Housing Equity Funds

Background

The Low Income Housing Tax Credit was created by the Tax Reform Act of 1986 as an incentive to stimulate the development and preservation of rental housing targeted to lower income households.  To qualify for credits, a housing project must have a certain proportion of its units set aside for low or very-low income families.  Rents are calculated using family income, bedroom size and area median income.  Rental properties must remain affordable for 15 years.  

How Do the Credits Work?

The credits allow property owners to reduce federal income tax liability dollar for dollar.  Generally these credits are taken by outside investors who contribute initial development funds for a project.  The amount of the tax credit for a project is calculated based on: 

• Eligible basis:  project's depreciable costs. 
• Basis boost:  30% increase of eligible basis for new construction or rehabilitation projects located in a Qualified Census Tract or Difficult to Develop Area.
• Qualified basis:  proportion of units set aside for low or very-low income families
• Credit rate:  determined by the type of development and use of other federal subsidies.  New construction or rehabilitation that is non-federally financed earns a 9% credit rate, while acquisition projects earn a 4% credit rate.  Any project financed with other federal subsidy automatically earns a 4% credit rate. 

Credits are generally awarded to projects by the State Housing Finance Agency through a competitive application process.  Once a project is awarded credits it has a financial incentive that can be sold to investors in exchange for a portion of the cash necessary to finance the project's development. 

What are Syndicators and Equity Funds? 

Typically LIHTC projects and individuals investors are connected through an independent third-party, known as a syndicator.  Syndicators sell tax credits to private investors to raise equity in the form of large cash investment in exchange for future tax credit.  By pooling these investments, the syndicator and the individuals investors form an Equity Fund to can invest in projects that are eligible for tax benefits through LIHTC. 

How do individual investors get the tax credits? 

The syndicator underwrites eligible projects for approval by the investors.  When the Equity Fund selects a project it forms a limited liability corporation or partnership with the project developer.  This new entity owns the project.  As an owner of the project the Equity Fund, including all of its investors, are entitled to the tax credits awarded to an eligible project.  Once a tenant rents a unit, credits are placed and the Equity Fund's individual investors are able to use them to reduce their tax liability.