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The Benefits of Tax Credits and How They Work July 6, 2016

Midwest Lenders LIHTC Workshop. The Benefits of Tax Credits and How They Work July 6, 2016. Ohio Capital Corporation for Housing. OCCH was created in 1989 by the Ohio Housing Finance Agency OCCH is an independent nonprofit corporation with its own Board of Directors

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The Benefits of Tax Credits and How They Work July 6, 2016

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  1. Midwest Lenders LIHTC Workshop The Benefits of Tax Credits and How They Work July 6, 2016

  2. Ohio Capital Corporation for Housing • OCCH was created in 1989 by the Ohio Housing Finance Agency • OCCH is an independent nonprofit corporation with its own Board of Directors • OCCH’s mission is: “to cause the construction, rehabilitation, and preservation of affordable housing throughout Ohio”

  3. Ohio Capital Corporation for Housing

  4. Organizational Focus • Establish equity funds of corporations doing business in Ohio • Provide technical assistance to nonprofit and for-profit developers in structuring and financing affordable housing tax credit transactions as well as property/asset management training • Manage assets of the equity funds for the 15-year life of the partnerships • Other Value-added Programs

  5. Organizational Focus • Other Value-added Programs • Ohio Affordable Housing Loan Fund • Resident Development Fund • OCCH Training Academy • OCIC Foundation • Other grants for selected partners • Ohio Housing Conference • HUD HOME/CHDO technicalassistance

  6. Tax Credit 101 What Are Low Income Housing Tax Credits (LIHTC) & How Are They Used?

  7. Federal Housing Programs • Federal housing programs have traditionally taken the form of Direct Cash Subsidies • Interest/Credit Subsidies • Project-Based Rental Income Subsidies • Capital Subsidies • Rental Housing Certificates and Vouchers

  8. Low-Income HousingTax Credit Program LIHTC Indirect Subsidy Program "The program provides a series of tax credits for projects which provide housing for families at or below 60% of the Area Median Income." The Credit attracts private investors who invest capital in exchange for the Credit.

  9. What is a Tax Credit? • Tax Credit - dollar for dollar reduction in tax liability • Tax Deduction - offset to pre-tax income • LIHTC projects make use of both types of benefits • Private investors provide equity in exchange for the Credit • Benefits flow through the partnership to investors • 15-Year Investment Horizon • 30-Year Compliance Period

  10. How Does the Program Work? IRS, US Dept Treasury Grants from State, City, Non-profit sponsor HOME money AHP TAX CREDITS Ohio Housing Finance Agency TAX CREDITS 1st Mortgage Operating Returns pay off 1st Mortgage Lender EQUITY INVESTMENT TAX CREDITS INVESTOR Ohio Equity Fund - Managed by OCCH

  11. Definitions Terms commonly used when discussing Low Income Housing Tax Credits: • Eligible Basis • 9% and 4% Credit • Acquisition Credit

  12. Definitions – Eligible Basis • Costs to develop the low-income units become the building’s eligible basis • Ineligible Costs: • Commercial Building Costs • Land • Permanent Financing Fees, • Reserves • Off-Site Improvements • Syndication Expense • Any Expense that cannot be depreciated with the building • Application Fees, Reservation Fees and Compliance Fees • In-kind contributions to the project

  13. Types of Tax Credits • 9% New construction/Rehab credit • Most common credit • 4% New construction/Rehab with federal funds or proceeds from tax exempt bonds • a “Bond Deal” • 4% Acquisition Credit • Used when purchasing an existing building

  14. The 9% Credit • Percentage applied to eligible basis to determine amount of credit • Set monthly by the U.S. Department of the Treasury • 9% Rate has now been Locked • Provides a 10 year credit stream • Also commonly known as the 70% credit • The 10 year credit stream has a present value of 70% of the qualified construction and rehabilitation expenditures. • Extremely Competitive • Most States Oversubscribed

  15. Tax Credits Help Finance the Property Typical 9% tax credit project

  16. The 4% Credit • The 4% Credit is Similar to 9% Credit BUT • Percentage applied to eligible basis is lower • Commonly known as the 30% credit • The 10 year credit stream has a present value of 30% of the qualified construction and rehabilitation expenditures. • Projects do not have to compete for credits • Eligible to projects that finance over 50% of the development costs with tax-exempt bonds • Rate still floats

  17. Tax Credits Help Finance the Property Typical 4% tax credit project

  18. The Acquisition Credit • The Purchase of an existing building may qualify for an additional 4% credit if: • The Project involves either the 4% or 9% rehabilitation credit • The rehabilitation must be “Substantial” • Meets the requirements of the “10 year rule” • The property must not have changed ownership in the previous 10 years. • Rate floats

  19. LIHTC Program Requirements • Income/Occupancy Restrictions • Rent Restrictions • 15 Year Compliance Period • Plus 15 Year Extended Use Period

  20. Income Restrictions Minimum Requirements: • At least 40% of the property must be set aside for families earning below 60% of Area Median Income, or • At least 20% of the property must be set-aside for families earning below 50% of the Area Median Income Franklin County: Family of Four Household (2007) 50% AMI = $32,100 60% AMI = $38,400 100% AMI = $64,200 Franklin County: One Person Household (2007) 50% AMI = $22,550 60% AMI = $27,060 100% AMI = $45,100

  21. Rent Restrictions Rents are restricted by income group, bedroom size and Area Median Income Franklin County – Maximum Rents 1 Bdrm2 Bdrm 50% Area Median Income $603 $725 60% Area Median Income $723 $870 Fair Market Rent $533 $674 (Rents include utility costs and all other costs that are required by owner)

  22. Compliance Period Although the tax credit is claimed over a ten year period, the project must comply with the occupancy and rent restrictions for fifteen (15) years. In addition, under the 1989 amendment to the program, the project must extend the low-income use for an additional fifteen (15) years.

  23. Syndicating The Tax Credits • Establish Limited Liability Corporations or Limited Partnerships with an investor • Limited Partnership / Operating Agreement: Sets Forth Roles, Responsibilities and Compensation of Partners • 0.1% General Partner/Managing Member: Manages Affairs of the Partnership • 99.9% Limited Partner/Investor Member: Invests in Exchange for Tax Benefits

  24. Syndicating The Tax Credits • Benefits (the Credits) flow through the partnership to the investor • 15 Year Investment Horizon – i.e. the investor has an economic interest in the property for 15 years.

  25. Syndicating The Tax Credits Total Tax Credits $1,000,000 ($100,000 / year for 10 years) Net Amount to Project $900,000 "$1.00 of credit brings 90¢ net to the project"

  26. LIHTC Tax Credit Topics • Bridge Loans • Subordinate Mortgages • Pay In Schedule • Developer Fees & DDF • M2M & Allonges • Section 8 Contracts

  27. What types of projects can be done? • Family, Elderly, SRO • New Construction or Rehabilitation • Preservation of existing Section 8 or RD projects • Multifamily or Single family lease-purchase • Single or scattered site • Mixed use / mixed income

  28. Single Family Homes • EANDC Homes • Located in Akron, Ohio • 32 Single Family lease purchase homes • 10 three bedroom homes and 22 four bedroom homes

  29. Single Family Homes • Kingsford Homes • Located in Columbus, Ohio • 33 single family homes • All homes are 4 bedrooms

  30. Elderly Housing • Columbus Elderly • Located in Columbus, Ohio • 50 elderly units • All 2 bedroom units

  31. Elderly Housing • Devon House • Located in Tiffin, Ohio • 40 elderly units • Comprised of 1-,2-and 3- bedroom units

  32. Supportive Housing • YMCA of Central Ohio • Located in Columbus, Ohio • 400 SRO units • Project houses very low-income men who are at risk of homelessness

  33. Supportive Housing • Briggsdale Apartments • Located in Columbus, Ohio • 35 efficiency units • Project serves homeless individuals

  34. Historic Rehabilitation • YWCA Residential • Located in Columbus, Ohio • 102 efficiency units • Project serves homeless women

  35. Historic Rehabilitation • Park Avenue Apartments • Located in Ironton, Ohio • Elderly Housing

  36. Preservation • Network Restorations II • Located in Columbus, Ohio • Project Based Section 8 housing for families

  37. Doug Klingensmith Vice President, Development Ohio Capital Corporation for Housing 88 East Broad Street, Suite 1800 Columbus Ohio 43215 614.224.8446 p 614.224.8452 f dklingensmith@occh.org

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