September 8, 2025
Affordable housing is more than a critical need—it’s a powerful opportunity to invest in community, stability, and economic mobility. The National Low Income Housing Coalition states the U.S. lacks 7.1 million affordable rental homes for extremely low-income renters. However, traditional financing often falls short of the high costs of construction, land, and operations.
That’s why a smart, well-structured capital stack is essential. At Advantage Capital, we partner with developers and housing agencies to design creative, balanced financing solutions that help affordable housing developments succeed.
What Is Affordable Housing?
The U.S. Department of Housing and Urban Development defines affordable housing as housing where rent and utilities cost no more than 30% of a household’s income. When families exceed this threshold, they often sacrifice essentials like food, healthcare, or childcare.
In communities facing rising rents and stagnant wages, many residents are cost-burdened, underscoring the urgent need for smart financing tools and investment strategies.
What Is a Capital Stack?
A capital stack is the combination of funding sources used to finance a development. Because affordable housing is designed to keep rents low, it often needs more than just traditional debt.
Instead, developers layer multiple financing sources to make the numbers work while keeping units affordable over time. A strong capital stack balances risk, leverages resources, and supports long-term success.
Common Capital Stack Components
- Tax Credit Equity: The Low-Income Housing Tax Credit (LIHTC) attracts private investment in exchange for tax credits. LIHTC equity is often the largest part of the stack.
- Loans: Traditional loans and government-backed loans (e.g., FHA-insured) offer critical support but must be repaid—often paired with grants or deferred sources to preserve affordability.
- Grants and Soft Money: Forgivable or deferred-payment loans and direct grants from federal, state, or local programs help fill funding gaps.
- Local and State Housing Funds: These funds target priority populations, including extremely low-income households and those needing permanent supportive housing.
- CDFI Financing: Community Development Financial Institutions (CDFIs) provide flexible, impact-driven capital, often taking on more risk than traditional lenders.
- Creative and Supplemental Sources: Tools like the Historic Tax Credit can raise additional equity, especially for adaptive reuse of historic buildings.
How LIHTC Works
The federal Low-Income Housing Tax Credit (LIHTC) program, created by the Tax Reform Act of 1986 and administered by the IRS, provides tax credits to developers of affordable housing. The LIHTC program is the most important program in the country for building affordable housing. Since its inception, the program has supported the construction or rehabilitation of about 110,000 affordable rental homes per year, financing more than 3.7 million affordable homes in total.
The federal credits are allocated by state housing agencies and sold to investors in exchange for equity, which reduces the need for debt and allows developers to offer lower rents. There are two types of federal credits:
- 9% credit (competitive): Covers ~70% of development costs (excluding land).
- 4% credit (non-competitive): Covers ~30% of costs, typically paired with tax-exempt bond financing.
Many states also offer their own LIHTC programs to supplement the federal credits. These state programs are usually modeled after the federal structure and compliance rules, but are funded separately by the state. They are designed to close financing gaps and increase the amount of equity available for a development.
Together, federal and state LIHTC programs are often stacked in a project’s capital structure. The combined equity from both sources improves financial feasibility, enables deeper affordability, and supports the development of more units—particularly in high-cost or underserved markets.
What’s Changing: Key Policy Updates
Recent legislation (H.B.1) introduced two major improvements to the LIHTC program:
- Permanent 25% Test: Starting in 2026, the required Private Activity Bond (PAB) financing threshold for 4% LIHTCs drops from 50% to 25% for properties placed in service after December 31, 2025—if at least 5% of land and building costs are financed with PABs issued after that date. Acquisition and rehabilitation costs can qualify separately, allowing rehab projects placed in service in 2026 or later to benefit.
- Permanent 12% Increase: Beginning in 2026, the annual allocation for 9% LIHTCs will permanently increase by 12%, expanding access to equity for more developments nationwide.
These provisions are projected to support creating 1.22 million new affordable homes over the next decade.
Partner with Advantage Capital
Advantage Capital invests in affordable housing to help ensure family and community stability, accompanying the firm’s broader efforts to invest for positive outcomes. We leverage federal and state tax credit programs to help finance housing developments and increase access to safe, high-quality, and affordable homes for low-income families, veterans, public service workers, and other vulnerable populations in America.
Our LIHTC syndication services help investors – including banks, corporations, and insurance companies – convert tax liabilities into assets, while addressing the housing crisis across the country.
Ready to put your capital to work in affordable housing? Visit our Investor Solutions page or reach out to Natalie directly at nmoretz@advantagecap.com to explore how Advantage Capital can help you achieve meaningful impact alongside strong returns.
