Syndication and Partnership

As mentioned above, the credit is used to generate private equity, often prior to, or during, the construction of the project. Developers typically "sell" the credits by entering into limited partnerships (or limited liability companies) with an investor, with 99.99% of the profits, losses, depreciation, and tax credits being allocated to the investor as a partner in the partnership. The developer serves as the general partner/managing member, and receives a majority of the cash flow (either through the payment of fees, or through distributions). The funds generated through the syndication vary from market to market and year-to-year. Although 85-95¢ for each total dollar of tax credits was common in the first several years of the 21st century, recent turmoil in the financial markets has reduced some of the demand for tax breaks, meaning that investors are paying somewhat less, as of early 2008. So, for example, $10,000 credits annually for the next 10 years would be $100,000 total, and a developer could probably raise $75,000-$85,000 through syndication, which is less than could have been raised for the few years prior to 2008. Further, due to the fact that depreciation on the buildings owned by the partnership is also tax deductible, and that depreciation is allocated 99.99% to the investor, investors may pay still more for the total tax benefits. (Indeed, when the credit alone was selling for 95 cents per dollar of credit, there were some cases where investors actually paid slightly more than a dollar for a dollars worth of tax credits plus other tax benefits.)

An investor will typically stay in the partnership for at least the compliance period, because a reduction in its interest can also result in recapture of the credits. An investor wishing to exit the partnership before the end of the compliance period may post a surety bond to avoid credit recapture.

The following table summarizes the relationship between the developer and outside investors. NOTE: This is only meant to demonstrate the concept of partnerships for such projects and is not to be taken as literal guidelines for developing a LIHTC project.