Low-income Housing Tax Credit
Basics
Brad Elphick, CPA
October 17, 2008
Short History of Affordable Housing
A Short Affordable
History of Affordable
HousingHousing
Tax
Federal
Government
Spend
Affordable
Housing
A Short Affordable
History of Affordable
HousingHousing
Tax
Tax
Federal
Government
Banks &
Insurance
Companies
Administered by State Housing Agencies
1. Reduction of federal agency costs
Spend
2. States able to assess local housing
needs better than federal gov’t
Affordable
Housing
Price
CRA Investors
Yield
Insurance
Energy
LIHTC
Market
High-tech
Fannie
Freddie
LIHTC
Market
Price
Yield
H.R. 3221
The Housing and
Economic Recovery
Act of 2008
ELEVEN LIHTC UPDATES (covered today) DUE TO H.R. 3221
1
9% allocation increased by $0.20 for 2008 and 2009
2
Priority on QAPs for energy efficiency and historic nature
3
Deadline to pass 10% test extended to 12 months
4
State housing agencies can give 130% E.B. boost to projects
5
Rehab requirement now $6k/unit or 20% of adj. basis of bldg.
6
Additional $11 Billion in tax-exempt housing bonds in 2008
7
Tax-exempt housing bond interest not subject to AMT
8
LIHTCs can now offset AMT
9
Temporary 9% minimum credit
10
Federal grants for operations do not reduce E.B.
11
“Federal Subsidy” taint limited to tax-exempt bond financing
Typical LIHTC Structure
Typical LIHTC Structure
Investors
Syndicator
GP
$$
Syndication
fees
P’ship Mgt Fees
LP
$
CREDITS
$
LOSSES
Developer
$
Developer Fee
$
Fund
Typical LIHTC Structure
Sponsor/
Syndicator
General Partner
1% or less of P&L and
Credits
General
Partner
General Partner
1% or less of P&L and
Credits
Developer
Lower Tier
Operating
Developer fee
Limited Partnership
Investor
Limited Partner
99+% of P&L and
Credits
Fund/Upper Tier
Limited Partnership
Limited Partner
99+% of P&L and
Credits
Tax Credit Prices
95¢
80-85¢
45¢
1989
2008
Tax Credit Prices
95¢
80-85¢
45¢
1989
2008
The Project Time Line
Lenders
H.R.
3221
‘08 & ‘09
Upper Tier/
Investment L P’ship
Contractors
CA pop. - 2008
Approx 36.5 mil
$2.20
$2.00
x
Approx $73 mil $80.3 mil
IRC §42
Architect
Property Management
Company
Attorneys
9%
H.R.
3221
Credits
Preliminary
Reservation
Letter
Credits
$1 million
“energy efficiency”
&
“historic nature”
$400k
$600k
Placed-in-service
due date
Placed-in-service
due date
Reservation
Just kidding!
1/1/08
IRC §42
5/1
9/28 12/31/08
12/31/09
12/31/10
(6 mo.)
10/31
1/1/08
9/28 12/31/08
Placed-in-service
due date
4/30
12/31/09
IRC §42
Carryover
Allocation
Document
$
12/31/10
(6 mo.)
(12 mo.)
10/31
1/1/08
4/30
H.R.
3221
10/31
9/28 12/31/08
12/31/09
Placed-in-service
due date
12/31/10
Reservation
IRC §42
“Reasonably Expected Basis”
(i.e. land plus depreciable basis)
Carryover
Allocation!
10%
IRC §42
IRC §42
Credits
(The Philadelphia office)
The buildings
are ready
to be
Certificate
of
Certificate
leased
up!
Occupancy
of
Occupancy
Regulatory
Agreement
$400k
$600k
Property
Management
Company
Time Line of Events
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
Formation of Partnership
Line up attorneys, architect, contractor,
accountants, lenders, etc.
Preparation of forecast to “woo” investors
Apply for tax credits
Final reservation
Cost Certification
Receive
of credits
Placed
in Service
Package
Pass
a 10% Test
Regulatory
Agreement
Finish construction
Reception of 8609s
Yearly audits and tax returns
Property Compliance
IRC §42
HUD Handbook
Credits
Property
Management
Company
Rental rules:
IRC §42
1) Don’t rent low-income units to families who
make too much money
2) Don’t charge low-income families too much
rent
Credits
Property
Management
Company
$30,000
$750
Income Limit
Rent Limit
(by household size)
(by # of bedrooms)
IRC §42
Credits
Property
Management
Company
IMPORTANT TIME FRAMES
Compliance Period
Extended Use Period
Tax Credit Period
PIS
10
15
30
9% vs. 4% Deals
Time Line of Events
Formation of Partnership
Line up attorneys, architect, contractor,
accountants, lenders, etc.
Preparation of forecast to “woo” investors
Bonds (4%)
Apply for bonds
No Bonds (9%)
Apply for tax credits
(includes 1st 50% Test)
Receive reservation of credits
Issuance of bonds
(tax credit app follows)
Pass a 10% Test
Time Line of Events
Formation of Partnership
Line up attorneys, architect, contractor,
accountants, lenders, etc.
Preparation of forecast to “woo” investors
Bonds (4%)
No Bonds (9%)
Apply for bonds
Apply for tax credits
2nd
50% Test
(includes
1st 50% Test)
for Bond deal
Final Cost Certification
Receive reservation of credits
Placed in Service Package
Issuance of bonds
Pass a 10% Test
(tax credit app follows)
Regulatory Agreement
Reception
of 8609s
Finish construction
Yearly audits and tax returns
Construction Method
New
Construction
Non-Federally
Subsidized
(Perm Loan)
9% credits
Financing Method
Construction Method
Non-Federally
Subsidized
(Perm Loan)
New
Construction
Acquisition/
Rehabilitation
9% credits
Acq – 4%
Rehab – 9%
Financing Method
Construction Method
New
Construction
Acquisition/
Rehabilitation
Non-Federally
Subsidized
(Perm Loan)
9% credits
Acq – 4%
Rehab – 9%
Federally
Subsidized
(TE bonds)
4% credits
Acq – 4%
Rehab – 4%
Project X
Eligible Basis
10,000,000
x DDA/QCT
100%
EB adj. for DDA/QCT
10,000,000
x Applicable Fraction
100%
Qualified Basis
10,000,000
x Applicable Percentage
3.50%
Annual LIHTC
350,000
Project Y
10,000,000
100%
10,000,000
100%
10,000,000
8.00%
800,000
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
Lower (< 50% AMGI)
Higher (60% AMGI)
Low to very low
High
Rents
Financing Leverage
Amenity Costs
Competition for
Allocation/Reservation
Higher (due to
competitive application
requirements)
Lower
Very high
Low
Tax Credit Calculation
Eligible Basis
Total Project Costs
Less: Ineligible costs
Eligible Basis
Eligible Basis
Live here!
Marketing
Interest
Tax Credit
Application Fees
Partnership
Agreement
And
finally…
Organization
Syndication
• Architectural Fees
• Engineering Fees
• Developer Fees
• Contractor Profit/Overhead
• Other?
Replacement Reserve
Eligible Basis
Demolition Costs
Eligible Basis
Demolition Costs
Building = $2,000,000
$50,000
Land = $300,000
$350,000
Eligible Basis
Demolition Costs
Building = $2,050,000
$2,000,000
$50,000
Land = $300,000
Eligible Basis
Land vs. “Land Improvements”
$50,000
Land = $350,000
$300,000
Eligible Basis
Land vs. “Land Improvements”
Building = $2,030,000
$2,000,000
$30,000 = “Land Improvement”
$30,000
Land = $350,000
Eligible Basis
Total Project Costs
$38 mil
Less: Org costs, Syndication fees; reserves, tax credit fees, marketing,
land, off-site improvements, commercial costs, fees in excess of
state limits
Eligible Basis
($2.5 mil)
$35.5 mil
Total project Eligible
Basis is divided amongst
the buildings.
$9 mil + $8.5 mil + $8 mil
+ $10 mil = $35.5 mil
Calculating Credits
Eligible Basis
x DDA/QCT
10,000,000
QCT
Not a QCT
130%
DDA =
Area
130%
State Housing
Agency
H.R.
3221
130%
HUD DDA or
QCT = 130%
(Buildings PIS after 7/30/08)
(does not apply to tax-exempt
bond financed projects)
Calculating Credits
Eligible Basis
x DDA/QCT
EB adj. for DDA/QCT
x Applicable Fraction
10,000,000
130%
13,000,000
Applicable Fraction (LIHOP)
Building A
Low-income units
Market-rate units
Unit Fraction:
50%
Floor Space Fraction:
35%
Applicable Fraction (LIHOP)
Building A
Low-income units
Market-rate units
Unit Fraction:
50%
Floor Space Fraction:
65%
Calculating Credits
Eligible Basis
x DDA/QCT
EB adj. for DDA/QCT
x Applicable Fraction
Qualified Basis
x Applicable Percentage
10,000,000
130%
13,000,000
35%
4,550,000
Calculating Credits
Eligible Basis
x DDA/QCT
EB adj. for DDA/QCT
x Applicable Fraction
Qualified Basis
x Applicable Percentage
10,000,000
130%
13,000,000
35%
4,550,000
7.80%
Calculating Credits
Eligible Basis
x DDA/QCT
EB adj. for DDA/QCT
x Applicable Fraction
Qualified Basis
x Applicable Percentage
Annual LIHTC
10,000,000
130%
13,000,000
35%
4,550,000
7.80%
354,900
New
Construction
9% credits
H.R.
3221
Pre-HR 3221
Bldgs allocated credits after 7/30/08
Greater of:
• $3,000/unit, or
• 10% of adj. basis
of bldg
Greater of:
• $6,000/unit, or
• 20% of adj. basis
of bldg
New
Construction
Acquisition/
Rehabilitation
9% credits
Acq – 4%
Rehab – 9%
130%
Acquisition/Rehabilitation
Located in a QCT
4,000,000 E.B.
45% LIHTC Applicable Fraction
Building PIS: May 9, 2008
Acquisition
Eligible Basis
Rehab
2,000,000
2,000,000
100%
130%
EB adj. for DDA/QCT
2,000,000
2,600,000
x Applicable Fraction
45%
45%
900,000
1,170,000
x Applicable Percentage
3.34 %
7.80 %
Annual LIHTC
30,060
91,260
x DDA/QCT
Qualified Basis
Financing the Project
Financing LIHTC Projects
CREDITS
9%
Credits
Investors
Higher Interest
Fund / Upper tier
Limited Partnership
Debt
Equity
Needed
Sources
Lower Tier Operating
Limited Partnership
Financing LIHTC Projects
9%
Credits
Investors
Fund / Upper tier
Limited Partnership
Needed
Sources
Lower Tier Operating
Limited Partnership
Financing LIHTC Projects
CREDITS
4%
Credits
Investors
Lower Interest
Fund / Upper tier
Limited Partnership
Debt
Equity
Needed
Sources
Lower Tier Operating
Limited Partnership
For Further Information on LIHTC Housing
Find FREE tax credit resources at:
“www.taxcredithousing.com”
E-mail
cpas@novoco.com
Send Queries & Comments to:
brad.elphick@novoco.com
678-867-2333