Skip to content 
Affordable housing lenders are watching more LIHTC deals slip into distress in 2026 as a historic wave of multifamily loan maturities collides with high refinancing rates. Rising rates, expiring loan modifications, and tightening operating margins are pushing borrowers and lenders back to the negotiating table at the same time.
If you’re a general partner, syndicator, or housing authority asset manager watching a loan approach maturity, understanding how lenders restructure distressed LIHTC deals is the first step to protecting your property and your investors. This guide walks through the actual tools lenders use, from debt right-sizing to a full HUD Mark-to-Market workout, so you know what’s coming before the lender’s timeline forces your hand.
What Does It Mean to “Right-Size” a Distressed LIHTC Loan?
Right-sizing means bringing a loan’s principal or monthly payment down to a level the property can afford. Lenders look at net operating income first, then check it against the debt service coverage ratio to see how far off the loan really is.
From there, a lender has three basic paths: ask for partial repayment, forgive part of the debt, or blend both. None of this is automatic. It’s a negotiation, and the final numbers depend on how much leverage each side believes they have.
For LIHTC deals specifically, the LIHTC deal structure matters here too. A 9% deal and a 4% bond-financed deal don’t right-size the same way, and that difference shapes how long the process takes.
Why Are More LIHTC Deals Facing Restructuring in 2026?
According to the Mortgage Bankers Association, $875 billion in commercial and multifamily mortgage debt is scheduled to mature in 2026, with another $652 billion following in 2027; 13% of mortgages backed specifically by multifamily properties fall within the 2026 total.
A lot of that debt was originated in 2020 and 2021, when rates were low and rent growth projections were optimistic.
Neither of those assumptions held up. Lenders spent 2024 and 2025 extending loans and modifying terms just to buy time, but that runway is running out now.
For LIHTC deals specifically, this maturity pressure lands on top of compliance rules and, for bond-financed properties, added legal complexity that conventional multifamily loans don’t carry.
Does a Lender Always Try to Sell a Non-Performing LIHTC Loan Before Restructuring It?
Not always, but it’s often the first option a lender considers. Selling a non-performing loan lets the lender walk away from the workout entirely, passing that risk and effort to a buyer at a discount.
For most commercial real estate, this happens all the time. There’s a large, active market of investors who specialize in buying distressed debt and resolving it themselves.
LIHTC deals are different. The buyer pool for a non-performing LIHTC loan is much narrower, which is exactly why restructuring tends to win out over a straight sale.
What Restructuring Tools Do Lenders Use on a Distressed LIHTC Deal?
Lenders generally move through these tools in order, starting with the least disruptive and escalating only if the property keeps underperforming.
- Forbearance agreement. Payments pause or reduce temporarily while both sides negotiate.
- Loan modification The rate, amortization schedule, or maturity date changes, but the balance stays the same.
- A Note / B Note bifurcation The debt splits into a smaller note the property can support now and a second note paid only from future cash flow or a sale.
- Capital stack rebuild Fresh subsidy, soft funds, or new equity fill the gap instead of a straight refinance.
- Deed-in-lieu of foreclosure The borrower hands over the property directly, avoiding a formal foreclosure process.
Each tool addresses a different level of distress, and most LIHTC deals move through more than one before the situation resolves.
What Happens to the LURA If a Distressed LIHTC Property Is Foreclosed On?
Foreclosure is usually the last resort, used only after other restructuring options have failed. Once it happens, the Land Use Restriction Agreement becomes the most important document in the room.
A lender can choose to wipe out the LURA entirely, which frees the property for market-rate use and often increases its resale value. Or the lender can preserve it, keeping the property affordable and protecting the tax credits still tied to the deal.
This decision affects far more than the loan. It determines whether the property stays part of the affordable housing supply or exits the program completely.
Does a Debt Restructuring Trigger LIHTC Recapture?
Restructuring on its own doesn’t trigger recapture under IRC Section 42(j). It’s the actions taken during a restructuring, not the restructuring itself, that create the risk.
A foreclosure that removes the property from qualified use is the clearest trigger, especially if it happens while the property is still inside its 15-year compliance period. Credits already claimed can be clawed back if the property stops meeting program requirements.
This is one of the biggest differences between LIHTC deals and conventional multifamily workouts. The tax exposure doesn’t stop at the borrower it extends to every investor who claimed credits on the deal.
How Does HUD’s Mark-to-Market Program Fit Into a LIHTC Workout?
For properties carrying a HUD-insured mortgage alongside project-based Section 8 assistance, there’s a separate federal track available called Mark-to-Market, or M2M. It was created under the Multifamily Assisted Housing Reform and Affordability Act of 1997.
HUD’s Office of Affordable Housing Preservation runs the program through contracted Participating Administrative Entities, who negotiate a restructuring plan directly with the owner. That plan can include a reduced first mortgage and a second note tied to future cash flow.
This runs alongside a private lender’s own workout process, not instead of it. Housing authorities and owners managing LIHTC deals with HUD assistance need to track both tracks at the same time.
What Happens If a Lender and Borrower Can’t Agree on a Workout?
When negotiations break down, the lender’s remaining options are foreclosure or appointing a receiver to take over the property. On the borrower’s side, filing Chapter 11 bankruptcy is usually the last available move.
A bankruptcy filing triggers an automatic stay, which halts foreclosure immediately. In some cases, it also lets the borrower cram down a reorganization plan on the lender, paying the full value of the secured claim under new terms instead of the original loan.
This path is expensive and slow, and it doesn’t fix the underlying problem on its own. For LIHTC deals specifically, it’s a genuine last resort, not a negotiating strategy.
How Shamrock Helps Owners Navigate a LIHTC Restructuring
Shamrock Development is a national affordable housing consulting firm that works with developers, lenders, syndicators, housing authorities, and investors across the country. The firm specializes in land entitlement, deal structuring and underwriting, LIHTC asset management, and workouts and restructuring for distressed housing assets.
The owner’s position depends on understanding the LIHTC deal structure behind their specific loan and what leverage exists when a lender raises the possibility of a workout. Shamrock helps owners model right-sizing scenarios, quantify the refinance gap, and coordinate with bond counsel or HUD’s Participating Administrative Entities when those tracks apply.
Getting ahead of that conversation matters more than reacting to it if your property is approaching a maturity date or a DSCR covenant breach.
Frequently Asked Questions
What is an A Note / B Note split in a LIHTC workout?
It splits the debt into a smaller note the property can pay now and a second note that only gets paid from future cash flow or a sale.
Does a lender always try to sell a non-performing LIHTC loan before restructuring it?
Not always, loan sale is often considered first, but the narrow buyer pool for LIHTC deals usually pushes lenders back toward restructuring instead.
What happens to the LURA if a distressed LIHTC property is foreclosed on?
It depends on the lender. They can extinguish it to boost resale value or preserve it to protect the tax credits and keep the property affordable.
Does a debt restructuring trigger LIHTC recapture?
Not automatically, recapture risk mainly comes from specific events, like a foreclosure during the compliance period, not the restructuring itself.
What is HUD's Mark-to-Market program?
A federal restructuring track for HUD assisted properties, run through the Office of Affordable Housing Preservation to reduce mortgage debt on distressed assets.
What happens if a lender and borrower can't agree on a LIHTC workout?
The lender can move to foreclosure or receivership, while the borrower's main option is usually Chapter 11 bankruptcy.
Why are more LIHTC deals facing restructuring in 2026?
A large wave of loans from the low-rate years is maturing now, right as extended terms run out and rates remain high.
Conclusion
Distressed LIHTC deals rarely follow one script. Whether a lender starts with a forbearance agreement, moves toward a full capital stack rebuild, or opens a Mark-to-Market conversation, the process depends on the property’s numbers and the loan’s structure.
Knowing how lenders restructure distressed LIHTC deals gives owners, syndicators, and housing authorities a real advantage. It turns a lender-driven timeline into a conversation both sides can negotiate.
The properties that come out of a workout in the best shape are almost always the ones where the owner understood the process early, not the ones caught off guard by it.
