10. Allowance for Credit Losses

Held-to-Maturity Debt Securities, Held-for-Investment Loans and Related Unfunded Commitments

The Partnership considers key credit quality indicators when estimating expected credit losses for assets recorded at amortized cost. Such assets primarily finance the construction or rehabilitation of affordable multifamily properties. The GILs are primarily repaid through a conversion to permanent financing pursuant to a forward commitment from Freddie Mac dependent on completion of construction and various other conditions that each property must meet. The property loans related to GILs are primarily to be repaid from future equity contributions by investors and other forward financing commitments provided by various parties. If Freddie Mac is not required to purchase the GIL and payment of the property loans from available sources is not made, the GIL and associated property loan will have defaulted, and the Partnership has the right to foreclose on the underlying property, the associated LIHTCs, and enforce the guaranty provisions against affiliates of the individual property borrower. Accordingly, the Partnership’s key credit quality indicators include, but are not limited to, construction status of the property, financial strength of borrowers and guarantors, adequacy of capitalized interest reserves, lease up and occupancy of the property, the status of other conversion conditions, and operating results of the underlying property. The property loans secured by other multifamily properties are repaid through property operations or future sales proceeds.

The Partnership recorded a provision for credit losses of approximately $9,000 and a recovery of provision for credit losses of approximately $172,000 for the three months ended March 31, 2026 and 2025, respectively. The net provision for credit losses for the three months ended March 31, 2026 includes an asset-specific allowance of approximately $93,000 related to the Opportunity South Carolina property loan partially offset by a recovery due to a decrease in the weighted average life of the remaining investment portfolio. The decrease in the provision for credit losses for the three months ended March 31, 2025 is primarily due to GIL and property loan redemptions, a decrease in the weighted average life of the remaining investment portfolio, and updates of market data used as quantitative assumptions in the Partnership’s model to estimate the allowance for credit losses.

Risk Ratings

The Partnership evaluates held-to-maturity GILs and taxable GILs and held-for-investment property loans on a quarterly basis and assigns a risk rating based upon management’s assessment of the borrower’s ability to pay debt service and the likelihood of repayment through the GIL’s conversion to Freddie Mac financing and the property loan’s payment from future equity contribution commitments. The assessment is subjective and based on multiple factors, including but not limited to, construction status of the property, financial strength of borrowers and guarantors, adequacy of capitalized interest reserves, lease up and occupancy of the property, the status of other conversion conditions, and operating results of the underlying property. The credit risk analysis and rating assignment is performed quarterly in conjunction with the Partnership’s assessment of its allowance for credit losses. The Partnership uses the following definitions for its risk ratings:

The Partnership evaluates its outstanding principal and interest receivable balances associated with its GILs, taxable GILs, and property loans for collectability. If collection of these balances is not probable, the loan is placed on non-accrual status and either an asset-specific allowance for credit loss will be recognized or the outstanding balance will be written off. There are no GILs, taxable GILs, or property loans that are currently past due on contractual debt service payments and the Partnership considered all GILs, taxable GILs and property loans to be performing as of March 31, 2026, except as noted below. The Partnership currently has three property loans on nonaccrual status.

During the three months ended March 31, 2026 and 2025, the interest to be earned on the Live 929 Apartments property loan was in nonaccrual status. The discounted cash flow method used by management to establish the net realizable value of the property loan determined the collection of the interest accrued was not probable and the loan is considered to be nonperforming. The Live 929 Apartments property loan has outstanding principal of approximately $495,000 as of March 31, 2026 and December 31, 2025, which was fully reserved with an asset-specific allowance.

In December 2022, the Partnership received a property loan in exchange for the sale of its 100% interest in The 50/50 MF Property. The property loan is unsecured, will be repaid from net cash flows of the property, and is subordinate to the mortgage debt of the property which was assumed by the buyer. The property loan is in non-accrual status as of March 31, 2026 because payments under the loan are not required immediately and are expected to be paid from future net cash flows of the property. As such, the loan is considered to be performing. The property loan associated with the 50/50 MF Property had a reported carrying value of approximately $4.3 million as of March 31, 2026 and December 31, 2025.

The Partnership has advanced funds of approximately $1.8 million to Opportunity South Carolina to finance the funding of reserves, operating deficits and other operating expenses. Opportunity South Carolina was the borrower associated with The Park at Sondrio MRBs, The Park at Vietti MRBs, and the Windsor Shores Apartments MRBs prior to the deed in lieu of foreclosure transactions in the first quarter of 2026 (See Note 8). The property loan is in non-accrual status as of March 31, 2026 because interest payments under the loan are not required until maturity. The loan is considered to be nonperforming and was fully reserved with an asset-specific allowance as of March 31, 2026.

Available-for-Sale Debt Securities

The Partnership records impairments for MRBs and taxable MRBs through an allowance for credit losses for the portion of the difference between the estimated fair value and amortized cost that is related to expected credit losses. The following table summarizes the changes in the Partnership’s allowance for credit losses for the three months ended March 31, 2026 and 2025: