Tax Credits Explained
What are tax credits?
Real estate tax credits are tools the federal government and state governments use to encourage investment in the development of real estate that is necessary and beneficial to a community, but not financially feasible without additional incentives.
Such developments may include:
affordable housing,
historic rehabilitation, and
commercial development in underserved or distressed areas.
These tax credit programs include:
Low-Income Housing Tax Credits (LIHTCs),
Historic Rehabilitation Tax Credits (HTCs),
New Markets Tax Credits (NMTCs) and
Renewable Energy Tax Credits.
While the details of each program differ, they all provide incentives to invest private dollars in exchange for certain commitments by the developer (e.g., to rent to lower income people at affordable rents, to reduce energy consumption, etc.). For instance, a LIHTC credit investor receives an enhanced return on its investment in the form of extra tax benefits. The resulting investment reduces the property’s reliance on debt financing-- because less money is required for debt service, the property can afford to commit to lower rents and can agree to rent to lower income tenants for the next thirty years.
Tax credits are a valuable resource because they benefit all stakeholders of a community. The investor gains a competitive return on investment, the developer gains access to capital to complete a project serving needs that would not otherwise have been financially feasible, and the community gains affordable housing, businesses, or resources that would not traditionally attract such investment without enhanced incentives.
Competitive returns
The returns are more predictable and less volatile than other investments because of the regulatory guidelines of the tax credit programs.
Decreased tax liability
The combination of tax credits and passive losses reduces the investor’s tax liability-- the investor is less dependent on cash flow and capital gains to receive their returns because of enhanced tax benefits.
CRA consideration
Financial institutions earn positive consideration toward their regulatory ratings under the Community Reinvestment Act (CRA).
Stronger communities
Tax credit investments provide a positive and visible means for corporations to demonstrate their commitment to the communities in which they live and work.
Tax credits offer companies and shareholders a safe, sound, and profitable investment that strengthens the communities in which they do business.
VCDC’s Role
VCDC functions as an Equity Fund Manager (or syndicator) of tax credit investments. We raise capital from multiple investors, organize it into investment funds, and deploy that capital as equity investments into tax credit producing properties.
VCDC Equity Funds invest in properties that produce Low-Income Housing Tax Credits (LIHTCs), Historic Rehabilitation Tax Credits, New Markets Tax Credits and Renewable Energy Tax Credits. The investor enjoys the benefits of tax credit investing; VCDC manages the details, from concept through the 15-year compliance period. The tax credits from each program provide a dollar-for-dollar reduction in the investor’s federal tax liability.
To learn more about the tax credit program and how VCDC can help you invest or develop in communities you serve, please contact us. (link to contact page)
