WWSSHHFFCCIntroduction toIntroduction to
Low Income Housing Tax CreditsLow Income Housing Tax Credits
AGENDAAGENDA
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What Are Low Income Housing TaxCredits?
How do Tax Credits Work?
The Role of the Commission
Outcomes
The Tax Credit Development Process
Questions & Answers
Began with Tax Reform Act of 1986; tax credits are now the primary vehicle for low-income rental housing construction and rehabilitation in the U.S.
Federal tax incentive to encourage the production of low-income housing (Section 42 of the Internal Revenue Code)
Dollar for dollar reduction in federal tax liability for ten years
Through partnerships, investors receive tax credits in return for equity investments
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What is the Low-Income Housing What is the Low-Income Housing Tax Credit?Tax Credit?
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Why the Tax Credit Program WorksWhy the Tax Credit Program Works
Investors realize return on equity investment
Creates affordable housing
Supports housing
industry professionals
Spurs economic development
Credits provide a dollar for dollar reduction in federal tax liability
Investors give $$’s to a development in exchange for tax credits
The credits are allocated over a 10 year period to investors in the development
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How are the Credits Turned Into How are the Credits Turned Into Equity for the Project?Equity for the Project?
Tax CreditsLimited
Partnership/ LLC
General Partner/Managing Member/Developer
Limited Partner/Member
Equ
ity $
$ fo
r P
roje
ct
Tax Credits & Other Real Estate Benefits
Credit to EquityCredit to Equity
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Amount of credit is based on theType of projectDevelopment costs% qualified low-income unitsNature and amount of financing
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Calculating the CreditCalculating the Credit
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Two Credit Allocation ProcessesTwo Credit Allocation Processes
Competitive Credit 9% credit – new
construction 4% / 9%
acquisition/rehab 130 points minimum One round annually
Tax-Exempt Bond Credit
4% credit only 50% test 50 points minimum Open application
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Why 4% Tax Credits?Why 4% Tax Credits?
Federal Subsidies:
A project is federally subsidized if it is financed with tax-exempt bonds or a federal loan with an
interest rate below market
Acquisition
Federal Subsidies
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Two Credit CalculationsTwo Credit Calculations
Qualified Basis
Equity Gap
Credit amount is based on the lesser of these two calculations
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Calculating the CreditCalculating the Credit
The project’s Qualified Basis =
Eligible Basis X Applicable Fraction
The project’s Equity Gap =
Total Project Costs – Sources of Funds
(other than the equity from the credit)
Calculating the CreditCalculating the Credit
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Example : Total Project Cost $7,400,000
Basis Calculation Gap Calculation
eligible basis $5,800,000
x applicable fraction 100%
qualified basis $5,800,000
x applicable percentage 9%
= credit amount $522,000
total funding $2,516,000- total costs $7,400,000= gap ($4,784,000)tax credit factor .92= credit amt $5,200,00010 years = $520,000
Credit Amount is $520,000
Credit to EquityCredit to EquityExample : $520,000 in credit
Owner[Limited Partnership]
Developer[General Partner(s)]
Investor(s)[Limited Partner(s)]
HOUSING EQUITY
TAX CREDITS TAX SAVINGS
$520,000/yr......… over 10 yrs...........equals $5,200,000
$4,784,000
WWSSHHFFCCWith a .92 Tax Credit Factor, $520,000 in credit =
$4,784,000 in equity to build project
What is the Role of the HFA?What is the Role of the HFA?
Develop and administer the Low-Income Housing Tax Credit program in Washington State
Develop a Qualified Allocation Plan and Policies to
govern the allocation of credits
Determine which projects best further the goals of
the Qualified Allocation Plan and the Policies
Allocate $1.95 in credit per resident in 2007 (about
$12.5 million in Washington), plus any credit for
eligible tax-exempt bond projects
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HFA HFA RoleRole (continued(continued))
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Report tax credit allocations annually to the
Internal Revenue Service, Governor and
Legislature
Monitor the compliance of projects receiving
tax credits (about 40 years)
IRS requires that preference be given to projects serving the lowest income tenants for the longest period of time
Projects are ranked based on an objective point system
Points are awarded in 20 categories which reflect housing and policy priorities statewide
Commission considers staff recommendations and makes final decision
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Project SelectionProject Selection
Sample Allocation CriteriaSample Allocation Criteria
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Additional Low-Income Housing Set-Aside (the “lowest”)
% of units beyond the income limits required by the IRS CodeWorth a maximum 50 points
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Sample Allocation Criteria (cont’d)Sample Allocation Criteria (cont’d)
Additional Low-Income Housing Use Period (the “longest”)
Add up to 22 years to the minimum 15 year requirement2 points for every year = up to 44 points 100% of our competitive applications select the maximum totaling 40 years
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Sample Allocation Criteria (cont’d)Sample Allocation Criteria (cont’d)
Special Needs Housing Set-Asides For:
Farmworkers 20-25 pts.Large Households 5-10 pts.Persons who are Elderly 10 pts.Persons with Disabilities 5-10 pts.Housing for the Homeless 5-20 pts.
Competitive Credit Set-Asides
20%
15%5%
50%
10%
Qualified Nonprofit (10%) HOPE VI (20%)
Rural Housing (15%) Rural Dev. Program (5%)
General Pool (50%)
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WSHFC Tax Credit Program WSHFC Tax Credit Program AccomplishmentsAccomplishments
Approximately 37,000 low-income units were completed from 1987 through 2007
In 2007, awarded over $12.4 million in competitive 9% tax credits to 26 projects, which will result in approximately 1,160 low-income housing units
In 2006, awarded over $13 million in 4% tax credits to 23 bond-financed projects, which will result in over 3,300 low-income housing units
Competitive (9%) Competitive (9%) Low-Income Tax Credit UnitsLow-Income Tax Credit Units
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Allocated 1987 through 2007
Development ProcessDevelopment Process
Pre-DevelopmentYear OneYear TwoYear ThreeBeyond Placed-In-Service
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To Learn MoreTo Learn More……
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• www.wshfc.org/tax-credits• Refer to the Commission's Requirements Included in:
– 2007 Application Packet
• Qualified Allocation Plan
• Program Policies
– Review Sec 42 of the Code and Other Treasury Regs.
• Seek Professional Assistance From:– Consultants
– Legal Counsel
– Tax and Financial Advisors
– Accountant
– Refer to the Resource List
• Tax Credit Guide Books
• CALL US: 1-800-767-HOME
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