Certificated Credits Guide

As funding sources continue to tighten, local policymakers are increasingly looking toward state Low Income Housing Tax Credit (LIHTC) programs as effective affordable housing gap fillers. These state LIHTC programs can vary widely, and issuing authorities must make certain structural choices in order to accurately fit local needs.

Whether or not to make state credits certificated is one such choice. Though still a relatively novel practice, certificating credits can offer project stakeholders increased flexibility — increasingly important as market conditions continue to shift between application and completion.

Nuts and Bolts: Allocation vs. Certification
Tax credits can either be allocated or certificated. Allocated credits are the “typical” model, and mirror the federal LIHTC program. Allocated credits are generated as a result of an equity contribution to a project, with an investor required to take ownership interest in the project. That ownership interest lasts through a project’s compliance period – 15 years or more, in most cases.

Certificated credits flip the posture and are purchased from a project without requiring ownership stake.

That shift matters in the documents: The state credit becomes a standalone purchase, with its own closing conditions and buyer protections, rather than another set of partnership rights. “Investors are not taking an ownership interest — they’re just buying the tax credits,” explains Stephen Strain, an affordable housing attorney in California and CEO of Sabelhaus & Strain PC.

Certificated credits are typically issued for shorter periods, often one year at a time, and are often transferrable between multiple investors.

Thus, if well structured, certificated tax credits can lead to more efficient, flexible investment options and more competitive credit pricing.

However, because the buyer is outside ownership, recapture is often more difficult to enforce, and investors may feel slightly uneasier since they no longer have principal oversight over a project’s qualified basis. This puts more pressure on developers to “do what they said they were going to do,” Strain says.

In Strain’s experience, the market answer for these increased risks is contractual credit support. “If a developer screws up, and the issuing authority recaptures your state credits,” then “we guarantee you your benefit” via contract. Buyer comfort is then less about partnership control rights and more about contract remedies, including the representations, covenants, indemnities, and the creditworthiness of the parties standing behind them.

In practice, however, Strain says recapture has been a non-issue in his experience managing certificated transactions. “I have actually never been involved in a deal where recapture even came up,” he says, citing disciplined paperwork adherence as a factor for success.

Of the 24 states counted in Novogradac’s 2025 state LIHTC tracker, 11 allow for some form of credit certification. Of that group, three states allow for certification only; the rest authorize both allocated or certificated credits.

As with every other element in a state’s LIHTC structure, issuers of certificated credits can embed rules that vary from state to state, such as credit transferability, taxable vs. non-taxable credit-derived income, pricing floors and credit issuance duration.

Case Study: California’s Decade of Certification
One example of a seasoned certificated credit comes from California, where certification has been an authorized credit issuance for over a decade. In 2016, the state’s legislature authorized the California Tax Credit Allocation Committee (CTCAC) to issue certificated state LIHTCs, allowing developers to opt-in to certification or stick with traditional allocations. According to the State Treasurer’s Office, the structure was intended to reduce the state credit’s impact on an investor’s federal tax position and support higher state-credit pricing.

The certificated program contains several key requirements “straight from the legislation that created it,” says Marina Wiant, CTCAC’s executive director. For practitioners, that means the guardrails are not merely “guidance” — they are hard constraints.

The first thing a development team must decide is whether to “opt in” to the certification program, or to remain with a more traditional allocated structure. In California, the timing of this election has changed a bit over the years. Wiant says CTCAC historically required an election “at the time of application,” with the ability to “rescind later,” (but not to opt out and later opt in). She says added flexibility has been implemented “as of January 1”; a Franchise Tax Board bill analysis for AB 480 describes a statutory change that removes the prohibition on opting in later, allowing an election to be made before CTCAC allocates the final credit amount.

The state also requires the certification-electing entity to be a nonprofit, furthering a nonprofit-forward trend in state affordable housing policy.

Nonprofit participation is not ornamental in California LIHTC deals, and certification raises the stakes. Strain says “almost every tax credit project has a nonprofit” in part because nonprofit participation unlocks a welfare/property tax exemption. “Property taxes can be exorbitant, so the nonprofit is essential to making the deals pencil.”

He also emphasizes that California has worked hard to ensure that a partner nonprofit’s role is not simply window dressing in order to unlock additional funding. “All of the nonprofits play an important role in providing services and overseeing the operation of the project for compliance with the affordability requirements and several other duties that are required for that. They have real duties, real contributions, and real obligations they have to satisfy.”

Certification furthers the state’s mission to embed nonprofits deep into LIHTC deals by requiring that applicants for certificated credits be nonprofits. Strain warns teams to plan ahead. If they decide they would rather certificate than allocate after having applied for state LIHTCs, they will not be eligible if “your nonprofit was not your applicant.”

Turning Proceeds into Affordable Housing
Certification’s most consequential element is the mechanics of how proceeds are made project-usable.

In California, Strain describes this as a two-step process. First, the certificated credits “go directly to the nonprofit partner,” which sells them under a purchase and sale agreement; then, with “a promissory note, a loan agreement and a deed of trust,” the nonprofit “loans the proceeds to the limited partnership that owns the project.” In effect, a “credit-only” sale becomes gap financing, often subordinating debt from the nonprofit into the ownership entity.

That loan-back is where underwriting and negotiation concentrate — term, security, repayment priority, and lender acceptability. Strain notes these loans are typically structured “with a term that coincides with the affordability.” For lenders and investors, the practical work is between creditors, how that loan sits relative to permanent debt and other soft sources.

Guardrails and Oversight
California pairs certification with program guardrails that are directly relevant to proceeds sizing and closings. The Treasurer’s Office sets a minimum pricing floor of $0.80 per $1.00 of credit, and states that the purchaser is not responsible for project compliance; the ownership entity remains liable.

CTCAC’s administrative role focuses on tracking — rather than negotiating — sale terms. Deputy director Anthony Zeto says that this contrasts with allocated credits, where CTCAC enters into a regulatory agreement with the recipient “because they’re part of the ownership entity.” For certification, sponsors “can sell those credits” at will, but “have to notify us when they do sell it.” CTCAC then reports the sale to the Franchise Tax Board. This account is backed up by Treasurer’s Office guidance, which also notes that credits may be resold multiple times.

Practitioner Takeaways: Successfully Leveraging Certificated Credits
Though these hoops may appear onerous, certificated credits can have real upside if leveraged correctly. Strain says that this begins with preserving optionality early in the development timeline. “Being thoughtful about who your applicant is in the beginning can at least leave open the option,” he says.

Second, Strain says it is critical to underwrite the loan-back like real capital stack debt: The note, security package, repayment priority, and lender acceptability are what convert a certificated sale into deployable proceeds.

Third, paper the risk: When the buyer is outside ownership, buyer protection lives in contract. “The credits are contingent” on sponsor-side performance, and contract-enshrined guarantees and indemnities can carry the load of risk mitigation, Strain explains.

Finally, Strain encourages parties to re-verify certification-election rules at key milestones. As in California, election frameworks may be described differently across primary sources and subject to statutory change. Teams should stay apprised of current mechanics for the relevant reservation year, and document the rule set they rely on.

Certification is not the right answer for every deal. But in a market where state credits routinely fill feasibility gaps — and where pricing can move between application and completion — certificated credits are increasingly a structure practitioners need to understand well enough to use, or deliberately decline, without losing time mid-transaction.