Low-income Housing Tax Credit Basics Brad Elphick, CPA October 17, 2008.

Low-income Housing Tax Credit BasicsLow-income Housing Tax Credit Basics

Brad Elphick, CPAOctober 17, 2008

Short History of Affordable HousingShort History of Affordable Housing

Tax

Affordable Housing

Spend

Affordable Housing

Federal Government

A Short History of Affordable HousingA Short History of Affordable Housing

Tax

Affordable HousingA Short History of Affordable HousingA Short History of Affordable Housing

Tax

Affordable Housing

Federal Government

Banks & Insurance Companies

Administered by State Housing AgenciesAdministered by State Housing Agencies

1.1.

2.2.

Reduction of federal agency costsReduction of federal agency costs

Administered by State Housing AgenciesAdministered by State Housing Agencies

1.1.

2.2.

Reduction of federal agency costsReduction of federal agency costs

States able to assess local housing States able to assess local housing needs better than federal gov’tneeds better than federal gov’tSpend

Price

Yield

LIHTCMarket

Energy

High-tech

InsuranceCRA Investors

LIHTCMarket

Fannie

Freddie

Price

Yield

H.R. 3221

The Housing and Economic

Recovery Act of 2008

9% allocation increased by $0.20 for 2008 and 2009

Priority on QAPs for energy efficiency and historic nature

Deadline to pass 10% test extended to 12 months

Rehab requirement now $6k/unit or 20% of adj. basis of bldg.

Tax-exempt housing bond interest not subject to AMT

LIHTCs can now offset AMT

Temporary 9% minimum credit

Additional $11 Billion in tax-exempt housing bonds in 2008

Federal grants for operations do not reduce E.B.

“Federal Subsidy” taint limited to tax-exempt bond financing

ELEVEN LIHTC UPDATES (covered today) DUE TO H.R. 3221

1

2

3

4

5

6

7

8

9

10

11

State housing agencies can give 130% E.B. boost to projects

Typical LIHTC StructureTypical LIHTC Structure


Developer Fee

P’ship Mgt Fees

Syndicator

Syndication fees

Investors

Fund

$$

$$

$$$$

$$$$GP

Developer

LP

GP

LP

CREDITSLOSSES

Limited Partner99+% of P&L andCredits

General Partner1% or less of P&L andCredits

Developer fee

General Partner1% or less of P&L andCredits

Limited Partner99+% of P&L andCredits

Lower TierOperating

Limited PartnershipDeveloper

GeneralPartner

Sponsor/Syndicator

Fund/Upper TierLimited Partnership

Investor


45¢

95¢

1989 2008

Tax Credit PricesTax Credit Prices

80-85¢80-85¢

45¢

95¢

1989 2008

80-85¢80-85¢

Tax Credit PricesTax Credit Prices

The Project Time LineThe Project Time Line

$2.20$2.20

$80.3 mil$80.3 mil

CA pop. - 2008CA pop. - 2008

ApproxApprox

xx

ApproxApprox

36.5 mil36.5 mil

$2.00$2.00

$73 mil$73 mil

CreditsCredits

9%Credits

9%Credits

IRC §42

Attorneys

Lenders

Architect

Contractors

Upper Tier/Investment L P’ship

Sponsor

Property Management Company

$400k$400k

$600k$600k

‘08 & ‘09H.R.3221

H.R.3221

“energy efficiency”&

“historic nature”

PreliminaryReservationLetter

$1 million

IRC §42

1/1/08 12/31/08

Reservation

12/31/09 12/31/10

Placed-in-service due date


5/1 9/28

Just kidding!Just kidding!

1/1/08 12/31/08 12/31/09 12/31/10


CarryoverAllocationDocument

9/28

10/31



4/30

$$

(6 mo.)

IRC §42

H.R.3221

1/1/08 12/31/08 12/31/09 12/31/10


10%

“Reasonably Expected Basis”

(i.e. land plus depreciable basis)

9/28

10/31 4/30

(6 mo.)

Carryover Allocation!

Reservation

IRC §42

10/31

(12 mo.)

IRC §42

IRC §42

The buildings are ready to be

leased up!

The buildings are ready to be

leased up!Certificate

of Occupancy

Certificate of

Occupancy

CreditsCredits

(The Philadelphia office)

Property Management

Company

$400k$400k$600k$600k

RegulatoryAgreement

Formation of Partnership

Line up attorneys, architect, contractor, accountants, lenders, etc.

Preparation of forecast to “woo” investors

Apply for tax credits

Receive reservation of credits

Pass a 10% Test

Time Line of Events






Pass a 10% Test

Time Line of Events

Finish constructionRegulatory Agreement

Reception of 8609s

Placed in Service Package

Yearly audits and tax returns

Final Cost Certification

Property ComplianceProperty Compliance

HUD Handbook

IRC §42

CreditsCreditsProperty

Management Company

Property Management

Company

CreditsCredits

IRC §42

Rental rules:Rental rules:

1) Don’t rent low-income units to families who make too much money

2) Don’t charge low-income families too much rent

1) Don’t rent low-income units to families who make too much money

2) Don’t charge low-income families too much rent

Income Limit Rent Limit

(by household size) (by # of bedrooms)

$30,000

$750

Property Management

Company

CreditsCredits

IRC §42

IMPORTANT TIME FRAMESIMPORTANT TIME FRAMESIMPORTANT TIME FRAMESIMPORTANT TIME FRAMES

PIS 10 15 30

Tax Credit Period

Compliance Period Extended Use Period

9% vs. 4% Deals9% vs. 4% Deals

Time Line of Events




Apply for bonds

(includes 1st 50% Test)



Pass a 10% TestIssuance of bonds

(tax credit app follows)

Bonds (4%) No Bonds (9%)




Apply for bonds

(includes 1st 50% Test)



Pass a 10% TestIssuance of bonds

(tax credit app follows)

Finish construction

Bonds (4%) No Bonds (9%)

Time Line of Events

Regulatory Agreement

Reception of 8609s

Placed in Service Package

Yearly audits and tax returns

Final Cost Certification2nd 50% Test for Bond deal

NewConstruction

Non-FederallySubsidized(Perm Loan)

9% credits

Construction Method

NewConstruction

Acquisition/Rehabilitation


9% credits Acq – 4%Rehab – 9%

Fin

an

cing

Meth

od

Construction Method

NewConstruction




FederallySubsidized(TE bonds)


Fin

an

cing

Meth

od

Construction Method

Eligible Basis

x DDA/QCT

EB adj. for DDA/QCT

x Applicable Fraction

Qualified Basis

x Applicable Percentage

Annual LIHTC

10,000,000 10,000,000

100%100%

10,000,00010,000,000

100%100%

10,000,00010,000,000

3.50%3.50%

350,000350,000

10,000,000 10,000,000

100%100%

10,000,00010,000,000

100%100%

10,000,00010,000,000

8.00%8.00%

800,000800,000

Project X Project Y

Comparing “9%” Tax Credits to Bonds with “4%” Credits

“9%” Tax Credits Bonds with “4%” Credits

Financing Fees Low High to very high

Interest Rates Higher Lower to very low

Rents Lower (< 50% AMGI) Higher (60% AMGI)

Financing Leverage Low to very low High

Amenity CostsHigher (due to competitive application requirements)

Lower

Competition for Allocation/Reservation

Very high Low

Tax Credit CalculationTax Credit Calculation

Less: Ineligible costs

Total Project Costs

Eligible Basis

Eligible Basis

Interest

Replacement Reserve

Tax Credit Application Fees

Marketing

Syndication

Partnership Agreement Organization

Eligible Basis

• Architectural FeesArchitectural Fees• Engineering FeesEngineering Fees• Developer FeesDeveloper Fees• Contractor Profit/OverheadContractor Profit/Overhead• Other?Other?

And finally…And finally…

Live here!Live here!

Eligible Basis

Demolition CostsDemolition Costs

Eligible Basis

Land = $300,000Land = $300,000Land = $3Land = $350,00050,000

$50,000$50,000

Building = $2,000,000Building = $2,000,000


Eligible Basis

Land = $300,000Land = $300,000

Building = $2,000,000Building = $2,000,000Building = $2,0Building = $2,050,00050,000

$50,000$50,000


Land = $300,000Land = $300,000Land = $3Land = $350,00050,000

Eligible Basis

$50,000$50,000

Land vs. “Land Improvements”Land vs. “Land Improvements”

Eligible Basis

Land = $3Land = $350,00050,000

$30,000$30,000

Building = $2,000,000Building = $2,000,000Building = $2,0Building = $2,030,00030,000

Land vs. “Land Improvements”Land vs. “Land Improvements”

$30,000 = “Land Improvement”$30,000 = “Land Improvement”

Less: Org costs, Syndication fees; reserves, tax credit fees, marketing, land, off-site improvements, commercial costs, fees in excess of state limits

Total Project Costs

Eligible Basis

Eligible Basis

Total project Eligible Basis is divided amongst the buildings.

$38 mil

($2.5 mil)

$35.5 mil

$9 mil $8.5 mil $8 mil $10 mil+ + + = $35.5 mil$9 mil $8.5 mil $8 mil $10 mil+ + + = $35.5 mil

Calculating Credits

Eligible Basis 10,000,000

x DDA/QCT

Area

QCT

Not a QCT

130%130%

130%DDA =DDA =

HUD DDA or QCT = 130%

State Housing Agency

130%(Buildings PIS after 7/30/08)

(does not apply to tax-exempt bond financed projects)

H.R.3221

Calculating Credits


x DDA/QCT 130%

EB adj. for DDA/QCT 13,000,000

x Applicable Fraction

Building A

Low-income units

Market-rate units

Applicable Fraction (LIHOP)

Unit Fraction: 50%

Floor Space Fraction: 35%

Building A

Low-income units

Market-rate units

Applicable Fraction (LIHOP)

Unit Fraction: 50%

Floor Space Fraction: 65%

Calculating Credits


x DDA/QCT 130%


x Applicable Fraction 35%

Qualified Basis 4,550,000



Calculating Credits


x DDA/QCT 130%




7.80%


Calculating Credits


x DDA/QCT 130%




7.80%

Annual LIHTC 354,900

NewConstruction

9% credits

NewConstruction

9% credits

NewConstruction



H.R.3221

130%

Pre-HR 3221

Greater of:

• $3,000/unit, or

• 10% of adj. basis of bldg

Bldgs allocated credits after 7/30/08

Greater of:

• $6,000/unit, or

• 20% of adj. basis of bldg

Eligible Basis Eligible Basis

x DDA/QCTx DDA/QCT

EB adj. for DDA/QCT EB adj. for DDA/QCT

x Applicable Fractionx Applicable Fraction

Qualified BasisQualified Basis

x Applicable Percentagex Applicable Percentage

Annual LIHTC Annual LIHTC

2,000,000 2,000,000

100%100%

2,000,0002,000,000

45%45%

900,000900,000

3.34 %3.34 %

30,06030,060

2,000,000 2,000,000

130%130%

2,600,0002,600,000

45%45%

1,170,0001,170,000

7.80 %7.80 %

91,26091,260

Acquisition Rehab


Located in a QCT

45% LIHTC Applicable Fraction

Building PIS: May 9, 2008

4,000,000 E.B.

Financing the ProjectFinancing the Project

Financing LIHTC ProjectsFinancing LIHTC Projects

Needed Sources

Investors

Fund / Upper tier Limited Partnership

Lower Tier Operating Limited Partnership

9% Credits

CREDITS

Equity

Debt

Higher Interest

Needed Sources

Investors



9% Credits



Needed Sources

Investors



4% Credits

CREDITS

Equity

Debt

Lower Interest

For Further Information on LIHTC HousingFor Further Information on LIHTC Housing

Find Find FREEFREE tax credit resources at: tax credit resources at:

““www.taxcredithousing.com”www.taxcredithousing.com”

E-mail E-mail [email protected]@novoco.com

Send Queries & Comments to:Send Queries & Comments to:[email protected] [email protected]

678-867-2333678-867-2333

Low-income Housing Tax Credit Basics Brad Elphick, CPA October 17, 2008.

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