Example: 4% LIHTC Equity Term Sheet

[INVESTOR] [DATE]

[SPONSOR CONTACT] [SPONSOR ENTITY] [ADDRESS]

Re: [PARTNERSHIP NAME] (the “Partnership”), [PROJECT NAME], [CITY, STATE]

Dear [ ]:

Thank you for the opportunity to present this letter of intent to make an equity investment in the Partnership, subject to completion of our underwriting and approval process. This letter outlines the terms and conditions that would form the basis of a limited partnership agreement (the “Partnership Agreement”) among the general partner identified below, [INVESTOR] or an affiliate as limited partner (the “Limited Partner”), and an affiliate of [INVESTOR] as special limited partner (the “Special Limited Partner”).

This letter is not a commitment to invest. It reflects our present intent based on the information you have provided and is subject to Section 14 below.

1. Transaction Participants

Partner	Interest	Identity
General Partner	0.01%	[GP ENTITY], a to-be-formed affiliate of the Developer
Limited Partner	99.98%	[INVESTOR] or an affiliate
Special Limited Partner	0.01%	An affiliate of [INVESTOR]

Developer: [DEVELOPER] Guarantor: [GUARANTOR(S)] Property Manager: [MANAGER] General Contractor: [CONTRACTOR]

The Project consists of [X] residential units in [X] buildings located at [ADDRESS], of which [X] units will be tax credit qualified and [X] will be unrestricted. Total development cost is estimated at [$TDC]. The Project will comply with the [40/60] minimum set-aside.

2. Partnership Tax Credits

Annual federal credit reservation	[$X]
Annual federal credit generated	[$X]
Applicable percentage	4.00% (statutory minimum)
Rate locked at admission	Yes
130% basis increase	[$X]
Total qualified basis	[$X]
Aggregate federal credits to be delivered	[$X]

The Project is expected to be financed with tax-exempt private activity bonds in the approximate amount of [$X], issued by [ISSUER] under the [STATE] volume cap. Our underwriting assumes those bonds will finance not less than 25% of the aggregate basis of the buildings and the land, and that at least one bond in an issue dated after December 31, 2025 will finance not less than 5% of that aggregate basis.

3. Project Timing and Tax Credit Delivery

Benchmark	Estimated date
Limited Partner admission	[DATE]
Construction start	[DATE]
Construction completion	[DATE]
Lease-up start	[DATE]
Stabilized Occupancy	[DATE]
Mortgage Loan Commencement	[DATE]
Receipt of Forms 8609	[DATE]

Projected credit delivery by year: [SCHEDULE].

Stabilized Occupancy shall mean, for a period of three consecutive months occurring immediately prior to Mortgage Loan Commencement, the achievement of each of the following: (a) physical occupancy of 90% or greater by residents paying contract rents under written leases; (b) economic occupancy of 80% or greater, measured as actual rental collections divided by gross potential rent; and (c) a minimum monthly debt service coverage ratio of 1.15x on all must-pay debt, calculated on full principal and interest payments and projected forward for each year of the compliance period. No interest-only payment period will be recognized in sizing debt at admission or in the Stabilized Occupancy test. Evidence of Stabilized Occupancy is subject to the review and approval of the Special Limited Partner.

Mortgage Loan Commencement shall mean the first date following the latest to occur of final completion, Stabilized Occupancy, satisfaction of all conditions to conversion under the permanent loan documents, and commencement of amortizing principal and interest payments on the permanent loan.

4. Limited Partner Capital Contributions

The total capital contribution of [$EQUITY] is based on projected federal low-income housing tax credits of [$CREDITS] multiplied by [$X] per credit dollar (the “Tax Credit Price”). Contributions will be payable in installments, each due within ten business days following our receipt and approval of documentation evidencing satisfaction of the conditions to that installment and to all prior installments.

First Installment: [$X], or [X]% of the total capital contribution

• Fully executed Partnership Agreement and admission of the Limited Partner
• Valid tax credit reservation and determination letter under Section 42(m)(2)(D)
• Evidence that the Project meets the requirements of the applicable qualified allocation plan under Section 42(m)(1)(D)
• Issuance of the tax-exempt bonds and receipt of bond counsel opinions
• Fully executed construction loan and equity bridge loan documents
• Written permanent loan commitment in form and substance acceptable to the Limited Partner
• Closing or binding commitment of all subordinate and soft sources, less required retainage
• Acceptable owner’s title insurance commitment, pro forma policy and endorsements
• Unqualified tax opinion of Limited Partner’s counsel and satisfactory local counsel opinion
• Notice to proceed or commencement of construction
• Payment of the closing draw with supporting documentation

Second Installment: [$X], or [X]%

• Lien-free substantial completion of the improvements in a workmanlike manner, certified by the Project architect, with a schedule of remaining punch list items
• Architect’s certificate of substantial completion (AIA Form G704)
• Temporary certificates of occupancy for all buildings
• ALTA/NSPS as-built survey
• Updated title policy or date-down endorsement, including zoning endorsement and deletion of survey exceptions
• Final inspection by the Limited Partner’s construction consultant
• Draft cost certification from the Project accountant
• Evidence that not less than 150% of the estimated cost to complete outstanding punch list items has been withheld from this installment
• Evidence of satisfactory radon testing where the Project is located in Radon Zone 1 or 2
• Verification of insurance in accordance with Section 13
• No sooner than [DATE]

Third Installment: [$X], or [X]%

• Achievement of Stabilized Occupancy
• Mortgage Loan Commencement
• Satisfactory completion of all punch list items
• Permanent certificates of occupancy for all buildings
• 100% initial occupancy by tax credit qualified residents
• Final cost certification from the Project accountant
• Verification that the bond financing test has been satisfied
• Updated title policy or date-down endorsement
• Evidence of filing for Forms 8609
• Verification of insurance and that all prior installment conditions remain satisfied
• No sooner than [DATE]

Fourth Installment: [$X], or [X]%

• Final determination by the Special Limited Partner that all development completion obligations under Section 9 have been satisfied
• Receipt of Forms 8609 for all buildings and the recorded land use restriction agreement
• Receipt of the Schedule K-1 for the first fiscal year of tax credit occupancy
• Updated title policy or date-down endorsement
• Verification of insurance and that all prior installment conditions remain satisfied

5. Payment of Developer Fees

The developer fee is [$FEE], payable [X]% at the First Installment, [X]% at the Third Installment, and the balance at the Fourth Installment. Not less than [X]% of the fee will be deferred, payable from available cash flow under Section 6, bearing interest at [X]% per annum, and projected to be repaid in full prior to the end of the compliance period.

6. Distribution of Net Cash Flow

Beginning in the first fiscal year in which Stabilized Occupancy is achieved, net cash flow remaining after payment of operating expenses, debt service and replacement reserve deposits will be distributed within 45 days of fiscal year end in the following order:

1. To the Limited Partner, an annual investor services fee of [$X] per unit, cumulative, increasing 3.00% per year
2. To the Limited Partner, reimbursement of any fees, debts or obligations owed to it
3. To replenishment of the Operating Reserve to its required balance
4. To the Limited Partner, to the extent taxable income is allocated to it, an amount equal to that taxable income multiplied by the sum of the highest federal corporate income tax rate then in effect plus five percentage points
5. To the Developer, until the deferred developer fee is paid in full
6. To the General Partner, reimbursement of fees, debts and obligations owed to it, including subordinate loans
7. 90% of the balance to the General Partner as a non-cumulative incentive management fee, provided that to the extent the fee would exceed 12% of gross revenues, net of any property management fees paid to an affiliate of the General Partner, the excess will instead be distributed as a preferred return accompanied by a gross income allocation in the same amount
8. The remaining 10% to the Limited Partner

7. Sale of the Property or the Limited Partner’s Interests

Purchase option. During the twelve month period following the end of the fifteen year compliance period, the General Partner will have an option to acquire either the Project or the interests of the Limited Partner and Special Limited Partner. The purchase price for the Project will be the greater of (a) its fair market value or (b) the sum of all outstanding debt secured by the Project, all other Partnership obligations including partner loans, all exit taxes, fees and amounts owed to the Limited Partner, plus $1.00. The purchase price for the partnership interests will be the sum of their fair market value, the exit taxes payable in connection with the transfer, and all amounts owed to the Limited Partner.

Fair market value will be determined by agreement of the parties or, failing agreement, by a mutually acceptable broker or appraiser experienced in affordable housing. The option terminates if the General Partner is removed.

Right of first refusal. If the General Partner or an affiliate is a qualified nonprofit organization within the meaning of Section 42(i)(7)(B), it will hold a right of first refusal to purchase the Project following the compliance period at the minimum price permitted by Section 42(i)(7), plus all fees, debts, exit taxes and obligations owed to the Limited Partner.

Limited Partner put. At any time following the end of the credit period, the Limited Partner may require the General Partner or its designee to purchase the partnership interests for the sum of $1,000, the Limited Partner’s transfer costs, and all amounts then owed to the Limited Partner. Transfer will be made under an assignment and assumption agreement providing for release and indemnity of the Limited Partner and, if during the compliance period, ratification of the guaranties.

8. Distribution of Proceeds from Sale or Refinancing

Proceeds of a sale or refinancing will be distributed:

1. To payment of Partnership debts and liabilities, other than those owed to the General Partner
2. To reserves the Limited Partner reasonably deems necessary for contingent liabilities
3. To payment of unpaid fees, exit taxes and obligations owed to the Limited Partner
4. To repayment of subordinate loans
5. To payment of unpaid fees, debts and subordinate loans owed to the General Partner
6. The balance, 90% to the General Partner, 0.01% to the Special Limited Partner, and the remainder to the Limited Partner

9. General Partner Obligations

Development completion. The General Partner and Guarantor will guarantee lien-free completion of the improvements substantially in accordance with the approved plans and specifications, without material defect, and will fund all development cost overruns through Stabilized Occupancy. Overruns will not be reimbursed by the Partnership.

Operating deficits. Following Stabilized Occupancy, the General Partner will guarantee funding of operating deficits in an amount not to exceed [X] months of foreclosable debt service, operating expenses and replacement reserves, estimated at [$X]. An amount equal to [X] months will expire [X] months following Stabilized Occupancy, with the balance continuing through the compliance period. Deficits will first be funded by deferral of fees payable to the General Partner or its affiliates, including the property management fee. Prior to expiration of any portion of this obligation, the Operating Reserve must be fully funded and the Project must have maintained Stabilized Occupancy for the four consecutive quarters immediately preceding.

If the Project benefits from a property tax exemption or abatement, the General Partner and Guarantor will guarantee all deficits arising from its loss or reduction for the compliance period.

Tax credit recapture. In the event of recapture, the General Partner will reimburse the Limited Partner as a capital contribution for the recaptured credits together with associated interest, penalties and additional taxes. The General Partner will not be liable for recapture caused by a change in law or resulting from a transfer of an interest by the Limited Partner or Special Limited Partner.

Repurchase. If specified development, operational or tax credit benchmarks are not achieved by the outside dates set in the Partnership Agreement, or if an event of default occurs under any Project loan, or upon bankruptcy of the Partnership, the General Partner, a controlling interest in the General Partner, or the Guarantor, the General Partner will repurchase the partnership interests for a price equal to the sum of previously contributed capital, interest on that capital at 12% per annum, and recapture penalties and expenses, less credits taken and not subject to recapture.

Removal. The Partnership Agreement will provide for removal of the General Partner for cause. On removal, amounts owed by the Partnership to the General Partner or its affiliates will, at the Special Limited Partner’s election, be repaid by General Partner capital contribution or assigned to the Special Limited Partner.

Net worth and liquidity. The General Partner, Developer and Guarantor will maintain aggregate net worth of not less than the greater of $5,000,000 or 25% of total development cost, and aggregate liquidity of not less than the greater of $1,000,000 or 5% of total development cost, in each case until expiration of the operating deficit guaranty. Liquidity means unrestricted cash and unencumbered marketable securities, excluding retirement accounts.

Guarantor. The Guarantor will unconditionally guarantee all obligations of the General Partner and Developer.

10. Partnership Reserves

Operating Reserve. The development budget will include a funded operating reserve equal to [X] months of operating expenses, replacement reserves and must-pay debt service, estimated at [$X], funded from the [Third/Fourth] Installment and held in an account under the control of the Limited Partner. Funds will remain in the Operating Reserve for the fifteen year compliance period. The Operating Reserve may be drawn before any operating deficit guaranty obligation is funded.

Replacement Reserve. Annual deposits of not less than [$X] per unit, increasing 3.00% per year, or the amount required by the permanent lender, whichever is greater.

11. Capital Adjustments

If actual credit delivery differs from the projections in Section 3, capital contributions will be adjusted as follows:

A. Decrease in credits on Forms 8609. The next installment will be reduced by the shortfall in credits multiplied by the Tax Credit Price. If remaining installments are insufficient, the General Partner will contribute the difference as capital.

B. Increase in credits on Forms 8609. The final installment will be increased by the additional credits multiplied by the Tax Credit Price. Any such increase, together with any other increase, is limited to the lesser of 10% of the total capital contribution or available funds.

C. Administrative adjustment. If credit delivery is delayed or challenged by reason of the absence of Forms 8609, the next installment will be reduced by the difference between projected and actual credits multiplied by [$X] for each year of delay, plus any penalties, interest and costs incurred by the Limited Partner.

D. Delay in delivery. If credit delivery is delayed, the next installment will be reduced by the difference between projected and actual credits multiplied by [$X]. If remaining installments are insufficient, the General Partner will contribute the difference as capital.

E. Acceleration of delivery. If credit delivery is accelerated, the final installment will be increased by the difference between actual and projected credits multiplied by [$X], subject to the cap in paragraph B.

F. Placed in service delay. If any building is placed in service later than [DATE], capital contributions will be reduced by an amount determined during underwriting to offset the loss of accelerated depreciation.

12. Financing

The Limited Partner’s investment assumes the following sources on the terms described in the attached sources and uses:

Source	Amount	Terms assumed
Tax-exempt bonds	[$X]	[rate], [term]
Construction loan	[$X]	[rate], [term]
Equity bridge loan	[$X]	[rate], repaid from installments 3 and 4
Permanent loan	[$X]	[rate], [amortization], [term], 1.20x minimum coverage
Subordinate and soft sources	[$X]	[terms]
Equity	[$X]	This letter
Deferred developer fee	[$X]	Section 5

Any change in the amount, rate, amortization, term or coverage requirement of the permanent loan, or the withdrawal of any source not replaced with a comparable commitment within 90 days, will permit the Limited Partner to reunderwrite and adjust its capital contribution.

The General Partner will provide the bond documents, the issuer’s determination under Section 42(m)(2)(D), and evidence of volume cap allocation for review prior to closing.

13. Property Management, Accountant, Insurance, and Contractor

The property manager, the management agreement and the management fee are subject to approval by the Limited Partner. The management fee will not exceed [X]% of gross revenues. The Partnership accountant is subject to approval and may not be changed without consent.

The Partnership will maintain owner’s title insurance with endorsements acceptable to the Limited Partner, builder’s risk and commercial property insurance, general and excess liability coverage, and such other coverage as the Limited Partner reasonably requires.

The construction contract will be a guaranteed maximum price contract with a general contractor acceptable to the Limited Partner, secured by payment and performance bonds or a letter of credit equal to not less than [X]% of the contract sum. Where the general contractor or property manager is an affiliate of the General Partner, the contract terms are subject to review for consistency with arm’s length terms.

14. Due Diligence and Termination

This letter is subject to satisfactory completion of our due diligence, including receipt and approval of an appraisal, market study, physical needs assessment, environmental site assessment, plans and specifications, construction budget, operating projections, and financial statements and real estate schedules for the General Partner, Developer and Guarantor.

The General Partner will pay a due diligence deposit of [$X] at acceptance, applied against third-party report costs and the Limited Partner’s legal fees, with any excess deducted from the First Installment. Except as provided in this paragraph, each party bears its own costs.

During the term of this letter the General Partner will not solicit or accept a competing equity proposal for the Project.

This letter will expire if the Partnership Agreement has not been executed and the First Installment funded by [DATE], and may be withdrawn by the Limited Partner at any time prior to closing if our underwriting is not satisfactorily completed or if the terms above cannot be met.

Sincerely,

[INVESTOR]

Agreed and accepted:

[SPONSOR ENTITY]

By: ___________________ Date: ___________