A recapture, or taking back, of LIHTCs occurs when a project violates requirements of the program. Typical recapture occurs when the project fails to meet the minimum set-aside requirements by the end of each taxable year. This can occur if the project or building fails to meet the requirements in the first, or subsequent, tax credit periods. A partial recapture can occur when there is a
decrease in Eligible Basis or the low income occupancy percentage decreases (Applicable Fraction). However, if the Applicable Fraction decreases below the minimum set-aside (40/60 or 20/50), then a full recapture will occur. Once a property fails the required minimum set-aside test, then it no longer qualifies for LIHTCs even if it meets the test in subsequent years.
If recapture occurs between years 2-11, one-third of previously claimed LIHTCs are recaptured. During year 12, 4/15 are subject to recapture, in year 13 3/15 are subject to recapture, and so on through year 15. In addition, the owner is subject to an interest charge on the recaptured tax credits that equals the overpayment rate established under IRC 6621.
A recapture event is a serious occurrence that can financially destroy a project. LIHTCs are typically a significant portion of a development’s financing; therefore, the inability to utilize the credits are catastrophic to the project’s financing assumptions. It should be noted that LIHTC projects have historically had a strong compliance history.
Sale Recapture Trigger
In addition to compliance, an improper sale can also activate recapture. The Housing and Economic Recovery Act of 2008 made it significantly easier for an owner of a LIHTC property to dispose of the asset during the 15 year compliance period. Section 3004(c) states that recapture “shall not apply solely by reason of the disposition of a building (or an interest therein) if it is reasonably expected that such building will continue to be operated as a qualified low-income building for the remaining compliance period with respect to such building”. Therefore, as long as the buyer agrees to maintain the affordability restrictions imposed by the LIHTC program, a recapture event will not occur.
When a sale transpires during the 15 year compliance period, it is the seller’s responsibility to ensure that the property remains in compliance throughout the 15 year period. The new owner is not allowed to assume the liability for recapture. However, some sellers will put requirements in the sale documents providing adequate recourse to the buyer if the property is non-compliant in the future.