The 4% LIHTC Term Sheet Series, Part One: Why the Transaction Exists and What the Term Sheet Covers

This is the first in a series of articles on the equity term sheet in a 4% low-income housing tax credit transaction financed with tax-exempt private activity bonds. The series works through each major part of the document, one article at a time, from the sponsor and developer perspective. It closes with an annotated term sheet setting out suggested sponsor revisions.

This first article covers three things: why the transaction exists at all, what the term sheet does within it, and the components a complete term sheet contains. An example term sheet accompanies this article. It is drafted as an investor would send it, before any sponsor negotiation, with pricing left as variables. The later articles take it apart section by section, and the final article annotates it.

Scope. This series addresses 4% transactions financed with tax-exempt private activity bonds. It does not address 9% competitive allocations, where the carryover allocation and ten percent test replace the bond conditions and where the exit tax posture differs. It does not address the bond documents, the construction or permanent loan term sheets, or the equity bridge loan agreement, each of which is a separate negotiation with a separate counterparty. It does not address the partnership agreement itself, the securities treatment of the offering, the tax opinion, or the state agency and qualified allocation plan requirements that constrain the underlying development. All references to partnership or partners can equally be replaced with terms such as company agreement and members in the limited liability company context. Most of my LIHTC transaction joint venture agreements are company agreements over the last five years. However, terms such as general partner and partnership agreement remain industry slang.

The business opportunity

A LIHTC transaction exists because the credit is worth more to someone other than the developer and the developer needs equity for the construction loan (or at least wants to use someone else’s money). Passive activity rules limit individuals, trusts, estates, closely held C corporations, and personal service corporations to claiming passive credits only against tax attributable to passive activities, and most sponsors have nowhere near the federal tax liability to absorb ten years of credits. 26 U.S.C. § 469. Widely held C corporations are outside that limitation. The credit therefore moves to a corporate taxpayer, and the developer is paid for it.

Banks are the dominant buyers, and the reason is regulatory as much as tax. Investments in LIHTC properties receive consideration under the Community Reinvestment Act, which gives a bank a second return on the same dollar. Office of the Comptroller of the Currency, Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks, Community Developments Insights (Mar. 2014, rev. Apr. 2014). Bank investors accounted for roughly 80 percent of the equity in the most recent volume survey. CohnReznick, 2024 LIHTC Equity Market Volume Survey (Mar. 5, 2025).

Each side gets something it cannot get otherwise. A rent-restricted property cannot carry debt sized to its development cost, so the sponsor needs capital and selling the credits produces exactly that. The investor gets a dollar-for-dollar offset against federal tax liability over ten years at a discount to face, depreciation losses alongside it, and CRA consideration.

The term sheet exists because the investor is buying performance it does not control. It funds during construction for benefits delivered over the following decade, subject to recapture for fifteen years, all of it contingent on the sponsor completing the building, placing it in service, and keeping it compliant.

What the document is, and what it is not

Although customarily not a short term sheet, it fixes the major business points and leaves the balance to the partnership agreement. It is generally non-binding as to the investment itself.

That does not make it provisional. The terms fixed here carry into the investor’s first draft of the partnership agreement largely intact. As one practitioner describes the drafting practice, the investor’s form “covers the same core subjects and bakes the terms of a deal-specific letter of intent into a form.” John W. Gahan III, LIHTC Partnership Agreements (for Developers): An Old-Timer’s Hints for Reviewing and Tweaking Your Investor’s Agreement, Tax Credit Advisor (Sept. 28, 2022).

Two provisions of section 42 set the outer boundaries and are worth stating once, here, so the rest of the series can treat the document as what it is. A building financed with tax-exempt private activity bonds qualifies for credits without a separate housing credit allocation, provided bonds subject to the state volume cap finance the required share of the aggregate basis of the buildings and land. 26 U.S.C. § 42(h)(4)(B). That share was 50 percent for decades. Section 70422 of the One Big Beautiful Bill Act reduced it to 25 percent for buildings placed in service in taxable years beginning after 2025, conditioned on a bond issue dated after December 31, 2025 financing not less than 5 percent of aggregate basis. Pub. L. No. 119-21, § 70422 (2025).

The components

A complete 4% equity term sheet covers fourteen subjects. They are ordinarily presented in this order.

1. Transaction participants. The investor limited partner, special limited partner, general partner, developer, guarantors, property manager and contractor, with ownership percentages and a description of the property. The guarantor identification is the reference point for every guaranty obligation stated later.
2. Partnership tax credits. Annual credit reservation and generation, applicable percentage, basis boost, qualified basis, and the bond financing assumption, including the expected volume cap allocation and the share of aggregate basis the bonds are assumed to finance.
3. Project timing and tax credit delivery. The construction, lease-up and conversion milestones, the year-by-year credit delivery schedule, and the definitions of stabilization and permanent loan commencement. The delivery schedule is the reference point against which every adjuster is later measured.
4. Limited partner capital contributions. The total contribution, its division into installments, and the conditions to each. In a bond deal the first installment conditions on the financing being in place rather than on a carryover allocation and ten percent test.
5. Payment of developer fees. The fee, the payment milestones, the holdbacks, the deferred portion, and the interest rate and priority on the deferred note.
6. Distribution of net cash flow. The operating waterfall, running from the investor services fee through reserve replenishment, a tax distribution, deferred developer fee, and the residual split.
7. Sale of the property or the investor’s interests. The purchase option, the section 42(i)(7) right of first refusal where a qualified nonprofit is involved, the investor put, and how fair market value is determined.
8. Distribution of proceeds from sale or refinancing. A second and separate waterfall governing capital proceeds, including exit taxes and the residual split.
9. General partner obligations. The longest section. Completion, operating deficits, tax credit recapture, repurchase, removal for cause, net worth and liquidity covenants, and the guarantor.
10. Partnership reserves. The operating reserve, its sizing, funding source, holding period and release conditions, and the annual replacement reserve.
11. Capital adjustments. How the contribution moves if credits differ from projection in amount or in timing, including basis, timing and placed-in-service adjusters.
12. Financing. The capital stack the equity is priced against, the underwriting assumptions behind the permanent loan, and the consequences of a source not arriving.
13. Property management, accountant, insurance, and contractor. Approval rights over the manager, accountant and contractor, the required insurance, and the construction contract form and security.
14. Due diligence and termination. Third-party reports, the due diligence deposit, exclusivity, closing conditions, and the date the investor may withdraw.

The example term sheet

The accompanying example is drafted as an investor would send it, unnegotiated, on a bond-financed transaction. Pricing, deal facts and amounts appear as bracketed variables. Structural terms are stated where the market sits rather than left blank, because that is the part worth studying.

It is illustrative. No form is standard, and the point of the series is that the differences between forms are where a sponsor’s leverage lives.

Companion document Example: 4% LIHTC Equity Term Sheet The full illustrative investor form, with pricing left as fill-in variables. Read it alongside the series; Part Nine annotates this same document with suggested sponsor revisions. →

What the series covers

1. This article, with the example term sheet
2. Credits, pricing, and the adjusters
3. Capital contributions: the installments, the conditions to funding, and stabilization
4. The guaranty package and the guarantor covenants
5. Reserves, developer fee, and the operating cash flow waterfall
6. Financing, the equity bridge, and conversion
7. Control: consent rights, removal, reporting, and affiliate contracts
8. The exit: options, the right of first refusal, the put, exit taxes, and capital proceeds
9. The annotated term sheet, with suggested sponsor revisions

Citations

Statutes

• 26 U.S.C. § 42(b)(3) (minimum applicable percentage of 4 percent for allocations made after December 31, 2020 and for buildings financed by qualified tax-exempt bonds issued after that date).
• 26 U.S.C. § 42(h)(4)(B) (buildings financed by tax-exempt private activity bonds receive credits without a separate housing credit allocation where the specified share of aggregate basis is financed by bonds subject to volume cap).
• 26 U.S.C. § 42(i)(7) (right of first refusal in favor of a qualified nonprofit organization, resident management corporation, tenants, or government agency at a statutory minimum price).
• 26 U.S.C. § 469 (passive activity losses and credits limited; the limitation reaches individuals, estates, trusts, closely held C corporations, and personal service corporations, and not widely held C corporations).
• 12 U.S.C. § 24 (Eleventh) (national bank public welfare investment authority; ceiling raised from 15 to 20 percent of capital and surplus by section 203 of the 21st Century ROAD to Housing Act, which became law July 10, 2026).
• Pub. L. No. 119-21, § 70422 (2025) (One Big Beautiful Bill Act; reduction of the tax-exempt bond financing test from 50 percent to 25 percent for buildings placed in service in taxable years beginning after 2025, conditioned on a post-2025 bond issue financing not less than 5 percent of aggregate basis).

Secondary Authority

• CohnReznick, 2024 LIHTC Equity Market Volume Survey (Mar. 5, 2025), https://www.cohnreznick.com/insights/2024-lihtc-equity-market-volume-survey (bank investors approximately 80 percent of surveyed equity; 71 percent syndicated and 29 percent direct).
• John W. Gahan III, LIHTC Partnership Agreements (for Developers): An Old-Timer’s Hints for Reviewing and Tweaking Your Investor’s Agreement, Tax Credit Advisor (Sept. 28, 2022), https://www.taxcreditadvisor.com/articles/lihtc-partnership-agreements-for-developers/.
• Office of the Comptroller of the Currency, Community Affairs Department, Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks, Community Developments Insights (Mar. 2014, rev. Apr. 2014), https://www.occ.gov/publications-and-resources/publications/community-affairs/community-developments-insights/pub-insights-mar-2014.pdf. The document states it has not been updated to reflect the Tax Cuts and Jobs Act and that Insights reports do not reflect agency policy.