After the 15-year contractual period, he says, investors could lose their tax credits, but they still get a tax deduction. "In the 16th year going forward, we continually monitor the marketplace and work looking for opportunities-for refinancing, liquidation, or providing additional tax benefits on each of the properties in the fund."
The portfolio is not going to sell intact, he emphasized. "There are 14 or 15 properties within a fund. Unlike most investments, it's important to realize in the beginning that the tax credit alone is a return of capital, and a return on capital. They (investors) will be whole and profitable just from the tax credit. If they want to invest in real estate directly, they should be making another investment."
WNC's Garban acknowledges that the programs were more attractive in the late 1980s and early 1990s because they were new and priced more advantageously. "Whenever you have a new program, the market isn't as efficient as when it matures," he contends
These programs can be tough to sell for several other reasons, ING's Fred says. Prior to 1990, most of the property loans issued under these programs were Farmers Home Administration loans, at low interest rates hovering around 1%. Now, Fred says, most loans are at market rates. "There's a much higher risk for a mortgage default these days than in the old days." At the same time, the low-income property operator is limited from raising rents.
Low-income housing tax credits, provided by the U.S. Treasury Department, are phased in, and assigned on a property-by-property basis. Investors can't use them until the construction is completed and the lease-up takes place.
Then the credit is pro-rated. Say the property comes on line July 1; you can get six months of a credit for that year, which marks the beginning of 120 months of tax credit flow. "In reality, you're looking at ten to 12 years of actual tax impact, because of a partial year on the front," WNC's Garban explains. To be safe, and to consider partial years, sponsors report investors need to be willing to tie up their money for 15 years.
In Winer's case, the partnership was only about a year old and had not yet started accruing tax credits.
However, Fred says that investors have no guarantee even of getting tax credits that are promised. An investment partnership receives Tax Form 8609, allotting the tax credits, Fred says. One misstep, and those tax credits not only can be yanked, but they also can be recaptured. Boston Capital and WNC follow stringent polices and procedures, and their entire staff checks and monitors them. "That's probably why they've survived," Fred says.