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SMCo Principal Pete Wesch talks about the dos and don’ts of using low-income housing tax credit
If you’re considering low-income housing tax credit (LIHTC) to expand your affordable housing inventory, there are some dos and don’ts to be addressed.
Over the past three decades, Smith Marion & Co. has been part of the evolution of the Low-Income Housing Tax Credit (LIHTC) developments from a novelty to the primary vehicle for adding public housing units.
We’ve witnessed the evolution of the contractual and investor side of LIHTC. The early projects often had smaller or even individual investor partners or members (IP/IM). Partnership or operating agreements were relatively short, and IM/IPs had an expectation of a buyout at some time after the completion of the 15-year federal compliance period.
This was generally unrealistic, considering most LIHTC properties have barely sufficient cash flow to sustain themselves. They are, after all, meant to provide affordable housing, and not profits for investors. Today’s IM/IP are generally large institutions, who themselves market the tax credit to many smaller individual investors.
Because IM/IPs are selling investments to their clients, they often insist on a much tighter timeline for the development of the project. The developer can face steep reductions in investment if those timelines are not met.
On the positive side of that change, the IM/IPs are now looking to exit the project as soon as the tax credit and deductible losses are exhausted, without any further compensation.