Interest Rate Swap Advisory for Affordable Housing and LIHTC Developers
If You’re Financing an Affordable Housing Project with Tax-Exempt Bonds, You May Need Independent Swap Advice
Affordable housing developers using 4% Low-Income Housing Tax Credits know the capital stack is complex. Tax-exempt bonds, tax credit equity, subordinate loans, and gap financing all need to work together for the deal to pencil. When variable-rate bonds are part of the structure (and they frequently are), the lender or bond purchaser will almost always require the borrower to hedge their interest rate exposure, typically through an interest rate swap or an interest rate cap.
This is where many developers make a costly mistake: they let the bank or bond purchaser dictate the terms of the hedge without seeking independent advice. The bank is on the other side of your swap transaction. They profit from it. Their interests are not aligned with yours. An independent swap advisor works exclusively for you, ensuring you get the right hedge structure, competitive pricing, and documentation that protects your project, not the bank’s bottom line.
How Swaps and Caps Work in LIHTC Bond Transactions
In a typical 4% LIHTC deal, the developer issues tax-exempt bonds through a state or local housing finance agency or conduit issuer. If the bonds are variable rate (which is common during the construction and stabilization period), the developer faces interest rate risk. If rates rise, debt service increases, and the project’s cash flow may not be sufficient to cover the higher payments.
To mitigate this risk, the developer enters into either an interest rate swap (which converts the variable rate to a fixed rate) or an interest rate cap (which puts a ceiling on how high the rate can go). Both instruments serve a legitimate purpose, but the devil is in the details: the strike rate, the notional schedule, the term, the documentation, and, critically, the pricing.
Why Independent Advice Matters
When your lender also serves as your swap counterparty, they are simultaneously lending you money and selling you a financial product. Federal law (the OCC Anti-Tying Statute) gives you the right to obtain your hedge from a provider other than your lender, but in practice, construction and permanent lenders often require the hedge to be provided by the lending institution because the swap creates credit exposure that needs to be secured by the underlying property.
This means you may be required to do your swap with your lender, but that does not mean you have to accept the first price they quote. An independent swap advisor benchmarks the bank’s pricing against current market rates, identifies hidden costs or unfavorable terms, and negotiates on your behalf. On a typical affordable housing swap, the savings from competitive pricing oversight can range from a few basis points to several, which translates to tens of thousands of dollars over the life of the hedge.
What Evercrest Does for Affordable Housing Clients
Evercrest Advisors is an independent advisory firm providing hedging and bond advisory services to real estate owners, developers, and asset managers, tax-exempt and municipal issuers, nonprofit organizations, and corporate borrowers nationwide. We help you evaluate whether a swap or a cap is the right hedge for your project. We analyze the bank’s proposed pricing and terms against current market conditions. We review and negotiate the ISDA documentation to make sure it doesn’t introduce hidden risks. And we stay involved after the transaction closes, providing ongoing compliance and hedge accounting support as needed.
The 25% Bond Test Changes Everything
In 2025, Congress permanently reduced the bond financing threshold for 4% LIHTC projects from 50% to 25%. This means developers can now qualify for 4% credits with significantly less tax-exempt bond volume, which is expected to dramatically increase the number of LIHTC deals coming to market. Many of these new projects will use variable-rate debt structures that require hedging. If you’re entering the 4% LIHTC market for the first time, or doing more deals than ever because of the lower threshold, independent swap advice is more important than ever.
Get in Touch
Evercrest works with affordable housing developers, housing finance agencies, and nonprofit borrowers nationwide. If you have a bond deal in progress or in the pipeline and need independent advice on your interest rate hedge, contact us.
Email: info@evercrestadvisors.com | Phone: 212-837-8900