Affordable Housing Sponsors Approaching LIHTC Property Transitions

The Low-Income Housing Tax Credit (LIHTC) program, enacted in 1987, has been paramount for financing the construction and rehabilitation of properties in low-income communities.  The credits are claimed by the investor over a period of 10 years, with a 15-year Federal compliance period. Additionally, there is an overall 30-year restricted use-period with the state housing agency (or longer depending on the State) to keep the property for low-income use.

As projects near the end of their 15-year Federal compliance period or 30-year affordability period, AAFCPAs encourages developers to proactively prepare for outcomes and financing options available for these properties.

LIHTC Year 15 Outcomes

AAFCPAs has outlined below the two main changes that occur to LIHTC properties after the 15-year compliance period:

Change of use restrictions

During the first 15 years of the compliance period, owners are required to report annually on compliance with LIHTC leasing arrangements, both with the IRS and State monitoring agency (e.g., The Department of Housing and Community Development (DHCD) in Massachusetts).  After 15 years, the IRS obligation ends, and investors are no longer at risk of credit recapture. There may be no material benefit for investors to stay in the deal as the credits are taken over the first 10 years, and the initial compliance period ends at year 15.

AAFCPAs advises developers to understand other possible use restrictions from other financing, which may be longer in nature than LIHTC use restrictions.

Structure of Ownership Changes

In many cases, at the conclusion of the 15-year compliance period, an investor will sell its interest in the partnership to the General Partner or an affiliate. The General Partner will generally continue to manage the property.

AAFCPAs advises clients to perform a careful review of the Operating Agreement to understand your rights upon exit.

However, there is a key distinction in buy-out structures for a for-profit vs nonprofit developer:

• Nonprofit – Right of First Refusal to purchase the property for existing debt plus exit taxes (if any)
• For-profit – Option agreement to purchase the property at the greater of fair market value or debt plus taxes.

The Right of First Refusal allowed for nonprofit sponsors can be very beneficial since the fair market value of the property is not a consideration in the potential purchase price.

If the property is sold (rather than a transfer of investor interest) under an option or right of first refusal agreement, the General Partner will set up a new partnership and purchase the existing assets from the existing partnership.

Common financing options at Year 15 and beyond…

The mission of Community Development Corporations (CDCs) and other like-minded developers is to create and maintain affordable housing for low-to-moderate income individuals and enhance the physical image of the areas they serve. To maintain the housing you have worked so hard to develop, additional financing solutions may be required once your LIHTC investors exit the property. Often a refinance or re-syndication is performed after the buy-out of the investor to pay for deferred maintenance on the property while also creating much needed liquidity.

• Refinance – Affordable Housing developers/CDCs may consider the cost/benefit of refinancing, which would allow them to continue to operate the property as affordable housing without new subsidies, and with the ability to do moderate rehabilitation without recapitalization. AAFCPAs encourages clients considering a refinance to understand their short- and long-term capital needs. In some cases, refinancing may also provide additional cash flow which may be used to pay back deferred developer fees and deferred loans, which can be attractive to the General Partner and/or sponsor.
• Re-Syndication – Developers may consider applying for a new round of tax credit funding in cases where substantial rehabilitation is necessary. This option will require a refinancing of the mortgage and new sources of soft mortgages. A re-syndication will reset the tax credit compliance period and the extended use period.
• Qualified Contract – Developers may consider transitioning the building to market housing after the initial 15-year compliance period. The state agency will need to find a buyer within a 1-year period who will continue the property as affordable. If the state agency cannot find a buyer, then the owner may bypass LIHTC use restrictions and transition into market housing over a 3-year span. However, AAFCPAs reminds clients that if there are other restrictions in place, those restrictions are not eliminated through this process. This is the least common approach and may not be an option based on how the tax credit application was written.

To ensure your property is well-positioned and financed post LIHTC compliance period, AAFCPAs urges clients to understand the condition of the property, the significance of necessary improvements, and the financing resources available.

If you have any questions, please contact Matthew McGinnis, CPA at mmcginnis@aafcpa.com, 774.512.4080; or your AAFCPAs Partner.