BEGINNER’S GUIDE
TO LIHTC
TOPICS
• History of LIHTC
• LIHTC Program Details
• Credit Types
• Restrictions and Other Issues
• LIHTC Utilization
• Credits and Other Benefits
• Ownership
• Credit Calculation
• Ready to Develop?
• Nuts & Bolts Sessions
• Budgets and Feasibility
• The Application and QAP
• Construction, Asset Management, and Compliance
HISTORY OF LIHTC
• Low-Income Housing Tax Credit program is a
Federal tax credit created as part of the Tax Reform
Act of 1986.
• Program governed by Section 42 of the Internal
Revenue Code for which the Internal Revenue
Service (IRS) is the implementing agency.
• Credits are allocated by formula to States (and
even territories) – about $2.30 per capita for 2014
with and Virginia has a population of 8 million.
HISTORY OF LIHTC
• Virginia Housing Development Authority manages
Virginia’s LIHTC allocation and prepares, annually, a
Qualified Allocation Plan, or QAP.
• The QAP establishes selection criteria and in
preparing the Plan, VHDA must provide
opportunities for public input.
• Discussion of Virginia’s QAP for 2015 underway
down the hall right now……….
LIHTC PROGRAM DETAILS
• Handouts:
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VHDA’s 2015 QAP
VHDA’s 2014 Manual and Application
Rent Limits Table
Income Limits Table
VHDA Program Timetable
LIHTC Lexicon (from Novogradac & Company)
Web Resource List (from Elizabeth Moreland Consulting)
LIHTC PROGRAM DETAILS
9% Credits
• Available for qualified expenses incurred in projects
involving new construction or rehabilitation
(including adaptive reuse) of existing buildings.
• Not available for acquisition costs.
• 9% available competitively – March 2015
application.
• Also known as the 70% present value credit.
• Rate adjusted monthly by Treasury – 7.56% for
September 2014.
LIHTC PROGRAM DETAILS
4% Credits
• Available for building acquisition costs for buildings that,
generally, have been continuously owned for at least 10
years prior to applying for credits and are outside of
initial compliance under a previous LIHTC award.
• Acquisition credits may be secured through applications
for 9% tax credits.
• Available for acquisition and rehabilitation expenses for
projects receiving loans based on tax-exempt bond
proceeds – such projects may apply on an open
submission basis.
• Also called the 30% present value credit – rate also
adjusted monthly – for September 2014, 3.24%
LIHTC PROGRAM DETAILS
4% Credits
• Available for building acquisition costs for buildings that,
generally, have been continuously owned for at least 10
years prior to applying for credits and are outside of
initial compliance under a previous LIHTC award.
• Acquisition credits may be secured through applications
for 9% tax credits.
• Available for acquisition and rehabilitation expenses for
projects receiving loans based on tax-exempt bond
proceeds – such projects may apply on an open
submission basis.
• Also called the 30% present value credit – rate also
adjusted monthly – for September 2014, 3.24%
LIHTC PROGRAM DETAILS
Credit boosts – factors increasing credits:
• Qualified Census Tract – the project is located in a
tract where more than 50% of the households have
incomes at or below 60% of the Area Median
Income (30% boost).
• Difficult Development Area – project is in a locality
designated by HUD as having high development
costs as compared to incomes (30% boost).
• VHDA boost – for some 9% projects, can provide a
boost of up to 30% - VHDA utilizes this authority to
provide a limited boost for certain project features.
LIHTC PROGRAM DETAILS
Income restrictions –
(minimum):
• At least 40% of the
apartments reserved
for families earning
60% or less of Area
Median Income; or,
• At least 20% at 50% of
AMI.
Locality
50% AMI
60% AMI
Richmond
$36,450
$43,740
Arlington
$53,500
$64,200
Wise Co.
$26,150
$31,380
LIHTC PROGRAM DETAILS
• Rent restrictions
Locality
1 BR
2 BR
Richmond
$684
$821
Arlington
$1,003
$1,203
Wise Co.
$491
$588
• Rents indexed to 30%
of qualified income
adjusted for family
size and assuming 1.5
persons per
household.
• VHDA prepares a
table – available on
the VHDA website.
LIHTC PROGRAM DETAILS
• Credits flow for a 10 year period, but compliance
requirements are in place for at least 15 years.
• Compliance requirements and the benefits of the
credits lead many developers to seek credits on all
of the apartments in a development.
• Projects subject to Extended Use Agreements to
provide continued affordable housing benefits for
at least 15 more years. These agreements and
related agreements also hold developers to other
promises made in applications.
• EUA recorded against the property.
LIHTC PROGRAM DETAILS
Among the other promises an applicant can make in
an application:
• Longer compliance period or provision of a
purchase option to a nonprofit
• Deeper income and rent targeting
• Green building certification
• Accessibility
• Locality financial support
• Subsidy availability
LIHTC PROGRAM DETAILS
Other Issues:
• Noncompliance with IRS requirements can result in
loss of credits.
• Noncompliance with VHDA requirements can result
in negative points for future applications.
• Other funding sources may require different /
deeper promises – more apartments at 50% AMI or
some at 40% AMI, for example.
LIHTC PROGRAM DETAILS
Timetable:
• March 9% application is for a Reservation of LIHTC
• Competitive rankings revealed in May and June.
• Awardees receive LIHTC agreements in Summer.
• Allocation applications due by early November.
• Can request a current year Allocation or a
Carryforward Allocation – Carryforward provides up
to 2 years after the year credits are received to
complete a project.
• Must incur expenses in excess of 10% of basis within
12 months of Carryforward Allocation.
LIHTC UTILIZATION
• Tax credits provide a dollar-for-dollar reduction in
income tax liability.
• In contract, a tax deduction provides an offset for
income and is calculated pre-tax, so it does not
result in a dollar-for-dollar reduction in tax liability.
• Low-Income Housing Tax Credits flow to owners of
affordable rental housing projects.
• While some developers of LIHTC projects may have
significant tax liability, most developers and
sponsors do not have enough to utilize all of the
available credits.
LIHTC UTILIZATION
• Syndication involves the provision of limited
ownership interests to other taxpayers in exchange
for equity investments.
• These investments are commonly made through
Limited Liability Companies or Limited Partnerships.
• Investors enter these entities and provide capital in
exchange for LIHTC and other tax benefits.
• In these structures, developers and/or sponsors
maintain day-to-day control over a project and the
investors take a limited role.
LIHTC UTILIZATION
Typically 99% of the
interests in an
ownership LLC or LP
are provided to an
investor and the
developer / sponsor
retains a 1% interest.
owns project subject
to mortgages
Project Owner LLC
Developer /
Sponsor
1%
Investor
99%
LIHTC UTILIZATION
• Investors are primarily corporations as there are
limits on passive losses for individuals.
• Individual corporations may make investments in
LIHTC projects directly – this is called a direct
investment.
• Corporations may also work through a syndicator
that can deploy investments through:
• A fund that is established solely for deploying the
investments of a specific corporation – a proprietary fund
• Funds that also include investments from other corporations
– a multi-investor fund
LIHTC UTILIZATION
The amount of capital or equity an investor will pay
may vary based on the following:
• Community Reinvestment Act interest for investors
that are also regulated financial institutions
• To reflect risks associated with the strength of a
project or the strength of a developer or sponsor
• To reflect economic factors such as the timing of
investment payments.
LIHTC UTILIZATION
Shady Acres (sample project):
• Existing 20 unit property costs $200,000 - $15,000 of this is
land cost and $185,000 is building cost.
• Rehabilitation costs are $1,000,000
• Architect’s fees are $70,000
• Construction loan fees and interest are $70,000
• Cash reserves of $75,000
• Permanent loan fees of $25,000
• Developer’s fee of $150,000
• Permanent and partnership legal of $75,000
• Due diligence report costs of $25,000
• Total project cost of $1,690,000
LIHTC UTILIZATION
Cost Category
Total Cost
Credit Basis
Land
$15,000
NO
Building
$185,000
$185,000
$1,000,000
$1,000,000
Design
$70,000
$70,000
Construction Loan Costs
$70,000
$70,000
Reserves
$75,000
NO
Permanent Loan Fees
$25,000
NO
Developer’s Fee
$150,000
$150,000
Non-Construction Legal
$75,000
NO
Due Diligence Reports
$25,000
$25,000
$1,690,000
$1,500,000
Construction
Totals
LIHTC UTILIZATION
Shady Acres credit calculations:
• 4% credits:
• $185,000 in basis
• Multiply by 3.24%
• $5,994 in annual credits
• 9% credits:
• Rest of basis - $1,315,000
• Multiply by 7.56%
• $99,414 in annual credits
• Total annual credits of $105,408
LIHTC UTILIZATION
• Total annual credits of $105,408 available for a 10
year period.
• Investor credit pricing – after assessing earlier factors
– is $.90 per credit dollar.
• Equity available for Shady Acres:
• $948,672 of the $1,690,000 total development cost – 56% of
the total.
• Typically, LIHTC equity can offset 45% to 65% of total
development costs.
READY TO DEVELOP?
• The step, in the process of developing a project,
wherein you determine what you want to do and if
what you want to do is feasible is the
predevelopment phase.
• Predevelopment involves the evaluation of all key
factors for determining project feasibility, including:
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Selecting a location
Building a team
Evaluating the market
Designing the project
Determining financial viability
READY TO DEVELOP?
Selecting a location:
• Complete an evaluation of factors associated with
the location of an affordable housing project,
including proximity to transportation and services,
zoning, utility availability, site size, and seller
involvement.
• Price is a key factor in determining feasibility and
may be established by an appraisal – but may also
be negotiated.
• Site should be reasonably clear of environmental
hazards and a Phase I ESA may be needed.
READY TO DEVELOP?
Building a team:
• The developer / sponsor is responsible for evaluating
the viability of a project, but will also need to
involve others in evaluating project factors,
including:
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Architect
Attorney
Local government officials
Representatives of financing sources
Potential residents
Others….
READY TO DEVELOP?
Evaluating the market:
• Developers / sponsors should begin to evaluate the
potential market early in project planning:
• Find and evaluate Census and other data concerning area
demographics.
• Seek information concerning competing projects.
• Collect information on an existing project’s operating
history.
• Survey potential residents.
• Order a formal Market Study from a firm on VHDA’s
list of approved analysts.
READY TO DEVELOP?
Designing the project:
• For the population
• With all of the requirements:
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VHDA standards
Green standards
Universal Design
Historic
• That includes all remedies / fixes for site and building
• Feedback from contractors
READY TO DEVELOP?
Determining financial viability:
• Development budget that includes all costs.
• Sources for all of the development costs
• Reliable income possibilities
• Good expense projections
• Affordable debt
• Result – cash flow and a feasible project.
NUTS & BOLTS
• Budgets and Feasibility – this afternoon
• The Application and the QAP – later this afternoon
• Construction, Asset Management, and Compliance
– tomorrow
• Networking in the meantime…..