NMTCs and HUD Financing Deals Becoming More Common

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

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

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

The landlord partnership then makes a special election to pass the credit through the lease to the master-tenant partnership, which then allocates the credit to the investor. With NMTCs, the key to receiving the credit is to have cash run through a Community Development Entity (CDE). NMTCs and historic tax credits can be combined when the source of the cash being run through the CDE is the historic tax credit equity.

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

The agency eventually softened its stance and by late 2008 had released the so-called Garvin memo, which provided a roadmap for HUD'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 in New Orleans that was structured according to the updated memo, according to Nesbitt and Banghart.

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

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

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