MHN Asks: Why Aren’t More 4 Percent LIHTC Deals Closing?
KeyBank’s Celia Smoot and Christina Knuckles on the dynamics impacting transaction flow.
Lowering the bond-financing threshold from 50 percent to 25 percent for qualifying 4 percent low-income housing tax credit transactions was intended to stretch scarce private-activity bond capacity further, thereby opening the program to more affordable housing projects. But expanding the 4 percent LIHTC market has exposed another constraint: The investor capital needed to absorb that growth has not increased at the same pace.
The result is a more selective equity market. On the development side, softer pricing is colliding with elevated construction, insurance and operating costs, widening affordable housing financing gaps even after a project qualifies for credits. On the investor side, returns, geography, execution risk and the timing of tax-credit delivery are taking on greater weight as more transactions compete for capital.
To examine how that shift is playing out across the capital stack, Multi-Housing News spoke with two executives from KeyBank Real Estate Capital. Celia Smoot, head of equity originations, has extensive experience in LIHTC investing, fund structuring and community development finance. Christina Knuckles, head of equity syndications and fund management, specializes in investor relationships, fund strategy and capital deployment.
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Where is the 25 percent test creating genuinely incremental development or preservation capacity?And which indicators will show whether it is producing net new housing rather than simply changing how transactions are financed?
Smoot: The greatest opportunity has appeared in markets where bond-cap availability genuinely constrained production or preservation activity. In those locations, lowering the bond requirement allows states to stretch limited private-activity bond volume across more transactions.
In other markets, the change may be less about creating entirely new projects and more about improving capital efficiency for developments that likely would have proceeded anyway. Through 2027, the industry should focus on whether total unit production, preservation activity and bond utilization are increasing, rather than simply tracking transaction volume. Those metrics will better indicate whether the policy is generating net new housing.
Knuckles: I would focus on whether the market is producing more affordable units rather than simply restructuring existing deals. The most meaningful indicators will include changes in bond-cap utilization, the number of projects moving from concept to closing, preservation transactions completed and the amount of private capital ultimately attracted into the sector.
If the policy is working as intended, we should see measurable increases in housing production and preservation—not merely changes in how capital stacks are assembled.
How can the lower bond requirement improve access to 4 percent credits while softer equity pricing simultaneously makes the same transaction harder to finance?
Smoot: A representative example would be a preservation or acquisition-rehabilitation transaction that previously would have required substantially more bond allocation to qualify for 4 percent credits. The lower threshold reduces the required bond issuance and preserves valuable bond volume for other projects.
However, if equity pricing declines by even a few cents per credit, the resulting reduction in equity proceeds can create a significant funding gap. In those situations, sponsors often need additional subordinate financing, local support, state resources, deferred developer fees or other capital sources to restore feasibility. The transaction may gain access to credits more easily than before while simultaneously becoming harder to fully finance.
What’s currently preventing more 4 percent LIHTC transactions from reaching closing?
Smoot: The biggest challenge today is not access to transactions. It is aligning all of the capital sources required to make those transactions feasible. The reduction of the bond-financing threshold to 25 percent has expanded the universe of projects that can access 4 percent credits, but equity pricing has softened from prior peaks, while many developments are facing significantly higher construction, insurance and operating costs. As a result, gap financing remains a critical constraint.
From an originations perspective, the greatest disconnect is around overall economics rather than any single term. Pricing, pay-in structures, investor requirements and certainty of soft funding all matter. But many transactions ultimately succeed or fail based on whether developers can close the remaining financing gap after all sources are assembled. The projects moving forward most efficiently are those with strong sponsorship, clear execution plans and reliable access to state and local funding resources.
Knuckles: On the investor side, the market challenge is less about interest in affordable housing and more about the pace at which investor demand can absorb an expanded transaction pipeline. The 25 percent test increased potential supply, but investor appetite did not expand at the same rate.
As a result, we are seeing a more selective market. Investors remain focused on fundamentals, but they are increasingly evaluating sponsor strength, execution risk, geography and the timing of tax-credit delivery. While headline pricing receives significant attention, the allocation of risk and certainty of execution can be equally important in determining whether a transaction clears.
When industry participants refer to limited investor capacity, which constraints are most consequential?
Knuckles: If I were ranking today’s constraints, I would place available tax-credit investment capacity and target return requirements at the top, followed closely by geographic considerations and portfolio-allocation decisions.
Operational bandwidth matters, but investor discipline around returns and capital deployment is generally more decisive. The industry often refers broadly to “investor capacity,” but in practice the binding constraint is usually whether available investors can deploy capital at risk-adjusted returns that align with their objectives and regulatory considerations.
What does the headline cents-per-credit figure miss? Which transaction terms are moving the most?
Knuckles: The headline cents-per-credit number tells only part of the story.
Two transactions may report similar pricing yet deliver meaningfully different economics to the sponsor. Pay-in schedules, adjusters, reserve requirements, guarantee expectations and other structural provisions can have a significant impact on value.
In today’s market, timing-related provisions and execution protections have arguably experienced some of the most meaningful movement as investors seek greater certainty around project performance and credit delivery.
How could a more selective equity environment affect smaller, nonprofit or emerging sponsors, and what can help them remain competitive for capital?
Smoot: There is certainly a risk that a more selective equity environment could disproportionately benefit larger, experienced sponsors with strong balance sheets and established development platforms.
That said, investors and syndicators have long worked successfully with nonprofit and emerging developers. The key is structuring. Early underwriting, strong development partners, thoughtful guarantees, technical assistance and reliable local funding support can all help broaden access to capital. The objective should be to preserve strong risk management while ensuring the affordable housing ecosystem remains diverse.
For aging LIHTC properties, how much does the 25 percent test actually improve preservation economics and which constraints now matter more?
Smoot: The 25 percent test is helpful, but for many preservation transactions it is no longer the primary constraint. Today, preservation economics are often driven by rehabilitation costs, insurance expenses, operating pressures, subsidy availability and the complexity of ownership transitions.
Transactions serving deeply affordable populations or requiring substantial rehabilitation can be particularly challenging because both development costs and long-term operating needs have increased significantly.
The lower bond threshold improves one piece of the equation, but preservation transactions still require multiple sources of capital and strong public-private partnerships.
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How could the increase in the public-welfare investment ceiling from 15 to 20 percent expand LIHTC investment capacity, and what will determine whether institutions actually use that capacity?
Knuckles: The increase in allowable public-welfare investment capacity creates the potential for additional capital, which is a positive development for the industry. The actual impact will depend on institution-specific considerations, including strategic priorities, tax capacity, portfolio construction and regulatory expectations.
Some institutions may view the increased limit as an opportunity to deepen participation, while others may remain constrained by broader capital-allocation decisions. The market will likely see varying responses rather than a uniform shift.
What indicators would show that the LIHTC equity market is moving toward a healthier balance between deal flow and investor demand?
Knuckles: I would focus on four indicators: the time required to secure investor commitments, pricing dispersion between markets, the amount of product seeking placement and the entry of new investors.
A healthier market would typically see shorter commitment timelines, narrower pricing differences across geographies and greater confidence in capital formation. Conversely, persistent backlogs of unplaced product or widening pricing dispersion would suggest continued imbalance between supply and investor demand.
The most important question is whether capital formation begins catching up with the expanded pipeline created by the 25 percent test.
