Why Some Sites Only Work with the Right Capital Stack | Alpha Deal News

In affordable housing development, not every site works with every capital structure. The relationship between a site's physical and financial characteristics and the capital stack it can support is one of the central determinants of feasibility — and one of the factors that's easiest to miss when evaluating sites without a clear model of how the pieces interact.

This piece is about that relationship: why some sites only work with specific capital structures, what drives that specificity, and how to identify it early.

Capital stack basics

An affordable housing capital stack is the combination of financing sources that fund a project's development. The typical components:

Tax credit equity from the sale of Low-Income Housing Tax Credits (either 9% competitive credits or 4% credits paired with tax-exempt bonds)
Conventional debt from a bank or CDFI lender, sized based on the project's debt service coverage from restricted rents
Soft loans from federal programs (HOME, CDBG), state housing trust funds, or local housing finance agencies
Other equity from historic tax credits, opportunity zone investments, or developer equity

The relative weight of each component varies enormously by deal type, market, and what's available. A 9% LIHTC deal might be 65% tax credit equity, 15% conventional debt, and 20% soft loans. A 4% deal with bonds might be 45% equity, 40% conventional debt, and 15% soft. A preservation deal might look entirely different from a new construction deal in the same market.

Why the site determines the stack

The capital stack a deal can support isn't a free design variable. It's constrained by specific features of the site and the deal:

Program eligibility determines equity availability. Not every site qualifies for 9% credits — competitive states require a level of QAP score that not every site can achieve. QCT and DDA designation affect eligible basis and therefore how much equity the credits generate. A site that doesn't check the right program boxes can't access the equity those programs produce.

Achievable rents determine debt capacity. The conventional debt a deal can support is sized against the rent roll — specifically, against the net operating income after expenses at a lender-required coverage ratio. In markets where AMI-restricted rents are low, debt capacity is limited. In markets where restricted rents are closer to market rate, there's more room for conventional debt. The site's market context, not the developer's preference, sets this ceiling.

Development cost determines the size of the gap. The combination of eligible basis, equity pricing, and achievable debt produces a total financing amount. The gap between that total and actual development costs is what soft loans need to fill. If the development cost of a given site — driven by construction type, site conditions, and market labor costs — produces a gap that can't be closed with available soft sources, the site doesn't work at any reasonable structure.

Location and site type affect which programs apply. Some soft loan programs are geographically restricted. Some are only available for new construction, others only for preservation or adaptive reuse. Some require populations that a given deal doesn't serve. Understanding which programs are realistically available for a specific site — not just in theory but given the deal's actual characteristics — is part of evaluating the capital stack.

The 4% vs. 9% question

One of the earliest capital stack decisions in affordable housing development is whether a deal is a 9% LIHTC deal or a 4% with bonds — and this decision is driven significantly by site and deal characteristics.

9% LIHTC is more equity-rich per dollar of eligible basis, but it's competitively allocated and available only once a year in most states. It works well for smaller deals in competitive markets where the site can score well. It requires going through the QAP process with all the uncertainty that entails.

4% with bonds is available on a more rolling basis (subject to bond volume cap) and doesn't require competitive allocation. It typically works better for larger deals where the lower per-dollar equity is offset by deal scale, and in markets where bond volume cap is accessible. The trade-off is that 4% deals typically need more soft debt to close the same gap.

The right answer depends on the site's scale, the market's bond cap accessibility, and the developer's timeline and risk tolerance. But the key point is that this decision has real implications for the rest of the capital stack — and it should be made early, informed by the site's characteristics, not late.

Recognizing when a structure doesn't fit

Sites that don't match the capital structure they need aren't necessarily bad sites — they may just need a different approach. Some common mismatches and what they suggest:

A site that's too small for 9% LIHTC. If the site can only support 30–40 units and the market requires 70 for a viable 9% deal, consider whether 4% with bonds is a path (sometimes works at smaller scales with the right soft stack), whether parcel assembly is feasible, or whether this is genuinely not a LIHTC site.

A site where the land cost exceeds program capacity. If comparable land is trading above what the capital stack can support, explore whether there's a local soft loan that specifically addresses land cost, whether a long-term ground lease with a land trust or municipality is possible, or whether the site simply doesn't work for affordable housing.

A site that needs more soft debt than is realistically available. If the gap between equity plus debt and total development cost is $4M and you can realistically access $2M in soft loans, either the deal structure needs to change (different program, different unit mix, lower construction costs) or the site doesn't advance.

The early-stage diagnostic

The goal of capital stack thinking in early-stage feasibility isn't to build a complete financing structure. It's to answer one question: is there a plausible capital structure — one that relies on programs this site qualifies for, in amounts that are realistically accessible — that makes this deal work?

If the answer is yes, even roughly, the site earns further attention. If the answer is clearly no, the site doesn't pencil at any structure — and knowing that early is valuable.

Alpha Deal helps development teams model capital stack scenarios during early feasibility — identifying which structures are realistic for a given site before underwriting begins.