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Real Estate Development Opportunities in a Tight Credit Market
Posted in Real Estate

As credit markets remain tight, real estate developers continue to search for viable development opportunities. Tax credit funds are an alternative method of financing that has recently received more attention. Two notable federal tax credits available for developers are Low Income Housing Tax Credits and Rehabilitation Tax Credits.  The federal programs under which these credits are awarded are intended to aid developers in constructing affordable housing or refurbishing and preserving residential or commercial buildings.  These credits can be combined with other incentives, such as tax increment financing, facade easement tax deductions, and community block grants.

Although there are nuances to each of the tax credit programs, the investment model is basically the same. Developments meeting tax credit program criteria are awarded tax credits to be allocated over a number of years. Then, the developer sells the tax credits to investors at a fraction of the total award (e.g., .65/$1.00). This is attractive to investors because they pay only a percentage on each dollar but are entitled to a dollar-for-dollar credit against their tax liability (rather than simply a deduction from taxable income).

Tax credit projects do have some risks.  In addition to normal construction and development risks, each project must meet certain program requirements for a number of years. Failure to maintain these minimum standards could result in a project losing its annual allocation of tax credits or lead to recapture of previously allocated tax credits.  Despite the risks, tax credit programs have created some attractive development opportunities. 

If you are considering shifting your focus to tax credit projects or have already done so, and you would like more information, contact the Bingham Greenebaum Doll Real Estate Practice Group.

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