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In addition to low-cost mezzanine financing through EB-5 funding, developers can use tax credit financing to increase returns or even make an otherwise unfeasible project profitable. There are several federal tax credit programs available, some of which complement EB-5 financing exceptionally well, and these programs can generally be used in conjunction with each other and EB-5 financing on the same EB-5 project.
There are three main types of tax credits.
The low-income housing tax credit (LIHTC), new market tax credit (NMTC), and historic tax credit all match nicely with the EB-5 program since they both aim to revitalize economically poor places. A more in-depth review of these three credits follows.
(1) Tax Credit for Low-Income Housing (LIHTC)
The LIHTC, which was established to assist in the financing of low-income housing development, encourages private investors to pursue federal tax breaks that promote economic growth and the building of affordable housing. The tax credit is available for both new construction and renovations.
Tax credits are assigned to applicants by approved state agencies and subsequently sold to private investors. Third-party investors or project partners can subsidize qualifying expenditures spent in the creation of low-income rental housing units by 30% using the “4% credit” or 70% using the “9% credit.”
The 4% credit has no annual limits but is limited by a certain number of private activity bonds that must represent 50% or more of total development costs. The 9% credit, on the other hand, has an annual cap, and the quantity of credits granted to each state is decided by population.
The taxpayer can claim the LIHTC for a total of ten years.
(2) Tax Credit for New Markets (NMTC)
The NMTC program, like the EB-5 program, aims to boost community development, stimulate the economy, and generate jobs in economically poor areas. This credit, like the EB-5 scheme, requires evidence of job creation and other community benefits.
The NMTC, which was created to encourage private investment in low-income regions, is given depending on the amount of equity contributed by qualifying investors. The NMTC is typically allocated to projects involving the construction or renovation of cultural and educational centers (e.g., art centers, charter schools, college campuses, and so on), emergency housing and related services (e.g., homeless shelters, transitional housing, education facilities for homeless people, and so on), and commercial property (e.g., shopping centers, technology facilities, hospitals, hotels, office spaces, etc.).
When properly constructed, the NMTC can equal to 15%–25% of the overall expenditures of a project.
(3) Tax Credit for Historic Properties
For qualifying expenses paid during the refurbishment of registered historic buildings erected before 1936, the federal government gives a rehabilitation tax credit of up to 20%. The tax credit is typically syndicated to a third-party corporate investor by the owners of the historic property under refurbishment. When the historic tax credit is combined with EB-5 money, the EB-5 capital is utilized as long-term (or replacement) financing.
Other Tax Benefits
Municipalities also use tax increment financing (TIF) and tax abatements to promote economic development. These incentives, as well as other sources of public financing, can be beneficial when combined with EB-5 money.