Virginia Housing Coalition
2013 Housing Credit Conference
Deal Structuring, Fundamentals, and
Financing and Legal Issues
Discussion Topics
 Tax Credits and Low-Income Housing Tax Credits
 Structuring LIHTC Projects
 Fundamentals of LIHTC Projects
 Project Feasibility
 Credit Basis and Other Calculations
Q&A
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues
Tax Credits and LIHTC
 What are tax credits?
 Dollar for dollar reduction in a taxpayer’s tax
responsibility - $1 in credits offset $1 in income tax
responsibility
 Not a tax deduction – a tax deduction reduces the
income calculation upon which a tax is calculated
 Low-Income Housing Tax Credits
 Authorized in 1980s – now a permanent part of the
IRS Code – Section 42
 Credits available to States as per Code – VHDA
manages Virginia’s LIHTC program – see QAP
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Tax Credits and LIHTC
 Low-Income Housing Tax Credits
 Credits available to projects that commit to Income
and Rent restrictions
 Income Restrictions – restrictions on the income of
potential residents - at least 40% of apartments
reserved for 60% AMI households or at least 20% for
50% AMI households – most developers reserve 100%
of apartments for eligible households
 Rent Restrictions – restrictions on rent that can be
charged for the apartments - must be at or below
30% of income adjusted for household size
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Tax Credits and LIHTC
 Low-Income Housing Tax Credits
 Restrictions for 15 years
 VHDA QAP:
 Extended compliance
 Deeper income and rent targeting
 Serving households with special needs
 “Green” building
 Amenities
 Efficiencies
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Structuring LIHTC Projects
 Most developers can’t use credits directly – lack
income tax liability
 Credits available to owners of housing
 Typically create Limited Partnership or Limited
Liability Company as owner
 Entities with tax liability enter as Limited Partner
 Provide cash in exchange for credits and other
benefits
 Developer often manages day-to-day affairs
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Fundamentals of LIHTC
Projects
 Developers evaluate a number of factors in
planning a project:
 Mission
 Site Selection and Control
 Cost
 Availability
 Environmental Considerations
 Utilities
 Zoning
 Purchase Option / Fee Simple Ownership / Lease
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Fundamentals of LIHTC
Projects
 Developer issues (continued):
 Design
 Target Market
 Market Area conditions
 Special resident needs
 Development Team
 Architect
 Attorney
 Board
 Consultants
 Builders
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Financial feasibility involves careful preparation
of a development budget and an operating
budget
 Development budget – includes all of the costs
necessary to build a project
 Operating budget – captures projected income,
expenses, debt costs, and cash flow
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Development Budget:
 Construction / contractor costs:
 Offsite and onsite improvements
 Demolition
 Hard construction costs
 Contractor general conditions, overhead, and
profit
 Bond / letter of credit costs
 Fixtures / appliances
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Development Budget:
Architecture costs
Engineering costs
Permits
Tap fees
Construction loan fees and interest
Taxes and insurance during construction
Legal costs – construction loan closing and other
legal costs
 Permanent loan fees
 Consulting fees – mortgage banker or historic
consultant
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2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Development Budget:
 Land and building costs
 Cash reserves
 Contingency
 Developer fees
 Add all of these development costs to calculate
total development cost
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Development sources – funding available to pay
for development costs (aka development uses).
 Sources include:
 Equity from investors based on availability of credits
 Loan proceeds
 Grants – preferably structured as loans
 Developer contributions
 Seller soft loans
 Deferred developer fees
 Construction loans repaid by permanent sources
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Calculating LIHTC
 Eligible basis costs
 Ineligible basis costs
 Eligible basis reductions
 QCT or DDA increases
 Calculation of credits / credit rates
 Bond tests
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Operating budget
 Income
 Rent – restricted by program
 Subsidies
 Other Income
 Maximum rents adjusted for utility allowances and
vacancy rates
 Expenses
 Management Fees
 Other Management / Administrative
 Management Salaries
 Marketing
 Legal
 Supplies and Phone
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues
Project Feasibility
 Operating budget
 Expenses (continued)
 Utilities
 Maintenance
 Maintenance and grounds costs
 Exterminating
 Trash
 Turnover
 Property and Other Taxes
 Insurance
 Compliance and Audit Fees
 Replacement Reserves
 Management Fees
 Income less expenses equals Net Operating Income –
amount available to pay debt costs and provide cash
flow
2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and
Legal Issues