-income community projects. Tax equity sits between traditional debt and sponsor equity in the stack, and changes how senior debt sizes and prices.
Where tax equity sits in the stack and what changes vs. straight debt
This page is sponsor-POV process commentary, not tax or legal advice. Bring a CPA and tax counsel onto every transaction before relying on any of the mechanics described below.
Tax-equity mechanics: an investor (typically a corporate taxpayer) buys partnership equity that allocates federal tax credits and accelerated depreciation. The equity contribution is upfront, the credits flow over a defined compliance period (10 years for LIHTC, 5 years for HTC under accelerated rules, 7 years for NMTC). Pricing is expressed as cents per dollar of credit, e.g., LIHTC equity priced at $0.85 means the investor pays 85¢ for each dollar of future credit.
LIHTC: the 9% credit (competitive) is the 70% present-value credit. The 4% credit (bond-financed) is the 30% present-value credit. Those figures are not the percentage of project cost the equity check funds. Senior debt sizes against the post-credit equity stack, the equity contribution from the LIHTC investor reduces the senior debt requirement. HUD 221(d)(4) construction and 223(f) refi commonly serve as the senior debt counterpart.
HTC: the 20% federal historic credit applies to qualified rehabilitation expenditures on certified historic structures. The credit equity is typically syndicated to a tax-equity investor, usually paired with a master lease structure (single-tier or two-tier).
NMTC: the 39% federal new markets credit (taken over 7 years) applies to qualifying investments in low-income communities. The structure typically involves a leverage loan from a bank into a Community Development Entity (CDE) and a Qualified Equity Investment from the tax-equity investor. The unwind at year 7 is structurally complex.
IRA energy credits (§48, §48E, §45L): the IRA introduced transferability under §6418, which lets credits be sold for cash to unrelated parties. Transferability has changed the energy-credit market. Sponsors who would previously have run a tax-equity flip now sell credits directly for cash, eliminating the partnership-flip overhead.
Lender consent: tax-equity structures change the property-level partnership and the lender's collateral position. Senior lenders need to underwrite the tax-equity documentation, the put rights, and the unwind mechanics. Most institutional CRE lenders have tax-equity-aware underwriting; bridge debt funds vary.
Sources
- Low-Income Housing Tax Credit (IRC §42) · U.S. Internal Revenue Service · current
- Elective Pay and Transferability under the Inflation Reduction Act (§6418, §6417) · U.S. Internal Revenue Service · current