TAX CREDITS 101

1. TAX CREDITS 101 SEPTEMBER 5, 2013

2. CARA WALLO Asst. Director of LIHTC Programs (804) 343-5714 J. D. Bondurant Strategic Planner (804) 343-5725 Alena Henderson LIHTC Business Analyst (804) 343-5908 Tax Credit Team Members JIM CHANDLER Director of LIHTC Programs (804) 343-5786 JAYNELL PITTMAN-SHAW Sr. Tax Credit Allocation Officer (804) 343-5733 Hope Rutter Tax Credit Allocation Coordinator (804) 343-5518

3. How does the LIHTC program work? Established by Congress with the Tax Reform Act of 1986 Significant Amendments in 1990, 1993, 2002 and 2008 Section 42 of the Internal Revenue Code

4. Credit Flowchart Equity TC Syndicator Developer Lender Debt Tax Credits Tax Credits State Allocating Agency Illustration by Lancaster Pollard

5. Income Levels Served • 20% of units at 50% of median incomeor • 40% of units at 60% of median income • More restrictive limits elected during Application process

6. 9% vs. 4% • 9% New construction or Rehabilitation credits • 4% Acquisition credits • 4% Tax-exempt bond credits

7. Tax Credit & Equity Calculation

8. Equity Calculation • Pricing based on total credits available, timing of pay-ins and market conditions • Equity is paid in several installments based on negotiated benchmarks (ex: land transfer, substantial completion of construction, stabilization, receipt of 8609’s)

9. Investors • INCREASED EQUITY FOR DEVELOPMENT RESULTS IN: • Lower Debt • Lower Rents • TAX BENEFITS: • Tax Credits (10 yrs) • Tax Losses (15 yrs) (Depreciation & Interest Expense) Illustration from Nixon Peabody

12. How many credits are allocated to Virginia each year? • Per Capita Credits$2.25 per person* • Previous Allocations: • National Pool: • 5 % of 2015 Credits: • Non-competitive pool: • New Construction Pool • Estimated 2014 Credits: 2013 Population Estimate: 8,184,441

13. Non-Profit Local Housing Authority Regional New Construction N.VA Planning District 8/Inner Washington MSA Northwest/North Central Virginia Richmond MSA Tidewater MSA Balance of State At Large Non-Competitive Developments for Persons with Disabilities Credit Pools

14. What are the responsibilities of housing credit agencies? • Qualified Allocation Plan (QAP) • Notify local CEO of proposed development & allow time for comment • Obtain market study • Provide a written explanation, when requested, if an allocation is not made according to established priorities

15. Qualified Allocation Plan • Sets forth selection criteria to allocate appropriate to local conditions • Gives preference to properties • Serving lowest income households • Remaining affordable for the longest periods • Located in QCT’s (and the development contributes to a concerted community revitalization plan) • Provides procedure for monitoring compliance

16. Project location Housing needs characteristics Project characteristics, including existing housing as part of community revitalization plan Sponsor characteristics Tenant populations with special housing needs Public housing waiting lists Tenant populations of individuals with children Intended for eventual tenant ownership Energy efficiency Historic nature of the project QAP: Sec 42 Selection Criteria

17. QAP: VHDA’s Selection Criteria • Readiness • Housing Needs Characteristics • Development Characteristics • Tenant Population Characteristics • Sponsor Characteristics • Efficient Use of Resources • Bonus Points • Rents < 40% AMI • Rents and Incomes < 50% AMI • Extended Compliance • Sale to Nonprofit or Local Housing Authority • Tenant Ownership Option

18. Market Studies • Provide a plethora of information to help us assess the housing needs and demands of low-income individuals and communities • Help us determine if there’s a market for the proposed project • Help us understand the impact on existing LIHTC communities (VHDA owned/financed - lower rents, competing amenities, etc.) • VHDA is able to review this data objectively because of its own market data; to minimize negative impact on its existing VHDA owned/ financed properties

19. Market Study Components • PROJECT OVERVIEW – address, # units, construction type • PRIMARY MARKET AREA – where will tenants come from • ECONOMIC OUTLOOK – employment trends • DEMOGRAPHICS – population, age of population, household status, incomes, etc. • SUPPLY/RENT ANALYSES – existing & pipeline projects that will compete with the subject • DEMAND ANALYSIS – absorption, capture rate – is there sufficient demand for additional units? For the type of construction proposed?

20. Market Studies – VHDA Guidelines • No study over 12 months old will be accepted • VHDA at its sole discretion may commission an additional market study or supplementary market data • The market study must be submitted in electronic format to VHDA directly from the applicant • Studies deemed inadequate by VHDA will cause the application, and perhaps the analyst, to be rejected

21. Market Studies – Industry Guidelines National Council of Affordable Housing Market Analysts (NCAHMA) • Standard terminology, e.g. primary market area, market demand, comparable property • Standard methodology, e.g. absorption rate, capture rate • Standard report format • Membership/Best Practices

22. Market Studies A Requirement Under IRC Section 42 • Before the credit allocation is made • At the developer's expense • Completed by a disinterested party • Analyst approved by the Housing Credit Agency (VHDA)

23. 2014 Allocation Cycle Jul 20132014 QAP Forum Aug 2013 Release 2014 QAP changes for public comment Sep 20132014 QAP Focus Group Sep 2013*2014 QAP Public Hearing/close public comments Oct 2013 VHDA Bd of Commissioners Approve 2014 QAP Jan 2014 How-to-Apply Workshops (4) Jan 2014*CEO notification letter info deadline Mar 2014 Application for Reservation deadline May 2014 Preliminary Rankings/ begin comment period May 2014 Comment & Rebuttal period Jun 2014 Review final rankings with VHDA Board Jun 2014Announce final rankings Nov 2014 Application for Allocation deadline Dec 2014 Finalize Allocations Dec 2016 Dev. Place in Service, then issue 8609s

24. Submitting the Application • Excel workbook having a self-score component • Extensive documentation required but is a by-product of an objective, point based award system • Transparent process

25. Alignment With VHDA Strategic Goals and Housing Policy • Alignment in five areas: • Green building • Accessibility • Homelessness • Sustainability • Transit-oriented development

26. Alignment With VHDA Strategic Goals and Housing Policy Significant incentives for: • LEED or EarthCraft green building standards • Universal Design Standards • Developments serving homeless populations • Proximity to public transportation

27. VHDA’s Multifamily Loan Program and LIHTC Program • VHDA cannot require a VHDA loan as a condition of receiving a tax credit award • We do have a unique opportunity to facilitate financing • Relationship established between developer and VHDA • Minimum Design & Construction Requirements apply to both VHDA loans and tax credit deals

28. Production Summary • Program Inception to Date (includes 9% and Tax-Exempt Bonds) • 907 Developments • 84,921 Units • 60% TC deals with VHDA financing

29. What sets VHDA apart? • Open, objective process • Provide timely assistance • We listen to stakeholder concerns and incorporate their input/suggestions into the program • We provide program learning opportunities • Manual and application are user friendly