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Tax Credit Basics

Tax Credit Basics. Nebraska Investment Finance Authority. Source of Funds. Funds originated from the Internal Revenue Code, Section 42. Tax Reform Act of 1986 The amount of tax credits issued to each state is based on $1.80 per capita per year. Amount to Allocate in 2005: $3,130,724

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Tax Credit Basics

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  1. Tax Credit Basics Nebraska Investment Finance Authority

  2. Source of Funds • Funds originated from the Internal Revenue Code, Section 42. • Tax Reform Act of 1986 • The amount of tax credits issued to each state is based on $1.80 per capita per year. • Amount to Allocate in 2005: $3,130,724 • Generally over-subscribed: 3:1

  3. Types of Credits and Unit Requirements • To qualify: 20% of Units at 50% AMI or 40% of Units at 60% AMI • Types of Credits: • Annual “9% cycle” for construction (new/rehab) • First Round Applications Due: 10/1/04 • Second Round Applications Due: 2/14/05 • CRANE Applications: Accepted monthly • 4% credits with Tax Exempt Bonds: Applications accepted monthly. AMI = Area Median Income

  4. Ownership Structure Tax Credit Apartments, Limited Partnership Tax Credits General Partner (Developer) 1% Limited Partner (Tax Credit Investor) 99% Equity

  5. Ownership Structure • The Limited Partner (L.P.) owns 99% or more and receives 99% or more of the credits. • The L.P. pays the General Partner (Applicant/Developer) generally between $.75 and $.85 per credit.

  6. Commitment to Affordability • Only get credits for the low income units (qualified basis). • Retain affordability period for 15 year compliance period plus a 15 year extended use period. Income and rent restrictions. • NIFA offers points for longer affordability periods.

  7. Syndication Rate and Gap • The current syndication rate (value of the credits) is from $.75 to $.85 per $1 of credit. • Capital from an award of credits. • Annual credit amount X 10 year credit period X syndication rate. • Cash from sale of credits fills the gap between the permanent loan and the total development cost.

  8. 2005 Set-Asides 2005 Per Capita Allocation: $3,130,724 At least 10% to Qualified Non-profits 50% Rural – 50% Urban (MSAs) $1 million for CRANE projects

  9. Qualified Allocation Plan and Rules • The QAP governs the annual distribution of tax credits • Points are awarded for specific items • Applicants must meet threshold requirements. • QAP and Application can be downloaded from NIFA website: www.nifa.org

  10. Threshold Requirements • Development Costs Determined • Preliminary Plans and Specifications • Site Control (valid for 90 days). • Zoning Approved (or conditional use permit) • Utilities are available and adequate. • List of Board of Directors • State and/or Local Subsidies

  11. Threshold Requirements • Syndicator Interest Letter (valid for 6 months). • Construction/Permanent Financing (valid for 6 mos.) • 15 Year Operating Proforma • Site Specific Market Study • Pre-notification to the Mayor • Capital Needs Assessment (for Rehab Only)

  12. Underwriting • Site information • Construction design • Estimated development costs • Financing structure • Organization Structure (capacity at G.P level?) • Market Study • Financial Feasibility

  13. Calculations of Tax Credits and Equity Total Development Cost $3,000,000 Less: Non-eligible (i.e. land-soft cost) (200,000) Eligible Basis $2,800,000 Applicable fraction X 100% Qualified Basis $2,800,000 Tax Credit Applicable Percentage X 9% Annual Tax Credit 252,000 Tax Credit Period X 10 yrs. $2,520,000 Equity at $.80 per Credit X .80 $2,016,000 Total Development Cost $3,000,000 Less: Equity $2,016,000 Required Debt $ 984,000

  14. Low-Income Housing Tax Credits Affordable Housing Trust Fund Federal Home Loan Bank HOME funds USDA – Rural Development funding CDBG TIF funds Historic Tax Credits Tax Exempt Bond Financing Developer Note Grants In today’s market the average development must has a least two or three sources of funding.

  15. Other Important Dates • Conditional Reservation: • Follow-up information due within 60 days of Board approval. • Carry-over Application • Due November 1 for projects receiving allocations prior to June 30. Projects receiving allocations after June 30 have 5 months from the date of conditional reservation. • Cost Certification Application • Due 60 days from PIS. • Annual Compliance Reports • Due by January 15th following the PIS date, and each year thereafter.

  16. LIHTC Fees • Application Fee: Greater of 1% of annual credit request or $500. • Reservation/Carry-over Fee: 2% of annual credit request. • Allocation Fee: Due at Cost Certification: 2% of annual credit actually allocated. • Annual Compliance Fee: 2% of annual credit actually allocated.

  17. Maximums • NIFA does not prescribe maximum per unit costs. • NIFA allows no more than $450,000 per development. Developers no more than 34% of total allocation. • Developer Fees and Contractor Profit/Overhead combined can be no more than 20% of eligible basis.

  18. Compliance Monitoring • Annual Owner Certification of Continuing Compliance Report required. • File review and inspection required no later than the end of the 2nd year following PIS. • On-site reviews and inspections required at least every three years thereafter.

  19. Contact for Allocation Questions • Michael D. Fallesen Manager of LIHTC and IDB Programs 1230 “O” Street, Suite 200 Lincoln, NE 68508 Phone: 402-434-3919 Fax: 402-434-3921 Email: mike.fallesen@nifa.org

  20. Contacts for Compliance

  21. NIFA Website http://www.nifa.org

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