Financing Credits
In commercial real estate, the conversation around financing usually starts with two things: debt and equity.
But in today’s market, the capital stack is often far more complex.
Public incentives and financing credits can materially change how a deal pencils. When used correctly, these tools can lower the cost of capital, reduce equity requirements, improve internal rates of return, and in some cases make a project viable that otherwise would not move forward.
Understanding these tools is becoming increasingly important for developers, investors, and advisors navigating modern commercial real estate transactions.
Five financing credits in particular play a significant role in shaping development feasibility:
Tax Increment Financing (TIF)
New Markets Tax Credits (NMTC)
Historic Tax Credits (HTC)
Low-Income Housing Tax Credits (LIHTC)
Energy and sustainability-related tax credits
These programs are not just accounting benefits. They are capital stack tools that can fundamentally alter how projects are structured.
Let’s break down how each one works.
1. Tax Increment Financing (TIF)
Tax Increment Financing, commonly referred to as TIF, is one of the most widely used development incentives available to municipalities and developers.
At its core, TIF allows a city or municipality to use the future increase in property tax revenue generated by a new development to help finance that development upfront.
Here’s the simplified version.
Imagine a property currently generates $100,000 per year in property taxes. After redevelopment, that same property generates $400,000 annually.
The difference—$300,000 per year—is the tax increment.
Municipalities can pledge that incremental tax revenue over time to reimburse or finance portions of the project.
Eligible costs typically include:
Site preparation and grading
Public infrastructure
Utility improvements
Parking structures
Environmental remediation
From a capital stack perspective, TIF often behaves like subordinate financing. It reduces the amount of senior debt or equity required, which can significantly improve project feasibility—especially for large-scale urban redevelopment projects.
2. New Markets Tax Credits (NMTC)
New Markets Tax Credits, or NMTCs, are one of the most impactful—and complex—financing tools in commercial real estate.
The program was designed to incentivize private investment in low-income or underserved communities by offering federal tax credits to investors.
The total credit equals 39% of the qualified investment, claimed over a seven-year period.
In practice, developers rarely use these credits directly. Instead, a tax credit investor, often a large financial institution, contributes equity to the project in exchange for the tax credits.
For example, consider a $20 million development located in a qualifying census tract.
Through the NMTC program, the project might receive $3 million to $5 million in subsidy through tax credit equity.
That equity reduces the overall cost of the project and can dramatically improve project economics.
NMTCs are frequently used for projects such as:
Grocery-anchored retail centers
Industrial or manufacturing facilities
Medical offices
Community-focused mixed-use developments
When structured properly, NMTCs can significantly lower the cost of capital and reduce the amount of conventional equity required.
3. Historic Tax Credits (HTC)
Historic Tax Credits are particularly important for adaptive reuse and redevelopment projects involving historic structures.
The federal Historic Tax Credit program provides a 20% tax credit on qualified rehabilitation expenses for the restoration of historically significant buildings.
Many states also offer their own historic tax credits, which can often be stacked with federal credits, dramatically increasing the total benefit.
For example, if a developer spends $10 million rehabilitating a historic building, the federal credit alone could generate $2 million in tax credits. When combined with state programs, the total subsidy may be even larger.
As with other tax credit programs, developers typically monetize these credits by bringing in a tax credit investor who contributes equity in exchange for the credits.
Historic Tax Credits are frequently used in:
Downtown revitalization projects
Office-to-mixed-use conversions
Boutique hotel developments
Multifamily adaptive reuse
These programs allow developers to preserve architectural character while improving project returns.
4. Low-Income Housing Tax Credits (LIHTC)
Low-Income Housing Tax Credits, or LIHTCs, are the foundation of affordable housing finance in the United States.
The program provides tax credits to developers who build or rehabilitate rental housing reserved for low- to moderate-income tenants.
There are two primary types of LIHTCs:
9% Credits
Highly competitive and provide deeper subsidy.
4% Credits
Typically paired with tax-exempt bonds and used for larger projects.
The credits are claimed over 10 years and are sold to investors to generate equity for the project.
In many cases, LIHTC equity can cover 50% to 70% of total development costs, dramatically reducing reliance on conventional financing.
While LIHTCs are primarily associated with multifamily housing, they are also frequently used in mixed-use developments where affordable residential units are combined with retail, office, or community space.
The biggest advantage of LIHTC financing is stability. By reducing debt requirements, these projects often achieve stronger long-term cash flow and financial resilience.
5. Energy and Sustainability Tax Credits
The final category of financing incentives involves energy efficiency and sustainability-related tax credits.
These programs reward developers for incorporating energy-efficient systems and renewable energy infrastructure into their projects.
Examples include:
Investment Tax Credit (ITC) for solar energy systems
Section 179D energy-efficient commercial building deduction
Credits for energy storage and EV infrastructure
For instance, installing rooftop solar on an industrial or retail property may qualify for a 30% investment tax credit on the system cost.
Beyond the immediate tax benefits, these incentives can improve project economics in several ways:
Lower operating expenses through reduced energy costs
Increased tenant demand for energy-efficient buildings
Higher asset values tied to sustainability features
They also align with the growing emphasis on ESG considerations among lenders and institutional investors.
The Modern Capital Stack
The biggest takeaway is simple:
The capital stack in commercial real estate today is far more complex than just debt and equity.
Developers who understand how to layer financing credits and public incentives into their deals often unlock opportunities that would otherwise never move forward.
These tools can:
Reduce development risk
Improve project feasibility
Lower capital costs
Increase investor returns
In competitive markets, the difference between a deal that works and one that doesn’t often comes down to how creatively and strategically the capital stack is built.
If you’re underwriting deals without considering financing credits and public incentives, you may be leaving significant value on the table.