The allocation of low-income housing tax credits (“LIHTC”) follows the allocation of depreciation losses. If an investor’s capital account becomes negative prior to the end of the credit period, the investor can continue to claim LIHTCs only if the LIHTC partnership has non-recourse debt from sources unrelated to the general partner that will produce minimum gain.

Recourse debt does not produce minimum gain, so an obligation to pay deferred development fee that is guaranteed by a general partner does not produce minimum gain. Likewise, non-recourse debt owed to a developer partnership is partner non-recourse debt and would not generate minimum gain where an individual owns both the pass-through general partner of the LIHTC partnership and the developer partnership. See the “tiered partnership” rules of Treasury Regulation Section 1.752-2(i) and 1.752-4. If the general partner of the LIHTC partnership is a corporation as to which the owners of the developer own less than 80%, however, the “tiered partnership” rules are not applicable and the loan from the developer entity to the LIHTC partnership would be unrelated.

We note that Treasury Regulation Section 1.752-4(b)(2)(iv) provides that a lender entity structured to avoid the related party rules will be treated as related unless the overlapping ownership is less than 20%. As a result, the best practice to ensure that a lender is disaffiliated is to incorporate the general partner rather than the developer entity and to ensure that the principals of the developer entity own less than 80% of the general partner.