LIHTC Year-15 Underwriting: The Rent Lift Is Dated

Published October 28, 2026

Roughly 845,000 rent-restricted Low-Income Housing Tax Credit (LIHTC) units are scheduled to lose their affordability requirements between 2024 and 2035 — about a third of the homes carrying an active LIHTC subsidy — according to an October 2025 Chicago Fed Letter by Dustin Ingram and Maxwell Jaffe of the Federal Reserve Bank of Chicago. That pipeline is why year-15 acquisitions keep landing in multifamily underwriting inboxes, and it is also where most of the models go wrong.

The error is almost always the same, and it is a date error rather than a rent error. The buyer identifies a real gap between restricted rents and market comps, which is usually there, and then schedules the capture of that gap to the end of the compliance period. The compliance period is not the restriction. Three separate federal clocks sit between year 15 and a repriced rent roll, and on most properties at least one of them never runs out inside a normal hold.

Why LIHTC Year-15 Underwriting Breaks on the Restriction Date

The 15-year compliance period is the recapture window — the span during which credits already claimed can be clawed back. It is the investor's clock, not the resident's. Per Treasury Regulation 26 CFR 1.42-18(a)(1)(i), the extended use period runs separately: it begins on the first day of the compliance period and ends on the later of the date the state agency specifies in the commitment or 15 years after the close of the compliance period. The federal floor is therefore 30 years, and state agreements commonly specify longer.

So a property in year 14 is not 12 months from decontrol. On the base case it is roughly 16 years from it. A five-year or seven-year hold underwritten with a mark-to-market lift in year 2 is modeling revenue that the recorded agreement on the property does not permit, and the exit buyer is the one who reads the agreement.

This is the same structural problem as a tax abatement burn-off, inverted. There, the benefit ends on a known date while the restriction survives it. Here, the credit period ends while the restriction survives it. In both cases the model carries a dated legal instrument as if it were an operating assumption, and in both cases the residual is where the mistake compounds.

What the Statute and the Regulation Actually Say

Sourced mechanics first; the reading of them follows.

• Per 26 CFR 1.42-18(a)(1)(i), the extended use period ends on the later of the agency-specified date or 15 years after the close of the compliance period.
• Per 26 CFR 1.42-18(a)(1)(ii)(B), an owner may submit a written request after the 14th year of the compliance period asking the agency to find a buyer; the period ends on the last day of the one-year period beginning on that request if no qualified contract is presented.
• Per 26 CFR 1.42-18(a)(1)(iii), if the agency presents a qualified contract and the owner rejects it or fails to act, the building remains subject to the existing commitment.
• Per 26 CFR 1.42-18(b)(5) and (c)(3)–(c)(6), the qualified contract amount is the fair market value of the non-low-income portion plus a low-income portion equal to the applicable fraction times the sum of outstanding qualifying indebtedness, adjusted investor equity carried forward by a cost-of-living adjustment, and other capital contributions, less cash distributions from or available from the building.
• Per Section 42(h)(6)(E)(ii), for three years after an early termination an owner may not evict or terminate tenancy other than for good cause, and may not increase gross rent above what Section 42 otherwise permits.
• Per the National Low Income Housing Coalition and Public and Affordable Housing Research Corporation report Picture of Preservation 2024 (December 3, 2024), an estimated 155,555 LIHTC homes allocated since 1990 lost their affordability restrictions after only 15 years, likely through the qualified contract process.
• Per the National Council of State Housing Agencies estimate cited in the Chicago Fed analysis above, roughly 10,000 units a year exit early through qualified contracts.
• Per the Daily Treasury Par Yield Curve Rates, the 10-year Treasury was 5.00% on October 26, 2026.

The two preservation figures are worth holding together. Early exits do happen, at meaningful scale over three decades, and they remain a small annual share of the stock. Both facts argue for carrying the early exit as a scenario rather than as the base case.

The Qualified Contract Is a One-Year Option at a Formula Price

The qualified contract is where optimistic year-15 underwriting usually hides, and the formula is the reason it often fails to deliver. The low-income portion is not appraised value. It is a backward-looking build-up of debt, inflation-adjusted equity, and later capital contributions, net of distributions, as set out in 26 CFR 1.42-18(c).

On a deal with meaningful remaining debt and a large original equity raise carried forward by the cost-of-living adjustment, that formula can land above what the restricted cash flow supports — which is precisely the case in which a state agency can find a qualified buyer, because the price is attractive relative to an unrestricted market value the buyer would otherwise have to pay. The owner's early exit then does not occur. Conversely, on a heavily amortized deal with modest original equity, the formula price can sit below market, which is the case advocates point to and the case several state agencies have responded to by restricting the option in their allocation plans.

Either way, the timeline is the part a model can state plainly: a request after the 14th year, a one-year agency marketing window, and then the three-year rent and eviction restriction under Section 42(h)(6)(E)(ii). On a clean run with no qualified buyer, the first lawful gross rent increase is roughly four years past the request date.

A Worked Example: What the Delay Costs

Illustrative only. A 120-unit LIHTC property in year 14 of the compliance period, 100% applicable fraction, restricted at 60% of Area Median Income (AMI). Assume restricted rents average $1,050 per month against an unrestricted comp set at roughly $1,500 — a $450 per unit per month gap, or about $648,000 of annual gross potential. Net of incremental vacancy, bad debt, and the operating cost of a repositioned rent roll, call the Net Operating Income (NOI) increment roughly $520,000. At a 5.5% capitalization rate that is about $9.5M of value, and at a 10% discount rate it is worth what the table shows depending on when it arrives.

The spread between the first row and the third is roughly $6.5M on a 120-unit deal — comfortably larger than the equity check in most year-15 acquisitions. The figures are illustrative and the rent gap in particular varies sharply by submarket, vintage, and how far the restricted rents sit below the published AMI limits. The point is the shape rather than the magnitude: the lift is a long-dated option, and discounting it like one changes the bid materially.

It also changes the debt. A lender sizing to the restricted Debt Service Coverage Ratio (DSCR) is underwriting the first row of that table, not the third, and the proceeds gap between a restricted and an unrestricted NOI at a coverage floor is typically where the capital stack stops working. The same discipline that applies to a loss to lease gap applies here, with the difference that this gap is closed by a recorded instrument rather than by leasing velocity.

The Purchase Right Sitting Above the Partnership

Even where the restriction clock could run out, the equity may not be purchasable. Section 42(i)(7) permits a right of first refusal in favor of a tenant group, resident management corporation, qualified nonprofit, or government agency at a price as low as outstanding debt plus exit taxes — far below unrestricted value on most stabilized properties.

Whether that right behaves as a true right of first refusal, requiring a bona fide third-party offer and an owner who intends to sell, or as something closer to an option, has been litigated repeatedly and has not resolved uniformly. Per rulings catalogued by Novogradac, Riseboro Community Partnership v. SunAmerica (September 1, 2020) treated the right under the common law definition rather than as an option; SunAmerica Housing Fund 1050 v. Pathway of Pontiac found the right unexercisable absent a good-faith bona fide offer (February 4, 2021), and the Sixth Circuit reversed and remanded that grant of summary judgment on May 10, 2022; and JER Hudson v. DLE Investors (Delaware Chancery, May 2, 2022) resolved a related dispute through fiduciary duty and partnership law. These are case summaries rather than legal advice — the partnership agreement and the recorded right are the documents that govern, and verifying them with counsel is a diligence item, not a modeling one.

For an acquirer, the practical consequence is narrow and important: on some year-15 deals the unrestricted residual the model is reaching for belongs, contractually, to someone else at a formula price.

Where This Breaks

The case against all of the above is that it proves too much. Year-15 deals do trade, state agencies do process qualified contracts at a rate of roughly 10,000 units a year per the National Council of State Housing Agencies estimate, and a buyer who discounts every restricted rent roll to a 16-year option is likely to never win a deal. That objection has force where the specific extended use agreement is short, where the state process is functioning and documented, and where the seller has already filed the request and burned part of the one-year clock. Diligence that reads the recorded agreement and the agency's file can move a deal from the third row of the table to the second, and that is a real underwriting edge rather than an assumption.

The rent gap itself is also softer than it looks on many properties. Where published AMI limits have risen faster than market rents, restricted rents can sit close to achievable market rents, and in some submarkets at or above them — in which case decontrol is worth little and the whole analysis is moot. Preservation economics can run the other way too: resyndication is a live alternative, and the 2025 federal tax law included a permanent 12% increase in annual 9% credit allocation authority beginning in 2026 and reduced the private activity bond financing test to 25%, per summaries published by Baker Tilly. More credit capacity may make a restricted-but-recapitalized hold more competitive against a decontrol thesis, not less.

Finally, the discount-rate treatment above is a convenience. A legal release date is not a risky cash flow in the ordinary sense, and reasonable underwriters price the delay differently — some as a timing haircut, some as a reduced exit capitalization rate, some by excluding the lift entirely and treating it as upside. Each is defensible. Carrying the lift at full value from year 2 is the one that is not, and it is the one that shows up most often in an exit capitalization rate that quietly assumes the next buyer pays for income nobody is yet permitted to collect.

The Underwriting Takeaway

LIHTC year-15 underwriting comes down to pulling one document and finding one date. The recorded extended use agreement states when the restriction actually ends, and the state agency's qualified contract file states whether an early exit is available, has been requested, or has been removed from the allocation plan. Everything else in the model follows from those two facts.

A simple test: run the deal twice, once with the rent lift arriving on the agreement's own date and once with it excluded entirely, and look at what the levered return does. A year-15 acquisition that only clears its hurdle on the mark-to-market case is a deal whose return depends on a legal event that has not happened, may be years away, and on some properties belongs to a nonprofit partner at a formula price.

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This analysis reflects current market interpretations as of the publication date and may evolve as new data becomes available. Figures cited are drawn from public sources including Internal Revenue Code Section 42 and Treasury Regulation 26 CFR 1.42-18, the Federal Reserve Bank of Chicago's October 2025 Chicago Fed Letter by Dustin Ingram and Maxwell Jaffe, the National Low Income Housing Coalition and Public and Affordable Housing Research Corporation report Picture of Preservation 2024, court rulings as catalogued by Novogradac, published summaries by Baker Tilly, and the Daily Treasury Par Yield Curve Rates, and are subject to revision. Nothing in this post is investment advice; readers should conduct their own diligence and consult qualified professionals before making investment decisions.