Are you curious about tax credit delivery basis adjustors in LIHTC projects?
When a Sponsor delivers less basis there may be a downward adjuster in the number of LIHTCs delivered. This causes a reduction in the amount of equity for the project.
What is LIHTC basis?
LIHTC basis is the sum of all depreciable basis costs (such as construction, architectural, reports, surveys and loan interest) that are incurred in constructing or rehabilitating the LIHTC restricted building. The sum of these costs determine the number of eligible LIHTCs the project is eligible to receive.
Credit Adjustors for LIHTC Projects
When the project incurs fewer eligible costs than projected or the LIHTC rate is lower than projected (if it is floating, as in a Tax-Exempt Bond transaction), it is possible to generate fewer credits than projected. If the number of credits is reduced, the limited partner will reduce their equity proportionately.
Credit Adjustors in LIHTC in Action
Scenario 1: Sponsor closes a tax-exempt bond financed project but does not lock in the LIHTC rate at closing. They opt instead to lock in the LIHTC rate at completion. The LIHTC rate falls from 3.28% at initial closing to 3.20% on the month they place the building in service (i.e. receive their Certificate of Occupancy). Thus, the investor reduces their equity by 2.439% (no basis boost in this example).
Scenario 2: Sponsor does not use any of the construction contingency and so has $500,000 of budget savings. The projections assume the entire contingency would be fully utilized and all other costs matched projections. The project had a 9% locked LIHTC rate and there was no excess basis and no basis boost. Thus, the credits were reduced by $45,000 and the equity was reduced by $427,500 ($0.95 per LIHTC). The loss of equity was more than offset by the construction contingency savings.
Get Expert Help on Your LIHTC Project
As you can see, adjustors in LIHTC projects are just one of the many complexities that are part of a LIHTC project. However, with the right guidance, your development projects can move swiftly (and you can rest easy.)