A Practitioner’s Reference Guide to Construction Debt
Construction debt is one of the most technically complex and operationally demanding components of affordable housing development. For developers, program managers, and public agency staff working in this space, understanding how construction financing works — from term sheet to loan payoff — is not optional. It is the foundation on which every project is built, literally and financially.
This guide is designed to fill a gap in the practitioner literature. Most resources on affordable housing finance focus on tax credits, subsidy programs, or permanent debt. The construction period — when the most money is moving, the most risk is concentrated, and the most consequential decisions are made — is often treated as a black box. This guide opens that box.
Drawing on real transaction term sheets from affordable multifamily housing projects in California, the guide explains construction debt from the ground up: what it is, how it is structured, how it is sized, how it is priced, and how it is managed from closing through conversion. It is written for practitioners, not theorists. Every section connects to decisions that real developers, lenders, and program staff face on real deals.
What the Guide Covers
The guide begins with the fundamentals — the difference between conventional and tax-exempt construction debt, the back-to-back bond structure that underlies most 4% LIHTC transactions in California, and the federal rules that govern how bond proceeds can be used. It explains the mechanics of the 25% bond financing test enacted by the One Big Beautiful Bill Act in 2025, including how California’s CDLAC has implemented higher safe-harbor minimums and what this means for the size of the taxable tranche in today’s deals.
From there, the guide moves through loan terms in detail: how construction loan terms and extensions work, how interest rates are structured using SOFR-based conventions, how to size an interest reserve using both a detailed drawdown projection and a simplified average balance method, and how to inventory every fee category — from origination to cost of issuance — that belongs in a project’s sources and uses.
The guide addresses collateral and guarantees with equal rigor, explaining the security package construction lenders require, the range of recourse structures from full repayment guaranty to completion-only support, and the evolving trend toward expanded bad-boy carve-outs and ongoing liquidity covenants. It explains ground lease provisions, entity structure requirements, and what happens to recourse when a construction loan converts to permanent financing.
A full section on tax-exempt bond mechanics covers the TEFRA hearing process, the 95% qualified use requirement, the 2% cost-of-issuance limitation, and the good-cost/bad-cost analysis that bond counsel drives for every transaction. A dedicated section on the taxable tail explains why it exists, what it finances, and how California’s volume cap strategy has made it larger and more consequential in recent years.
The guide covers forward commitments and permanent loan conversion in depth — including conversion requirements, stabilization thresholds, how lender-underwritten NOI differs from trailing actual NOI, yield maintenance, and the Delivery Assurance Note that makes conversion failure an expensive proposition.
LIHTC equity gets its own section, focused on installment schedules, “no earlier than” funding restrictions, the relationship between equity timing and interest reserve sizing, and the critical importance of modeling the final conversion installment as a construction loan payoff source.
Draw administration — often overlooked in finance guides — is treated as the operational core of construction loan management. The guide explains what goes into a monthly draw package, how disbursement controls work, how contingency is governed, how draw sequencing interacts with equity and subordinate funds, and what labor compliance requirements apply under Davis-Bacon, California prevailing wage, and Section 3.
The guide closes with a framework for selecting a construction lender, a practitioner checklist organized by deal phase, a legislative update on OBBBA changes effective in 2026, and a full glossary of key terms.
Who This Is For
This guide is written for affordable housing developers, project managers, public agency lending staff, housing finance analysts, and anyone who needs to read a construction term sheet intelligently, model construction debt accurately, or manage a construction loan from closing through conversion.
It is a practitioner’s tool, not academic theory. The goal is to make the complexity of construction debt legible — so that practitioners can ask better questions, make better decisions, and build more housing.
