That investor money helps finance the development. But that amount generally represents only 75%, at best, of the cost of the deal. Community Development Block Grant (CDBG) money, or HOME money at the city level, secondary mortgage financing, Federal Home Loan Bank financing and other local programs will be necessary to fund the remaining 25%.
There are usually at least a half-dozen such layers of financing in a tax credit development. And in almost every case, the developer may be required to defer part or all of his fee to establish project eligibility for as long as 15 years, or be required to share a portion of the fee with local resident groups and non-profit partners.
Proper Management Is Key
Consequently, an important way for tax-credit developers to consistently have their developments end up in the black over the long term is to stay continually involved with the management of the property. This is key to ensuring proper maintenance and compliance with Tax Credit, Sec. 42 regulations. Annual inspections by the state Housing Finance Agencies (HFAs) look for improprieties, and the investors also monitor ongoing management to ensure that the development remains in compliance with the IRS rules.
If proper management isn't maintained, the project could lose its tax-credit eligibility and the credits would be recaptured. In such an event, the developer would have to reimburse the investors for the money they paid up front for the credits, not to mention fines or penalties from the IRS and the state.
One doesn't enter into tax credit development lightly. It is a serious commitment. But it's a program that is crucial to ensuring that working people have safe, affordable and attractive places to call home.
Next week: How to Get Started
To read Part 1 of this series, “Affordable Housing Demand Fuels Tax Credit Projects,” published on March 31, click here.
Robert Greer is president of Michaels Development Company, Inc. in Marlton, NJ, and has 25 years of experience in tax-credit development, both as a director of the Pennsylvania Housing Finance Agency and as a developer. He is the chair of the NAHB Multifamily Housing Credit Group. Greer can be reached at 856-596-3008 or via e-mail. To visit the Michaels Development Company Web site, click here.
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