Transcript The Low Income Housing Tax Credit Program

The Low Income
Housing Tax Credit
Program
The LIHTC Program
Created by Section 42 of the Internal
Revenue Code
 Administered by State Housing Finance
Agencies
 Each state allowed $1.75 per capita
annually

# of Units Completed
LIHTC Units Comple te d by Ye a r
140000
120000
100000
80000
# of Units
60000
40000
20000
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
http://www.danter.com/taxcredit/stats.htm
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Low initial start due to difficulty of program
Leveled off as costs increase
What is Low Income Housing?
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Program is for rental housing
 Some lease purchase deals – 15 year
Eligibility based on tenant income
 40 % of units below 60% income or
 20% of units below 50% income
Maximum allowable rents set based on HUD guidelines
Housing mainly for families but also includes elderly,
SRO, and special needs
What is a Tax Credit?
Tax Credit - dollar for dollar reduction in
tax liability
 Tax Deduction – offset to pre-tax income
 LIHTC projects make use of both types of
benefits

Tax Credits vs Tax Deductions
No Tax Credit/
No Deduction
Deduction
Tax Credit
Income from Operations
$100,000
$100,000
$100,000
Operating Expenses
$50,000
$50,000
$50,000
Deductions
None
$10,000
None
Taxable Income
$50,000
$40,000
$50,000
Tax Liability (@35%)
$17,500
$14,000
$17,500
Tax Credits
None
None
$10,000
Net Tax Liability
$17,500
$14,000
$7,500
Types of Tax Credits

9% New construction/Rehab credit
 Most
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4% Acquisition Credit
 Used
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common credit
when purchasing an existing building
4% New construction/Rehab with federal funds
 Bond
Deal
 HOPWA
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Value fluctuates with interest rates
 Current
value 9%=7.96%, 4%=3.14%
The 9% Credit
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Percentage applied to eligible basis to determine amount
of credit
Eligible basis included depreciable assets
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Adjustments to eligible basis
Qualified basis – adjusts by applicable fraction
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Development costs minus – land, building acquisition costs,
grants or other credits, fees and costs related to perm loan,
syndication costs, operating expenses including reserves
% of units set aside for low income
Most projects are 100% low income
Basis boost
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Qualified Census Tract (QCT) – 30% boost
Difficult to Develop Area (DDA) – 30% boost
4% Acquisition Credits
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Cost of purchasing building qualifies if:
 Project
includes substantial rehabilitation
 Meets requirements of 10 year rule
No basis boost for acquisition basis
 Adjust basis for applicable fraction of low
income units
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Computing the Credit Amount
Eligible Basis
Applicable Fraction
QCT Basis Boost
Total qualified basis
X Treasury Rate
Annual Tax Credit
$1,000,000
100%
30%
$1,300,000
7.96%
$103,480
Computing the Equity Value
Annual Credits
X 10 Years
Total Credits
$103,480
X 10
$1,034,800
NPV @12%
$584,685
Equity for Losses
Example:
Operating Losses $100,000 per year
15 years losses
Tax benefit $35,000 per year 15 years
NPV @ 12% = $238,380
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Total Equity
Tax Credit Equity
Loss Equity
$584,685
$238,380
Total Equity
Total Tax Credit
$823,065
$1,034,800
Equity price
$0.79
Syndicating The Tax Credits
Sell credits to investors to generate equity
 Set up funds with Limited Liability
Corporations or Limited Partnerships
 Benefits flow through the partnership to
investors
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Sources to Fill Gap
HOME, CDBG Funds
 AHP Funds
 Other local funds
 Deferred Developer Fee
 Structured as loans not grants
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How to Get the Credits
Competitive process
 Scoring based on QAP
 Ohio QAP awards points for
characteristics
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 Unit
amenities, AC, Energy Efficiently, 2 baths
 Special needs units
 State/City support
 GP/Developer experience
 Management company experience
Timeline
6)
Apply for credits – Different for all states
Receive Reservation of Credits
Incur at least 10% of costs in year 1
Complete project and place in service within 2
years
Tax credits begin at qualified occupancy
Keep units in compliance
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Restrictions
1)
2)
3)
4)
5)
-
Low income for 15 years or recapture
Many have extended use 15 more years
What Happens in Year 15?
Expiring Properties numbers increasing
 Property reuse options
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 Acquisition
and continue
 Acquisition and resale
 Acquisition and rehab
Re-syndication
 Refinance
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 Homeownership
(lease-purchase)
Exit Strategies
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GP right of first refusal
 Debt
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Fair market value sale
 If
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plus exit taxes
property has appreciated significantly
Bargain Sale
 Where
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fair market value exceeds debt
Withdrawal of investor
What is Exit Tax?
Cumulative losses > capital invested
 Must recapture with gain at disposition
 Who pays determined in the agreement
 Can begin to mitigate at year 11
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 Allocate
losses
 Forgive debt
 Reduce investment by 1/3
 Is this a good idea?