EB5 Investors Magazine | Page 49

The low-income tax credit works by allowing the credit claimed by the taxpayer pro rata over a period of 10 years to be used in connection with both new construction and renovation of residential rental units. Taxpayers claiming the LIHTC may use the tax credit to offset their regular tax liability, subject to certain limitations. Often, the LIHTC are sold to a financial institution through a tax credit syndication since LIHTCs are subject to alternative minimum taxes and are most advantageous if owned by financial institutions or corporate owners. To avoid tax credit recapture and the repayment of any tax savings, LIHTC taxpayers must comply with all applicable compliance rules and retain an ownership interest for at least a 15-year period. As a result, an investor in the project will typically retain its participation in the project for at least the compliance period. In addition, most state allocating agencies require an additional restriction on rents for a specified period beyond the initial 15-year compliance period, typically evidenced in an additional 15-year extended use agreement. “Sale” or Syndication of the LIHTC: Source of Equity As mentioned above, the LIHTC provides an additional source of equity for the construction of rental low-income housing projects for families and seniors. Once a developer is allocated tax credits by a state allocating agency, such developer “sells” the tax credits to an investor or syndicator by entering into a limited partnership or limited liability company with such investor or syndicator. The investor’s or syndicator’s participation in the newly formed entity is typically 99.99 percent of the profits, losses, depreciation and tax credits, as a limited partner or member of the entity, and the developer typically serves as the general partner or managing member of the entity, holding the remaining 0.01percent of the newly formed entity. The capital raised by such sale or syndication reduces the amount of equity that a developer would have to obtain from loans or the issuance of debt to cover the costs of the project. Additional benefits to an investor acquiring the LIHTC include allocating the depreciation of the buildings owned by the entity, which is tax deductible, based on the investor’s equity participation in the entity. EB-5 as Part of the Capital Stack Although EB-5 can be used in several ways within the capital stack, it is most common for projects to utilize EB-5 investment either in a first mortgage position or as preferred equity or subordinated debt. EB-5 financing does not typically utilize traditional institutional lender underwriting criteria, and therefore EB-5 financing can be deployed as first mortgage debt for projects which might not have reached the leasing requirements or other criteria typically required by an institutional lender. Given the respective current costs of institutional first lien financing for projects where such financing is available, mezzanine de