Virginia Housing Coalition 2013 Housing Credit Conference

1. Virginia Housing Coalition 2013 Housing Credit Conference Deal Structuring, Fundamentals, and Financing and Legal Issues

2. Discussion Topics 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues Tax Credits and Low-Income Housing Tax Credits Structuring LIHTC Projects Fundamentals of LIHTC Projects Project Feasibility Credit Basis and Other Calculations Q & A

3. Tax Credits and LIHTC 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • What are tax credits? • Dollar for dollar reduction in a taxpayer’s tax responsibility - $1 in credits offset $1 in income tax responsibility • Not a tax deduction – a tax deduction reduces the income calculation upon which a tax is calculated • Low-Income Housing Tax Credits • Authorized in 1980s – now a permanent part of the IRS Code – Section 42 • Credits available to States as per Code – VHDA manages Virginia’s LIHTC program – see QAP

4. Tax Credits and LIHTC 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Low-Income Housing Tax Credits • Credits available to projects that commit to Income and Rent restrictions • Income Restrictions – restrictions on the income of potential residents - at least 40% of apartments reserved for 60% AMI households or at least 20% for 50% AMI households – most developers reserve 100% of apartments for eligible households • Rent Restrictions – restrictions on rent that can be charged for the apartments - must be at or below 30% of income adjusted for household size

5. Tax Credits and LIHTC 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Low-Income Housing Tax Credits • Restrictions for 15 years • VHDA QAP: • Extended compliance • Deeper income and rent targeting • Serving households with special needs • “Green” building • Amenities • Efficiencies

6. Structuring LIHTC Projects 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Most developers can’t use credits directly – lack income tax liability • Credits available to owners of housing • Typically create Limited Partnership or Limited Liability Company as owner • Entities with tax liability enter as Limited Partner • Provide cash in exchange for credits and other benefits • Developer often manages day-to-day affairs

7. Fundamentals of LIHTC Projects 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Developers evaluate a number of factors in planning a project: • Mission • Site Selection and Control • Cost • Availability • Environmental Considerations • Utilities • Zoning • Purchase Option / Fee Simple Ownership / Lease

8. Fundamentals of LIHTC Projects 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Developer issues (continued): • Design • Target Market • Market Area conditions • Special resident needs • Development Team • Architect • Attorney • Board • Consultants • Builders

9. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Financial feasibility involves careful preparation of a development budget and an operating budget • Development budget – includes all of the costs necessary to build a project • Operating budget – captures projected income, expenses, debt costs, and cash flow

10. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Development Budget: • Construction / contractor costs: • Offsite and onsite improvements • Demolition • Hard construction costs • Contractor general conditions, overhead, and profit • Bond / letter of credit costs • Fixtures / appliances

11. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Development Budget: • Architecture costs • Engineering costs • Permits • Tap fees • Construction loan fees and interest • Taxes and insurance during construction • Legal costs – construction loan closing and other legal costs • Permanent loan fees • Consulting fees – mortgage banker or historic consultant

12. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Development Budget: • Land and building costs • Cash reserves • Contingency • Developer fees • Add all of these development costs to calculate total development cost

13. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Development sources – funding available to pay for development costs (aka development uses). • Sources include: • Equity from investors based on availability of credits • Loan proceeds • Grants – preferably structured as loans • Developer contributions • Seller soft loans • Deferred developer fees • Construction loans repaid by permanent sources

14. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Calculating LIHTC • Eligible basis costs • Ineligible basis costs • Eligible basis reductions • QCT or DDA increases • Calculation of credits / credit rates • Bond tests

15. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Operating budget • Income • Rent – restricted by program • Subsidies • Other Income • Maximum rents adjusted for utility allowances and vacancy rates • Expenses • Management Fees • Other Management / Administrative • Management Salaries • Marketing • Legal • Supplies and Phone

16. Project Feasibility 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues • Operating budget • Expenses (continued) • Utilities • Maintenance • Maintenance and grounds costs • Exterminating • Trash • Turnover • Property and Other Taxes • Insurance • Compliance and Audit Fees • Replacement Reserves • Management Fees • Income less expenses equals Net Operating Income – amount available to pay debt costs and provide cash flow