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Low-income Housing Tax Credit Basics

Low-income Housing Tax Credit Basics. Brad Elphick, CPA. October 17, 2008. Short History of Affordable Housing. A Short History of Affordable Housing. Federal Government. Affordable Housing. Tax. Spend. Affordable Housing. A Short History of Affordable Housing.

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Low-income Housing Tax Credit Basics

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  1. Low-income Housing Tax CreditBasics Brad Elphick, CPA October 17, 2008

  2. Short History of Affordable Housing

  3. A Short History of Affordable Housing Federal Government Affordable Housing Tax Spend Affordable Housing

  4. A Short History of Affordable Housing Banks & Insurance Companies Federal Government Administered by State Housing Agencies Administered by State Housing Agencies $ 1. 2. 1. 2. Reduction of federal agency costs States able to assess local housing needs better than federal gov’t Affordable Housing '86 Tax Tax $ Reduction of federal agency costs Spend Affordable Housing

  5. Price Energy $ Insurance LIHTC Market High-tech Yield CRA Investors $ $ $ $

  6. Freddie Fannie $ LIHTC Market $ $ Price Yield

  7. H.R. 3221 The Housing and Economic Recovery Act of 2008

  8. ELEVEN LIHTC UPDATES (covered today) DUE TO H.R. 3221 9% allocation increased by $0.20 for 2008 and 2009 1 2 3 4 5 6 7 8 9 10 11 Priority on QAPs for energy efficiency and historic nature Deadline to pass 10% test extended to 12 months State housing agencies can give 130% E.B. boost to projects Rehab requirement now $6k/unit or 20% of adj. basis of bldg. Additional $11 Billion in tax-exempt housing bonds in 2008 Tax-exempt housing bond interest not subject to AMT LIHTCs can now offset AMT Temporary 9% minimum credit Federal grants for operations do not reduce E.B. “Federal Subsidy” taint limited to tax-exempt bond financing

  9. Typical LIHTC Structure

  10. Typical LIHTC Structure $ $ $ $ Investors Syndicator $ $ GP GP Syndication fees P’ship Mgt Fees LP LP $ Fund $ CREDITS Developer $ LOSSES $ Developer Fee

  11. Typical LIHTC Structure Investor Sponsor/ Syndicator Limited Partner 99+% of P&L and Credits General Partner General Partner 1% or less of P&L and Credits Fund/Upper Tier Limited Partnership General Partner 1% or less of P&L and Credits Limited Partner 99+% of P&L and Credits Lower Tier OperatingLimited Partnership Developer Developer fee

  12. Tax Credit Prices 80-85¢ 95¢ 45¢ 1989 2008

  13. Tax Credit Prices 80-85¢ 95¢ 45¢ 1989 2008

  14. The Project Time Line

  15. Sponsor H.R. 3221 H.R. 3221 ‘08 & ‘09 Lenders Upper Tier/ Investment L P’ship Property Management Company Architect 1 2 IRC §42 Contractors $ $ $ $ 7 5 0 3 1 2 4 9 8 6 x Attorneys APP QAP APP - Preliminary Reservation Letter $1 million + = - ABC, LP $2.20 $80.3 mil 36.5 mil $2.00 $73 mil CA pop. - 2008 Approx x Approx 9% Credits $400k Credits $600k “energy efficiency” & “historic nature”

  16. Reservation 1/1/08 12/31/08 12/31/09 12/31/10 IRC §42 Placed-in-service due date Placed-in-service due date Just kidding! 5/1 9/28 !

  17. 1/1/08 12/31/08 12/31/09 12/31/10 IRC §42 Carryover Allocation Document Carryover Allocation Document Carryover Allocation Document (6 mo.) Placed-in-service due date 10/31 4/30 9/28 $

  18. H.R. 3221 3 1/1/08 12/31/08 12/31/09 12/31/10 “ReasonablyExpectedBasis” (i.e. land plus depreciable basis) IRC §42 Report (6 mo.) (12 mo.) Placed-in-service due date 10/31 4/30 10/31 9/28 Reservation Carryover Allocation! 10%

  19. IRC §42

  20. Property Management Company IRS Certificate of Occupancy Certificate of Occupancy IRC §42 (The Philadelphia office) FCC Regulatory Agreement Report $600k $400k PIS TAX FORM FORM 8609 Return 8609 Package Credits The buildings are ready to be leased up!

  21. Time Line of Events Formation of Partnership Line up attorneys, architect, contractor, accountants, lenders, etc. Preparation of forecast to “woo” investors Apply for tax credits Receive reservation of credits Pass a 10% Test

  22. Time Line of Events Formation of Partnership Line up attorneys, architect, contractor, accountants, lenders, etc. Preparation of forecast to “woo” investors Apply for tax credits Receive reservation of credits Pass a 10% Test Finish construction Final Cost Certification Placed in Service Package Regulatory Agreement Reception of 8609s Yearly audits and tax returns

  23. Property Compliance

  24. Property Management Company IRS IRC §42 Credits HUD Handbook

  25. Property Management Company IRS IRC §42 Credits Rental rules: • Don’t rent low-income units to families who make too much money • Don’t charge low-income families too much rent

  26. $30,000 $750 Income Limit Rent Limit (by household size) (by # of bedrooms)

  27. Property Management Company IRS IRC §42 Hey IRS! They are in violation!! Gimme back the credits! Recapture! Credits

  28. IMPORTANT TIME FRAMES Compliance Period Extended Use Period Tax Credit Period PIS 30 10 15

  29. 9% vs. 4% Deals

  30. Time Line of Events Formation of Partnership Line up attorneys, architect, contractor, accountants, lenders, etc. Preparation of forecast to “woo” investors Bonds (4%) No Bonds (9%) Apply for tax credits Apply for bonds (includes 1st 50% Test) Receive reservation of credits Issuance of bonds (tax credit app follows) Pass a 10% Test

  31. Time Line of Events Formation of Partnership Line up attorneys, architect, contractor, accountants, lenders, etc. Preparation of forecast to “woo” investors Bonds (4%) No Bonds (9%) Apply for tax credits Apply for bonds (includes 1st 50% Test) Receive reservation of credits Issuance of bonds (tax credit app follows) Pass a 10% Test Finish construction 2nd 50% Test for Bond deal Final Cost Certification Placed in Service Package Regulatory Agreement Reception of 8609s Yearly audits and tax returns

  32. Construction Method

  33. Construction Method Financing Method

  34. Construction Method Financing Method

  35. Project X Project Y Eligible Basis x DDA/QCT EB adj. for DDA/QCT x Applicable Fraction Qualified Basis x Applicable Percentage Annual LIHTC • 10,000,000 • 100% • 10,000,000 • 100% • 10,000,000 • 3.50% • 350,000 • 10,000,000 • 100% • 10,000,000 • 100% • 10,000,000 • 8.00% • 800,000

  36. Comparing “9%” Tax Credits to Bonds with “4%” Credits

  37. Tax Credit Calculation

  38. Eligible Basis Total Project Costs Less: Ineligible costs Eligible Basis

  39. Partnership Agreement Syndication Organization 1 3 2 $ Interest $ Off-site Improvements Replacement Reserve Tax Credit Application Fees Eligible Basis Live here! Marketing • Architectural Fees • Engineering Fees • Developer Fees • Contractor Profit/Overhead • Other? And finally…

  40. Eligible Basis Demolition Costs LAND

  41. Eligible Basis Demolition Costs Building = $2,000,000 $50,000 Land = $300,000 Land = $350,000

  42. Eligible Basis Demolition Costs Building = $2,050,000 Building = $2,000,000 $50,000 Land = $300,000

  43. Eligible Basis Land vs. “Land Improvements” $50,000 Land = $300,000 Land = $350,000

  44. Eligible Basis Land vs. “Land Improvements” Building = $2,030,000 Building = $2,000,000 $30,000 = “Land Improvement” $30,000 Land = $350,000

  45. $9 mil $9 mil + + $8.5 mil $8.5 mil + + $8 mil $8 mil + + $10 mil $10 mil = = $35.5 mil $35.5 mil Eligible Basis Total Project Costs $38 mil Less: Org costs, Syndication fees; reserves, tax credit fees, marketing, land, off-site improvements, commercial costs, fees in excess of state limits ($2.5 mil) Eligible Basis $35.5 mil Total project Eligible Basis is divided amongst the buildings.

  46. Eligible Basis 10,000,000 x DDA/QCT Calculating Credits

  47. QCT Not a QCT 130% DDA = 130% Area

  48. H.R. 3221 State Housing Agency 4 CALIFORNIA REPUBLIC (Buildings PIS after 7/30/08) 130% HUD DDA or QCT = 130% (does not apply to tax-exempt bond financed projects)

  49. Eligible Basis 10,000,000 x DDA/QCT 130% EB adj. for DDA/QCT 13,000,000 x Applicable Fraction Calculating Credits

  50. Building A Low-income units Market-rate units Applicable Fraction (LIHOP) Unit Fraction: 50% Floor Space Fraction: 35%

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