Syndication

What Is Syndication?

In affordable housing, syndication is the process of turning a development’s tax credits into cash by bringing investors in as owners. The firm that arranges it is called a syndicator. It is used mostly with the Low-Income Housing Tax Credit (LIHTC), and the money it raises is called tax credit equity.

How It Works

Only a property’s owners can claim its tax credits. So investors do not buy credits outright. Instead, they buy an ownership stake in the limited partnership or limited liability company (LLC) that owns the property. The Office of the Comptroller of the Currency (OCC) describes two ways to do this:

• Direct investment. One investor buys all or part of the 99.99% ownership interest in a single property partnership. The developer, as general partner or managing member, keeps 0.01% and runs the property. The investor has no say in management.
• Fund investment. A syndicator gathers several investors into an upper-tier fund. Investors own 99.99% of the fund, and the syndicator, as general partner or managing member, holds 0.01%. The fund then becomes the 99.99% limited partner in several lower-tier property partnerships.

Credits and tax losses pass up from each property to the fund, then to investors by ownership share.

What Syndicators Do

• Find and underwrite projects, and negotiate terms with developers, including when equity is paid in
• Pool money so investors can join with smaller minimums and spread their risk across many properties
• Monitor properties’ compliance and finances through the compliance period, work known as asset management
• Manage the fund’s eventual exit from each property. The OCC says investors most often exit between years 11 and 16

Syndication vs. Direct Investment

Criticisms and Limitations

Syndication adds layers of cost: syndicator fees, legal and accounting work, and the return investors expect. Each of them reduces how much of the credits’ face value ends up in the building.

The system also depends on corporations having federal tax bills to offset. The OCC notes that in 2008 and 2009, falling bank profits and the exit of Fannie Mae and Freddie Mac cut demand for credits and pushed prices down. Congress stepped in with temporary measures, and the OCC reports that the market had rebounded by the end of 2010.

Syndication only finances properties that meet LIHTC income limits. Housing for workers above those limits has to raise equity some other way.