Transcript Introduction to Multi-Family Real Estate Development and

Affordable Rental Housing:
Tax Credits & Financing
AHS gratefully acknowledges the use of materials
developed by the
Virginia Community Development Corporation
(AHS has deleted slides and made minor edits on others )
Historic Tax Credits
 Historic Tax Credits
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Provide a dollar for dollar reduction in taxes due to a
taxing body.
How do they work:
 Federal credit of 20% of the improvement cost of certified
historic buildings – used to offset federal taxes.
 Virginia credit of 25% of improvement cost – used to offset
VA taxes
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Historic Tax Credits
Historic Tax Credits (continued)
 Credits reduces the depreciable basis by an amount equal to
the tax credit
 Example: A historic building costs $300,000 ($100,000 of
this is land). The owner spends $700,000 to rehab the
building for residential use.
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Historic Credit (Federal) - $140,000 (20% of $700K)
Annual Depreciation - $27,636
($200K+$700K-$140K / 27.5)
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Historic Tax Credits
Historic Tax Credits (continued)
Property must be listed on the National Register or
included in an historic district and identified as a
contributing structure.
 Rehab must follow the Secretary of the Interior’s
guidelines for rehabilitation of historic properties
 Credits can only flow to an owner of the property
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LIHTC – A Primer
Everything You Need to Know but
Were Afraid to Ask
Low Income Housing Tax Credits
Low-Income Housing Tax Credits:
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Provide a 10-year stream of tax credits to owners in
projects that provide housing for lower income families
Individuals are not good targets for LIHTC investment
− IRS passive activity loss rules limits losses of individual taxpayers
($9600 maximum).
− Individuals can’t use some of the other tax benefits associated
with these projects
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LIHTC – A Primer
Credit Categories
 Four separate and distinct credits permitted:
– Acquisition – credit of ≈4% for acquisition of qualified
buildings
– Rehabilitation – credit of =9% of the qualified rehab costs
– New Construction – credit of =9% of the qualified
development cost for low-income units in newlyconstructed buildings
– Federally-financed – credit of ≈4% for acquisition, rehab
and or new construction of projects using
Federal subsidy
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LIHTC – A Primer
Rehab / New Construction
 Credit =9% per year for 10 years
 Rehabilitation and related expenses must be
minimum of $6,000/unit and the work must be
completed within a 24-month period
 To achieve $6,000/unit minimum threshold, rehab
expenditures may be allocated to all the units in a
building
 If project has mixed-income units, low-income units
must be similar to market units
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LIHTC – A Primer
Restrictions
 Income Restrictions – restrictions on the
income of tenants
 Rent Restrictions – restrictions on the rent
that can be charged for the units
 These restrictions apply for AT LEAST 15 years
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LIHTC – A Primer
Oversight
 Low-Income Housing Tax Credits are allocated
to states by formula; Virginia’s allocation
managed by Virginia Housing Development
Authority (VHDA),
 States must detail how they will allocate
credits to projects, specifically the 9% credits
 States prepare a Qualified Allocation Plan
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LIHTC – A Primer
Oversight
A Qualified Allocation Plan details:
 Selection criteria used to determine priorities
appropriate to local conditions
 Gives highest priority to projects with lowest
intermediary costs
 Preference to projects serving lowest income
tenants and obligated for longest periods
 Provides procedure for notifying IRS of noncompliance encountered
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LIHTC – A Primer
Oversight
 In developing the QAP, a State’s designated agency
must provide opportunities for public input
 The public is given an opportunity to review and
respond to a proposed QAP
 A public hearing must be held no sooner than 14
days after publishing the plan
 Under law, the Governor must approve a QAP
following the public hearing
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LIHTC – A Primer
The Virginia Program
Virginia’s allocation divided into 8 pools:
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Northern Virginia
Richmond
Tidewater
Small MSA
Rural
Non-Profit
Local Housing Authority
At-Large – any unallocated credits
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LIHTC – A Primer
The Virginia Program
 Amenity Preferences
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Brick siding
EarthCraft or LEED
Community rooms
Larger living spaces
Extra bathrooms
Location close to public transportation
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Financing and
Debt Service
The long-term impact of financing
Financing and Debt Service
Overview
 Financing falls into different categories depending on:
− The STAGE of the development process
− The NEED that the financing fills
 Some of the different types of financing include:
– Predevelopment – for costs associated with the planning of a
construction project
– Construction – short-term financing of real estate
construction
– Permanent (aka Take Out Loan) – long-term
financing to cover period of indebtedness of note.
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Financing and Debt Service
Overview
 Different types of financing (continued):
– Bridge – temporary or interim loan made between a shortterm (construction) and permanent financing. Also used
to bridge between extended equity pay-in
– Gap – additional funds necessary for completion of
construction or purchase of property. Fills a “gap”
between equity and debt.
– Mini Perm – a construction loan that rolls into a short-term
(usually five years or less) permanent loan
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Financing and Debt Service
Overview
Financing consists primarily of grants and loans
 Grant – normally funds given by a public entity for an
enterprise deemed advantageous. Grant funds may have
conditions. Property cannot be sold or used for another
purpose for a period of time.
 Loan – money lent with conditions:
− Amortizing – payment of debt in regular installments of principal
and interest
− Deferred – payment made at a future date
− Forgivable – after a period of time or condition is met, debt is
wiped clean
− Interest – amount or percentage of money charged for use of a
principal sum of money
− Term – maturity or period of time from beginning to end of a
payment of a loan
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Financing and Debt Service
Overview
Equity Financing: consists of the owners money
 Owner’s cash downpayment
 Equity from the sale of Tax Credits
 There will be the expectation of a return on investment
− Fees
− Appreciation
− Cash flow
− Tax benefits
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Financing and Debt Service
Overview
 Loans are usually secured and grants are often secured
to ensure that the conditions of the award are
adhered to
 Security is - real or personal property pledged to help
guarantee an amount of indebtedness
 Types of security and some security terms are:
– First or Primary Position: Interest in property whereby the
security is guaranteed by the value of the
property and no other rights to property exist
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Financing and Debt Service
Overview
Types of security and terms (continued):
 Subordinate: Interest in property which may take a second
or third position behind first
 Title: Legal evidence that one has right of ownership to
property
 Lien: Legal instrument placing an encumbrance against
property for money. All liens are encumbrances, but not
all encumbrances are liens. Normally, a secured interest
created by a mortgage
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Financing and Debt Service
Financing Sources
CDBG
 Administered locally or by States
 Can be structured as a loan or a grant – depends on
project circumstances
 NOT treated as federal subsidy
 In Virginia, up to $700,000 available on competitive basis
– for locally-controlled CDBG will depend on local
prioritization and process
 Must serve people below 80% AMI
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Financing and Debt Service
Financing Sources
Tax-Exempt Bonds
 Government or 501(c)(3) issued
 Bond purchasers don’t pay taxes on interest income allows better interest rate due to tax exempt nature
 Eligible for non-competitive 4% LIHTC credits if subject to
volume cap and allocated to state for housing
 Most subject to volume cap for housing are issued by HFA
or local government entity
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Financing and Debt Service
Financing Sources
Tax-Exempt Bonds (continued)
 Work best for acquisition / rehabilitation projects where
acquisition is a significant part of project
 At least 50% of project costs have to be financed by
proceeds from bond
 Project must support debt service for 50% of project (as
bond proceeds are 50%)
 Typically better where strong 60% market exists – allows
higher rents
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Limited
Partnerships
And other forms of ownership
Limited Partnerships
Background
Limited Partnerships are business entities that are
neither corporations nor partnerships
 Unlike Partnerships, not all partners have the same legal
involvement in the day to day management of the business
 Unlike Partnerships, some partners have limited liability
 Unlike Corporations, the benefits pass through the entity
to the Partners
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Limited Partnerships
Summary
 Typically, project sponsors realize cash by using a
limited partnership to sell the project to investors
without relinquishing control
 The limited partnership is 99% owned by investors
(tax credit purchasers). The sponsor retains a 1%
interest, acts as the general partner, and manages
the project’s business affairs (retains control).
 As 99% owners, investors receive 99% of cash flow,
tax shelter, and appreciation – the general partner
can charge a reasonable fee for services
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Limited Partnerships
Limited Liability Company
 Alternative to Limited Partnership
 Has most of the benefits of an LP while allowing
more flexibility for investor participation in
management
 It is a corporation that is taxed like a partnership or
sub S corporation
 Management is centralized
 Liability is limited
 State law was amended to allow LLCs
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