December 19, 2023

Low-income housing tax credits (LIHTC) are a common funding source for not-for-profit organizations (NFPs) to develop affordable housing projects. In order to access the credits, the project sponsor—commonly the NFP developer—forms a legal entity—usually a limited partnership or LLC with an investor—to obtain access to the benefits from the tax credits (LIHTC entity). The following are some key terms included within the corresponding operating agreement that sponsors should be aware of when accounting for LIHTC entities under U.S. generally accepted accounting principles (U.S. GAAP).

Consolidation Considerations

Common structures of LIHTC agreements result in the NFP developer having a .01% general partner interest (or equivalent managing member interest in an LLC) in the LIHTC entity that owns the affordable housing project. As a general partner, the NFP typically has the rights and duties to perform the day-to-day management and operating activities of the LIHTC entity. The relevant guidance for a NFP project sponsor to consider in U.S. GAAP is FASB ASC 958-810-25-11 through -29. Under this guidance, the NFP general partner has a presumption that the NFP has control and should consolidate the entity unless one of the following two provisions are met.

  • The limited partner has substantive kick-out rights. This typically refers to the ability of the investor member to remove the general partner from the partnership with or without cause and are rights that are beyond protective in nature.
  • The limited partner has substantive participation rights which grant the limited partner the powers to make major managerial and operational decisions. An example of an indicator of substantive participation rights is the ability to set or approve the entity budgets.

Consolidation considerations can be complex, so we recommend that project sponsors work alongside their accounting professionals to understand the significant judgements made in this area.


The LIHTC entity’s operations, debt, and agreements commonly require the entity to place some of the cash proceeds from the project funding sources into cash reserves that are subject to restrictions on utilization. The common reserves are as follows:

  • Operational Reserves: Utilized to maintain a certain level of cash to cover ongoing operational expenses, repairs, and regular maintenance.
  • Replacement Reserves: Allocate funds for future renovations or major repairs, maintaining the property’s quality over the long term.
  • Lease-up Reserves: Establish a source of funds that can be used to cover any temporary gaps between the project’s operating income and expenses during the lease-up period and is intended to be short-term in nature.

It is important the sponsor ensure ongoing reserve requirements are met, including obtaining all the necessary approvals for withdrawals and making continuous required deposits to remain in compliance with legal agreements. Further, the legal restrictions on the use of these funds should be disclosed within the financial statements.

Developer Fee

The developer fee is typically paid to the developer, commonly the NFP project sponsor, for their efforts in developing the affordable housing project. Developer fees vary in terms of the timing of payout but are commonly linked to the timing of capital contributions from the investor member and/or the availability of cash flows.

One commonly utilized method of accounting for developer fees results in the project sponsor recognizing the revenue from the developer fee as earned, and the LIHTC entity recognizing the full developer fee payable as part of the capitalized project costs. The NFP entity will need to consider the proper accounting treatment for the developer fee revenue and capitalized developer fee expenditures on the consolidated basis. The treatment of these transactions upon consolidation can be complex and we recommend consulting with an accounting professional to fully understand the common accounting practices.

Potential Ongoing and Contingent Fees

Agreements commonly establish some of the following types of fees which may be paid out in accordance with the terms and conditions of the operating agreement:

  • Tax Credit Compliance Monitoring Fee, Investor Services Fee and/or Asset Management Fee: Compensation usually due to an entity related to the limited partner for services related to monitoring and ensuring compliance with LIHTC regulations.
  • Property Management Fee: Compensation to the company responsible for day-to-day operations, maintenance, and tenant services.
  • Incentive Fee: A fee payable to the project sponsor or general partner for achieving certain operational metrics.

In many instances, ongoing fees are paid based on or are contingent upon available cash flows in a period and may or may not accrue between periods. It is important the entity understands the nature of all the applicable fees and properly recognizes the fees in accordance with the contingent liability accounting guidance.

Some other key items to consider when looking at your agreement are operating deficit guarantees, capital contribution payment schedules and requirements and reporting requirements.


The terms for each LIHTC entity agreement are often unique to that transaction and each agreement should be separately analyzed and understood. If you have any questions related to the LIHTC Entity agreement, please do not hesitate to reach out to a Clark Nuber accounting professional.

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This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.