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Low Income Housing Tax Credits ("LIHTC”)

Saturday, October 09, 2010

 ... by Warren Kirshenbaum

In this period of difficulty obtaining adequate bank financing, it benefits developers to structure the financing of projects using mechanisms that allow for less of an equity contribution.   Owners/developers of affordable housing are able to receive low-income housing tax credits (“LIHTC’s”) by providing for an indirect federal subsidy of qualified low-income housing.  Owners receiving LIHTC’s will rent to tenants earning 80% or less of the area’s Average Median Income (“AMI”). These tenants will qualify for a below-market rent, which the tax credits effectively subsidize in exchange for the project’s commitment to restrict rents, and to rent to low-income people for a designated time period.  LIHTC’s offset federal taxes on a dollar-for-dollar basis for a ten year period and are awarded to owners of low income housing by application to the State’s housing department. Developers “sell” the tax credits at a discount to syndicators (investors) to raise the project’s equity, resulting in less or no equity being needed from the developer.  The developer is required to restrict rents to below market rates, making the property affordable to low-income individuals, and this restriction can remain in place for 15 years or more.  Tax credit investors usually claim a limited partnership interest with a 99.9% interest in the limited partnership, as well as participation in cash flow or sale proceeds.  Although tax credit deals have many variations, developers usually utilize 9% tax credits for new construction, or substantial rehabilitation with no federal subsidy.  These tax credits subsidize 9% of the project’s qualified building costs every year for ten (10) years; or 4% tax credits for federally subsidized new construction or acquisitions of existing buildings.  This program subsidizes 4% of the project’s qualified building costs every year for ten years.  As with most deals, the equity and debt are funded in periodic draws from the project with requirements stipulated by agreement.  These projects must restrict their rents and benefit low-income tenants for a fifteen year compliance period.  This restriction is usually detailed in a recorded Land Use Regulatory Agreement (“LURA”).  Consequently, a tax credit financed project requires constant monitoring of the rents and income requirements of the tenant population to avoid a recapture of the tax credits by the IRS.  In an affordable housing transaction, a Stipulated Sum contract is awarded for the construction, and a property management company will manage the project, thereby shouldering the compliance responsibilities of IRC $42.  Various other funding sources add to the multi-layered financing structures of these deals.  

We, at Kirshenbaum Law Offices and the Cherrytree Group have experience in all aspects of LIHTC transactions, from the development and construction related issues to the financial structuring and tax credit implications and structuring of the transaction.  Specifically, we can assist in many of the issues that arise in LIHTC deals, such as:

  • Purchasing affordability restricted apartment complex(es);
  • Obtaining bridge loans or pre-development loans;  
  • Assistance with loan conversions;
  • Post Compliance Period Restructurings;  
  • Historic tax credit rehabilitation transactions with or without an affordable component;
  • HUD transactions; and
  • New Construction for Multifamily and Seniors.  

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