Title: IPED HOUSING TAX CREDITS
1IPED HOUSING TAX CREDITS 101Boston,
MassachusettsJune 7-8, 2007Molly R.
BrysonThomas A. Giblin
2Background
- Part of 1986 Tax Reform to Encourage the
Construction and Rehabilitation of Low-Income
Rental Housing - Tax Incentives Replace Direct Funding Guarantee
Programs - Administered by the Treasury Department and
Allocated by State Agencies - Contained in Section 42 of the Tax Code
(Including Any Penalties for Noncompliance) - Objective To Provide Investor Equity to Lower
Debt Service, Thereby Lowering Rents - Emphasis on Private Sector Involvement (i.e.
Developing and Managing Projects) - Credit is a Dollar-for-Dollar Tax Reduction
- Credit Amount Based on the Cost of Constructing
or Rehabilitating Housing Developments
3Program Requirements
- Minimum Percentage of LIHTC Units (20/50 or
40/60) - Minimum 30-Year Affordability Commitment
- Maximum Rents Limited for LIHTC Units
- Maximum Income Limited for Households Renting
LIHTC Units - Projects Subject to IRS and State
Regulation/Compliance
4State Allocation Volume Limit
- Credits Are Limited
- In 2000, Congress Raised Cap from 1.25 to 1.50
in 2001, 1.75 in 2002, and Thereafter Adjusted
for Inflation - 1.95 Per Person for 2007
- 2,275,000 State Minimum in 2007
-
5Volume Limit Rules
- Example
- State With Three Million Population Has
5,850,000 in Credits in 2007 - Allocated Amount is for One Year of Credit
- 10 Nonprofit Set-Aside
- 50 Test Private Activity Tax-Exempt Bonds
Subject to Bond Volume Cap No Credit Allocation
Needed
6Qualified Allocation Plans
- State Must Adopt QAP to Allocate Credits
- QAP Must Set Forth Allocation Priorities
- QAP Must Give Preference To
- Lowest Incomes
- Longest Period of Low-Income Use
- QCT Projects Contributing to a Concerted
Revitalization Plan - QAP Must Provide Procedure for Notifying IRS of
Non-Compliance - Bond Financed Projects Must Satisfy QAP
7Project Evaluation
- Credit May Not Exceed Amount State Agency
Determines Is Necessary for Feasibility and
Viability - Agency Must Consider
- Sources and Uses
- Amounts Expected to Be Generated by Tax Benefits
- Reasonableness of Development and Operating Costs
8Project Evaluation (Contd)
- Evaluation Occurs at Application, Allocation and
Completion - Owner Must Certify as to Amount of Subsidies
- For Tax-Exempt Bond Financed Projects, Issuer
Must Do Similar Evaluation - Agency Must Require Market Study Paid by Developer
9Industry Participants
- Congress
- IRS/Department of Treasury
- State Tax Credit Agencies
- Developers/Owners
- Property Managers
- Syndicators/Investors
- Nonprofits
- State/Local Governments
- HUD
- Tenants
- Tax Professionals
- GSEs
10Who Can Use Credits?
- C Corporations Can Use Losses and Credits Against
Ordinary Income and Taxes - Limitations on Closely-Held Corporations
- Individuals Limited Under Passive Loss Rules to
Approximately 9,900/Year at the 39.6 Rate - Cannot Use Credits Against AMT
11Structure
12Key Business Terms
- Projects Generally Owned by Limited Partnership
or Limited Liability Company - Limited Partner Generally Owns 99.99 of Tax
Credits, Losses and Profits - Limited Partner Pays in Capital Contributions in
Multiple Installments (Generally 3 or 4), Based
on Negotiated Benchmarks - General Partner Guarantees Completion, Amount of
Credits and Funding of Deficits
13Tax Credit Development Timeline
- March 2007 Read State QAP. Analyze Prior
Winners, Meet With Staff. - April 2007 Pick Site, Plan Type of Project.
- May 2007 Develop Cash Pro Formas and Construction
Budget. Investigate Loan Availability and
Interest Rates. Request Market Study. - September 2007 Option Land (With Conditions
Regarding Zoning, Approvals). - September 2007 Apply for Soft Loans/Grants, if
Necessary. - December 2007 Receive Soft Loan Commitment.
14Tax Credit Development Timeline (Contd)
- March 2008 Apply for Tax Credits.
- May 2008 Receive Reservation of Tax Credits.
- May 2008 Work on Site Plan and Zoning Approvals.
Submit Applications for Construction and
Permanent Loans. - July 2008 Obtain Site Plan and Zoning Approvals.
- July 2008 Purchase Land. Select Equity Investor
and Execute Letter of Intent. Execute Commitment
Letter for Debt/Equity. - November 2008 Submit Cost Certification of 10 of
Reasonably Expected Basis for Carryover
Allocation (State Deadlines Vary). - December 2008 Obtain Carryover Allocation.
15Tax Credit Development Timeline (Contd)
- January 2009 Close on Equity Investment and
Construction Loan. Begin Construction. - November 2009 Finish Construction. Begin
Leasing. - January 2010 Start First Year of Credit Period.
Continue Leasing. Submit Cost Certification for
Forms 8609. - April 2010 Achieve Full Lease-up and Beginning of
Break-Even Period. Obtain Forms 8609. - September 2010 Close Permanent Loan and Achieve
Final Equity Contribution. - December 31, 2010 Place All Buildings in Service.
16Calculating Credits/Defining Terms
- Annual Credit Amount Applicable Percentage
Times Qualified Basis - Annual Credit Amount Available for 10 Years
17Applicable Percentage
- Two Credits
- 70 Percent Present Value Credit (the 9 Credit)
- 30 Percent Present Value Credit (the 4 Credit)
- Credit Rates
- 8.11 (9 Credit) and 3.48 (4 Credit) June
2007 - Lowest Rates in July 2003 7.78 and 3.33
18Applicable Percentage (Contd)
- Owners Election to Set Applicable Percentage
Either(i) When Receiving a Binding Commitment
From the State to Allocate Credits (or When
Tax-Exempt Bonds Issued) (a Lock-in Election),
or (ii) When Building Placed in Service
194 New Construction/Substantial Rehabilitation
Credit
- Federally Subsidized New Construction or
Rehabilitation Expenditures - Building Receives Tax-Exempt Bonds or Below
Market Federal Loan - Below Market Federal Loan
- From Federally Appropriated Funds
- Interest Rate Below AFR (Approximately 4.91 in
June 2007 for Long-Term Loans Compounded Annually)
20Exceptions From Federally Subsidized Definition
- HOME Loan if 40 at 50 Targeting (in Each
Building) - Community Development Block Grant (CDBG) Loans
- Affordable Housing Program (AHP) Loans
- Loan is Subtracted From Eligible Basis
- Section 8
- Native American Housing Assistance and
Self-Determination Act (NAHASDA) of 1996 if 40
at 50 Targeting (in Each Building)
214 Acquisition Credit
- Existing Buildings/Acquisition Costs
- Purchase From Unrelated Party
- Ten-Year Rule
- Waiver of Ten-Year Rule From Treasury
224 Acquisition Credit (Contd)
- Certain Placements in Service Ignored
- Carryover Basis
- Acquired From Decedent
- Placement in Service by Governmental Unit or
Nonprofit Entity - Foreclosure
23Substantial Rehabilitation Requirement
- Greater Of
- 3,000 Per Low-Income Unit, or
- 10 of Adjusted Basis
- Separate New Building
- Can Receive 4 Plus 9 Credits
249 New Construction/Substantial Rehabilitation
Credit
- If Not Federally Subsidized
25Basis Calculations
- Start With Eligible Basis, Then Qualified Basis
26Eligible Basis
- New Construction Adjusted Basis (Generally,
Development Cost Less Land) - Acquisition Acquisition Cost
- Substantial Rehabilitation Capitalized
Rehabilitation Expenditures (24-Month Rule) - Must Subtract Federal Grants
- 130 Increase in Qualified Census Tracts (QCTs)
and Difficult Development Areas (DDAs)
27Qualified Basis
- Qualified Basis Applicable Fraction Times
Eligible Basis - Applicable Fraction is the Lower of
- Number of Occupied Low-Income Units Divided by
the Total Number of Units, or - Floor Space Fraction
28Low-Income Units
- Minimum Set-Aside Election of
- 20 of Units at 50 of Area Median Income
(AMI), or - 40 of Units at 60 of AMI
- Election Upon Placement in Service
- Must Meet Minimum by End of 1st Credit Year
- HUD Publishes Area Income Figures Annually
29Low-Income Units (Contd)
- Adjustments for Family Size Like Section 8
- Family of 4 Qualifies at 60 (50) AMI
- Family of 3 Qualifies at 54 (45) AMI
- Family of 2 Qualifies at 48 (40) AMI
- Single Household Qualifies at 42 (35) AMI
30Rent-Restricted
- Rent (Including Utilities) Cannot Exceed 30 of
Qualifying Income for Assumed Family Size Based
on Bedrooms Per Unit - Occupancy Assumptions
- One Person for Studio
- 1.5 Persons Per Bedroom
31Additional Rent Rules
- Rent Limits Change Annually With Publication of
New Area Median Incomes - Rent Will Not Decrease Below Original Floor
- Gross Rent Does Not Include Section 8 (or Similar
Rental Subsidies) - Gross Rent Must Include Utility Allowance for
Tenant-Paid Utilities (i.e., Deduct From Rent to
Owner)
32Example of Tax Credit Calculation
- 100 Unit Project/70 Low-Income Units
- TDC (Including Land) 5.5m
- Land Value 500k
- Eligible Basis 5.0m
- Qualified Basis 3.5m (5.0m X 70)
33Example Tax Credit Calculation (Contd)
- Applicable Percentage 8.11 (Not Federally
Subsidized) - Annual Credit 283,850 (3.5m X 8.11)
- 10-Year Credits 2,838,500
34Equity Calculation
- Pricing Primarily Based on Total Amount of
10-Year Credits Available to Investor and Market
Conditions - Expressed As Cents Per Tax Credit Dollar
- In Above Example, if Investor Will Pay 0.90 Per
Tax Credit Dollar, Equity Equals 2,554,394
(2,838,500 X 99.99 X 0.90) - Equity Generally Paid in Several Installments
(Often 3 or 4 Installments) Based Upon Negotiated
Benchmarks - If Bond-Financed 4 Deal, Equity Equals
1,096,090 ((5,500,000 - 500,000) X 70 X 3.48
X 10 X 0.90 X 99.99)
35Continued Compliance
- 15-Year Compliance Period
- Continued Tenant Qualification
- 40 Increase Above Eligibility OK
- Vacant Units/Over-Income Units OK if Next
Available Unit Rule Followed
36Recapture
- Recapture on Non-Compliance
- Accelerated Portion of Credit Recaptured (1/3 of
Credit 1st 10 Years, Decreasing Through Year 15) - If Minimum Set-Aside Fails, All Accelerated
Credits Recaptured - Otherwise, Unit-by-Unit (Extent of Decrease in
Qualified Basis)
37Recapture (Contd)
- Recapture on Change of More Than 1/3 in Ownership
of Sale of Project - Bond Posting Procedure
- New Owner Steps Into Sellers Shoes Upon Sale of
Project
38Extended Use
- Recorded Extended Use Commitment
- Extended Use Period
- At Least 30 Years, May Be Longer to Gain Points
- Termination (With Three-Year Vacancy De-Control)
- Upon Foreclosure
- Qualified Contract
39Qualified Contract
- State to Find Buyer if Requested by Owner After
14th Year Pursuant to Qualified Contract - Contract
- Outstanding Debt
- Adjusted Investor Equity
- Other Capital Contributions, Less
- Cash Available for Distribution
40Qualified Contract (Contd)
- Adjusted Investor Equity Initial Investor
Equity to Project Inflated by COLA (Up to 5 Per
Year) - If No Buyer Found Within One Year, Property May
Be Sold or Converted to Non-Low-Income Housing,
Subject to 3-Year Vacancy Decontrol - IRS Guidance Expected in 2007
41Compliance Monitoring
- State Credit Agencies Monitor Projects
- Owners Recordkeeping Requirements
- Number of Low-Income and Total Units
- Income Certifications/Annual Re-Certifications
and Backup Verifications - Qualified Basis and Eligible Basis Amounts
- Rent Amounts
- Owner Annual Compliance Certifications
10603835.1