Is a LIHTC Syndication the Same as an Apartment Syndication?
No. A LIHTC syndication raises equity for affordable housing by passing federal low-income housing tax credits under Internal Revenue Code Section 42 to investors, often corporations, and the property must keep rents and tenant incomes within limits for at least 15 years and usually longer. A market-rate apartment syndication raises equity from individual investors who expect a share of cash flow and sale profits, with rents set by the market. Both use the word "syndication," but the investor, the return and the rules are different.
What is a LIHTC syndication?
The low-income housing tax credit (LIHTC) is a federal credit under 26 U.S.C. 42 for owners of qualified affordable rental housing. The federal government gives states credit authority, and state housing credit agencies award credits to specific projects. A building's credit cannot exceed the amount the agency allocates to it.
A developer usually cannot use the credits itself, so it brings in investors who can. In a LIHTC syndication, a syndicator forms a fund or partnership, investors contribute equity, and the credits and tax losses flow to them. Freddie Mac describes the chain this way: credits go to state agencies, agencies award them to developers, and "developers exchange the tax credits with corporate investors, like Freddie Mac, who provide equity capital" (Freddie Mac, LIHTC Equity Investments).
What rules does a LIHTC property follow?
Section 42 sets the core rules. A project must meet one minimum set-aside test, chosen by the owner:
- 20-50 test: at least 20% of units are rent-restricted and occupied by households at or below 50% of area median income.
- 40-60 test: at least 40% of units are rent-restricted and occupied by households at or below 60% of area median income.
- Average income test: at least 40% of units are rent-restricted and occupied by households whose income does not exceed the limit designated for each unit.
A unit is rent-restricted if gross rent does not exceed 30% of the imputed income limit for the unit. The credit is claimed over a 10-year credit period. The compliance period is 15 taxable years from the first year of the credit period, and the owner must also record an extended low-income housing commitment whose term ends no earlier than 15 years after the compliance period. States can add stricter requirements. HUD publishes data on LIHTC properties in its LIHTC database.
How is it different from a market-rate syndication?
| Feature | LIHTC syndication | Market-rate apartment syndication |
|---|---|---|
| Main investor return | Federal tax credits, plus tax losses | Cash distributions and a share of sale or refinance profits |
| Typical investors | Corporations and funds, such as banks or Freddie Mac | Individual accredited investors |
| Rents | Capped on restricted units at 30% of the income limit | Set by the market, subject to local rent laws |
| Tenant incomes | Limited on restricted units | No income limit |
| Time commitment | 15-year compliance period plus an extended use period | Set by the sponsor's business plan and disclosed in the offering |
| Who decides the credit | State housing credit agency | Not applicable |
| Offering rules | Securities law still applies to the investment | Usually Rule 506(b) or 506(c) under Regulation D |
Why do individuals rarely invest in LIHTC deals?
Two reasons stand out. First, the value is a tax credit, which helps an investor only if it has enough federal tax to offset over the credit period. Second, individuals face the passive activity rules in 26 U.S.C. 469. Section 469 does give the LIHTC some relief: the income-based phase-out of the special allowance for rental real estate does not apply to the part of the passive activity credit attributable to Section 42. Even so, the amount an individual can use each year is limited. Whether a LIHTC investment makes sense for a person is a question for their own tax professional.
Market-rate deals work differently for individuals. Depreciation creates paper losses, distributions are paid in cash, and gains come at the sale. See apartment syndication taxes for beginners.
Can a market-rate deal have affordable units?
Yes. Some market-rate buildings include units with rent limits from a local program, a recorded regulatory agreement, or an older LIHTC agreement still in its extended use period. Those limits run with the property, so a buyer inherits them. If you see a building where rents are well below market, ask whether a recorded agreement is the reason. The rent roll and T-12 and the title commitment will usually show it.
What should an individual investor take from this?
If someone offers you a "syndication," find out which kind. A market-rate deal should come with an offering memorandum that explains the business plan, the fees and preferred return, and how distributions work. A LIHTC investment is built around credits and compliance, and its documents will focus on credit delivery and recapture risk. See what is a multifamily syndication for the structure of a typical market-rate deal.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for market-rate apartment buildings with 5 or more units from their friends and followers under Rule 506(b) or 506(c). It prepares the standard offering documents, forms the deal's LLC, files Form D and state notices, and holds investor funds in escrow at Enterprise Bank & Trust, an FDIC-insured bank. DoorRaise does not structure tax credit investments.
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FAQ
What does LIHTC stand for?
Low-income housing tax credit, the federal credit in Section 42 of the Internal Revenue Code.
How long does a LIHTC property stay affordable?
At least the 15-year compliance period plus an extended use period that ends no earlier than 15 years after it, so 30 years or more in total under the federal rule. States can require longer.
Is LIHTC equity a security?
An investment in a partnership or fund that holds LIHTC properties is generally a security, so securities laws apply. The structure and exemption depend on the offering.
Are LIHTC rents set by HUD?
The rent limit is 30% of the imputed income limit, and the income limits come from area median income figures. Ask the state housing credit agency for the limits that apply to a specific property.
Next step: read real estate syndication vs. REIT to compare other ways individuals invest in apartments.
Sources
- 26 U.S.C. 42, Low-income housing credit
- 26 U.S.C. 469, Passive activity losses and credits limited
- Freddie Mac Multifamily, LIHTC Equity Investments
- HUD User, LIHTC Database
This article is general information, not legal, tax or investment advice. Talk to your own tax professional before you invest. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.