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Why Developers Need HTC Bridge Loans and What They Need to Know about Them

Published by John Dejovine on Tuesday, May 7, 2024

Journal Cover May 2024   Download PDF

Question: What should historic tax credit (HTC) developers know about using bridge loans to fill financing gaps?

Answer: When a developer seeks to finance their project with HTC equity, they will find only a portion of the equity will be contributed during construction, with the remaining amount contributed after the development is placed in service.

Revenue Procedure (Rev. Proc.) 2014-12 requires that, “The investor minimum contribution equals 20 percent of the investor’s total expected capital contributions required under the agreements relating to the partnership as of the date the building is placed in service.” To meet this requirement, HTC investors’ most common contribution of HTC equity at financial closing will be 25% of the anticipated HTC equity to provide a buffer if the development generates qualified rehabilitation expenditures (QREs) more than what was originally forecast. 

Equity contributed after a development is placed-in-service is generally paid at various milestones, including combinations of construction completion, unconditional lien waivers, National Park Service Part 3 approval, permanent financing conversion, debt service coverage ratio requirement, HTC cost certification and prior year K-1.

With only 25% of the HTC equity typically available to a developer to directly pay various contractors and obtain unconditional lien waivers, this typically leaves HTC projects with 75% of the HTC equity unavailable to directly pay for these construction costs. 
To fund this gap, lenders have developed what is commonly known as the HTC bridge loan. This is a loan secured by the future tax credit equity and generally requires a guarantee of the developer. Rates will generally be favorable for these loans due to their shorter term and the security of the tax credit equity. The loans can be obtained from banks that have developed this specific loan product and often HTC investors and syndicators will offer bridge loans which can make the closing process more efficient for the developer. 

Bridge Loan Interest can be QRE Eligible 

When using an HTC bridge loan, there are some factors to be considered by the developer. First, the interest and loan fees paid on these loans will generally be considered a qualified rehabilitation expenditure (QRE), meaning it can used in the calculation of HTCs. So a project that has only federal HTCs will be able to generate a federal HTC of 20% of the QREs, which when multiplied by the HTC investor pricing, could offset 13%-17% of the interest expense with the HTC equity it generates. Further a project that has both federal HTCs and state HTCs that are not capped can generate even more HTC equity and offset 30% or higher of the bridge loan interest expense with HTC equity. 

HTC Bridge Loan Sizing

HTC bridge loans typically have two components that affect how they will be sized. The first is that bridge lenders will typically only lend up to 90%-95% of the future anticipated HTC equity. This is because if the project does not generate as many QREs as forecast, and thus not as much HTC equity, the project may lack the HTC equity necessary to repay the bridge loan. The second way bridge lenders typically limit their bridge loan is to not lend against any future contributions that are related to the project meeting stabilization or a debt-service coverage ratio. The reason for this is to avoid situations where a project takes longer than anticipated to stabilize, leaving the bridge loan outstanding longer than either the developer or lender anticipated at closing.

These two aspects that affect the sizing of a bridge loan create planning opportunities to determine if there are any construction uses that can be paid after construction completion. This could be to fund an operating reserve, pay a portion of developer fee or any other aspect of the construction where the payee has flexibility in when they are paid.


When a developer is planning an HTC development, understanding their HTC equity pay-in schedule and their potential need for a bridge loan is an important planning aspect. This is one of many aspects Novogradac helps developers navigate. Engaging advisors early in the development process, ideally before signing HTC term sheets, can identify planning opportunities that reduce the amount of developer equity necessary to close on these developments.

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