There are both benefits and challenges to being and working with a nonprofit developer on a low-income housing tax credit (LIHTC) investment.

The Understanding the Nonprofit World panel at the Novogradac 2023 Affordable Housing Conference in late April dove into these issues. I moderated the panel and welcomed Jen Brewerton, Mike Jacobs, Laura Archuleta and Amy DeVaudreuil as speakers.

The panel discussion started off by talking about nonprofit developers bringing in a services component to LIHTC properties.

Archuleta, president and CEO of Jamboree Housing Corporation, shared her experiences as a nonprofit developer, beginning with the fact that as a nonprofit developer, Jamboree offers a suite of supportive services at its LIHTC properties. Archuleta said Jamboree has several enrichment programs that it brings to affordable housing properties. Because the nonprofit developer offers these services, more than half of Jamboree’s staff works on the services side.

Because Jamboree provides services, it does run into more unique operational hurdles.

Archuleta said Jamboree has asset managers, third-party property managers and service providers on staff. On the operations side, Jamboree houses all three departments under one director. Archuleta said that Jamboree typically finds a director with experience in two of those three areas. Then, Jamboree trains that director in the third area.

Brewerton, vice president of compliance at Dominium, a for-profit affordable housing developer, has experienced two benefits working with nonprofit developers. Brewerton said that when working with a nonprofit developer, a for-profit developer such as Dominium can get access to tax exemptions to make affordable housing developments viable. However, Brewerton stressed that it’s best not to partner with a nonprofit developer solely for access to additional funding sources. Brewerton said that it’s for the relationships. When partnering with a nonprofit developer, one of the benefits for a for-profit developer is building relationships with the city government and community.

Jacobs, senior director of acquisitions at Hunt Capital Partners, a tax credit syndicator, agreed, saying bringing in a nonprofit only to receive a tax exemption is not the right move.

Getting to Know your Nonprofit Partner

It’s important to know the strengths and weaknesses of a nonprofit partner.

DeVaudreuil, an attorney at Goldfarb & Lipman LLP, said that nonprofits have different levels of capabilities to partner with in LIHTC investments. DeVaudreuil stressed the importance of making sure to get enough material participation from the nonprofit partner when working with a nonprofit with limited experience. Insufficient participation by the nonprofit could jeopardize its mission and possibly its exempt status.

DeVaudreuil went one step further and said to make sure to not give a nonprofit partner duties they may not be able to fulfill.

Brewerton shared a story on what happens when nonprofit partners don’t have material participation.

Dominium does a lot of acquisition/rehabilitation of affordable housing developments. When a nonprofit defaults, Dominium steps in. For example, in Texas, Dominium acquired 13 affordable housing properties, four of which received 9% LIHTCs under the nonprofit set aside. As a result, those nonprofits must participate in the developments. However, the nonprofits weren’t providing material participation because providing supportive services doesn’t count as participation in Texas. It became problematic. As a result, Dominium now has a stronger vetting process when picking nonprofit partners.

Another challenge that nonprofit developers, in particularly face, is financing.

Archuleta said nonprofit developers are heavily dependent on city and government partners for financing, more so than for-profit developers.

For-profit/Nonprofit Partnerships

Regardless of any challenges, for-profit and nonprofit developers must find a way to work together.

Jacobs said both parties want a strong relationship. But he said it’s important for the for-profit developer and the nonprofit developer to be on the same page. As a syndicator, Hunt Capital Partners dives deep and asks the development team a lot of questions. It’s important for the syndicator to know the plan as well. Jacobs wants nonprofit and for-profit developers to be healthy partners for 15 years.

DeVaudreuil said being on the same page is especially important at the exit at Year 15. For this to happen, DeVaudreuil said the development partners should be having conversations about the exit very early and need to agree on the exit strategy.

DeVaudreuil also discussed watching for unintended tax-exempt use property that would result in longer depreciable lives and the inability to take bonus depreciation on personal property and land improvements.  This can result when there is a shift of allocations between partners, particularly in Year 15. One method to handle this is for the nonprofit to create a special use LLC that holds the general partner interest and makes an Internal Revenue Code Section 168(h) election to be treated as a taxable corporation. However, this comes at the risk of creating taxable income for the corporation and unrelated business taxable income for the nonprofit.