By Matt Grosz
Developing affordable housing is a multifaceted endeavor that demands creativity, determination, and, most crucially, adequate capital. For those navigating this field, the Low Income Housing Tax Credit (LIHTC) program stands out as a pivotal financing tool. However, while tax credits are indispensable, they cannot directly pay contractors, architects, or purchase building materials. This is where syndication becomes essential. As syndicators, our responsibility is to connect the future value of tax credits with the immediate cash needs required to fund project expenses. Before delving into the syndication process, it’s important to understand the typical lifecycle of an affordable housing project financed through equity derived from tax credits.
Project Conception and Application
The process begins when a developer identifies a suitable site and designs a project. The developer then applies for tax credits through the state allocating agency. This stage includes comprehensive feasibility studies, market analysis, initial financing strategies, and project structuring tailored to maximize points for state-level competitions involving tax credits and tax-exempt bonds.
Award of Tax Credits
Once tax credits are awarded, the developer has secured a valuable asset. However, tax credits themselves are not cash—they serve to reduce federal or state tax liabilities, which are especially attractive to investors with large, predictable tax obligations. Developers, on the other hand, typically require immediate funding to advance their projects. Syndication becomes critical at this stage, transforming awarded tax credits into usable capital.
Financing and Closing
With tax credits in hand, the developer actively seeks proposals from tax credit investors to purchase their credits and the associated tax benefits from the development. LIHTCs are commonly valued based on the equity provided for each dollar of tax credit. For instance, a developer with a $10 million tax credit award might receive an equity offer of $8.2 million, corresponding to $0.82 per dollar of tax credit. The syndicator prepares and negotiates a letter of intent (LOI) outlining the terms for the limited partnership agreement (LPA) with the developer. Once the LOI is accepted, the process of closing and due diligence begins. Underwriting and closing can take from three months to over a year, largely depending on the time needed to secure land use, development, and building permits. After all approvals and due diligence are complete, the project closes and financial partners begin funding, allowing construction to commence.
Construction and Lease-Up
Most construction funding is provided by conventional taxable or tax-exempt debt from a construction lender. Typically, the tax credit equity investor contributes 10-20% of the total equity at closing. Throughout construction, the syndicator monitors progress monthly to ensure compliance with underwriting standards. After construction is complete, the property management team starts leasing units to income-qualified tenants. Achieving occupancy with qualified tenants enables the investor to begin earning tax credits. The majority of the remaining tax credit equity is funded upon full occupancy and stabilization. Together with a permanent loan, these proceeds pay off the construction loan. Because much of the permanent financing comes from equity rather than debt, long-term debt service remains low, helping to keep rents affordable for residents.
Compliance and Asset Management
For the next 15 years, and in most states for extended periods ranging from 30 to 55 years, properties must adhere to LIHTC regulations. Tax credit equity investors depend on syndicators to monitor compliance and safeguard their investments. Should a project fail to comply with state or federal guidelines, investors may face recapture of claimed tax credits, risking partial or total loss of their equity investment. This oversight is a key part of the LIHTC program’s checks and balances.
Understanding LIHTC Syndication
For newcomers, LIHTC syndication can seem opaque. In essence, it involves pooling equity investments from one or multiple investors—such as corporations, insurance companies, banks, or other financial institutions—and channeling that equity into affordable housing projects in exchange for tax benefits. Syndicators act as intermediaries, raising capital from investors who have tax liabilities and are motivated by the social impact of affordable housing investments. Syndicators structure these investments to maintain compliance, preserve affordability and long-term financial feasibility, and manage investor risk. This capital enables developers to build housing that would not be feasible without tax credit equity and other unconventional financing sources. In short, syndicators help finance the housing that the private market cannot produce alone but is necessary for communities to house their residents. Without syndication, monetizing credits would be less efficient, less capital would be raised, and many projects would stall or fail to progress.
The Syndicator’s Partnership Role
Syndication is not simply a transaction—it is a partnership that can last at least 15 years. Syndicators work closely with developers throughout the credit application process, closing, construction, lease-up, conversion to permanent operations, and the entire tax credit compliance period. The syndicator’s role begins with financial feasibility during site selection and concludes only after all compliance requirements for the initial 15-year regulatory period are met. This ongoing collaboration is vital, as affordable housing projects frequently involve multiple funding sources and regulatory agencies—state and federal credits, soft loans, grants, and often tax-exempt bonds. Syndicators weave these elements into a coherent financing plan, allowing developers to access upfront equity and accelerate construction, reducing reliance on debt. Additionally, syndicators monitor pricing trends, investor demand, and regulatory requirements to maximize the value of tax credits, thereby increasing equity proceeds for projects.
Benefits to Communities and Residents
It is important to recognize the broader impact of tax credit syndication. The process benefits not only developers and investors, but also communities and, most importantly, current and future residents. By converting tax credits into equity, syndication enables the construction of housing for families, seniors, and individuals with special needs who cannot afford market rate rents. Investors gain predictable returns and tax benefits, developers receive essential resources, and residents obtain affordable, safe, and secure housing. Syndication is a driving force behind the LIHTC program, making possible the production of tens of thousands of affordable housing units each year. As syndicators, we are proud to be a piece of the financial puzzle providing permanent affordable homes, strengthening communities, building neighborhoods, and delivering value to all stakeholders involved in the developments we have a privilege to finance.