Ever wondered what guarantees are required for Low Income Housing Tax Credit (LIHTC) deals? In this post, viagra dosage we’ve provided an overview of some of the most common required guarantees for these deals so you know what to expect if/when taking advantage of these tax credits.

Six Guarantees

Syndicators and/or investors typically require six guarantees from the sponsor as a condition of making an equity investment. The sponsor (typically the developer or other well-capitalized entity) is typically the guarantor as well as any subsidiaries or affiliates the sponsor established for the deal. For for-profits, the individual owners are also likely to be required to provide personal guarantees.

Guarantees and Conditions for Low Income Housing Tax Credits

1. Construction Completion Sponsor agrees to fund any costs of construction in excess of the budgeted construction costs to complete the project. This is a typically an unlimited guarantee.
2. Lease-up operating losses
   • Sponsor agrees to fund any costs of operating the building in excess of the budgeted lease-up expenses until the project reaches stabilized occupancy (i.e. where income and expenses meet projected values)
   • This is a typically an unlimited guarantee
3. Long term operating deficits
   • Sponsor agrees to fund any operating losses of the building until the project has three full calendar years where the project either maintains a debt coverage ratio of 1.15 to 1.20; or, if there are no scheduled debt payments, where the project maintains the scheduled amount of cash flow
   • This guarantee is typically limited to the full amount of the developer fee (both paid and unpaid)
4. Tax Credit Delivery – Basis Adjustor
   
   • Sponsor agrees to refund back to the limited partner any loss of tax credits due to a permanent loss of tax credits
   • This guarantee may be limited to the full amount of the developer fee (both paid and unpaid) or may be unlimited
5. Tax Credit Delivery – first year of credits / on-going years
   • Sponsor agrees to refund back to the limited partner any reduction of tax credits (typically at a rate of 50-65%) anticipated in the first occupancy year due to a slower lease-up than anticipated (and thus a lower level of credits in the first year(s)
   • In addition, if any LIHTC-designated units are ever leased to a market-rate tenant in future years and the owner suffers recaptures a portion of the LIHTC award, then this reduction must be covered in full by the sponsor
   • This guarantee is typically limited to the full amount of the developer fee (both paid and unpaid)
6. Repurchase Obligation
   • If sponsor does not meet major deadlines, the sponsor agrees to buy back the limited partner’s interest. The amount of the repurchase is generally the amount of the equity put into the deal by the limited partner to date
   • This obligation is rarely if ever called upon, and would only be required if the tax credits were not substantially earned due to failure to complete the project within the required time-frame

Low Income Housing Tax Credit Experts Guide the Way

Need assistance with your project involving LIHTCs? We can help. Learn more about our team and how we can make your housing development project simple, painless, and successful.