Preserving the Low-Income Housing Tax Credit Public-Private Partnership: Investor Perspectives on Year-15 Exit Disputes

Established by the Tax Reform Act of 1986 and codified in Section 42 of the Internal Revenue Code,1 the LIHTC program is the federal government's largest program aimed at funding the development and rehabilitation of affordable rental housing for low-income families.2 It is also a political anomaly, enjoying bipartisan support for virtually the entirety of its existence and aligning the interests of groups-affordable housing advocates, corporations, and other for-profit and nonprofit organizations-that might otherwise find themselves at odds.3 By all accounts, the LIHTC has been, and remains, a remarkable success. An outgrowth of the free-market ideology of Ronald Reagan's administration and the policy shifts of the 1980s,4 the LIHTC is a supply-side tax subsidy in the form of a non-refundable credit that provides or allocates dollar-for-dollar credits to qualified developers for the production and operation of qualified affordable housing projects.5 A key feature of the program is the developer's ability to sell those credits to private investors in exchange for equity financing for qualified projects, which allows the developer to reduce construction costs and a property's debt burden while providing newly constructed or rehabilitated units at reduced rental prices.6 In turn, a key factor contributing to the rise and success of the LIHTC has been the emergence and role of intermediaries-or syndicators-in underwriting, bundling, and then brokering portfolios or "funds" of credits across multiple projects and developers to a secondary market of typically corporate or large institutional investors. [...]Part III surveys recent developments in the affordable housing sector and the role of the LIHTC in addressing the country's continued affordable housing shortage. [...]developers often sell or exchange their allocated credits to investors or syndicators in exchange for equity financing, in a process known as syndication.33 This equity financing reduces the debt burden on the project, lowers the cost of development, and allows the project to offer more affordable rents.34 The "sale" of credits in exchange for equity financing typically occurs within a partnership formed between the developer (as general partner and manager of the property)35 and the investor entity (as limited partner).36 The partnership exists for the sole purpose of constructing, owning, and operating the LIHTC property.