About The Low Income Housing Tax Credit Program or LIHTC

About The Low Income Housing Tax Credit Program or LIHTC 2008-07-17 19:29:33
by JY

Uncle Sam does not build a complex himself for low income family, it is the investors that using one of the low income housing program to build such project.

you need to find out what program was it build with, section 8? Farm Home Credit? senior housing? or the newer LIHTC?

The Low Income Housing Tax Credit (LIHTC or Tax Credit) program was created by the Tax Reform Act of 1986 for low- and moderate-income household, usually investors use either tax free bond or private loan to build the project and the project will receive a tax credit equal to 90% (Private funded project) or 40% (public funded project - tax free bond) of their hugely inflated cost (one project I saw was 95k per unit in Indiana, and that is crazy) over a 10 year period, most of the time, the owner of the property will not be able to use all of the tax credits, and therefore, many LIHTC properties are owned by limited partnership groups that are put together by syndicators, the sell the tax credit on 75 cents for each dollar to companies and private investors to against their federal tax liability in return.

there for, in 10 years, the project is paid for by the tax payers, and the project owner make millions on selling tax credit and still own the project, then at the end, they sell the project thru a non profit group to a third party buyer and still don't pay a dime in taxes on capital gain.

I did a lot of research on tit year ago, on one project I saw, 132 unit complex cost 12 mil, the developer makes 2mil in the beginning, builder makes 1.5 mil and each year tax credit can sale for almost 1mil, now that is huge money, but this market is dominated by big guys, they knows all the network and channel, they build project one after another, they really do not care about renting the units, because they make their money by selling tax credits.

80% of the apartment complex build today is under this program.

Question: 
Hi, JY. Just curious about this: sell the tax credit on 75 cents for each dollar to companies and private investors.
The tax credit should be attached to that low income project. How can the owner sell the credit to another company or investor, while still keep the property?

Answer:
 In an LP, there can be one or more general partner, all others “limited partners.” The general partner has full management responsibility runs the day-to-day operations of the business. A limited partner cannot incur obligations on behalf of the partnership and does not participate in the firm's daily operations or management. In fact, a limited partner's role usually involves nothing more than making an initial capital investment in exchange for a share of the firm's profits.

for example, if this project is private funded and qualify credit total is 12mil, IRS is allocated a tax credit equal to 90% of the qualify construction cost, which be 10.8mil over a period of 10 years. this tax credit is essentially an asset to the LP, and any investor wants to buy in, will become a limited partner, in exchange for their hard earn $$, they will receive a allocated tax credit, which they can apply to their own corp or personal tax return.

and remember, the LP can have thousands of limited partners, but only the general partner can operate the business, and the LP still responsible for repaying the 12mil loan.

so lets look at the number again, on this 12mil project, the developer makes 2mil, the builder makes 1.5 mil on the construction phase, then the general partners makes 7.5mil by selling tax credits, the LP repays the loan, mortgage holder makes 10+ mil in interest, 10 years later, they sell the project for 3mil.

usually these type of projects are put together by syndicators, for their investment of 12mil, their return over 10 year, is 24mil..