CORPORATE USE OF TAX CREDITS

WHY THEY USE THEM

Tax Credits provide a powerful incentive to corporate investors to invest in the development, rehabilitation and management of affordable housing. Investments in affordable housing that generate tax credits improve financial statements by providing:

Increased earnings per share - Tax Credits directly reduce book income tax expenses, thus improving after-tax earnings. When a direct reduction of tax liability increases a corporation's earnings per share, stock value is positively affected. For example, if a stock trades at a 10:1 price/earnings ratio (P/E), a $500,000 direct tax savings reflected in earnings per share can enhance stock value by $5 million. This effect on earnings becomes even more significant when pricing an Initial Public Offering.

Increased retained earnings - A direct reduction of tax liability enhances retained earnings, thus increasing corporate asset value, this is particularly significant to companies whose borrowing is limited to multiples of asset value.

Increased working capital - An investment in Tax Credits is funded with dollars that would otherwise be allocated to taxes. Converting tax dollars into spendable income increases working capital.

Increased net income - After passive losses are used to reduce taxable income and achieve net taxable income, Credits are applied to reduce net regular tax, dollar-for-dollar, thereby increasing net income.

While Tax Credit investments offer very good financial returns, many corporations are very aware of their role in the local community and recognize the importance of being a good corporate citizen. Other attractive features of a Tax Credit investment, in addition to helping satisfy local housing needs are:

Public Relations - Corporations that invest in local Tax Credit developments usually receive considerable local (and sometimes national) publicity, giving the public a very favorable image of the corporation.

Community Reinvestment Act - The CRA was enacted in 1977 as a response to the perception that regulated financial institutions treated some prospective borrowers unfairly and had unnecessary differences in lending policies based on geographic locations. Tax Credit investments provide an avenue through which financial institutions can achieve their investment objectives and help satisfy their CRA obligations.

Employee Compensation - Corporations can invest in Tax Credit developments and give a portion of the benefits to various executives as additional compensation.

This type of compensation realized over a period of time can be designed to have a "Golden Handcuffs" feature. Golden Handcuffs are compensation programs that make it too costly for an employee to leave their employer.

Secure Land for Expansion - A Tax Credit investment can be used by a corporation to secure property in an area which it expects to expand in at the end of the compliance period.

HOW THEY USE THEM

First, corporations use passive losses to reduce taxable income. Then, they use Tax Credits to reduce regular tax. Under the tax code, there are four distinct classes of corporations: Widely Held "C" Corporations, Closely Held "C" Corporations, "S" Corporations and Personal Service Corporations.

Widely Held "C" Corporations can use Tax Credits to reduce federal income tax on all regular income tax liabilities without exception (subject to the general limitations on Business Tax Credits and Alternative Minimum Tax).

Closely Held "C" Corporations can use an unlimited amount of Tax Credits to reduce federal tax liability on active and passive income (subject to the general limitations on Business Tax Credits). These corporations cannot, however, use tax credits to reduce portfolio income. Generally, a Closely Held Corporation is a corporation which is more than 50% owned, directly or indirectly, by five or fewer individuals.

"S" Corporations cannot use Tax Credits and passive losses at the corporate level. Instead, they pass the benefits on to the shareholders, who include them in their individual tax returns.

Personal Service Corporations can use Tax Credits and passive losses to reduce income tax liability on passive income. A Personal Service Corporation is generally a corporation of which the principal activity is the performance of personal services by its employees/owners, such as medical and legal practices.

Additional Tax Benefits from Passive Losses - Corporations, other than "S" and Personal Service Corporations, can use an unlimited amount of passive losses to offset regular business income and passive income. Therefore, if the Tax Credit expectations in an offering yield a double-digit return on investment per year, and the program also produces passive losses that can be used currently, the yield to the corporate investor increases dramatically.