Financing Green Affordable Housing

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Financing GreenAffordable Housing
Herbert F. StevensNixon Peabody LLP
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Better Equity Through Tax Credits

• Normal Equity is the most expensive money you
  can use
• Tax Credit Equity is, like grants, the cheapest
  money you can use
• Tax Credit Equity is based on a federal or state
  government giving you free money if investors put
  equity in your project

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Four Types of Federal Tax Credits

• Low Income Housing Tax Credits
• Historic Rehabilitation Tax Credits
• New Markets Tax Credits
• Renewable Energy Tax Credits

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Free Money with Strings

• Low Income Housing Tax Credits
• Rental housing for persons and families who earn
  less than 60 of median income for your area
• Rent charged must be no more than 30 of the 60
  median income each year, including utilities
• Must keep housing rental for 15 years and as
  affordable rental or ownership for 15 years after
  that (Minimum some states longer)

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Free Money with Strings

• Historic Rehabilitation Tax Credits
• Substantial rehabilitation for historic building
  consistent with federal standards
• Any type of building
• Housing
• Retail
• Theater
• Community Center

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Free Money with Strings

• New Markets Tax Credits
• building or business must be in low-income census
  tracts below 80 of median income
• Area must usually have some other higher distress
  criteria for example, high poverty rates, high
  unemployment, housing hot zone, brownfield, lower
  median income
• Generally investments are for 7 years

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Free Money with Strings

• Renewable Energy Tax Credits
• Investment Tax Credit Solar
• New facility includes Photovoltaic and fuel
  cells
• Must generate electricity, heating, cooling, hot
  water or fiber-optic lighting
• Production Tax Credits
• New facilities used to generate energy through
  wind, biomass, geothermal, certain irrigation,
  solid waste and others

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How Much Free Money?

• Time Periods Value as a
• Credit Type for Equity Percentage of
  Cost
• Housing 15 years 73
• Historic 5 years 20
• New Markets 7 years 25
• Solar 5 years 30

• Values are approximate and vary with timing of
  equity, losses and other tax benefits, current
  market pricing and credit of sponsor
• New Markets sunsets in 2009, unless Congress
  renews the credit
• Solar drops to 10 in 2009, unless Congress
  renews the credit

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Qualifying for Tax Credits

• Housing Credits Statewide competitions each
  year run by State housing finance agency
• New Markets National competitions each year run
  by Treasury Department Community Development
  Financial Institutions Fund
• Historic Available by right if building
  rehabilitation approved by federal government
• Solar Available by right for qualifying property

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New Markets Tax Credit

• Most flexible of all credits can be used for
  real estate or business
• Can be combined with historic credits, energy
  credits and, with creativity, housing credits
• Purpose is to give investors an extra incentive
  to invest in low income areas, and businesses an
  extra incentive to locate in these areas and
  produce jobs and services for such low-income
  communities

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New Markets Tax CreditsIneligible Business
Activities

• Operation of residential rental property
• Buildings which derive 80 or more of gross
  rental income from residential dwelling units
• Properties where no substantial improvements are
  made
• Development or holding of intangibles for sale or
  license
• Operation of certain ineligible businesses
• Golf courses
• Race tracks
• Gambling facilities
• Certain farming businesses
• Stores where the principal business is the sale
  of alcoholic beverages for consumption off
  premises

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New Market Tax Credits

• Made available to newly created lending conduits
  with a mission to bring capital to low income
  area
• Conduits with credits have been set-up by
• Banks / Financial Institutions
• Cities
• States
• Nonprofits
• Syndicators (nonprofit and for profit)
• Developers

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New Markets Tax Credit Structure
Lender
Investor
Debt (70)
Equity (30)
Investment Fund
Equity (100)
Equity (100)
Community DevelopmentEntity (CDE) (Conduit
Lender)
A Loan(70)
B Loan or Equity (25)
Project or Business
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New Markets Tax CreditsApplication cycle for
current competition

• December 1, 2006
• January, 2007
• March 5, 2007
• (Probably) October 30, 2007
• December 2007/January 2008

• Competition announced
• Deadline for certification of applicants
• Deadline for applications
• Announcement of Awards
• First investments close

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New Markets Tax Credits

• Competition is stiff
• About 25 of applicants each year get an
  allocation of credits
• About 10 of requested money is allocated
• In a recent year 3.5 billion was allocated,
  but 30 billion was requested
• Application stresses track record in raising and
  deploying capital, a business plan with a
  projected pipeline, and concrete measures of
  community impact

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Require Additional Information?
Herbert F. Stevens Nixon Peabody
LLP 202-585-8811 hstevens_at_nixonpeabody.com
To ensure compliance with IRS requirements, we
inform you that any tax advice contained in this
communication is not intended or written to be
used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue
Code or (ii) promoting, marketing or
recommending to another party any transaction or
matter addressed herein.
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Require Additional Information?
Herbert F. Stevens Nixon Peabody
LLP 202-585-8811 hstevens_at_nixonpeabody.com
To ensure compliance with IRS requirements, we
inform you that any tax advice contained in this
communication is not intended or written to be
used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue
Code or (ii) promoting, marketing or
recommending to another party any transaction or
matter addressed herein.
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