4% vs 9% LIHTC: choosing the credit track

The Low-Income Housing Tax Credit, IRC § 42, funds equity by selling ten years of federal credits to investors. Two tracks: the 9% credit (~70% of qualified basis in present value) allocated competitively from the state's ceiling, and the 4% credit (~30% of basis) available as-of-right to projects financed with tax-exempt private-activity bonds under IRC §§ 142(d)/146.

California administers both through the CTCAC regulations (credit allocation, underwriting standards, compliance) and the CDLAC regulations (bond volume-cap allocation) — adopted together each December; the current editions were adopted December 10, 2025.

Pub. L. 119-21 (July 2025) made two permanent changes that dominate current feasibility math: the 9% ceiling grew ~12%, and — the bigger one — the bond-financing threshold for 4% credits dropped from 50% to 25% of aggregate basis for bonds issued after 2025. Deals that previously had to carry oversized bond issues just to pass the 50% test can now right-size the bonds and still claim full 4% credits on all qualified basis.

• Underwriting watch-outs:
• The 25% test applies per the statute's effective-date rules — issuance timing matters for pipeline deals; read § 42(h)(4) as amended, not a 2024 memo.
• Lower bond need eases the CDLAC volume-cap constraint but scoring still allocates the queue — the California bottleneck moved, it didn't vanish.

• 9%: deepest equity; competitive rounds with CTCAC point scoring (site amenities, service amenities, leverage, sponsor experience) and set-asides (nonprofit, rural, special needs, at-risk) — small developments have a dedicated set-aside that genuinely helps sub-40-unit sponsors. Tiebreakers are brutal; a losing application costs a cycle.
• 4% + bonds: non-competitive credits once CDLAC awards volume cap under its QRRP scoring; pairs with taxable or tax-exempt debt structures; suits larger deals, acquisitions/rehabs and mixed-income where 9% would never score.
• Hybrid structures: splitting a site into a 9% phase and a 4% phase remains common where basis limits or scoring caps bind.

• California-layer watch-outs:
• CTCAC basis and cost limits, developer-fee caps and minimum operating reserves are underwriting constraints as real as the market's.
• The state LIHTC (allocated by CTCAC alongside) can top up either track; certificated state credits have their own investor market.
• Prevailing wage: not a federal LIHTC condition, but attaches through public funding sources, bond-issuer policies, or the entitlement path (AB 2011 etc.) — confirm the trigger stack before pricing labor.

The minimum set-aside election — 20% of units at 50% AMI, 40% at 60%, or the average-income test (units designated 20–80% AMI averaging ≤60%) — is irrevocable and drives the whole rent matrix. Average income (regulated at 26 C.F.R. § 1.42-19) enables mixed-income structures with 70–80% AMI units cross-subsidizing deeper affordability, at the cost of designation-tracking complexity that has real compliance stakes.

Rents are set from AMI schedules (HUD data through the Part 5 definitions), assume statutory occupancy sizing, and net out a utility allowance — three inputs small sponsors routinely mis-model. Gross-rent floors and HUD hold-harmless rules protect against AMI declines; they don't guarantee growth.