How to Finance Affordable
Housing with
Low Income Housing Tax
Credits
July 10, 2007
Outline
• Overview
Industry Statistics (Estimates)
What Are Low-Income Tax Credits(LIHC)
Administrative Roles of the States
How Credits Are Awarded to LIHC Project
• How Are LIHC Projects Funded?
• What Are The Compliance Requirements?
• Who Invests In LIHC Projects?
What Does The Developer Give To The Investor?
What Does The Developer Keep?
How Is A Tax Credit Transaction Structured?
What Are Low Income Housing
Tax Credits?
• Tax Credits Are Used To Reduce
Federal Income Tax
Individuals
Corporations
• Federal Government Allocates Credits
To Each State Annually
$1.95 Multiplied By State Population (2007)
State Credit Ceiling
What Are Low-Income Housing
Tax Credits?
• Available For Rental Housing Only
• Tax Credits Are Claimed By Investors Over A
10 Year “Credit Period”
• 15 Year “Compliance Period” - Project Must Be
Rented To Low-Income Tenants
• Extended Use Requirements - 30 Years+
• EB x LIOP x CP x 10 = Credits
*
EB = Eligible Basis, LIOP = Low Income Occ. % & CP = Current %
Administrative Roles Of The States
• Responsible For Reserving and Allocating
Tax Credits
Determine Competitive Process
(Beauty contest)
Assess Financial Feasibility
Monitor Development Process
• Compliance Monitoring
* Varies by State IRS = Minimum of 1 twice every 3 years
How Are Credits Awarded?
• State Housing Agencies Responsible For
Administering The Program
• LIHC Allocations Made In Accordance With A
Qualified Allocation Plan (QAP)
• QAP Documents Local Affordable Housing Need
• “Beauty Contest” Determines Which Projects
Will Be Awarded LIHC
• Application Cycles Vary From State To State
• Program Oversubscribed In Almost Every State
How Are LIHC Projects Funded?
• Equity Sources
Public Funds
Private Funds
Corporations
30-65% Of Project Funded From Equity
How Are LIHC Projects Funded
• Balance Of Cost Funded From Debt
For-Profit Lenders
Federal, State And Local Programs
 HOME Funds
 Community Development Block Grants
 Affordable housing Program
 Other State And Local Programs
What Are The Compliance
Requirements?
• Tax Credits Available For “Low-Income
Units” Only
• Restrictions On Low-Income Units
Income Restrictions
Rent Restrictions
What Are The Compliance
Requirements?
• Income Limitations
Percentage of Area Median Gross Income HUD Limits
Income Limits Adjusted For Family SizeActual Number of People Living In The Unit
Deeper Restrictions Often Imposed By States
• Elections
40/60 Set Aside
20/50 Set Aside
What Are The Compliance
Requirements?
• Rent Limitations
Maximum Rents Generally Equal To 30% Or
Less Of Imputed Income Limits
1.5 Persons Per Bedroom - Bond = 1 per bd.
2 Bedrooms Is Deemed To Have Three People
For Rent Restriction
Area Median Gross Income Figures From HUD
Are Based On A Four Person Family
Who Invests In LIHC Projects?
• Types Of Investors - Tax Law Governs
Corporate Investors
Individual Investors
• Total Annual Equity Investment - Over $2.5
Billion
What Does The Developer Give
To The Investor?
• Generally 99 to 99.99% Of The
Partnership
Tax Credits
Losses
• Generally 50 to 99.99% Of The
Partnership
Available Cash
Residual Value Of Property
Capital Account Maintenance Rules Apply
What Does The Developer Give
To The Investor?
• Tax Credit Guarantees
Construction Completion & Deficit
Lease-up
Permanent Loan Funding
Tax Credits (Adjusters)
Tax Losses
Yield Maintenance
Compliance Monitoring
What Does The Developer Retain?
•
•
•
•
•
•
Developer Fees
Contractor Overhead And Profit
Property Management Fees
Incentive Management Fees
Operating Cash Flow
Sale Or Refinancing Proceeds
Tax Credit Example
9,000,000 Project Costs
1,000,000 Developer Fee(7,000,000*15%)
10,000,000 Project Costs
(1,000,000)Non-eligible Project Costs
(1,000,000)Land
8,000,000 Eligible Basis
*1.3 Difficult To Develop Area
10,400,000 Qualified Basis
Tax Credit Example
10,400,000 Qualified Basis
*100% Low Income Occupancy%
10,400,000 Qualified Basis
*9% Credit Percentage
936,000 Credits Per Year
*10 Years
9,360,000 Total Credits
*.95 Credit Price
8,892,000 Equity
Tax Credit Example
150
*400
60,000
(30,000)
30,000
*12
360,000
/1.15
313,043
3,240,000
Rental Units
Per Unit
Per Month Rental Income
Operating Expense (50%)
Net Operating Income Per Month
Months
Net Operating Income
Debt Coverage Ratio
Cash Available
Loan
Tax Credit Example
10,000,000
(6,575,400)
( 3,240,000)
184,600
( 184,600)
0
Project Costs
Equity
Permanent Loan
Unfunded Project Costs
Deferred Developer Costs
What Do Best Properties Have in
Common?
• Great real estate
 Rents under market
 Very strong market demand (no occupancy
risk)
• Very little “hard” debt
Developer job -- meet community needs
Community job -- support w/financing
TIF, Home loans, soft seconds, etc.