Hypothetical Case Study: Investing in an LIHTC Fund
Typical investment amount: $1 million
Minimum investment amount: $250,000
Fund description: Community Fund X is a $10 million multi-investor LIHTC fund. The fund makes equity investments in several CRA eligible affordable housing LIHTC projects within a specified state. The fund investment is projecting a 9 percent pre-tax equivalent and 6 percent after-tax yield. This tax-advantaged investment generates its return based on the delivery of federal tax credits (LIHTC) and taxable losses that are calculated based on a 35 percent corporate tax rate.
By offering a $250,000 minimum investment, Community Fund X becomes a viable option for community banks wishing to participate and receive a return on their investment and CRA credit consideration.
The risks associated with investment in LIHTC funds is the continuation of program compliance to ensure federal tax credit and loss delivery. A financially strong and experienced fund manager is a crucial consideration when investing in a LIHTC fund.
Community Fund X is managed by a respected nonprofit regional tax credit syndicator. The fund manager has 20 years of experience in LIHTC syndication, has a strong balance sheet, and has an experienced management team. Asset and risk management are essential departments. Although there are more than 30 funds and 500 affordable housing LIHTC properties, the fund manager has never experienced a loss of tax credits due to foreclosure.
Investor pay-ins: This column in table 8 represents the gross proceeds of the investment in four units at $250,000 per unit. Typical use of proceeds is as follows: investment in operating partnership of 88.75 percent; payment of acquisition fees of 7.50 percent; payment of a working capital reserve of 3.25 percent, which is paid annually; and the payment of an organization and offering expense of 0.50 percent.
LIHTC: This is the total number of LIHTCs generated from the various affordable housing investments made by the fund. The tax credits are earned over 10 years of the 15-year compliance period.
Taxable loss: This is the total consolidated taxable losses generated from the various affordable housing investments and the management of the fund.
Tax savings (35 percent): The tax savings is the imputed tax benefit based on the taxable losses at a 35 percent corporate tax rate.
Total annual benefit: This represents the total number of LIHTCs and the tax-savings benefit.
Net annual benefit: This represents the net of investor pay-ins and the total annual benefit for the investment.
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