Low Income Housing Tax Credit (LIHTC) projects usually involve three main entities: developers, investors, and syndicators. The developers assemble a project proposal, including financial sources, and apply to the state administrative agency for tax credits. The state agency evaluates proposals and awards credits according to regulations and priorities established in its Qualified Allocation Plan (developed by the state under IRS requirements). The developer can then sell the credits directly to an investor or to a syndicator. Syndicators act as a broker of the credits for multiple developers and investors, and establish equity funds that finance multiple projects. The advantage of this to investors is that they can invest in a portion of a fund and spread their risk across several projects. Syndicators also perform additional services for both developers and investors, such as asset management, technical assistance, and bridge loan financing. LIHTC projects require a considerable amount of oversight to ensure compliance with federal rules and regulations over the 15-year minimum compliance period.
Investors may have several motivations for seeking LIHTC investments. Although there are investment returns, banks that provide equity or mortgage financing also receive credit toward their Community Reinvestment Act (CRA) requirements.
Mortgages for LIHTC projects are provided by private banks or state and local governments. Government mortgages may have terms similar to those of private institutions, or offer reduced interest rates. These public mortgages may be soft, meaning that they are paid only if there is sufficient cash flow and may be forgiven. Private banks provide about 40% of all LIHTC project mortgages.(1) Generally, project net rental income is used to cover mortgage payments and the value of the property covers the mortgage in case of default. Institutions that offer mortgages may or may not be the same firms that provide the equity investment.
As the tax credit program and demand for investments has grown, there has been increasing competition among investors and syndicators. The size of funds, services offered, and fees charged to investors by syndicators can vary widely. The oldest nonprofit tax credit syndicator is the National Equity Fund (NEF), which was established by the Local Initiatives Support Corporation (LISC) in 1987. The Enterprise Social Investment Corporation (ESIC) is another nonprofit syndicator with a national focus. Other large equity funds have been established by private institutions, and many states have their own funds. Many syndicators have begun to offer “single-source financing,” also called “one-stop shopping,” providing both debt and equity financing. Organizations that offer these services can save their clients time and money and become more competitive in the market for tax credit projects.
In 1988 only 67% of available tax credits were allocated to projects; the number had risen to 97% by 1995(2). With this boom in development and demand for credits, smaller state and nonprofit syndicators with a mission to provide financing for inner city and other risky projects are finding that private for-profit equity funds are increasingly willing to do these projects.