"HUD has gotten more innovative or flexible in trying to makesure that its financing programs work better with a variety offinance programs, including low-income housing tax credit, historicrehabilitation credits and NMTCs," Nesbitt tells GlobeSt.com.

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That trend dovetails a similar one in which developers havebegun focusing more on NMTCs to raise equity for apartment projectsthat also have a commercial component, Banghart says. These creditswere never intended to drive production of apartments, he explains,which has made combining NMTCs with other forms of finance inmultifamily deals tricky—but not impossible.

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For example with historic tax credits, a deal typically needstwo partnerships: one that is owned by the developer, which holds afee interest in the property and leases it to the otherpartnership, and one for the master-tenant partnership, which isowned by the tax credit investor.

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The landlord partnership then makes a special election to passthe credit through the lease to the master-tenant partnership,which then allocates the credit to the investor. With NMTCs, thekey to receiving the credit is to have cash run through a CommunityDevelopment Entity (CDE). NMTCs and historic tax credits can becombined when the source of the cash being run through the CDE isthe historic tax credit equity.

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HUD first worked on a project involving NMTCs and HTCs in NorthCarolina a few years ago, and hated the process so much it declaredit would never do it again, the duo say.

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The agency eventually softened its stance and by late 2008 hadreleased the so-called Garvin memo, which provided a roadmap forHUD's participation in deals employing a master lease structure.The agency further updated that memo in 2009. That same year,Holland & Knight became involved in closing a transaction inNew Orleans that was structured according to the updated memo,according to Nesbitt and Banghart.

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Since then more deals have come to market in which HUD financingand NMTCs have been combined—a recent example being the $108 million at theRhode Island Ave./Brentwood Metro station. It is beingfinanced through a combination of a $7.2 million PILOT note, NMTCsand a HUD-insured loan.

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Many hoped that the DC deal would advance the model that HUD putin place in 2008 by actually using the agency's financing togenerate NMTCs. But while the transaction was able to utilizeNMTCs, it was not able to leverage the HUD financing because ofregulations related to one of the participants in thetransaction.

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Sooner or later that leverage will happen, Nesbitt and Banghartpredict. "We are actively involved on a couple of transactions thatmay use that structure," Nesbitt says.

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