The federal government encourages developers to build affordable housing by offering them low-income housing tax credits (LIHTCs). Developments that meet certain criteria earn tax credits that can be used to offset taxes they owe to the IRS. If the developer is a non-profit or another organization that does not owe taxes, they are allowed to sell that tax credit to a for-profit corporation that can use it to pay its own tax bill. Other tax credits can be earned for things like preserving historic buildings and operating solar panels.
Community Building Partners is focused on using the 4% tax credits, which covers 30% of the costs for low-income housing projects. This credit has the advantage of being issued noncompetitively, which means there is more certainty in the financial planning process.
In the case of a nonprofit developer, the developer will form a limited partnership, a legal entity to control the project. The developer will be the general partner, with control over the operations of the project. One or more investors will come on as limited partners, with limited authority to make decisions. However, the limited partner will buy a large majority—usually 99%–of the partnership. This allows the limited partners to take virtually all of the tax credit, the depreciation on the building, and any losses the partnership incurs—all ways they can reduce their tax bill. After a set period of time (typically 15 years) the limited partner is retired from the partnership, and the general partner owns the project.
This arrangement is beneficial to both sides. The general partner gets an investment in a project they care about, and the limited partner gets back more than their investment in tax credits and other benefits.