After receiving the award of LIHTCs, stuff do you know what can happen that will reduce the actual LIHTCs allocated to the project?
Following is a quick breakdown of what you need to know about LIHTC credit delivery.
LIHTCs aren’t provided in a lump sum (as is the Historic Rehabilitation Tax Credit), no rx but rather are generally claimed over a ten year period and the recapture restrictions are in place for fifteen years.
LIHTC Delivery: First Year of Credits
- Each month a qualified LIHTC household occupies a unit earns 1 point. One unit can earn up to 12 points (if occupied as of January for that year). A unit initially occupied in June will earn 7 points.
- Divide the sum of these points by (Total LIHTC units * 12) to determine the percentage qualified for the year.
- Multiply that value by the annual credit amount.
The Sponsor agrees to pay back to the limited partner any reduction of tax credits in the first occupancy year compared to the projected amount. The amount of the payment is detailed in the partnership agreement and can range from 50 cents to 80 cents per LIHTC not delivered in the first year.
The IRS has confirmed that in the first year of the credit period, a qualified resident can move into a unit any time during the month and still qualify the unit for that month. However, the unit must be placed in service prior to the first day of the first month of occupancy.
LIHTC Delivery: 2nd – 11th Year of Credits
If any LIHTC-designated units are ever leased to an above-income tenant in future years, the owner can suffer recapture of a portion of the LIHTC award. This reduction (plus any penalties and interest and to offset income of the limited partner) must be paid in full by the sponsor. This guarantee is typically unlimited.
Although there are often limits on long term operating deficit guarantees, this ongoing LIHTC delivery guarantee provides assurance to the limited partner that the Sponsor won’t let the project fall into foreclosure, which would trigger this recapture.
Get Expert Help on Your LIHTC Project
This post illustrates just one of the many complexities that are part of a LIHTC project. However, with the right guidance, your developments can move swiftly and you can rest easy.