“Non-Profit” Apartment Complex Loophole

This was actually a draft of a post I wrote on August 20th, 2006. However I still think this is a clever loophole, as I know people who run apartment complex’s, and it would be GREAT if you could strictly discriminate who lives there (although that’s illegal):

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For the summer I lived in a “student community” where you HAD to be a student to live there, however they weren’t associated with any university.

I went to speak with the manager about this, asking how they were allowed to ask for student ID’s as a prerequisite to live there….as this obviously violates the Fair Housing Act (you can’t decline someone housing based on pretty much anything such as occupation, race, gender etc).

He told me the whole complex was a “Non-Profit Organization” which I immediately didn’t believe.  There HAS to be someone making money from this I thought. The manager didn’t know much about how it worked, but he said there are bond holders and some other people that make money off the apartments.  I knew it.

Someone is definitely profiting off a 400+ unit apartment complex.

I asked a close family friend of mine who deals with apartment complex’s what was going on, and I found it very interesting:

He said that there used to be a loophole in the system where if a property was established as a non-profit, they could accept or deny whoever they wanted to live there. This is why even in a heavily low-income, Hispanic part of town, there are only students living in the apartments.

The loophole was shut down, but people already under that loophole could continue operating as non-profits.  They were basically grandfathered in.

Obviously there were SOME profits, so I asked how those were collected. He said there are bond holders for the loans, so when the apartment makes a profit, it’s issued as tax credit. So if the apartment makes $1,000,000 in profit, they could sell that tax credit for $900,000 in cash to someone looking to save money on their taxes.

So while the complex loses a little money in the tax credit arbitrage, their ability to decline whoever they want probably makes them more profitable than others.

I found this VERY interesting…..it wasn’t illegal, but it’s very sneaky.

Blog posted on: August 23, 2010

5 comments on ““Non-Profit” Apartment Complex Loophole

  1. Joshua

    Say what? I don’t understand the bond holder/tax credit part. BTW, non-profits can make money, they just don’t have shareholders or anybody to dividend the money out to. In your description above, I’m still not sure how the profit is moving outside of the non-profit into other people’s hands.

    Reply
  2. Neville Post author

    Profit is $1,000,000 in tax credit.

    They sell that tax credit for $900,000.

    The person who bought it just immediately saved $100,000 on taxes (so it’s great for them).

    The person selling it gets the $900,000 in cash (the apt complex owners).

    Something like that.

    Reply
  3. Joshua

    Hah, well okay. Sounds like we’re missing a few details (such as how the non profit’s $1,000,000 tax credit got transfered to the apt complex owners), but I get the general picture.

    Plus, your general point is right on. There’s always clever ways to structure things to minimize tax impact or otherwise take advantage of the laws on the books.

    Reply
  4. Neville Post author

    Actually there might be another way (I probably got much of this wrong):

    1.) An investor puts in say $1,000,000 of the $5,000,000 required to build the apartment.

    2.) He in now a 5th owner of that project

    3.) If the project spits out $1,000,000 in profit, $200,000 is issued in tax credit back to the investor (which is basically like cash for someone paying millions in taxes per year).

    4.) The project gets to maintain full control over who they accept.

    Ahhh….the smell of legal discrimination in action :-)

    Reply

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