What is the Housing Credit, really?
The Low-Income Housing Tax Credit — usually shortened to LIHTC and often just called "the Housing Credit" — is the largest source of funding for affordable rental housing in the United States. Since it was created in 1986, it has financed nearly four million homes. It is not a grant. It is not a loan. It is something a little stranger, and understanding the strangeness is the key to understanding why the 9% vs. 4% question matters.
Here's the simplest way to picture it. The federal government wants private investors to help pay for affordable housing, but it doesn't want to write checks directly. Instead, it hands out tax credits — essentially IOUs against future federal tax bills — to affordable housing projects. The developer of the project then sells those credits to an investor (usually a bank or a corporation with a large tax liability). The investor pays cash now; in return, they get to reduce their federal taxes over the next ten years. The cash the investor pays is called equity, and it goes straight into the construction budget of the building. Fewer dollars need to be borrowed from a bank, which means rents can be kept affordable over the long term.
How the Housing Credit Works
Tax credits become cash. Cash becomes housing.
Federal Government
Issues tax credits
→
Developer
Builds the project
→
Investor
Pays cash for credits
→
Affordable Housing
Gets built & occupied
That's the whole mechanism. Tax credits become cash. Cash becomes housing. The building gets built, the rents stay affordable for at least 30 years, and the investor gets a federal tax benefit. Everyone gets something they wanted.
The 9% and 4% versions of the credit work this same way. What changes is how much equity they produce, how you get them, and what other pieces of a capital stack they need in order to make a deal actually close.
9% and 4%, side by side.
Before getting into which one is right for your project, it helps to see them laid out next to each other. The names refer loosely to the annual credit percentage — roughly 9% or 4% of the eligible construction cost claimed each year for ten years — but the real differences are structural.
9%
Competitive Credit
Higher equity, harder to win.
The 9% credit generates substantially more equity per unit — often enough to cover 70% or more of total development cost. That makes it the most powerful affordable housing tool in America. The catch: there isn't enough to go around. Every state has a limited annual allocation, and projects compete for it through an application round run by the state housing finance agency.
- Generates the most equity per dollar of eligible cost
- Awarded competitively — only a fraction of applications win
- Governed by each state's Qualified Allocation Plan (QAP)
- Generally used for new construction and substantial rehabilitation
- Typical award covers a 40-to-80 unit project
4%
Non-Competitive Credit
Lower equity, unlimited supply.
The 4% credit generates roughly half as much equity per unit as the 9%. But it comes with something the 9% doesn't: it is not capped and not competed for. Any project that meets the rules and is financed with tax-exempt municipal bonds can use it. The limit is not the credit — it is the state's bond cap, which most states don't fully use. The 4% credit makes projects work that would otherwise never get off the ground.
- Not competitive — available by-right if bond financing is secured
- Generates less equity, so the capital stack has to work harder
- Requires tax-exempt bond financing (usually private activity bonds)
- Works well for larger projects (often 100+ units)
- Well suited to acquisition-rehab and preservation deals
At a Glance
Four dimensions that shape the decision
Equity per unitHow much cash the credit produces
AvailabilityHow easy it is to get
Typical project sizeWhere each makes economic sense
Capital stack complexityHow many financing layers needed
The 9% credit is a competition. The 4% credit is a math problem. Knowing which one your project is solving for is the single most important early decision you'll make.
Six questions that point to an answer.
When a municipality or nonprofit comes to us considering a LIHTC project, this is the set of questions we walk through in a first meeting. They're presented here in the order we'd ask them — not because the later questions are less important, but because an answer to an earlier one often changes which questions matter most.
How many units do you want to build?
Size is the first and simplest filter. The 9% credit produces enough equity that a smaller project — say, 40 to 60 units — can pencil out with a relatively simple capital stack. The 4% credit produces less equity per unit, so projects generally need to be larger to absorb the fixed costs of bond issuance and generate enough total equity to matter. The rough rule of thumb is that 4% deals start to make sense at about 80 to 100 units and up.
If your community is looking at a 30-unit senior building in a small town, you are almost certainly in 9% territory. If you're looking at a 150-unit family development near a transit corridor, 4% is probably the more realistic path.
Rule of thumb
Smaller projects (under about 60 units) typically favor 9%. Larger projects (over about 80 units) typically favor 4%. The middle zone depends on the other five questions.
How fast do you need to move?
The 9% and 4% paths have very different timelines. A 9% application is submitted in a competitive round that usually happens once a year, sometimes twice. If you miss the cycle, you wait twelve months. If you apply and don't win, you also wait twelve months — and then compete again. A realistic 9% timeline from first conversation to construction start is two to three years, and that assumes you win on the first try.
The 4% path doesn't have competitive rounds. If bond financing is available and your project meets the rules, you can move when you're ready. That generally shortens the predevelopment timeline by a year or more — though 4% deals are structurally more complicated, which eats into some of that savings.
Rule of thumb
If the project has a hard deadline (matching a grant, a donor commitment, a municipal ground lease, a partner's move-in date), the non-competitive 4% path has a real timing advantage — but only if the rest of the capital stack can be assembled in parallel.
How strong is your local support?
This question matters because state Qualified Allocation Plans — the rulebooks that govern how 9% credits get awarded — all include scoring categories for local contributions. Projects that come in with a city donation of land, a tax abatement, a HOME loan, a zoning variance, or a letter of municipal support generally score higher in the competitive round. Projects without local support often can't score high enough to win.
If the municipality is genuinely behind the project and willing to contribute, that is a real advantage in a 9% competition. If municipal support is lukewarm or uncertain, the competitive math gets harder quickly, and the 4% path — which doesn't require you to out-score other applicants — starts looking more attractive.
Rule of thumb
Strong local support makes 9% more viable. Without it, 4% is often the only realistic path, because the 9% competition will be brutal without local contributions to score against.
Where is the project located?
Location matters for two related reasons. First, federal rules provide a 30% "basis boost" to projects in federally designated Difficult Development Areas (DDAs) and Qualified Census Tracts (QCTs). That boost can be the difference between a 4% deal that doesn't pencil and a 4% deal that does — and it's stackable with other tools. Many developers who have written off the 4% credit as "not enough equity" haven't recalculated with the basis boost included.
Second, state QAPs frequently set aside credits for specific geographies — rural areas, transit-oriented locations, high-opportunity neighborhoods, or specific regions. If your project sits inside one of those set-asides, you're competing in a smaller pool, and the 9% math gets meaningfully friendlier.
Rule of thumb
Check the DDA/QCT status of the site before ruling out 4%. Check the QAP set-asides before ruling out 9%. Location can flip the answer.
What else can come into the capital stack?
Because the 4% credit produces less equity, 4% deals generally need more additional funding to close the gap. That funding is usually called "soft money" or "gap funding," and it comes from a familiar set of sources: federal HOME funds, CDBG, state housing trust funds, state-level tax credits that pair with the federal credit, seller financing on the land or building, historic tax credits if the building qualifies, and deferred developer fee.
The question to ask is not "can we find gap funding?" — the answer is almost always yes, somewhere. The question is "how many of these tools can actually be stacked on this specific project, and who will do the work of stacking them?" A 4% deal with a good capital stack can be more resilient than a 9% deal with a thin one. But assembling the stack is real work, and it requires a partner who's done it before.
Rule of thumb
The 4% path rewards creativity in the capital stack. If your community has access to multiple gap funding sources — state credits, historic credits, federal HOME, a cooperative land donor — 4% becomes much more viable. If none of those are in play, 9% is probably the cleaner answer.
Is this new construction, or are you preserving an existing building?
The 9% credit was designed with new construction in mind. It works for substantial rehabilitation too, but the competitive pressure is usually focused on ground-up projects. The 4% credit, paired with bond financing, is often the better tool for acquisition-rehab and preservation — saving existing affordable housing that would otherwise be lost when a USDA Section 515 loan matures, or when a 30-year compliance period ends on an older LIHTC property.
The rural housing stock in particular is aging into a preservation crisis. Many of the buildings that need to be saved were financed with tools that no longer exist, and the 4% credit is the most common path to keeping them affordable. If your project is about preserving something that already exists, the 4% question gets more serious.
Rule of thumb
New construction leans 9%. Preservation leans 4%. This isn't absolute, but it's a reliable starting point.
State programs can change the math entirely.
One thing that catches first-time LIHTC partners off guard is how much state-level programs shape the real decision. The federal 9% and 4% credits are only part of the picture. Every state has its own Qualified Allocation Plan that controls how credits get awarded, and many states have their own state-level affordable housing tax credits that pair with the federal credits to produce more equity per unit.
Nebraska's Affordable Housing Tax Credit, for example, pairs with the federal LIHTC and meaningfully changes the equity math on in-state projects. Colorado's recently expanded state credit and new transit-oriented community credit under HB 24-1434 are reshaping where and how projects get built on the Front Range. Missouri has its own state LIHTC, and specific cities offer additional tools — like Kansas City's PIEA tax abatement under Missouri SB 872's 19% residential assessment rate — that stack with federal credits to improve project feasibility.
Priority pathways matter too. Nebraska's H3C Priority Pathway in the 2026–2028 QAP, for example, creates a faster, less-crowded route to 9% credits for projects that meet specific housing health and community criteria. That pathway can turn a project that would lose a general 9% competition into one that wins a more targeted one. Whether your state has something similar is one of the most important questions to ask early.
The point is: the 9% vs. 4% decision does not happen in a federal-only vacuum. It happens inside a state regulatory environment that can make one path dramatically more attractive than the other, sometimes in ways that aren't obvious without looking carefully at the current year's QAP and the interplay of state programs.
What each path asks of you.
Neither path is easier than the other — they're hard in different ways. A partnership with an experienced developer should help you understand which kind of hard your project is signing up for, because the kind of hard determines what your organization needs to contribute.
What the 9% path asks of you
A 9% project asks you to be competitive. That means a strong site, strong community support, a development team with a credible track record in your state, and a willingness to wait — sometimes through more than one application round — to win an allocation. It also generally means accepting that the project will be smaller than you might have initially imagined, because the available credit caps project size. In return, the 9% path offers a cleaner capital stack, higher equity per unit, and less risk of late-stage surprises on the financing side.
What the 4% path asks of you
A 4% project asks you to be resourceful. It asks you to stitch together multiple funding sources — tax-exempt bonds, gap financing from two or three different programs, possibly state credits, possibly historic credits, possibly deferred developer fee — and to navigate the complexity of a bond-financed deal. The upside is that you don't need to win a competition and you can build larger projects. The downside is that there are more moving parts, more parties at the table, and more opportunities for a deal to stall in structuring. The 4% path rewards experience and punishes inexperience.
For a municipality or nonprofit new to this world, the right move is almost never to try to figure out which path to take in isolation. The right move is to find a development partner who has done both, put your project on the table, and let them walk you through which questions actually matter for your specific site, your specific community, and your specific timeline. The decision framework in this paper is meant to prepare you for that conversation — not to replace it.
A small glossary, for reference.
LIHTC conversations are full of acronyms, and it's easy to get lost in them. Here are the terms that come up most often in a first meeting, in plain English.
Quick Reference
Common LIHTC terms, in plain English
- LIHTC
- Low-Income Housing Tax Credit. The federal program this entire paper is about.
- QAP
- Qualified Allocation Plan. Each state's rulebook for awarding 9% credits. Updated annually or every few years.
- HFA
- Housing Finance Agency. The state agency that runs the QAP and awards credits. (NIFA in Nebraska, MHDC in Missouri, CHFA in Colorado.)
- Capital stack
- The combination of all funding sources paying for a project — equity, loans, grants, credits, and anything else.
- Equity
- In LIHTC deals, the cash that investors pay for tax credits. It goes into the construction budget and does not have to be repaid.
- Soft money
- Gap-filling funding sources that are typically grants, forgivable loans, or low-interest subordinated loans. HOME and CDBG are examples.
- DDA / QCT
- Difficult Development Area / Qualified Census Tract. Federal designations that trigger a 30% boost to the credit amount for projects in those locations.
- Basis boost
- The 30% increase in eligible construction cost used to calculate credits, available for projects in DDAs, QCTs, or for other state-designated reasons.
- Tax-exempt bonds
- The specific kind of bond financing (private activity bonds) that a project needs in order to qualify for 4% credits.
- Compliance period
- The minimum time a LIHTC project must keep its units affordable — 15 years federally, usually extended to 30+ years by state rules.
- Syndicator
- A firm that buys tax credits from developers and sells them to investors. The middleman that makes the equity market function.
- Deferred developer fee
- The portion of a developer's fee that is not paid at closing and is instead repaid over time from project cash flow. A common gap-filling tool.
Start with the question, not the answer.
The 9% vs. 4% decision gets framed too often as "which credit is better?" That's the wrong question. The right question is "which credit fits the project we're actually trying to build?" — and that depends on size, timing, local support, location, available gap funding, and whether you're creating something new or preserving something existing.
For municipalities, nonprofits, and community partners who are exploring a LIHTC project for the first time, the most valuable thing you can do is come to the table with answers to the six questions above. You don't need to know the financing structure. You don't need to know the math. You need to be able to describe the project you're imagining, the resources your community can bring, and the timeline you're working with. With that, an experienced development partner can tell you within one meeting whether you're looking at a 9%, a 4%, or something else entirely — and what it would take to actually close.
Riverstone Platform Partners has structured both 9% competitive and 4% bond-financed transactions across Missouri, Nebraska, Colorado, and other states, often stacking federal credits with state housing credits, historic credits, USDA programs, and local contributions to make projects work that wouldn't pencil with any single tool. If your community is early in the conversation about affordable housing, we'd welcome the chance to help you figure out which path actually fits.