1 / 128

Low-Income Housing Tax Credits

Low-Income Housing Tax Credits. Lecture Notes National Trust for Historic Preservation November 4, 2010 Washington, DC John Linner National Development Council 1946 N. 13 th , #484, Toledo, OH 43604 ph: 419-242-5713 jlinner@nationaldevelopmentcouncil.org. Tax Credits.

marsha
Download Presentation

Low-Income Housing Tax Credits

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Low-Income Housing Tax Credits Lecture Notes National Trust for Historic Preservation November 4, 2010 Washington, DC John Linner National Development Council 1946 N. 13th, #484, Toledo, OH 43604 ph: 419-242-5713 jlinner@nationaldevelopmentcouncil.org

  2. Tax Credits • A direct, dollar-for-dollar reduction of tax liability • Two kinds for rental housing • Historic Rehabilitation Tax Credits (HRTCs) • Low-Income Housing Tax Credits (LIHTCs) • Intended to give investors an incentive to make investments that have a public purpose

  3. Low-Income Housing Tax Credits (LIHTCs) • Introduced in Tax Reform Act of 1986 • Extended in Revenue Reconciliation Act of 1993 • Intended to encourage investment in low-income rental housing • Principal federal subsidy for low-income housing • Annual credit for 10 years

  4. For Permanent Rental Housing • Excludes nursing homes, health care facilities • Must be for “general use” • Normally, minimum six month initial lease term (exception for SRO’s, housing for the homeless)

  5. Three Threshold Criteria • Incomes of occupants • Rent restrictions • State agency approval

  6. Income/Occupancy • 20 percent of units must be occupied by tenants with incomes below 50 percent of area median income (AMI) OR • 40 percent of units must be occupied by tenants with incomes below 60 percent of AMI • Election must be made by time building is placed in service • Must be met in first year credits are claimed • Receive credits only on units occupied by qualified low-income tenants (applicable fraction) • Maximum credit award requires 100 percent low-income occupancy

  7. What Counts as Income? • Gross wages and salaries • Social Security, pension, retirement • Disability, worker’s compensation, unemployment • Welfare • Alimony, child support • Earned income tax credit > taxes • Interest, dividends or imputed income • Qualifying amount is “anticipated” total • Once qualified, a household’s income may rise above LIHTC limits without disqualifying unit • Annual recertifications may be waived for 100 percent low-income projects

  8. Rent Restrictions • All units receiving LIHTCs have rent restrictions • Restrictions based on number of bedrooms, imputed household size, and AMI • Imputed household size equals number of bedrooms x 1.5 persons per bedroom (one person for a 0-bedroom unit) • Rent cannot exceed 30 percent of income qualifier (either 50 or 60 percent of median) for the assumed household size • Maximum rent includes all utilities except telephone

  9. Computation for Two-Bedroom Unit • Imputed household size is2 x 1.5 persons/bedroom = three-person household • DC median income for three-person household is $92,400 • 60 percent of median is .60 x $92,400 = $55,440 or $4,620 per month • Maximum two-bedroom rent is 30 percent of $4,620 per month, or $1,386 per month • If utility allowance for two-bedroom unit is $125 per month maximum contract rent is $1,386 – 125 = $1,261 per month

  10. Computation for a One-Bedroom Unit • Imputed household size is 1 x 1.5 persons per bedroom = 1.5 persons • If DC median income for one person is $71,900 and median for two persons is $82,200, median for 1.5 persons is midpoint or $77,050 • 60 percent of median equals $46,230 or $3,852 per month • 30 percent of median is $1,155 per month • If utility allowance for one-bedroom unit is $100 per month, maximum contract rent is $1,155 - $100 = $1,055 per month

  11. Computation for a One-bedroom Unit (cont.) • Maximum rents do not include rental assistance (Section 8) or payments for supportive services from government agencies or non-profits • Maximum rents do include any tenant payments for services that are required as a condition of occupancy • In assisted living projects, services must be optional or funded by agencies

  12. Tenant Charges for On-site Facilities • If tenants must pay to use on-site facilities (garage spaces, storage spaces), then either • Payments count against maximum LIHTC rent, or • Costs of facilities are excluded from basis

  13. LIHTC Rents (cont.) • Income qualification is based on the individual household’s income. Must be below threshold for that household. • Rent is based not on tenant’s household size or income but on threshold for imputed household size

  14. Maximum Rents May Decline • Maximum gross LIHTC rent may decline with decline in AMI, but cannot be less than initial maximum • Maximum contract rent may decline because of increase in utility allowance

  15. LIHTC Projects Must Remain Low-income on a Long-term Basis • Rent and income restrictions are in force for a minimum of 15 years (compliance period) • Additional 15-year “extended use obligation”

  16. State Agency Approval • LIHTCs are administered by states • Each state receives $2.15 LIHTCs per resident ($2.465 million minimum) for 2011 • State agency allocates credits • Creates own allocation plan • Underwrites projects • Monitors projects • At least 10 percent set aside for projects sponsored by non-profit organizations • States may require low-income occupancy for longer than 30 years

  17. Two Kinds of LIHTCs • 70 percent present value (9% credit) – presently fixed at 9.0% • 30 percent present value(4% credit) – floats and is adjusted monthly – 3.24% for November of 2010

  18. Two Kinds of LIHTCs (cont.) • Most projects are “9% deals” - receive 9% credit on all rehabilitation work or new construction • Others are “4% bond deals” - receive 4% credit on all rehabilitation work or new construction • Also sometimes receive 4% credit on the building portion of acquisition on a rehabilitation project

  19. Grants Excluded from Basis • No credits on costs funded with grants • Convert grants into loans

  20. New Construction/Substantial Rehabilitation • Annual credit for 10 years • Substantial rehabilitation requires spending the greater of • $6,000 per unit, or • 20 percent of remaining depreciable basis • “9 percent deal” - receive 9% credit on basis items (improvement costs) OR • “4 percent bond deal” - receive 4% credit on basis items

  21. ExampleNew Construction Project

  22. Example30% Basis Increase for Difficult Development Areas andQualified Census Tracts

  23. 30% Basis Increase contd. • A state may also provide the 30% basis increase for any project that the state believes needs additional credits in order to be feasible

  24. Improvement Basis (9% or 4% Credit) • Include • Construction and supervision • Architectural, engineering, design fees • Construction financing costs (fees, appraisals, interest) • Developer fees • Permits and inspection fees • Performance bonds • Furnishings • Environmental assessment • Development consulting fees • Property taxes and insurance • Community service space (qualified census tract, serve primarily low-income residents, limits on percentage of building basis)

  25. Not Considered Part of Construction or Rehabilitation Basis • Exclude • Permanent financing expenses • Syndication costs • Tax credit application fees • Reserves • Acquisition expense (land or building) • Off-site improvements (generally) • Organizational expense • All costs attributable to non-residential (exception for community service space) • All costs attributable to market-rate units

  26. Acquisition Credit • Can also receive 4% credit on portion of acquisition price attributable to building • Available with substantial rehabilitation only • Must spend greater of $6,000 per unit or 20% of building basis • Must meet “10 year placed in service rule” • Waivers for REO’s, preservation projects

  27. Acquisition/Rehabilitation In Difficult Development Area

  28. Historic Rehabilitation Tax Credits Reduce LIHTC Basis $4,000,000 Rehabilitation x .20 Credit Rate = $800,000 RTC $4,000,000 Rehabilitation - 800,000 RTC = $3,200,000 LIHTC Credit Basis x .09 $288,000 Maximum Annual LIHTC

  29. Historic Rehabilitation Tax Credits Reduce LIHTC Basis (cont.) • With 30% LIHTC basis increase $4,000,000 Rehabilitation - 800,000 RTC = $3,200,000 x 1.3 LIHTC credit basis increase = $4,160,000 x .09 = $374,000 Maximum annual LIHTC

  30. Issues in Combining LIHTCs and RTCs • Compliance with historic standards may increase costs • RTC’s reduce basis for LIHTCs – even greater impact if project is eligible for 30% basis increase

  31. Master Tenant Leases • Tax code allows RTCs to be passed through to a tenant • Create separate partnership (master tenant) to lease building and take RTCs • No basis reduction on LIHTCs • Used most often on large bond deals

  32. Example • Project with $10 Million of Historic Rehabilitation in Qualified Census Tract

  33. Typical Credit “Prices” • RTCs - $.80-.90 per dollar • LIHTCs - $.65-.80 per dollar • Prices are negotiated between developers and investors • Prices have declined sharply since peak in 2006-2007

  34. Competition Problem • Most states have two or three times as many proposed projects as they can fund • Makes the application process increasingly uncertain • Incur substantial predevelopment costs with no assurance of feasible project

  35. Solution – Bond Deal • Qualify for “4%” credit outside state’s normal allocation process • Requires allocation of “private activity” bond cap • State gets $95 per resident in bond cap (compared to $2.15 per resident in LIHTC’s)

  36. Tax-Exempt Financing and LIHTCs • Projects with 50 percent of costs funded with tax-exempt financing automatically receive 4% credit without state approval outside state’s LIHTC Allocation process • Financing must be from state’s volume cap for private activity bonds • Often mixed-income projects

  37. Must Fund Half of Development Costs With Tax-exempt Debt • Must pay for 50 percent of cost (land plus depreciable basis) with bond proceeds • Rent restrictions may limit the amount of permanent debt • Can meet the 50 percent test with tax-exempt interim financing and pay down with investor equity and soft permanent debt

  38. Problem – 4% Credit Yields Fewer Credits and Less Equity

  39. Need More Debt to Do Bond Deals • Higher “must pay” debt > higher NOI > higher rents • Without higher rents > large amounts of deferred payment loans (HOME, CDBG, AHP, State or local subsidies)

  40. Two General Types of Bond Deals • Relatively high rents, NOI sufficient to support Enough permanent debt to meet 50 percent test • Often mixed income with significant portion of units at market rate • 100 percent of units at tax credit rents, meet 50 percent test with interim financing

  41. Bond Deals Are Often Riskier • Higher rents, more market risk • More debt service than “9%” tax credit projects • Frequently done with FHA insurance - lower debt coverage requirements, less margin for error

  42. Bond Deals (cont.) • Advantages of 4% bond deals • Less competition for bond cap than for tax credits • May be faster – do not have to wait for LIHTC round • Disadvantages of bond deals • Less equity, more debt • More players • Higher transaction costs • Lower investor interest today

  43. Who Are the Limited Partners in Tax Credit Deals? • Corporate equity funds • Large corporate direct investors • Private placements • Equity funds for individuals

  44. Methods of Organizing the Ownership of an LIHTC Project • Limited Partnership • Limited Liability Company Objectives • Limited liability for investors • Direct pass-through of credits, losses and gains

  45. Limited Partnership • At least one General Partner (GP) • At least one Limited Partner (LP) • GP owns 0.01 percent • LP owns 99.99 percent • GP manages partnership • LP is passive investor • LP has limited liability • GP has unlimited liability

  46. Limited Liability Corporation (LLC) • A corporation taxed like a partnership • At least one manager (like a GP) • At least one member (like an LP) • Advantages over Limited Partnership • Limited liability for all owners • Investors can have role in management

  47. Investors Invest ForTax Benefits - Credits, Losses • LP invests solely for tax benefits - gets 99.99% of the tax credits and the losses • Developer/GP tries to capture as many of the cash benefits as possible (developer’s fees, cash flow, residuals)

  48. Ways Of DivertingCash Flow To GP • Deferred developer fees • Payments on GP loans • Partnership management fees • Incentive management fees – limited to lesser of 80-90 percent of cash flow or some percentage (10-15 percent) of effective gross

  49. Investors Also Value Losses Principal Payments + Reserve Deposits - Depreciation - Amortization - Accrued Interest = Taxable Income (Losses) x Tax Rate = Taxes (Tax Savings)

  50. Doing a LIHTC Project – Step One • Applying for credits • Site identification and control • Preliminary design concept and budget • Information about the development team • Market/feasibility analysis • Financial projections • Operating pro forma • Estimate of credits • Sources and uses • Letters of interest from financing sources

More Related