Guest Article Written By: B. Jones, Scott Insurance
Recently, we have seen an increasing number of property dispositions within the 15-year compliance period. While the IRS no longer requires LIHTC recapture bonds, many LP’s are hesitant to allow a change in ownership during the tax credit compliance period. Often times, for an LP to allow a change in ownership, they will require some type of security to protect the tax credits from recapture. Typically, the security is required to be in the form of an irrevocable letter of credit (ILOC) or surety bond.
As the economy changes, banks are becoming less interested in writing ILOCs and borrowers are looking for alternatives that do not tie up their lending capacity. For financially strong companies, the premiums for surety bonds can be less expensive than ILOC fees. On bonds in place for more than 2 years, we are seeing surety premiums well below 1% annually – sometimes as low as 30-50 basis points.
Additionally, surety bonds are appealing because they do not tie up available credit. While banking institutions often make you feel as though they are doing you a favor to provide an ILOC, the right surety company will welcome the additional business!