How Twinning 9% and 4% Tax Credits Can Transform Affordable Housing Projects

The market demand for affordable housing remains high; however, those active in the multi-family affordable housing industry know that a Low-Income Housing Tax Credit (LIHTC) development can be a very competitive process, and it can oftentimes be difficult to get a deal to pencil out.

If you’re like most real estate developers, you are always on the lookout for innovative ways to finance new projects.

One creative solution worth considering is twinning 9% and 4% tax credits for a LIHTC development. This approach offers benefits that can make the difference between a project breaking ground or being shelved.

RELATED CONTENT: BIZ TIP

STRATEGIES FOR DEVELOPERS AMID INFLATION AND RISING INTEREST RATES

OPEN IN NEW WINDOW

Why Consider Twinning?

A twinned 9% and 4% transaction is one that could have been structured as a single 9% LIHTC project, or a single 4% LIHTC project, but instead is structured as two related, but independently financed projects, using 9% LIHTC on one portion of the project and 4% LIHTC on the other portion.

Twinning 9% and 4% LIHTCs gives developers the ability to maximize the amount of equity that can be generated for a single project by allowing them to finance a greater portion of their project through tax credit equity, thereby reducing potential gaps in project financing.

The 9% credit, awarded on a competitive basis, offers a substantial subsidy but is limited in availability, and on its own limits the size of a viable project due to caps on per project credit awards. The 4% credit, while less lucrative, is non-competitive and is paired with tax-exempt bonds, providing an additional layer of financing.

It is important to note that though there is no cap on the 4% LIHTCs, the Private Activity Bond volume cap needed is a limited resource. By combining these two credits, developers can significantly increase the equity available for their projects.

Benefits of Twinning

Let’s take a look at some of the benefits of Twinning 9% and 4% Tax Credits.

1. Enhanced Project Feasibility

Twinning allows for the combination of the more substantial 9% credit with the less lucrative but still valuable 4% credit. This combination can result in tax credit equity that covers a larger portion of a project’s development costs, enhancing the project's financial feasibility.

2. Ability to Build More Units

The 9% credit cap inherently limits the size of a viable 9% credit development. The additional equity generated through twinning the 9% credit with the 4% credit can enable developers to construct more units within the same project.

3. More Effective Usage of Land

As indicated above, a 9%/4% twinning structure could potentially support a larger project, which could allow for a higher density of units and more effective usage of land.

4. Deeper Income Targeting

The increased equity that twinning could generate might allow for the ability to achieve a more deeply targeted mixed-income development than would otherwise be possible.

RELATED CONTENT: BIZ TIP

IRS REVISES ALTERNATIVE COST METHOD FOR DEVELOPERS

OPEN IN NEW WINDOW

Challenges of Twinning

While the benefits of twinning could be substantial, the strategy is not without its challenges.

1. Complexity

Twinning requires a high level of expertise in tax credit financing. The process is more complex than using a single type of credit and involves careful planning and coordination among the development team and stakeholders, including investors, lenders, attorneys, accountants, consultants, and public agencies.

2. Financing Structure

The IRS has previously indicated that cross-collateralization will taint the basis of the 9% portion of the project, which would effectively turn the 9% credit into a 4% credit and likely kill the feasibility of the project. To avoid this basis taint, each portion of the project will need its own independent financing structure. This creates added complexity, and as a result, added cost.

3. Investor Demand

Not all syndicators or investors are up to speed or comfortable with this model. Many of the national players have experience with twinning, but not all investors do or are willing to entertain the structure. This is an important consideration as you are seeking a limited partner to purchase the tax credits.

How to Approach Twinning

Given the challenges associated with twinning, careful planning and a well-structured process is needed.

1. Early Planning and Consultation

Consult with tax credit experts, including accountants, attorneys, and consultants who have experience with twinning.

2. Structure the Financing

Work with legal and financial experts to structure the project financing in a way that optimally utilizes both types of credits. This may involve setting up separate ownership entities for different parts of the project or other strategies to meet regulatory requirements.

3. Engage with Stakeholders

Successful twinning requires close collaboration with all project stakeholders, including public agencies that allocate the credits, investors who will purchase them, and lenders who may provide additional financing. All parties must be aligned on the project’s financing structure.

RELATED CONTENT: EGUIDE

TWINNING 9% AND 4% LOW-INCOME HOUSING TAX CREDITS IN THE SAME DEVELOPMENT

OPEN IN NEW WINDOW

Learn More

Twinning 9% and 4% Low-Income Housing Tax Credits is a powerful tool worth considering. To learn more about this and determine if it makes sense for you, contact SVA. Our real estate professionals are here to help.