United States: LIHTC Exit Strategies: Loan Sale

Note: This post is part of a continuing series on the Credit Report Blog on the subject of workouts and bankruptcies involving low-income housing tax credit (LIHTC) projects.

Because there is currently a very robust market for distressed debt, a lender's first option for dealing with any non-performing loan is often to look to sell the loan. This post addresses the unique considerations and difficulties involved in the sale of a loan secured by an LIHTC project (referred to herein as an "LIHTC loan").

The difficulties involved in the sale of an LIHTC loan are tied to two features of such loans. The first feature is the highly specialized nature of the affordable housing business and the limited market for such projects (and consequently for LIHTC loans secured by such projects). This feature pervades all LIHTC loans. The second feature relates to the way the loan is structured and comes into play only with respect to LIHTC loans secured by projects involving so-called 4% credits.

Limited market for potential purchasers

Affordable housing is a highly specialized industry, particularly when LIHTCs are involved. As such, there are very few, if any, financial buyers of distressed LIHTC loans (i.e. buyers who are making a financial play that they can collect more from the borrower than they are required to pay for the loan). Typical distressed debt investors simply don't have the time or inclination to understand the complexities of affordable housing and, therefore, are generally interested in loans secured by more common types of real estate or other collateral.

This means that the pool of potential buyers for LIHTC loans will likely consist only of strategic buyers (i.e. buyers who are interested in purchasing a loan in order to gain a strategic advantage with respect to an ownership interest in the property itself). Unfortunately, the pool of strategic buyers is also quite limited. Many developers of market-rate properties are simply unwilling to wade into the waters of affordable housing. Although an LIHTC property can be converted to a market-rate property under certain circumstances (such as following a foreclosure), the value of a property as a market-rate property is most often significantly less than its value as an LIHTC property because of the additive value of the tax credits that are available only if the property continues to be operated as an LIHTC property.Moreover, the ability to convert an LIHTC property to a market-rate property is often constrained by market factors. Thus, the sale of an LIHTC loan (or the sale of the LIHTC property itself) to a buyer that anticipates converting the property to a market-rate property is generally unlikely to be a lender's best option.

In short, the pool of potential purchasers for an LIHTC loan is typically limited to other affordable housing developers. Not only is this pool quite shallow, but there are few such developers who have experience in buying distressed debt and are interested in taking on the headaches associated with a failed LIHTC project.

9 percent credits vs. 4 percent credits

There are two different types of federal LIHTCs: 9% credits and 4% credits. Financing for a project involving 9% credits is structured like any other conventional construction or construction-to-permanent financing. In other words, a loan will be made directly by the lender to the borrower and the loan will be secured by a mortgage on the 9% LIHTC property. On the other hand, financing for a project involving 4% credits will be structured through bonds issued by a local public authority. The bonds will either be sold directly to the lender or will be sold to third-parties and credit enhanced by a letter of credit issued by the lender. The bonds and/or borrower's reimbursement obligation under the letter of credit will then be secured by the 4% LIHTC property.

The sale of an LIHTC loan secured by a 9% LIHTC property is relatively straightforward. There are comparatively few restrictions on the transfer of such a loan and the lender can simply transfer its interest in the loan and the loan documents to the purchaser. However, the sale of an LIHTC loan secured by a 4% LIHTC property is much more complicated.

With respect to bonds that have been purchased by the lender directly from the authority, the governing bond documents will typically restrict any re-sale of the bonds to a particular class of purchasers. Such restrictions typically limit the sale of bonds to (a) a "Qualified Institutional Buyers" (QIBs) as defined in Rule 144A under the Securities Act of 1933, as amended, (b) "Accredited Investors", as defined in Rule 501(a)(1)-(3) of Regulation D under the Securities Act of 1933, as amended, or (c) some combination or subset of (a) and (b). In addition, the governing bond documents will include various documentation requirements for a transfer of the bonds, such a requirement that the purchaser execute a letter of representation certifying that it meets the transfer restrictions and making certain other required representations.

Only very sophisticated institutional organizations, such as banks, qualify as QIBs. As such, a provision in the governing bond documents restricting transfers to QIBs will significantly limit the number and types of potential purchasers. A restriction on transfers to Accredited Investors opens up the market to a broader class, including certain high net worth or income individuals, but is still quite restrictive.

With respect tobonds which were previously secured by a letter of credit, and which are now held by the lender following a draw under the letter of credit and an optional or mandatory tender of the bonds, the operative bond documents may either prohibit a transfer of the bonds or may require certain additional documentation from the purchaser given that the bonds contemplate that holders will have the security of the letter of credit which is no longer available. Moreover, if the bonds have been redeemed and the lender is selling its rights under a letter of credit reimbursement agreement, various other complications come into play.

Given the obstacles associated with the sale of an LIHTC loan, is it still a viable alternative?
Because of the small market for potential purchasers and the various restrictions and complications concerning transferability, it is extremely difficult to sell an LIHTC loan. However, it is not impossible and the obstacles to such a sale can be overcome in certain circumstances. Based on our experience, we have the following observations concerning the sale of an LIHTC loan:

  • It is extremely difficult to sell an LIHTC loan through typical distressed debt markets.
  • Strategic buyers are the best prospects for purchasing an LIHTC loan.
  • Strategic buyers are most likely to be identified through industry sources.
  • The sale of an LIHTC loan is more likely to occur when the borrower is cooperative and participates in the process.
  • Negotiations concerning the sale of an LIHTC loan are complicated and will involve issues unique to the particular transaction.
  • When bonds are involved, the issuing authority is sometimes willing to waive or modify transfer restrictions to enable a sale of the bonds to an identified purchaser that would not otherwise qualify.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions