Using LIHTCs to Preserve Rural Affordable Housing Enterprise Community Partners Using LIHTCs to Preserve Rural Affordable Housing Title Date Texas Rural Housing Preservation Academy April 11, 2018

LIHTC Overview & Deal Structure Key Elements of 4% and 9% Transactions Syndicator’s Approach to Underwriting Tax Reform & Current Pricing

Limited Partnership Structure General partner owns just 0.01%, but controls and operates the project Generally a single-purpose entity set-up and controlled by the Developer Passive limited partner invests equity in return for 99.99% ownership

Types of Tax Credits 9% Credit and 4% Credit 5

Actual Credit rates published monthly April 2018: 9.00% and 3.28% Types of Tax Credits Actual Credit rates published monthly April 2018: 9.00% and 3.28% 6

Tax Exempt Bonds Eligible for 4% credits No allocation of credits needed No carryover allocation required No 10% Test 50% Test: Bond amount must exceed 50% of depreciable basis plus land Construction period bond financing Bonds must stay in place until at least one month after completion 7

Types of Tax Credits: Acquisition Credit Used when you purchase an existing building that qualifies Substantial rehab 10 year rule, if applicable Exceptions No basis boost 8

Computing Acquisition Basis Cost of purchasing building can qualify, including acquisition-related costs, only if: Building is substantially rehabilitated Building meets requirements of 10-year rule No basis boost is permitted for a project’s acquisition basis If not 100% low-income, only low-income percentage of cost can qualify 9

Eligible Basis – Excludes the following: Land and land-related costs Building acquisition and related costs Historic tax credits taken on residential part of project Fees and costs related to permanent loan financing Syndication-related costs Tax credit fees Reserves Post-construction working capital Federal grants Non-residential costs 10

Placing a Project in Service New Construction When first unit is ready Certificate of Occupancy Rehabilitation – more flexibility No earlier than the date when the rehab equals the greater of: $6,800 per unit (2018 level, amount inflated annually) or 20% of acquisition price

Important Considerations Occupied Rehabs Can tenants remain in place during rehab or is relocation required? When can credit delivery start? Are there over-income households? Re-Syndication of LIHTC project Brings new equity to the deal and extends useful life Prior investor considerations

The Syndicator’s Approach To Underwriting Quality of the Development Team Project Characteristics Development Budget Rents/ Market/ Marketability Rental or Operating Subsidies Operating Costs Reserves Sponsor Guarantees 13 13

Rents / Market / Marketability Are rents realistic for the market area? What is the demand for proposed housing? Neighborhood What demographics will project address Are tax credit rents sufficiently below area market rents? Are HOME, other financing requirements factored in? Is the scope of work sufficient for 15+ years? 14 14

Rent / Operating Subsidy Is subsidy anticipated? Will it be committed before closing? How long is the contract? What would happen to the property if the subsidy was not renewed through no fault of the Sponsor? Annual “appropriations” risk on Project Based Section 8 Annual contracts from USDA

4% vs 9% - Beyond the Obvious Debt Service Coverage Requirement May be higher on a 4% deal (typically 1.20 or 1.25 DCR) – likelihood that there is more debt than a 9% project Adjusters Total credits might change on a 4% deal – less likely on a 9% Could be good or bad Financing Team 4% deals have BIG “All Lender” Calls!

Fannie Mae & Freddie Mac Where is pricing now? Tax Reform & Current Pricing 2017 Tax Reform Corporate Tax Rate – lower rate hurts pricing Private Activity Bonds – saved! BEAT provision 2018 Omnibus 12.5% more 9% credits Fannie Mae & Freddie Mac Where is pricing now?

The ACTION Campaign www.rentalhousingaction.org Reagan Maechling rmaechling@enterprisecommunity.com