This agreement typically provides for two types of partner - general and limited partners. General partners are actively involved in running the partnership, while limited partners are investors with liability limited only to the amount of their investment. Usually, the project developer or sponsor will be the general partner with a .01 percent interest in the partnership and investors will provide capital for the remaining 99.99 percent interest after the project has been allocated the tax credits. While no income tax is paid by the partnership, each partner is required to report on an income tax return his or her share of all income, gains, cash flow, losses, and deductions. Banks and insurance companies for example, appear to be becoming more directly involved.
Investors become limited partners by purchasing interest in a partnership.
The investors determine the value of the 10-year tax credit to them and contribute that amount as a capital contribution to the partnership. The capital contribution is then provided as equity to the project. The credits are passed through to the investors to offset their taxes. When an investor's tax is offset by the credits, the investor is receiving a return on the investment. Land value or cost is not included.