The low-income tax credit works by allowing the credit
claimed by the taxpayer pro rata over a period of 10 years to be
used in connection with both new construction and renovation
of residential rental units. Taxpayers claiming the LIHTC may
use the tax credit to offset their regular tax liability, subject to
certain limitations. Often, the LIHTC are sold to a financial
institution through a tax credit syndication since LIHTCs are
subject to alternative minimum taxes and are most advantageous
if owned by financial institutions or corporate owners.
To avoid tax credit recapture and the repayment of any tax
savings, LIHTC taxpayers must comply with all applicable
compliance rules and retain an ownership interest for at least
a 15-year period. As a result, an investor in the project will
typically retain its participation in the project for at least the
compliance period. In addition, most state allocating agencies
require an additional restriction on rents for a specified period
beyond the initial 15-year compliance period, typically evidenced in an additional 15-year extended use agreement.
“Sale” or Syndication of the
LIHTC: Source of Equity
As mentioned above, the LIHTC provides an additional
source of equity for the construction of rental low-income
housing projects for families and seniors. Once a developer is
allocated tax credits by a state allocating agency, such developer
“sells” the tax credits to an investor or syndicator by entering
into a limited partnership or limited liability company with such
investor or syndicator. The investor’s or syndicator’s participation
in the newly formed entity is typically 99.99 percent of the
profits, losses, depreciation and tax credits, as a limited partner
or member of the entity, and the developer typically serves as the
general partner or managing member of the entity, holding the
remaining 0.01percent of the newly formed entity. The capital
raised by such sale or syndication reduces the amount of equity
that a developer would have to obtain from loans or the issuance
of debt to cover the costs of the project. Additional benefits to an
investor acquiring the LIHTC include allocating the depreciation
of the buildings owned by the entity, which is tax deductible,
based on the investor’s equity participation in the entity.
EB-5 as Part of the Capital Stack
Although EB-5 can be used in several ways within the capital
stack, it is most common for projects to utilize EB-5 investment
either in a first mortgage position or as preferred equity or
subordinated debt. EB-5 financing does not typically utilize traditional institutional lender underwriting criteria, and therefore
EB-5 financing can be deployed as first mortgage debt for projects which might not have reached the leasing requirements or
other criteria typically required by an institutional lender. Given
the respective current costs of institutional first lien financing
for projects where such financing is available, mezzanine de