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Commercial MortgageInsightReprinted with permission from the March 2004 issue

Copyright © 2004 Zackin Publications Inc. All Rights Reserved.

ownership of the facility must be in apartnership for federal income tax pur-poses, generally either a limited part-nership or a limited liability company,for state law purposes. One or moreinvestors who can use the credits mustbe admitted to the partnership, asowners. Generally this is a greater than99% ownership interest. The develop-er can receive a host of free and signif-icant profits and residential interests.But the developer must give up signifi-cant ownership rights, including cer-tain economic rights, for at least 15years.

The developer may receive a signif-icant developer fee up front, typicallybetween 10% to 15% of the total de-velopment costs. There are other fees,such as management, incentive man-agement, sales, administrative, over-sight and marketing, that may mitigatethe loss of ownership for 15 years. Butthe ownership interest of the investormust be real. The credits are notwholly separate from the ownership ofthe facility.

provider other than the owner/manag-er of the facility. If the services aremade optional in this manner, the pay-ment for services should not be con-sidered part of the restricted rent.Consequently, the amount needed topay for the services should not disqual-ify one from using LIHTCs because ofthe required rent limitations. Numer-ous affordable assisted living facilitiesare being developed, owned and oper-ated under the LIHTC program, andmost are assisted with Medicaid.

State LIHTC allocating agenciesare beginning to recognize the greatneed of this significant segment of thepopulation. Many states are giving pri-ority under their “qualified allocationplans” – the process by which thestates allocate LIHTCs among variouscompeting projects in each state. Thistrend is a positive one and reflects thestate agency’s desire to help satisfy theneeds of its constituents.

Strings attached to qualifyThe LIHTC program, like most

other government subsidies, comeswith strings attached. The facility mustremain “low-income” for a period of15 years to avoid “recapture” of cred-its. As long as sufficient Medicaidfunding is available to take advantageof the LIHTCs, the facility should beable to stay low-income indefinitely.

To take advantage of LIHTCs, the

In the first article in this series, wediscussed how affordable multi-family units could help solve theproblems raised by housing the el-

derly who are relatively healthy andneed some assis-tance, but are byno means in needof nursing homecare. Our discus-sion of programsavailable to takeadvantage of thelow-income hous-ing tax credit (LI-HTC) programcontinues.

The Medicaid provisions of the 41states that provide assistance for assist-ed living generally do not require“continual or frequent nursing, med-ical or psychiatric services.” Medicaidcan, therefore, be received in a facilitythat is constructed with the equitygenerated through the LIHTC pro-gram. The amounts of Medicaid reim-bursement should generally not beconsidered part of “gross rent” underan exclusion, as described in InternalRevenue Code Section 42(g)(2)(B)(iii).

Most tax attorneys that have re-viewed the requirements have conclud-ed that even services that are paid forby residents directly, not by Medicaid,can be considered “optional” if the res-ident has the option of using a

Douglas J. Antonio

Affordable Assisted Living: Creative Ways To Make ItThis second article of a two-part series explains

how Medicaid and tax credits help solve some of the challenges of housing the elderly.

BY DOUGLAS J. ANTONIO

Douglas J. Antonio is a partner with Duane Morris LLP in Chicago. He prac-tices in the areas of taxation, real estate,affordable housing and community devel-opment, and partnership and syndicationlaw. He may be reached at (312) 499-6772 or djantonio@duanemorris.com.

Douglas J. Antonio is a partner with Sugar Felsenthal Grais & Hammer LLP, a Chicago law firm. Doug joined the firm in December, 2011. He practices in the areas of taxation, real estate, affordable housing and community development, and partnership and syndication law. He may be reached at (312) 704-2198 or dantonio@sugarfgh.com.

The investor in a LIHTC facilitywill generally also want certain rights –such as the ability to remove the gen-eral partner and manager under certainconditions. If things do not go asplanned, the developer will not have a“silent partner.” In addition, there arealso numerous compliance and regula-tion requirements that go along withthe LIHTC. The residents must be in-come certified annually. There may beLIHTC inspections from the stateagency and the investor. There will bemore governmental and investorscrutiny with LIHTCs.

There are other programs that areavailable to facilities that are consid-ered housing, as opposed to healthcarefacilities. Since the assisted living facil-ities may qualify as “residential rentalfacilities,” many of the housing pro-grams, in addition to the LIHTC pro-gram, could be accessed and used.Many states have an “Affordable Hous-ing Trust Fund” funded out of transfertaxes that can provide subsidies, loansor grants. HOME Investment Partner-ship Program funds, the so-called“HOME program,” may be availablethrough subsidized loans or grants.Even Section 8 may be available, pro-viding either a tenant-based or project-based rental subsidy.

Many states and local municipalitieshave additional programs. The FederalHome Loan Bank, Affordable Hous-ing Program, may have funds tobridge costs. The U.S. Department ofAgriculture has loans and interest sub-sidies, as well as food stamps andrental subsidies. Each of these pro-grams may provide some degree ofsubsidy. Each has various “strings” orrequirements and oversight.

A significant program that does notrequire the facility to be a residentialrental facility is the program of loaninsurance under Section 232 of theNational Housing Act (NHA). Section232 provides mortgage insurance fromthe Federal Housing Administration(FHA) for nursing homes, intermedi-ate care facilities, and board and carehomes. Assisted living facilities gener-ally qualify as “intermediate care facili-ties” if they receive Medicaid reim-bursements. The state will license orregulate these facilities. The Section232 program allows the facility to leaseto residents who “require minimumbut continuous care, but are not inneed of continuous medical or nursing

services” (Section 232[b][2] of theNHA). These are the typical assistedliving residents. The FHA insurancewill enable the developer of a facility toobtain a non-recourse loan for up to90% of the cost of construction or ac-quisition of the facility. The downsideincludes additional regulation by theU.S. Department of Housing and Ur-ban Development (HUD), the require-ment to pay “prevailing” or unionwages under the Davis-Bacon Act, andthe need to prepare architectural draw-ings early in the predevelopment stagesof the deal.

Financial mix consideredThe ideal financing strategy for a

particular facility will depend on themarket for assisted living in its locationand the cost associated with developingthe facility, including the cost of land.The mix of financial incentives general-ly will depend on what is necessary tomake the facility financially feasible.Blair Minton & Associates of Bourbon-nais, Ill., is a manager and developer ofaffordable assisted living in Illinois with11 facilities under ownership, manage-ment or in development. Minton hascertain priorities for what kinds of sub-sidies he chooses for his facilities, whichare all under the SLF program. Com-pany founder Blair Minton’s first choiceis conventional financing, followed byFHA 232. His last choice is LIHTCs.

Minton prefers conventional financ-ing where the market can bear it. Incertain places in Illinois, conventional fi-nancing along with Medicaid may beable to provide sufficient funds for con-struction and operation of the facility, hesays. In these locations, there is a verystrong market of seniors needing theservices, and costs, especially of land, arereasonably inexpensive. Conventional fi-nancing is generally recourse, but is thevehicle with the fewest hassles and en-tangling requirements. In Minton’s ex-perience, the appropriate mix of Medic-aid beds to market-rate beds is 50/50.

His second choice would be to issueFHA 232 loans without LIHTCs. The232 loan has the advantage of beingnon-recourse, but requires at least 10%equity, prevailing wages and increasedpredevelopment costs. His last choice isthe use of LIHTCs, because of the ad-ditional requirements and involvementof equity partners. But to make mostdeals feasible in most locations, LIHTCs are necessary. Most of his fa-

cilities are subsidized by LIHTCs, ei-ther through an allocation of LI-HTCs or through the “automatic al-location” that comes from issuingtax-exempt housing revenue bonds.All of Pathway’s facilities combine LI-HTCs with the Medicaid waivers.

Chicago Equity Fund Inc. (CEF)and Illinois Equity Fund Inc. (IEF)are leading LIHTC syndicators inChicago that have been instrumentalin making the SLF program workseamlessly with LIHTCs. WilliamHigginson, president of CEF andIEF, states that both entities havebeen investing in affordable assistedliving facilities to obtain LIHTCs forinvestors for the past five years. He in-dicates that the quality of the locationand the operator are keys to success.He states that it is helpful for the de-veloper involved with the facility to“be an experienced LIHTC develop-er.” But more often than not, experi-enced developers of LIHTC projectsare not experienced in the operationsof assisted living facilities.

Investors in LIHTC facilitiesIn addition to CEF, there are nu-

merous LIHTC investors that are in-vesting in assisted living facilities.Nevertheless, many syndicators arenot willing to look at these invest-ments, which are not yet the norm. Ina market such as the market for LI-HTC, in which the product has be-come rather standardized, invest-ments that are not within the normalbusiness of the syndicator are moredifficult to monitor and manage.Some syndicators may not be willingto do anything outside normal rentalbusiness. In my view, this is a loss forthose that are not willing to investthe time and money necessary tolook at this species of LIHTC in-vestment. It is also an opportunity forthe syndicators and investors that arewilling to invest the time to under-stand the business.

Affordable assisted living throughMedicaid, LIHTC and other subsidiescan become viable alternatives to nurs-ing homes. In the long run, the facili-ties satisfy a significant need facing ouraging population. At the same time,these facilities can save money for statesunder their Medicaid programs. Af-fordable assisted living through Medic-aid, and where necessary, LIHTCs, is a“win-win” whose time has come. �