Developers take advantage of low income housing development tax credits, but recent Third Circuit decision stirs controversy


Developers of multi-family apartment complexes geared to low- to moderate-income tenants are increasingly taking advantage of federal low-income housing tax credits (LIHTC) and, where available, their state counterparts, to finance such developments. Strictly speaking, LIHTC, which are allocated by state housing authorities, are not a form of financing. But frequently, a developer will partner with an equity investor interested in utilizing the tax credits, which are made available following the development or renovation of a qualified low-income housing development project. The credits come in two basic types: (a) more valuable 9 percent credits and (b) 4 percent credits, which typically are paired with a bond financing.

A LIHTC partnership is typically structured as a special-purpose entity controlled by the developer. The developer acts as general partner (sometimes with a non profitentity as co-general partner if required for the issuance of the credits), and the equity investor acts as a limited partner. In general, the investor makes his or her equity available to the partnership in phases over the course of construction, with final equity payments made only upon completion of construction and lease-up of the project. As a result, a development typically needs construction financing from a traditional lender (and potentially other sources of financing such as HOME loan funds), until the equity proceeds are secured. The tax credits are then distributed to the partnership and allocated to the equity investor over a 10-year period beginning in the year the project is placed in service.

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