THE AFFORDABLE

HOUSING TAX CREDIT

PROGRAM

Presented by Midwest Housing Equity Group

Panelists

Jim RiekerPresident /CEO

Andrea FrymireExecutive Vice President

Background

The Tax Reform Act of 1986 signed by President Reagan Curbed tax shelters and introduced Section 42

Pre-1986 multifamily housing developments sold primarily to individual investors

Post-1986 Section 42 multifamily housing developments sold to corporate investors

The Omnibus Budget Reconciliation Act of 1993 signed by President Clinton – made the LIHTC permanent From 1987 through August 1993, the LIHTC program was subject to

various sunsets

1

Tax Credit Calculation

$1,000,000 Total Project Cost$ 200,000 Project Cost Not Eligible for

Credits$ 800,000 Eligible Basis for Credits* x 9% Tax Credit Percentage$ 72,000 Credits Received/year x 10 Years credits are received$ 720,000 Credits received x .70 Price paid for credits$ 504,000 Equity into project from

MHEG

Allows for low debt on project enabling developers to keep rents affordable

* States may allow 130% basis boost (not shown here).2

Typical Deal Structure – 55%

Soft Debt / GP Equity 25%*

Hard Debt < 20%

Tax Credit Equity 55%

* Funded By:- AHP- HOME- TCAP - Exchange- Developer Fee- Various Contributions- Certain Grants

3

Typical Deal Structure – 70%

Soft Debt / GP Equity 25%*

Hard Debt < 5%

Tax Credit Equity 70%

4

K-1 Example

5

6

Form 1120

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Form 3800

8

Tax Credit Pricing

1987

1991

1995

1999

2003

2007

2009

0

0.2

0.4

0.6

0.8

1

1.2 Initially investors were any

corporation looking for a good return

Many corporate controllers/ treasurers were skeptical of an unproven product LIHTC

Result – pricing was in the mid .40 range in 1987-1988 producing 20%+ IRR

Early in mid-1990s – Financial institutions embrace LIHTC

Banks, GSE’s – fair return plus Community Reinvestment Act (CRA) credit

9

Tax Credit Pricing

1987

1991

1995

1999

2003

2007

2009

0

0.2

0.4

0.6

0.8

1

1.2 2000-2007 – Substantially all

of the LIHTC purchased by financial institutions and GSE’s

2008 – Sub-Prime mortgage crisis followed by full scale financial meltdown – Investors retreat Housing and Economic

Recovery Act of 2008 intended to boost returns bringing non-financial investors to the LIHTC market

2009 – Many 2007 and 2008 deals unfunded and little prospect for 2009 American Recovery &

Reinvestment Act intended to jumpstart the LIHTC industry

10

C-Corp vs. S-Corp vs. Individuals

Corporations can offset credits and losses Limited only by tax liability

Sub-S flows through to owners Requires passive income

Rental real estate can materially participate

Business activities that one doesn’t materially participate

Individuals – same as S-Corps Makes less than $100,000

25,000 passive offset

Can offset credits up to 8,250

11

Purchaser Profile

Corporate Accredited Investor Accredited as per Regulation D of the Securities and

Exchange Act $5,000,000 or more in assets (varies by syndication firm,

many much higher) Can withstand losses due to depreciation or even loss of

investment Usually a C Corporation Has to forecast a taxable need for credits Must utilize the credits themselves

SEC issues when buy credits to resell Many Banks for CRA purposes Insurance Companies for both economic and social

responsibility No set standard for an exact profile other than paying

taxes

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Legislative Movements

HERA of 2008 The Housing and Economic Recovery Act of 2008 signed by President

Bush on July 30, 2008

ARRA of 2009 The American Recovery & Reinvestment Act of 2009 signed by

President Obama on February 17, 2009

13

HERA of 2008

Temporary provisions: Increase in-state LIHTC allocation authority by 10% = .20 (per

capita) for 2008 and 2009

Additional $11 billion nationally of Tax-Exempt Housing Bonds in 2008 (additional 38.6% for each state)

Temporarily fix at 9% the credit rate for new construction and substantial rehabilitation costs

14

2009 OHFA Allocation

3,642,361 Population of Oklahoma per IRS for 2009 LIHTC

x 2.30 Times two dollars and thirty cents per capita

$8,377,430 Total 2009 Credits available per capita

+$305,231 2008 unused credit ceiling from 8610 carryovers to 2009

$8,682,661 Tax Credits available to award in 2009

-$4,206,112 Amount of 1st cycle 2009 awards

+1,678,057 Amount of 2009 Credits returned by TCAP Applicants

-$4,000 Amount of tax credits awarded for ARRA applicants

$6,150,606 Amount of Tax Credits Available to award 2nd cycle 2009

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HERA of 2008 (continued)

Permanent provisions: Alternative Minimum Tax (AMT) Relief

HUD Moderate Rehabilitation projects are no longer prohibited from participation in the LIHTC program. Effective for buildings placed into service after July 30, 2008.

The 10-year hold provision for acquisition credits is no longer applicable to federally or state assisted buildings. HUD Section 8, 221(d)3, 221(d)4, 236 and RD section 515 properties and similarly assisted properties under various state programs.

Allowable Related Party interest in subsequent ownership is increased to 50% from 10%.

16

HERA of 2008 (continued)

Permanent provisions (continued): 30% basis boost previously allowed for properties located in qualified

census tracts or difficult to develop areas is allowed for any project that needs additional credits to be financially feasible as determined by the state housing finance agencies. Apples to projects placed in service after July 30, 2008. Does not apply to Tax Exempt bond financed properties.

The definition of federal subsidy no longer includes “or any below market federal loan” allowing HOME, RD and section 515 projects to utilize the 9% credit for new construction or substantial rehabilitation costs. Tax Exempt bond financed projects are still limited to the 4% tax credit.

Federal Grants received after construction no longer reduce tax credit basis – relief for IRP financed deals and other properties receiving federal operating subsidies.

Allowable eligible basis for community service facilities increased to 25% of total cost up to $15M; plus 10% of total cost in excess of $15M.

17

HERA of 2008 (continued)

Permanent provisions (continued): Minimum threshold to qualify for substantial rehabilitation is

increased to $6,000 per unit or 20% of acquisition basis from $3,000 or 10%. Indexed for inflation going forward.

LIHTC bond posting requirement is eliminated provided investor agrees to extend statute of limitations to three years after IRS notification.

Extends the time period to satisfy the 10% cost incurred test necessary for carryover to 1 year from 6 months.

Tenant re-certifications no longer required for 100% LIHTC properties.

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Example

Change in Maximum Credits due to 9% and Basis Boost:

Adjusted Eligible Basis 10,000,000 10,000,000

X 130% Basis Boost 100% 130%

X Applicable Percentage 7.94% 9.00%

= Total Annual Credits 794,0001,170,000

X 10 Years (Total Credits) 7,940,000 11,700,000

47.35% Increase

Obviously, HERA put substantially more resources on the table to attract other non-financial investors back into the LIHTC market.

19

ARRA of 2009

Not withstanding the tremendous resources included in the HERA legislation to boost the LIHTC industry, many 2007 and most 2008 allocated properties had not closed due to the frozen LIHTC market. In response to this, ARRA included provisions to “jump start” stalled projects. Section 1602: Grants to States for Low-Income Housing Projects in

Lieu of Low-Income Housing Credits aka the “Credit Exchange Program”

State HFA’s have the ability to exchange eligible LIHTC allocations with Treasury for $0.85 per dollar of credit allocation exchanged. The proceeds from the exchange are to be used by the HFA to provide funds to projects with or without an allocation of LIHTC in the form of grants or forgivable loans.

20

ARRA of 2009 (continued)

The amount of LIHTC an HFA may exchange for $0.85 is equal to the following: 100% of the state housing credit ceiling for 2009 attributable to

unused and returned credits from the 2008 housing credit ceiling plus any amount of state housing credit ceiling returned in 2009. (This provisions applies to 2007 and 2008 allocations).

40% of the state housing credit ceiling for 2009 attributable to the 2009 ceiling including any amounts reallocated from other states with unallocated credits. Amounts exchanged under this provision serve to reduce the state’s 2009 credit ceiling.

21

ARRA of 2009 (continued)

Grants or loans received by the project from exchange funds are not includable in taxable income and do not reduce basis. Treat as tax exempt interest income. Treatment at the state level may vary

Funds received cannot exceed 85% of the amount Recipients of exchange funds must demonstrate a good faith effort to obtain private equity commitments. Good faith effort is determined by each state HFA.

of buildings eligible basis including any increase for buildings located in high cost areas. Direct tracing is not required.

Funds received under this program must be expended by December 31, 2011 – originally this date was December 31, 2010

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Carry Back of Credits

Can be carried back 1 year Can be carried forward 20 years Legislation introduced to go back 5 and forward 15

Help some companies free up unclaimed credits

Gives them the sense of security if they can’t use the credits

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Fund Investment Structure

MHEGTax Credit Syndicator

OF III, L.P.Owned 99.99% by

InvestorsOwned 00.01% by MHEG

Investors

OHFATax Credits

Project ALower Tier Partnership

LP/LLC

Owned .01% by Developer/GP

Owned 99.99% by Fund

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Why Do Investors Invest

Optimal Tax Planning Strategy 10 full years of federal tax credits 15 full years of depreciation and other passive

deductions Periodic Write-down of Paid in Capital CRA Investment Credit, if applicable Marketing and PR opportunities Stabilizing and Investing in your local communities Stable proven track record of a performing asset class Accurately forecasted tax benefits Quarterly Reporting and Asset Management update

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Tax Planning Strategy Keep your tax dollars in Oklahoma instead of Washington

You know where they are going and how being used You have a say in those dollars usage You generate a decent return versus a 0% (or cost) with sending

to Washington Spread the credits over 10 years

The Warren Buffet Rule What other program can you do something for society and

have society give you something in return

Why Do Investors Invest (cont.)

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CRA Bank Benefits for Banks

Shortage- Allows for CRA credit regardless of project locations as long as it is within the fund’s trade territory (i.e. a Tulsa bank can receive credit for a project in Oklahoma City)*

Regulators do vary on the scope of inclusion. Please check with your Regulator for their interpretation.

See OCC report dated 2/08– further adopted by FDIC and Federal Reserves

By purchasing tax credits in a MHEG fund banks can potentially fulfill the Investment portion of the CRA exam, typically the most difficult portion for most banks to meet, as well as opportunities to meet the lending and service tests.

All documentation that the Examiners require is provided by MHEG.

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Fund vs. Direct vs. Proprietary Funds

Funds Offer Diversity Multiple investors Multiple projects Fund General Partner has

financial risk Fund level of reserves Less concerns over FIN 46,

consolidation issues Less need for tax credit

expertise by the investor

Direct No diversity-all eggs in one

basket Do get specific project in

investors area More of a say in investment

terms

Direct (cont.) Less reserves and no financial

backing from Fund General Partner

Sole investor-FIN 46 comes into play

May need staff expertise

Proprietary Some diversity, usually fewer

projects Usually specifies where

projects must be located Usually dictates deal terms Less chance of Fund General

Partner taking financial risk Most likely FIN 46 comes into

play Usually has tax credit staff

expertise

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What is the Real Risk?

Ownership risks of multifamily low-income rental housing pools

Mitigated by MHEG’s investment policies, ongoing management and financial oversight, as well as MHEG’s financial strength

Compliance risk Mitigated by MHEG’s continuing compliance practices and

oversight

Changes in current law Highly improbable any law change would affect any current

investments

Reputation Risk We take “the high road”, we know that we represent our

fund participants who are financial pillars of their communities

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Underwriting Guidelines

Geographical location Size of investment (% of total of Fund) Guarantees Reserve accounts Structure of debt to property Experience and strength of development team, general partner and property manager Project site-zoning, stability, accessibility Market Study/Analysis Title and Survey Insurance: property, contractor (insurance and bonds) Quarterly risk rating for life of investment Environmental studies: Phase I mandatory, Phase II if needed Reasonable and substantiated operating assumptions: rent levels, vacancy factors, expense estimates, level of must pay debt, and lease-up period

Construction parameters and oversight Rent Level Analysis Operating Expense Comparison and Analysis to MHEG’s extensive database 30

Points to Consider

MHEG does not want the capital you need for normal operations.

The dollars you are considering placing with MHEG are actually dollars you owe to the IRS as a result of your successful operations.

You receive no monetary return with your payment to the IRS.

You will receive an above market return and a CRA Investment Credit, if applicable, when you purchase tax credits with MHEG.

Your participation benefits the community and you receive a monetary return without jeopardizing your normal business capital.

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What to Expect in the Future

At the end of the 15-year tax credit compliance period, our goal is to exit the partnership in a manner that allows the property to continue to comply with the states extended compliance period.

The general partner or managing member in most cases has a right of first refusal to purchase our interest for an amount stipulated in the IRS code.

Since the project still has restricted rents, it will not be able to refinance much additional debt. Our exit usually does not generate significant cash or create a tax event. Therefore, we do not include any residual value in our analysis of return to investors.

(note: this narrative is greatly oversimplified, but does represent the results of a typical exit)

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Tax Credit Syndicator - MHEG

Non-profit organization established in 1993 at the request of Governor Ben Nelson - rural areas underserved

Mission: Change lives for a better tomorrow by promoting the development and sustainability of quality affordable housing

Service area today includes Nebraska, Kansas, Iowa and Oklahoma

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MHEG Profile

Our developments range from 6 to over 200 units and include: single family homes

multi-unit and multi-building complexes

duplexes

historical renovations

specialty needs developments: elderly, assisted living, transitional homeless facilities, and developmentally disabled residents

Number of Developments: 245 Number of Counties Represented: 105

Number of Housing Units: 6,708 Number of Cities Represented: 128

Equity raised: $570 million Current as of

12/15/09

34

Oklahoma Profile

OEF I, L.P. $25.81 million

raised* 13 projects closed 564 units created

OEF II, L.P. $40 million raised 7 projects closed 300 units created

OF III, L.P. currently open

* Equity raised total also includes side-by-side investments or direct investments 35

Oklahoma Map

Total Housing Units in OK 864

Multifamily

Senior

Single

Family

Special

Needs

Transitional

Type of Units

36

Oklahoma Developments

Quail Ridge HomesBroken Bow, OK

Cottage ParkMidwest City, OK

CHARMED-PerkinsPerkins, OK

Parkland Town HomesPrague, OK

Broadway PointeSeminole, OK

Woodson Park Apts.El Reno, OK 37

Questions ???