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Syndication

 Developers may claim housing tax credits directly, but most sell the tax credits to raise equity capital for their housing project. The developer can sell the tax credits: 

  • Directly to an investor; OR
  • To a syndicator, who assembles a group of investors and acts as their representative.

 Tax credits can be claimed annually over a 10-year period by the property owner. However, the developer needs the money immediately to pay for development costs, not 10 percent annually for 10 years. Accordingly, the developer typically syndicates the credits - i.e., sells the rights to the future credits in exchange for up-front cash.

 The credit purchaser must be part of the property ownership entity; usually this is accomplished by creating a limited partnership (in which the credit purchaser is a 99%+ limited partner) or a limited liability company (in which the credit purchaser is a 99%+ non-managing member). The general partner is responsible for managing the project and the partnership, while the limited partners are typically limited to a passive investment role.

 Typically, profits and losses and housing tax credits are shared according to the partners' (members') percentage ownership interests. However, each Limited Partnership Agreement (or LLC Operating Agreement) also provides for a carefully-negotiated "waterfall" that describes how any positive cash flow of the property is to be distributed. Typically, the general partner (managing partner) receives a large share of any positive cash flow, often structured in the form of fees for services such as partnership management, incentive management, or investor services.

 Note the following: 

  • Limited partnerships were the most common ownership structure for multi-family properties in the 1960s, and continuing through much of the 1990s. A typical LIHTC limited partnership consists of the developer (or an affiliate) as the general partner, and the credit purchaser as the limited partner. The general partner has a small percentage ownership interest (often below 1 percent), but has the responsibility to manage the affairs of the partnership, arrange for management of the property, and make most of the day to-day operating decisions. The limited partner has a large percentage ownership interest (often well above 99 percent), has a passive role, and has liability that is limited to the amount invested. That is, if a disaster occurs, the most the limited partner can lose is the amount invested; however, the general partner can lose many times the amount invested. The rights and obligations of the partners are outlined in a Limited Partnership Agreement. Typically the limited partners do not participate in day-to-day operating decisions but do participate in major decisions such as decisions to sell or refinance the property.
     
  • Limited liability companies (LLC) are an increasingly common ownership structure for multi-family properties. A typical LIHTC LLC consists of the developer (or an affiliate) as the managing member, and the credit purchaser as an additional (non-managing) member. The managing member has a small percentage ownership interest (often below 1 percent), but has the responsibility to manage the affairs of the partnership, arrange for the management of the property, and make most of the day-to-day operating decisions. The non-managing member has a large percentage ownership interest (often well above 99 percent), and has a passive investor role. All members of an LLC have liability that is limited to the amount invested. That is, if a disaster occurs, the most they can lose is the amount invested. The rights and obligations of the partners are described in an LLC Operating Agreement. Typically the non-managing members do not participate in day-to-day operating decisions but do participate in major decisions such as decisions to sell or refinance the property. 

A Closer Look at Syndication 

Syndication is a complex and expensive process. By law, syndicators must offer prospectuses to potential tax credit purchasers, fully disclosing the terms and risks of the investment. Sales of tax credits to multiple investors in the general public are referred to as public placements and have the highest disclosure requirements. Private placements are sales to a few knowledgeable investors. They have lower disclosure requirements and sales costs. 

Of course, developers are interested in the highest possible price paid by investors, and the lowest possible syndication costs. Similarly, investors are interested in paying the lowest possible price, at the lowest possible level of risk. Syndicators are interested in earning high fees, and potentially future business with the developer and investors. To-be-developed properties are not easy to evaluate. These factors mean that the market for housing tax credits is as complicated and sophisticated as the market for stocks and bonds. It is also quite competitive.