The 4% LIHTC Term Sheet Series, Part Two: Credits, Pricing, and the Adjusters

This is the second article in a series on the equity term sheet in a 4% low-income housing tax credit transaction financed with tax-exempt private activity bonds. Part One covered why the transaction exists, what a complete term sheet contains, and included an example term sheet drafted as an investor would send it. The series works through the document one part at a time from the sponsor and developer perspective.

This article covers the credit sections, the pricing sentence in the capital contribution section, and the capital adjustment section. Together they fix what the investor is buying and what it will pay. I like to negotiate these sections together as one conversation under what I would call the “credit amount and pricing bucket”.

Scope. This article addresses 4% transactions financed with tax-exempt private activity bonds. It does not address 9% competitive allocations. Observations below about how particular provisions are drafted come from a review of executed and draft investor letters of intent and term sheets in transactions I have handled and represent my personal opinion. I am not your attorney. Hire me or hire someone to review the work for your particular legal issues. Terms such as “forms” or “investor forms” describe term sheets received from investors for my sponsor clients. No names are revealed or individual pricing. I do, however, provide price ranges for the reader.

Companion document Example: 4% LIHTC Equity Term Sheet This part dissects the credit, pricing, and capital-adjustment sections. Open the illustrative investor form alongside it; pricing is left as fill-in variables. →

Why these provisions exist

The investor is buying a stream of credits that does not exist yet, generated by a building that has not been built, occupied by tenants who have not been qualified. Both the investor and the sponsor are working from a set of assumptions in the financial model. Financial models are never accurate. They are just our best guess at the probable outcome and the parties will not know whether the projection was right until the accountant certifies costs and the agency issues the Forms 8609, which is two to three years after the money starts moving.

Everything in these sections follows from that gap. The credit sections state the projection. The pricing sentence converts the projection into dollars. The adjusters move the dollars if the projection turns out to be wrong. Make no mistake, the sponsor is being asked to stand behind the accuracy of a forecast. Adjusters are just a nice way of renaming a guaranty. “Adjusters (Just a kinder, gentler name for guarantees).” Darryl Austin, David Cleghorn & Joseph Jampel, Negotiating LIHTC Investor LOIs, Homes Within Reach Conference, at 12 (Dec. 8, 2022).

What they do

The credit sections state the annual credit reservation, the applicable percentage, any increase in eligible basis for a qualified census tract or difficult development area, the total qualified basis, and the aggregate credits. For a bond-financed building the applicable percentage is 4 percent, a statutory floor for buildings financed by qualified tax-exempt bonds issued after December 31, 2020. 26 U.S.C. § 42(b)(3). The forms recite the rate and confirm it is locked at admission.

The delivery schedule assigns the projected credits to years. This table is the benchmark for every adjuster. Its most important line is the first-year percentage, because the first-year credit is prorated by the average of the qualified basis percentages at the close of each month, so a building that fills slowly delivers part of a year’s credit in year one and picks up the balance in year eleven. 26 U.S.C. § 42(f)(2). The forms I have seen project first-year delivery between roughly 28 and 41 percent of a stabilized year.

The pricing sentence multiplies the projected credits by a stated price per credit dollar. This is the negotiated price for the credits, which represents the capital contribution of the investor into the joint venture.

The adjusters move the contribution when delivery departs from the schedule by amount or time. A basis adjuster addresses credits that come in above or below projection, computed at the credit price. A timing adjuster addresses credits delivered late or early, computed at a lower rate (always a lower rate). A placed-in-service adjuster reduces the contribution for depreciation lost to a late placed-in-service date. Most forms add recapture, and some add an administrative adjuster for delay attributable to missing Forms 8609. Downward adjusters reduce the next unfunded installment first, and if the remaining installments will not cover the shortfall, the general partner funds the difference.

In my experience, adjusters are the least negotiated portion of the term sheet and the most likely guarantees to be enforced during the life of the joint venture. If you are a sponsor reading this article, you need to negotiate the legal terms of your adjusters and not just the economics. Pay particular attention to my annotated term sheet, which is published at the end of this series of articles.

Where the market stands in 2026

Pricing has softened, and the cause is a supply increase traceable to the One Big Beautiful Bill Act. Section 70422 cut the share of aggregate basis that must be bond financed from 50 percent to 25 percent for buildings placed in service in taxable years beginning after 2025. Pub. L. No. 119-21, § 70422 (2025). More deals now clear the test, and the credits they generate have arrived faster than the equity to buy them.

Comparing executed letters of intent on 4% bond transactions in my own files, the price per credit dollar declined by approximately 18 to 20 percent between 2021 and a letter issued in July 2026. That comparison spans different investors and a very different rate environment, so not all of it is attributable to supply.

The published accounts point the same direction. Enterprise Community Partners reported average pricing of roughly 84 cents in April 2026, down two to three cents on the year: “The 25 percent bond test has done what it was intended to do, and has increased the volume of four percent transactions in the market in the near term. That additional supply has pressured pricing because equity demand hasn’t grown at the same pace.” PNC Real Estate described a range from the low to mid 90s down to the mid to upper 70s. Pamela Martineau, LIHTC Remains Resilient Despite Downward Pressure on Tax Credit Pricing, Tax Credit Advisor (Apr. 13, 2026).

Two consequences matter for this negotiation. The first is that the leverage has moved to terms and not only to price. The same account reports that “these power dynamics have sometimes increased investor leverage in negotiating deal terms and pricing,” and that “[s]tronger guarantees are back on the table in many markets.” Id. The second is that the reduced test also thins the tax-exempt debt in the individual deal, since supportable permanent debt runs closer to 30 to 45 percent of aggregate basis while agencies are allocating 27.5 to 30 percent. The gap gets filled with taxable debt “trending anywhere from 75 to over 100 basis points higher.” Abram Mamet, Industry Looks Boldly Toward the Future as Bond Financing Threshold Requirements are Halved, Tax Credit Advisor (Aug. 18, 2025) (quoting Kent Neumann, Tiber Hudson LLC).

So the sponsor is negotiating adjusters against a lower price and a more expensive capital stack at the same time. Both shrink the cushion available to absorb an adjuster if one is assessed.

The comments I (attempt to) make

You need to understand the math and timing requirements to properly negotiate adjusters. Most attorneys rely on their clients for this portion of the term sheet, which is understandable and customary. I believe the transactional attorney should understand the timing and math so as to highlight areas that might assist the client. For example, what if you made every unit a BIN in an apartment complex to maximize credits? Although this is not allowed in all jurisdictions, it is allowed in some. Notice 88-91, 1988-2 C.B. 414. What if the timing adjuster provided a penalty rate instead of a yield maintenance rate? That does not seem fair, does it? It also seems like something that could be negotiated based on common sense and basic math.

Whether the upward basis adjuster is mandatory or discretionary. Most forms state it as a covenant in both directions at the credit price. This is what you want. However, I have seen language such as “[the investor] shall be under no obligation to increase its Capital Contribution” for excess credits, “but may elect to do so, in its sole discretion.” That is an option, not an adjuster, and the downward side of the same document is mandatory and uncapped.

The cap on the upward adjuster, and what happens to excess credits above it. Every form caps the upward adjuster, and AHIC treats a cap at 5 to 10 percent of total equity as standard. AHIC, Underwriting Guidelines § III.G (Apr. 2026). Fighting the cap is rarely worth the capital. However, you must answer the question of what happens to the credits over the cap. Answer it this way: if the investor declines to fund above the cap, the sponsor may market and sell the excess credits to a third party, with a proportional reduction in the first investor’s interest and capital commitment. The credits follow the money. At the minimum, some compromise language such as: permitting the general partner to “reduce the Investor’s interest in profits and losses by a percentage equal to the upward adjuster for which the Investor elects not to fund,” with the credits following the interest.

Timing adjuster discount rates. Credits run late when a building fills slowly or is placed in service late in the year. 26 U.S.C. § 42(f)(2). Nothing is lost; the shortfall returns in year eleven.

The charge for early or late delivery of credits is expressed as a figure calculated based on 1 − (1 + r)^−10, using the investor’s return. Figure and yield are the same thing, so the figure should match the return the deal was underwritten to.

The forms give the figure, never the rate. Back-solve it. $0.6144 is 10 percent, $0.6780 is 12 percent, and the letters I have reviewed imply 2 to 17 percent. A 6 percent deal supports $0.4416. More is a penalty, not time value.

Acceleration uses the wrong formula. An early dollar gains what a late one costs, so both should be $0.6144 at 10 percent. The forms pay $0.3856.

Ask for one rate both ways, accept the investor’s cap on early delivery, and check the rate first: implied yield = (1 ÷ (1 − adjuster))^(1/10) − 1.

The cash component of the downward adjuster. You will not get a cap on the liability, and you should not expect one. A downward adjuster refunds an overpayment for credits that never arrived, and the guidance protects it through holdbacks rather than ceilings, recommending at least a 25 percent installment holdback until stabilization and the Forms 8609, principally out of cash developer fee. AHIC, Underwriting Guidelines § III.E (Apr. 2026). What you can ask for is a limit on the cash call. I recommend limiting the general partner’s cash contribution to the capitalized developer fee and pushing any excess into a priority from cash flow and sale or refinancing proceeds. That does not reduce the exposure. It stops the exposure from becoming a demand for cash you do not have during lease-up.

The order of calculation between the basis and timing adjusters. If a basis increase and a timing shortfall both land, whether the projected credit is trued up for the basis increase first changes the number. You can solve this issue with one sentence: “The timing adjustment will be calculated after any adjustment for the LIHTC basis adjustment.” Most forms are silent on this point. Ask for the sentence.

Drafting the placed-in-service benchmark and adjuster by BIN. Term sheets state the placed-in-service benchmark by year (e.g. no later than December 31, 20XX) and the placed-in-service adjuster at the project level, which turns a BIN-level question into a binary project-level one. A single late BIN then triggers an adjuster measured against the entire transaction. Ask that the delivery schedule identify placed-in-service dates by BIN, that the adjuster be calculated only against the BINs actually delayed, and that the credit period election be made by the partnership BIN by BIN rather than left to the investor’s discretion.

Closing date adjusters and reimbursement of the investor’s costs. A closing date adjuster lets the investor reprice or withdraw if closing slips past a stated date. One form adds a penalty on top: “If the Managing Member/Developer/Guarantor does not agree to the revised reasonable pricing/terms or is unable to close the transaction for any other reason, other than for an action or inaction on the part of [the investor], the Managing Member/Developer/Guarantor would be required to reimburse [the investor] for all reasonable third party costs incurred.” You will not talk an investor out of the right to reprice or walk, and it is not worth the capital to try. What you can remove is the consequence of declining the new price. The trigger is not sponsor fault. Outside dates move for reasons no sponsor controls: agency review calendars and board meeting dates, the volume cap reservation window, TEFRA hearing scheduling, Attorney General approval in Texas, bond counsel filing requirements, and the investor’s own diligence. A sponsor should not pay the investor’s third party costs for declining a re-trade it did not cause.

The bottom line

You have to understand timing and math to negotiate adjusters. BINs and yield on early or late units are where you make your money with your client in this portion.

The next article addresses the capital contributions themselves: the installments, the conditions to funding, and the definition of stabilization.

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(f)(1) (credit period begins with the taxable year the building is placed in service or, at the irrevocable election of the taxpayer, the succeeding taxable year).
• 26 U.S.C. § 42(f)(2) (first-year credit determined by averaging the qualified basis percentages as of the close of each month; the balance allowed in the eleventh year).
• 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).

Administrative Authority

• Notice 88-91, 1988-2 C.B. 414 (each condominium unit of a building treated as a separate building, receiving its own building identification number, Forms 8609, and placed-in-service date).

Secondary Authority

• Affordable Housing Investors Council, Underwriting Guidelines (Apr. 2026), https://www.ahic.org/docs/2026_AHIC_Underwriting_Guidelines.pdf (§ III.E installment holdbacks for downward adjusters; § III.G credit adjusters, caps on upward adjusters, and the predetermined price and yield maintenance structures). This edition supersedes the August 2018 edition. The guidelines state that nothing in them should supplant individual analysis by an investor or be construed as mandating any particular deal term.
• Darryl Austin, David Cleghorn & Joseph Jampel, Negotiating LIHTC Investor LOIs, Homes Within Reach Conference (Dec. 8, 2022), https://housingalliancepa.org/wp-content/uploads/HWR_2022_D05.pdf. The presenters caution that the specimen letter is a composite prepared for instruction and “[i]n no way, shape or form is this example suitable for an actual deal.”
• Abram Mamet, Industry Looks Boldly Toward the Future as Bond Financing Threshold Requirements are Halved, Tax Credit Advisor (Aug. 18, 2025), https://www.taxcreditadvisor.com/articles/25-percent-test-lihtc/ (supportable permanent debt of 30 to 45 percent of aggregate basis; taxable debt trending 75 to over 100 basis points higher; quoting Kent Neumann of Tiber Hudson LLC).
• Pamela Martineau, LIHTC Remains Resilient Despite Downward Pressure on Tax Credit Pricing, Tax Credit Advisor (Apr. 13, 2026), https://www.taxcreditadvisor.com/articles/q2-2026-syndicator-roundup/ (Enterprise Community Partners average pricing of roughly 84 cents, down two to three cents year over year; PNC Real Estate pricing range; investor leverage on deal terms and guarantees).
• Pamela Martineau, As 2026 Approaches, State Agencies Prepare for New Bond Rules, Tax Credit Advisor (Dec. 22, 2025), https://www.taxcreditadvisor.com/articles/2026-25-percent-test-guide/ (state allocation policies under the 25 percent test; expected initial allocations of 27.5 to 30 percent of aggregate basis).