An Overview of Tax Credit Investments
The low-income housing tax credit (LIHTC) program began with the 1986 tax reform legislation enacted by congress; Section 42 of the Internal Revenue Code. Since that time, literally billions of dollars of equity investment capital has been invested across the country in the development or rehabilitation of low-income, affordable housing projects.
MPEG is known in the industry as a “syndicator” of tax credits. As a syndicator, we establish and manage equity funds for the benefit of both investors and developers. These equity funds function as an investment pool, with invested capital allocated among select low-income housing projects. The equity funds provide investment capital to project developers, offering a marketplace for the exchange (or sale) of tax credits awarded to qualified projects. In return, the investor receives a dollar-for-dollar reduction of their federal tax liability. These tax credits are typically purchased at a discount, so the investor actually receives an attractive “return on investment” as the tax savings are realized. And of course, as an added benefit, our investors often earn local recognition and notoriety for making a worthwhile investment in the community.
MPEG adheres to strict underwriting and investment criteria, thereby ensuring our equity funds provide sound economic benefits and a reliable rate of return to our investors. Of course, the value of these tax benefits (and the commensurate return) is heavily influenced by the discounted price of the tax credit itself. Subject to the laws of supply and demand, as well as other market factors, the price of tax credits will fluctuate somewhat from one year to the next. That being said, in today’s marketplace, LIHTC investments are producing attractive yields for investors.
Are Tax Credit Investments Suitable for Your Company?
It is a simple and basic concept … every dollar you save in taxes equals another dollar of cash on hand. Or as Ben Franklin would say, “A penny saved is a penny earned.” So why not take advantage of this same concept in managing your company’s financial affairs?
Traditionally, the main investors in the LIHTC program have been banks and financial institutions (e.g., Fannie Mae, Freddie Mac, Wells Fargo, Citibank, Bank of America, JP Morgan Chase, US Bank, AIG, AEGON Insurance, American Express). However, other savvy corporate investors have also been participating in the program for some time, including Berkshire Hathaway, Cargill, Verizon, and a host of utility/energy companies.
Tax credits are designed primarily for C-corporations, as individuals are quite limited in the amount of tax credits they can utilize in any given year. For this reason, tax credits are typically not well suited for Subchapter-S corporations; noting the pass-through feature of a Subchapter-S organizational structure, the tax credits will simply flow through to the individual’s personal tax return (where the limitations apply). Therefore, the traditional C-corporation is an organizational structure that allows maximum utility of the tax credit.
Low Income Housing Tax Credits are a proven strategy to help mitigate your tax liability and improve your bottom line. If your company owes taxes, the LIHTC program is a viable and practical consideration for your company. Instead of sending that check to Uncle Sam every quarter (at 0% return on investment), why not dedicate that same amount of money to a LIHTC investment? By doing so, your company will realize a tangible ROI, not to mention the benefit and goodwill to be earned by providing affordable housing to communities in need.
A Typical Tax Credit Investment Structure
LIHTC investments are generally organized as a Limited Partnership or LLC. The investor contributes equity capital and becomes a limited partner or member of the entity. The equity dollars are then invested directly into the housing project(s) and the resulting tax credits flow back to the investor. In addition to the tax credits, this pass-through entity also allows the property to deliver its operating losses to the investor (losses generated primarily from depreciation, amortization and interest expenses related to the property). The tax credits are earned over a period of ten consecutive years, whereas the operating losses are realized over the full 15-year term of the partnership. Coupled together, these tax benefits represent the economic rate of return to the investor.
Perhaps the easiest way for an investor to participate in the LIHTC program is to work through a financing company that specializes in such transactions. On behalf of investors, our company works to identify, evaluate and facilitate suitable LIHTC investments. This relationship allows an investor to access the program (and the marketplace) with an experienced and professional partner. As the saying goes, “We sweat the details … so you don’t have to!”
For more details about LIHTC investing and how this could benefit your organization, please call the MPEG office for more details.