E.4 LIHTC Structures

E.4.1 Background

In a LIHTC partnership structure, the general partner typically has an insignificant equity interest in the partnership but receives a fee for its decision-making responsibilities, including building and renovating the housing project, issuing partnership interests, and maintaining and operating the housing project. The limited partners invest in these projects to earn the tax benefits, and they hold essentially all of the equity interest.

E.4.2 Determining Whether a LIHTC Partnership Structure Is a VIE

A reporting entity is required to apply either the VIE model or the voting interest entity model in performing its consolidation assessment. A limited partnership would be considered a VIE regardless of whether it otherwise qualifies as a voting interest entity unless either of the following apply:

A simple majority or lower threshold (including a single limited partner) of the limited partners (excluding interests held by the general partner, entities under common control with the general partner, and other parties acting on behalf of the general partner) with equity at risk have substantive kick-out rights (including liquidation rights — see Section 5.3.1.2.2).
The limited partners with equity at risk have substantive participating rights (see Section 5.3.1.2.7).

Although a reporting entity should exercise judgment and consider all facts and circumstances, the partnership agreement in a LIHTC structure typically does not allow the limited partners to participate in the policy-making processes of the partnership or remove the general partner without cause. Factors to consider in the determination of whether the limited partner investors participate in the policy-making processes of a LIHTC partnership include the following:

Whether the investor has the ability to make decisions about the day-to-day operations of the LIHTC partnership (e.g., accepting tenants, setting rent).
Whether the investor has the unilateral ability to veto the operating and capital budgets or otherwise prevent the general partner from making decisions about the day-to-day operations of the LIHTC partnership without cause.

Accordingly, while protective rights may exist (e.g., the ability to remove the general partner with cause or to veto the sale of a property owned by the LIHTC partnership for significantly less than its fair value), a LIHTC partnership is typically considered a VIE as a result of the lack of substantive kick-out or participating rights.

Although a LIHTC partnership will typically be considered a VIE because of its lack of participating or kick-out rights, the partnership may also fail to satisfy the other VIE criteria. However, if such rights exist, and the partnership meets all of the conditions to qualify as a voting interest entity, a single limited partner with the ability to remove the general partner would be required to consolidate the partnership under the voting interest entity guidance.

E.4.3 Which Party Should Consolidate a LIHTC Structure That Is a VIE?

The assessment of whether a reporting entity is required to consolidate a limited partnership that is a VIE focuses on whether the reporting entity has both of the following characteristics of a controlling financial interest:

Power — The power to direct the activities that most significantly affect the VIE’s economic performance (see Section 7.2).
Economics — The obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE (see Section 7.3).

Often, despite not having made a significant equity investment, the general partner will meet both of these conditions and would consolidate the LIHTC partnership. For example, in situations in which the general partner is providing guarantees for construction or operations, the general partner may have, on its own, the characteristics of a controlling financial interest and would therefore be the primary beneficiary.

However, when the general partner does not meet both conditions (e.g., when a guarantee is not provided), typically no party individually would have both of the characteristics of a controlling financial interest. Specifically, the general partner may conclude that it meets the power criterion but not the economics criterion, and each limited partner may conclude that it does not meet the power criterion. However, facts and circumstances (including whether any partners have other interests in the partnership or each other) must be considered. For example, if the partnership is a VIE, and a single limited partner has the right to remove the general partner, the limited partner may have, on its own, the characteristics of a controlling financial interest and would be required to consolidate the partnership.

E.4.4 How Do Interests Held by Related Parties Affect the Analysis?

In certain instances, the limited partner or partners may be related parties or de facto agents or de facto principals of the general partner. For example, if the general partner is restricted from disposing of its interest without the approval of the limited partner and no similar restriction exists that limits the ability of the limited partner to dispose of its own interest, the general partner would be considered a de facto agent of the limited partner. A reporting entity would perform the related-party tiebreaker test in the following instances:

Power is shared within a related-party group and the related-party group meets both characteristics of a controlling financial interest. See Section 7.2.8.1 for further discussion of determining whether power is shared.
A single decision maker has met the power criterion but not the economics criterion, and the aggregation of entities under common control with the single decision maker have met the economics criterion. See Section 7.4.2.3 for further discussion of a single decision maker and related parties under common control.

In addition, in accordance with ASC 810-10-25-44B, a reporting entity in a single decision maker’s related-party group5 should generally consolidate a VIE if (1) the reporting entity is a party that is related to a single decision maker that does not, individually, have both characteristics of a controlling financial interest, (2) no other party in the single decision maker’s related-party group individually has both characteristics of a controlling financial interest in the VIE, (3) the single decision maker and its related parties under common control do not have both characteristics of a controlling financial interest, and (4) substantially all of the activities of the VIE either involve or are conducted on behalf of the reporting entity. However, as stated in ASC 810-10-25-44B, this requirement does not apply if the legal entity is a partnership in a LIHTC structure that meets criteria in ASC 323-740-15-3 and ASC 323-740-25-1. Accordingly, before an entity adopts ASU 2023-02, this exception for LIHTC structures applies only if (1) the legal entity is a limited liability entity established for affordable housing projects and a flow-through entity for tax purposes (i.e., the criteria per ASC 323-740-15-3) and (2) the following conditions in ASC 323-740-25-1 are met:

a. It is probable that the tax credits allocable to the investor will be available.

aa. The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity.

aaa. Substantially all of the projected benefits are from tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment).

b. The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive.

c. The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.

The exception is intended to prevent situations in which a single limited partner investor that holds more than 90 percent of the limited partner interests in a LIHTC partnership may have otherwise had to consolidate the partnership if the general partner is a related party or de facto agent of the investor.

As discussed in Section 7.4.2.5, ASU 2023-02 extends the applicability of the “substantially all” characteristic in ASC 323-740-25-1(aaa) and the use of the proportional amortization method to all tax equity investments, regardless of the program from which they receive income tax credits, provided that (1) the legal entity is a limited liability entity established for income tax credits and is a flow-through entity for tax purposes (i.e., the criteria in ASC 323-740-15-3) and (2) the conditions in ASC 323-740-25-1, as amended by ASU 2023-02, are met (see the pending guidance below).

ASC 323-740

Pending Content (Transition Guidance: ASC 323-740-65-2)

Proportional Amortization Method

25-1 A reporting entity that invests in projects that generate income tax credits and other income tax benefits from a tax credit program through limited liability entities (that is, the investor) may elect to account for those investments using the proportional amortization method (described in paragraphs 323-740-35-2 and 323-740-45-2) if elected in accordance with paragraph 323-740-25-4, provided all of the following conditions are met:

a. It is probable that the income tax credits allocable to the investor will be available.

aa. The investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.

aaa. Substantially all of the projected benefits are from income tax credits and other income tax benefits (for example, tax benefits generated from the operating losses of the investment). Projected benefits include, but are not limited to, income tax credits, other income tax benefits, and other non-income-tax-related benefits, including refundable tax credits (that is, those tax credits not dependent upon an investor’s income tax liability). Tax credits accounted for outside of the scope of Topic 740 (for example, refundable tax credits) shall be included in total projected benefits, but not in income tax credits and other income tax benefits when evaluating this condition. This condition shall be determined on a discounted basis using a discount rate that is consistent with the cash flow assumptions utilized by the investor for the purpose of making a decision to invest in the project.

b. The investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive.

c. The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.

Footnotes

See footnote 6 in Section 7.4.2.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.