Transcript How to Finance Affordable Housing with Low Income Housing Tax Credits July 10, 2007
How to Finance Affordable Housing with Low Income Housing Tax Credits July 10, 2007
Outline
• Overview
Industry Statistics (Estimates)
What Are Low-Income Tax Credits(LIHC)
Administrative Roles of the States
How Credits Are Awarded to LIHC Project
• How Are LIHC Projects Funded? • What Are The Compliance Requirements? • Who Invests In LIHC Projects?
What Does The Developer Give To The Investor?
What Does The Developer Keep?
How Is A Tax Credit Transaction Structured?
What Are Low Income Housing Tax Credits?
• Tax Credits Are Used To Reduce
Federal Income Tax
Individuals
Corporations
• Federal Government Allocates Credits
To Each State Annually
$1.95 Multiplied By State Population (2007)
State Credit Ceiling
What Are Low-Income Housing Tax Credits?
• Available For Rental Housing Only • Tax Credits Are Claimed By Investors Over A
10 Year “Credit Period”
• 15 Year “Compliance Period” - Project Must Be
Rented To Low-Income Tenants
• Extended Use Requirements - 30 Years+ * • EB x LIOP x CP x 10 = Credits
EB = Eligible Basis, LIOP = Low Income Occ. % & CP = Current %
Administrative Roles Of The States
• Responsible For Reserving and Allocating
Tax Credits
Determine Competitive Process (Beauty contest) Assess Financial Feasibility Monitor Development Process • Compliance Monitoring * Varies by State IRS = Minimum of 1 twice every 3 years
How Are Credits Awarded?
• State Housing Agencies Responsible For
Administering The Program
• LIHC Allocations Made In Accordance With A
Qualified Allocation Plan (QAP)
• QAP Documents Local Affordable Housing Need • “Beauty Contest” Determines Which Projects
Will Be Awarded LIHC
• Application Cycles Vary From State To State • Program Oversubscribed In Almost Every State
How Are LIHC Projects Funded?
• Equity Sources
Public Funds
Private Funds
Corporations
30-65% Of Project Funded From Equity
How Are LIHC Projects Funded
• Balance Of Cost Funded From Debt
For-Profit Lenders
Federal, State And Local Programs
HOME Funds
Community Development Block Grants Affordable housing Program
Other State And Local Programs
What Are The Compliance Requirements?
• Tax Credits Available For “Low-Income
Units” Only
• Restrictions On Low-Income Units
Income Restrictions
Rent Restrictions
What Are The Compliance Requirements?
• Income Limitations Percentage of Area Median Gross Income -
HUD Limits
Income Limits Adjusted For Family Size Actual Number of People Living In The Unit
Deeper Restrictions Often Imposed By States
• Elections
40/60 Set Aside
20/50 Set Aside
What Are The Compliance Requirements?
• Rent Limitations
Maximum Rents Generally Equal To 30% Or Less Of Imputed Income Limits
1.5 Persons Per Bedroom - Bond = 1 per bd.
2 Bedrooms Is Deemed To Have Three People For Rent Restriction
Area Median Gross Income Figures From HUD Are Based On A Four Person Family
Who Invests In LIHC Projects?
• Types Of Investors - Tax Law Governs
Corporate Investors
Individual Investors
• Total Annual Equity Investment - Over $2.5
Billion
What Does The Developer Give To The Investor?
• Generally 99 to 99.99% Of The
Partnership
Tax Credits
Losses
• Generally 50 to 99.99% Of The
Partnership
Available Cash
Residual Value Of Property
Capital Account Maintenance Rules Apply
What Does The Developer Give To The Investor?
• Tax Credit Guarantees
Construction Completion & Deficit
Lease-up
Permanent Loan Funding
Tax Credits (Adjusters)
Tax Losses
Yield Maintenance
Compliance Monitoring
What Does The Developer Retain?
• Developer Fees • Contractor Overhead And Profit • Property Management Fees • Incentive Management Fees • Operating Cash Flow • Sale Or Refinancing Proceeds
Tax Credit Example 9,000,000 Project Costs 1,000,000 Developer Fee(7,000,000*15%) 10,000,000 Project Costs (1,000,000)Non-eligible Project Costs (1,000,000)Land 8,000,000 Eligible Basis *1.3 Difficult To Develop Area 10,400,000 Qualified Basis
Tax Credit Example 10,400,000 Qualified Basis *100% Low Income Occupancy% 10,400,000 Qualified Basis *9% Credit Percentage 936,000 Credits Per Year *10 Years 9,360,000 Total Credits *.95 Credit Price 8,892,000 Equity
Tax Credit Example 150 *400 Rental Units Per Unit 60,000 Per Month Rental Income (30,000) Operating Expense (50%) 30,000 *12 Net Operating Income Per Month Months 360,000 Net Operating Income /1.15 Debt Coverage Ratio 313,043 3,240,000 Cash Available Loan
10,000,000 (6,575,400) ( 3,240,000) 184,600 ( 184,600) 0 Tax Credit Example Project Costs Equity Permanent Loan Unfunded Project Costs Deferred Developer Costs
What Do Best Properties Have in Common?
• Great real estate
Rents under market
Very strong market demand (no occupancy risk)
• Very little “hard” debt
Developer job -- meet community needs
Community job -- support w/financing
TIF, Home loans, soft seconds, etc.