Low Income Housing Tax Credits

March 4, 2013
Low Income Housing Tax Credit (LIHTC)
Created from 1986 Tax Reform Act

Section 42 of IRS Code

Dollar for dollar reduction in bottom line Federal income tax

liability

9% LIHTC are allocated to States

!  $2.20 per capita

4% LIHTC are “As-of-Right” with Multifamily tax exempt bonds.

The tax credit is only applied to the amount which develops the
affordable housing.

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LIHTC Basics

What are Low Income Housing Tax Credits (LIHTC)?

!  Available for rental housing only

!  Tax Credits are claimed by investors over a 10 year “credit

period”

!  15 year “Compliance Period”: Project must be rented to low

income tenants

!  Extended use requirement: An additional 15 years

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Two Types of LIHTC

•  “As-of-Right” 4% credit for qualified acquisition or when other

“federally-subsidized” funds are used in the project financing,
such as tax exempt bonds (50% test then applies)

•  “Competitive” 9% credit for new construction or substantial

renovation to existing housing units

•  “As-of-Right” credits are not allocated on a per capita basis.

However, in order to qualify for the 4% credits, a project must be
federally subsidized and commonly receives tax exempt bond
financing. The availability of tax-exempt financing (Volume
Cap) is determined on a per-capita basis. Money goes to State
HFA.

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•  QAP - Qualified Allocation Plan
Types of Tax Credits

Credit Rates
!  9% Credit
!  4% Credit

Actual Credit rates published monthly by US Treasury

       

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The Rules to LIHTC

Rental units with tenants at 60% AMI

Investors earn dollar for dollar credit against Federal tax liability

Investors also get tax benefits from losses and depreciation

Tax credits are received over a 10 year period

!  Tax credit rules must be complied for 15 years for investor
purposes
!  Plus another 15 years for extended use

IRS can recapture from investors any tax credit they took if
building is deemed out of compliance during initial 15 years
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IRS Rules

10 year rule
!  LIHTC can be used for acquisition and rehab only if property has
not changed ownership for the prior 10 years
!  Building must also have been in operation for a minimum of 10
years
Audit
!  LIHTC investor must have compliance audit performed and sent to
IRS annually
Unit Restrictions
!  Threshold elections developer must make
–  40% at 60% AMI
–  20% at 50% AMI
–  15% at 40% AMI (deep rent skewing)
–  NYC special rule 25% at 60% AMI
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IRS Rules (continued)

Unit Restrictions
!  Rent and utilities restricted to 30% of income
!  HUD Income definitions
–  80% AMI (Low Income)
–  50% AMI (Very Low)
–  30% AMI (Extremely Low)

Next available unit rule

!  In a partially assisted building the next unit in the building has to
become a LIHTC unit
Usage
!  State/City has 2 years to allocate. Any remaining goes into
national pool for competitive re-allocation

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Tax Credits vs. Tax Deductions

Deduction Tax Credit

Net Income from
Operations $1,000,000 $1,000,000
Tax Deductions ($300,000) none
Taxable Income $700,000 $1,000,000

Tax Liability:
Tax at 40% tax rate $280,000 $400,000
Low Income Housing
Tax Credits none ($300,000)
Net Tax Liability $280,000 $100,000
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Difference from Prior Programs

Prior Government Housing Section 420 LIHTC

!  Support more Debt !  Increases Equity

!  Struggle to get Equity !  Reduces Debt Level
!  Growing Operating Subsidies !  Saves on Operating Subsidies
!  Annual Appropriation !  Fewer Appropriations
!  Public Enforcement !  Private Enforcement

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LIHTC – Successful Investment Program

Government not involved in construction, ownership or

management

Brings in private money as equity source

Total cost to US Treasury is known up front versus rental subsidy

programs  

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LIHTC Finance

New construction and rehab projects

Housing for special needs populations (e.g. Elderly/Disabled)

Additional tax incentives for projects in high cost or difficult to

develop areas
!  30% basis boost

9% LIHTC cannot be combined with loan or obligation from a

federal funding source if the interest rate is less than U.S.
Treasury Rate

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Types of Projects

Construction Method
New Acquisition /
Construction Rehab
Financing Method

Non-
Federally Acquisition - 4%
Subsidized 9% Credit Rehab - 9%

Federally
Subsidized 4% Credit 4% Credit

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How are 9% Credits awarded to projects?

State Housing Agencies responsible for administering the

program
!  NYC Housing Preservation & Development Department receives
an allocation

LIHTC allocation made in accordance with a Qualified

Allocation Plan (QAP)
!  QAP documents affordable housing need
!  NYS and NYC each publish a new QAP annually

“Beauty Contest” determines which projects will be awarded

LIHTC

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How are 9% Credits awarded to projects? (continued)

Application cycles vary from State to State

!  Not exempt from ongoing disclosure

Program oversubscribed in almost every State

4% LIHTC come as of right with Private Activity Bonds (only

based on amount of proceeds used to construct compliant
units)

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Additional LIHTC Requirements

Acquisition - Rehabilitation
!  Rehabilitation cost must be the greater of:
–  $3,000 per unit; or
–  10% of the adjusted basis of the building

!  Rehabilitation cost included in basis must be incurred during any

24 month period

!  Cannot claim acquisition credits prior to rehab credits

       

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Syndication

Syndicator
!  Bundles funds from investors
!  Supplies diversification for investors
!  Performs due diligence for investors

Investors
!  Companies who make money
!  Added benefit for banks – CRA credit

       

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The Tax Credit Investment Process
Federal Government
Allocate Credits to States

State Housing Agencies

Allocate Credits to Housing
Development

$ Limited $ Corporate Investors

17   Partnership
Syndicator
Syndication investors form an investment Limited Partnership
(L.P.)

L.P. is subjected to compliance risk

L.P. owns 99.9%

General Partnership (G.P.) is managing partner. Runs the day-to-

day operations

G.P. owns 0.01% but controls property

L.P. passive investor – unless G.P. “messes up” then L.P. steps in

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The Syndicator’s Approach to Underwriting
!  Quality of the development team

!  Project characteristics

!  Evaluation of the development budget

!  Rent / Market / Marketability

!  Operating costs

!  Reserves

!  Sponsor guarantees

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Concerns Being Evaluated
!  Reputation of the developer, general contractor and other
members of the team

!  Design considerations of the project

!  Quality of materials to be used

!  Timelines for construction and lease-up

!  Useful life analysis – will it continue to attract tenants as it

ages?

!  Market analysis – are rents supported by outside analysis?

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Quality of the Development Team
!  Sponsor / General Partner experience

!  Architect / Engineer – design, supervision

!  General Contractor – size and type of construction, capacity

to produce on time

!  Attorney and Accountant – experience with tax credit

partnership structure and issues

!  Property Manager – experience with low-income tenants and

management capability

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Evaluation of Development Budget
!  What will it cost to build the project?

!  How much is needed to place it in service?

!  What are reasonable timelines?

!  Does the developer, permanent lender and syndicator agree

on costs and timing?

!  What are the key risk areas to lender and equity investors and
how can the risks be ameliorated?

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Evaluation of Operating Costs
!  Examine assumptions for proposed costs

!  Insurance costs, etc. confirmed by bid?

!  Are repair and maintenance costs consistent with housing

type and family size?

!  If there’s an elevator, are costs included?

!  Are legal, accounting and administrative costs high enough?

!  Are reserves funded in a plausible way?

!  Do costs need to be restructured for cash flow?

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Operating Agreement

Investor
$

Equity Fund
LP = Investor(s) 99.99%
GP = Syndicator 0.01%
$

Project
LP = Equity Fund 99.99%
GP = Developer/Sponsor
0.01%

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Actual Tax Credit Rate
!  Rate is either locked-in when you receive a binding
commitment from State or City

-or-

!  When project is put in service

Developer gets to decide but has to chose upfront

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Calculation

!  Eligible Basis equals amount of all hard and soft depreciable

development costs. Less excluded costs i.e. cost of land,
permanent financing costs, initial deposits to reserves

!  Qualified Basis equals amount of eligible basis related to low-

income units. Lesser percentage of number of low-income units
or percentage of gross floor area dedicated to low-income units.
!  That lower percentage is the Applicable Fraction
Ex: Eligible Basis of 80 unit building is $500,000
–  24 units low-income equal 30% of numbers
–  Total Square ft. 78,400. Low-income units totaling 13,650 sq. ft.
equals 17%
–  So “Applicable Fraction” is 17% (17% x $500,000 = $85,000)

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Calculation (continued)

!  Basis boost - multiple qualified basis by 30%

!  $85,000 x 130% = $110,500
!  Eligible Basis x Applicable Fraction x Basis Boost = new Qualified
Basis

!  Tax Credit Rate

!  9% or 4% x Qualified Basis = Annual Tax Credit
!  $110,500 x 9% = $9,945

!  Take Annual Tax Credit times 10 years = Total Tax Credit

!  $9,945 x 10 = $99,450

!  Equity you receive depends upon price of tax credits

!  $1.00 x $99,450 = $99,450 cash received
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Calculation (continued)

!  Ex: 70 units total with 40% low-income

Land Acquisition $1,000,000
Construction $2,400,000
Site Improvement $535,000
Architect/Engineer $40,000
Other Eligible Soft Costs $25,000
Total Costs $5,000,000
Less Land ($1,000,000)
Eligible Basis $4,000,000
!  Applicable Fraction is 40%
!  $4 million x 40% = $1.6 million
!  9% tax credit x $1.6M = $144,000 per annum
!  $144,000 x 10 years = $1.4 million
!  If sold at $0.75 then $1.4million x $0.75 =$1,050,000 cash raised for equity

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Forms

IRS form 8609 “Low-Income Housing Credit Allocation and

Certification”

HUD form 50059 “Owner’s Certification of Compliance with

HUD’s Tenant Eligibility and Rent Procedures”

Tenant Income Certification

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Compliance
!  Very Important

!  Rent and Utilities 30% of annual income

!  Maintain income distribution “Next Available Unit Rule”

unless deep rent skewing

!  Tax credit audits annually for TC investor

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