The multifamily capital stack in 2026: LIHTC, MSHDA, brownfield, and conventional debt

A multifamily development in Michigan in 2026 is almost never financed with a single source of capital. The economics of building rental housing at quality, at scale, and at rents that work for the local market generally require a stack: senior debt, gap financing, tax credit equity, sponsor equity, and one or more incentive layers. Each layer has its own underwriting standards, its own timeline, its own legal documentation, and its own way of breaking the deal if it is mishandled. The job of the developer, in the financing phase, is to assemble the stack in the right order, with the right counterparts, on terms that hold together when the construction draws actually start flowing. This article is the working framework we use on Michigan multifamily projects in 2026.

Why the capital stack matters more in multifamily than in industrial

A multifamily stack is structurally more complex than an industrial build-to-suit’s. First, the operating economics of multifamily, particularly mixed-income or affordable product, cannot support a conventional LTV at market debt pricing without supplemental capital. Second, the federal and state programs that close the gap (LIHTC, MSHDA, brownfield TIF, OPRA, historic credits) come with compliance regimes that affect rent setting, investor reporting, and the lease form. Third, the typical GP/LP partnership structure exists specifically to receive and distribute tax credit benefits, adding entity-level complexity industrial BTS does not have.

The result: the multifamily developer’s job at financing is a project management exercise. Construction loan closing, LIHTC equity closing, and MSHDA gap closing have to be choreographed to a single closing event.

Conventional debt

The senior debt layer is the foundation of the stack and is usually the first thing the developer underwrites against. The sources fall into a few categories.

Bank construction debt. Regional and community banks in West Michigan (Mercantile, Fifth Third, Independent, Macatawa, and others) underwrite construction debt on product they are comfortable with. LTC ratios on conventional multifamily construction debt generally run 60 to 70 percent, driven by stabilized DSCR and market view.

Permanent debt. Once stabilized, the construction loan rolls into permanent financing: Fannie and Freddie DUS lenders, HUD (221(d)(4) or 223(f)), life insurance debt for larger product, or bank perm. The construction lender wants a credible take-out, so the perm source affects the construction structure.

Tax-exempt bonds. For projects pursuing the 4 percent LIHTC, tax-exempt bond financing is the path to the credit. Bonds are issued by a state or local conduit (in Michigan, MSHDA or a local EDC or Housing Authority). The bonds carry their own compliance but unlock the non-competitive 4 percent credit.

The piece that consistently surprises new developers: senior debt is sized to what operating economics support, not what the developer wants. Underwriting an aggressive senior number and trying to backfill the gap later is how deals fall apart at closing.

LIHTC: 4 percent and 9 percent

The Low-Income Housing Tax Credit, allocated through MSHDA in Michigan, is the central tax-credit-equity layer in the multifamily stack for any project with an affordability component. The program has two flavors, and they behave very differently.

9 percent credits

The 9 percent credit is a competitive allocation. MSHDA runs an annual Qualified Allocation Plan (QAP) process that scores applications against the state’s housing policy priorities. The credit, when awarded, generates roughly 70 percent of the project’s eligible basis in tax credit equity over a ten-year credit period.

The competitive piece is real. Far more applications get filed than get awarded in any given QAP round, and the projects that win are the ones that score well against the QAP criteria, which change cycle to cycle. The QAP rewards projects that align with current state housing priorities (deeper affordability, specific geographies, certain populations, energy performance, leverage of other public investment), and the developer who builds the project to fit the QAP rather than designing the project and then trying to retrofit it for the QAP is the one who tends to win allocations.

Belknap Place Apartments, our 50-unit LEED Gold mixed-income project in Grand Rapids, was a 9 percent LIHTC project. The QAP scoring, the design, the rent restrictions, and the energy performance were structured together from early in the design phase.

4 percent credits

The 4 percent credit is non-competitive on the federal allocation side but requires tax-exempt bond financing covering at least 50 percent of the aggregate basis. The 4 percent credit, when paired with bond financing, generates roughly 30 percent of the project’s eligible basis in tax credit equity.

The non-competitive label is partially misleading. MSHDA still reviews the project, the bond allocation has to be available, and the structuring complexity is real. But for large multifamily projects that can absorb the bond financing structure, the 4 percent credit is a reliable layer of the stack in a way that the 9 percent is not.

The pricing on tax credit equity is set by a competitive market of LIHTC investors (banks meeting CRA obligations, corporate investors, and specialized LIHTC funds). Pricing has varied meaningfully cycle to cycle and is sensitive to the federal corporate tax rate and to the overall LIHTC investor demand.

Diamond Place, our 165-unit mixed-income mixed-use project, used the 4 percent credit structure paired with bond financing. The scale of the project and the bond capacity available made the 4 percent path the right structure.

MSHDA gap financing

MSHDA, beyond its LIHTC allocation role, runs gap financing programs that supplement the LIHTC equity and the senior debt on qualifying affordable projects. The structure typically takes the form of a soft second mortgage or a subordinate loan, with terms designed to make the affordable rent structure work alongside the senior debt.

The gap is real on most affordable projects. The senior debt, sized to the restricted rents, plus the LIHTC equity, plus the sponsor equity, generally does not add up to the project’s development cost. MSHDA’s gap financing fills the difference. The terms are favorable (low or no interest, deferred payment, soft repayment from cash flow) because the project would not otherwise pencil.

The MSHDA application and approval process runs in parallel with the LIHTC application and is woven into the QAP scoring on 9 percent deals. The developer who treats MSHDA as a separate, sequential conversation rather than an integrated part of the LIHTC structuring is going to lose time and probably money.

Brownfield TIF and OPRA

For multifamily projects on sites that qualify under Michigan’s Brownfield Redevelopment Financing Act (contaminated sites, functionally obsolete properties, or blighted properties under local plan criteria), the Brownfield TIF layer can fund a meaningful portion of site preparation, demolition, environmental remediation, and certain infrastructure work. We have written about the brownfield mechanics in detail in our brownfield redevelopment article, and the same framework applies on multifamily projects.

For adaptive reuse projects on properties that meet the Obsolete Property Rehabilitation Act criteria, OPRA freezes the property tax at the pre-rehabilitation assessed value for up to twelve years, capturing the increment over the base to support the project economics. OPRA is heavily used on downtown adaptive reuse multifamily, and where it is available it can be the difference between a project that pencils and one that does not.

The Marywood / Academy Manor project, our 109-unit senior multifamily adaptive reuse of the historic Dominican Sisters Motherhouse in Grand Rapids, drew on a layered structure that combined LIHTC equity, MSHDA support, and the adaptive reuse incentive framework. The project would not have been financeable on conventional debt alone, and the layered stack is what made the historic preservation outcome possible.

Sponsor equity and the GP/LP structure

The sponsor equity layer is the smallest in dollar terms but the most structurally important. The sponsor (the developer entity) puts in equity, takes on the developer fee, and serves as the general partner of the partnership that owns the project. The tax credit investors come in as limited partners, contributing the bulk of the equity in exchange for the tax credit allocations and the associated tax benefits.

The GP/LP agreement is the central legal document. It governs profit and loss allocation, developer fee timing, cash flow distribution, LP rights to compel actions, and exit provisions at the end of the 15-year compliance period. Terms are heavily negotiated and have real economic consequences.

The developer fee is the sponsor’s primary compensation, and its payment timing (some at closing, some over construction, some deferred to operations) is a structuring decision. Deferred developer fee is a common gap-filling tool, but the sponsor’s balance sheet funds that gap.

The GP role carries real ongoing obligations. The 15-year compliance period requires operating discipline (income certification, rent setting, tenant file management, agency reporting), and the GP is on the hook. A developer who treats the role as passive will have problems three or five years in.

Closing

The multifamily capital stack in Michigan in 2026 is one of the more sophisticated financing structures in commercial real estate, and the developer’s job at the financing phase is to assemble the layers in the right order with the right counterparts. The senior debt sizes to the operating economics. The LIHTC equity flows from the QAP allocation or the 4 percent / bond structure. MSHDA gap financing fills the difference on qualifying projects. Brownfield TIF and OPRA layer on top where the site qualifies. Sponsor equity, the developer fee, and the GP/LP structure complete the picture.

For more on how we approach this work, see the Belknap Place Apartments page, the Diamond Place page, the Marywood / Academy Manor page, and our multifamily development capability page.

If you are scoping a multifamily project in West Michigan and want to talk through how the capital stack would actually come together on your specific site and program, get in touch.