Federal Affordable Housing Tax Credit
The federal credit can be monetized by developers, often through syndicators, and utilized by third investors through the use of partnerships or limited liability companies.
Several states have programs of a similar nature to the federal program. These programs vary by state and apply to different state taxes levied.
The credits are spread over a 10-year time frame.
Eligibility for the credit is predicated on renting anywhere from 40% to 100% of the units to families with income below certain thresholds for the community. These rent-restricted units tend to provide attractive and affordable housing alternatives for the elderly.
- Requires purchase of a multiple-year strip.
- Guidance exists, eliminating GAAP concerns.
- Credits flow tax losses due to depreciation and usually no cash flow distributions.
- Typically safe underlying economics.
- Fifteen-year recapture period — though recapture seldom happens.
- Returns are single digits due to CRA (Community Reinvestment Act) competition.
- Federal affordable housing tax credits are typically pooled and syndicated on a proprietary basis or may be syndicated to multiple corporate investors in a given fund.
- Investments may be used to satisfy CRA requirements.
- Extremely low–risk profile given vigorous underwriting and proactive asset management throughout the 15-year compliance period.
- Debt levels are often less than 50% of the capital of the project due to the substantial tax equity investments.