Low Income Housing Tax Credits The Basics

Arizona LIHTC Projects 2019 Annual Credit Ceiling $19,766,849 Projects in Operations: 402 Projects Under Development: 26

Why do we do this? All citizens of Arizona want to live in a good home in a safe neighborhood. People stuck in low wage jobs or fixed incomes need a decent place to live and still have money left over for other necessary living expenses. People who pay more than they can afford for housing face: Eviction and homelessness Inability to pay for necessary expenses such as food, medical and transportation.

Who lives in LIHTC housing? Seniors living on Social Security Arizona has 952,601 retirees with an average social security benefit of $17,193 per year. That equates to $430 per month available to spend on rent and utilities combined.

Who lives in LIHTC housing? People with Disabilities SSI Federal Benefit Rate: $750 + $15 Nutrition Assistance $230 rent + utilities is affordable $1,125 for eligible couples $338 rent + utilities is affordable.

Who lives in LIHTC housing? Families In order to qualify for their housing in Graham County, this family could not earn more than $39,780 per year, which equates to $994 per month for housing plus utilities. A two-earner household receiving minimum wage does not qualify.

What are Low Income Housing Tax Credits? Public Private Partnership Tax Credit $ Equity $ I.R.S. Section 42 Investor Affordable Housing

How does the Owner receive LIHTC? Pays development costs as investment for 15 years Builds project Owner Entity Investor Limited Partner Developer General Partner Control & Risk Tax Credit over 10 years to recoup investment Form 8609

Tax Credits claimed over 10 Years Can be claimed year Placed In Service Or the following year

How are they affordable? LIHTC developments incur less debt, which allows the Owner to charge lower rents to tenants. Market Rate 9% LIHTC

Allowable Imputed Rent Based upon Income Limits (not individual HH income) Published Annually By County

Gross Rent & Income Limits Rent & Utilities Combined: Maricopa County - 2019

Utility Allowance TV & Data Telephone Heating & Cooling Hot Water Included in 30% Gross Rent Not eligible – Other Expense Heating & Cooling Hot Water Lights & Appliances (i.e., cooking) Photovoltaics Utility Service Fee Water, Sewer, Trash usually paid by owner, but may be included. TV & Data Cable Internet Satellite Entertainment subscriptions Telephone Land line Cell Phone & Data

Utility Allowance Calculation Energy Consumption Model Other Models Qualified Allocation Plan RESNET Rater Estimate Then 12 months consumption data Public Housing Authority (HUD) Rural Housing Service (USDA/RD) Local Utility Company Estimate HUD Utility Schedule Model

Rents

How many people are involved? Developer Owner Syndicator Investor Lenders Contractor Architect/Engineer Market Analyst Environmental Professionals Energy Consultant CPA Attorneys Service Provider Property Manager Tenant Asset Managers Compliance Monitors

Land Sold to LP at Equity Closing Timeline Placed In Service Compliance Period Extended Use Period Seller Owns Land Land Sold to LP at Equity Closing Construction

How are LIHTC calculated?

Eligible Basis Construction Architecture/Engineering Building Permits Eligible Costs Ineligible Costs Construction Architecture/Engineering Building Permits Construction Related Taxes, Insurance, Legal Costs Environmental Audits Construction Loan Costs Developer Fees Land Marketing/Lease Up Non-Construction Taxes, Insurance & Legal Permanent Loan Costs Syndication Fees Organizational Costs Capitalized Reserves

How are LIHTC calculated?

How much equity does this provide?

Same Calculation with Basis Boost

130% Basis Boost results in lower financing gap:

Effect of Basis Boost: Without the basis boost, many projects are not be feasible.

Cash Flow

Considerations Rents limited only by market Higher return to investor Market Rate Property LIHTC Property Rents limited only by market Higher return to investor More cash flow possible More marketable Rents restricted based upon imputed incomes Limited cash flow Limited ability to borrow Lower return to investor Compliance restricts potential buyer pool

Arizona Department of Housing Questions? Jeanne Redondo Arizona Department of Housing Jeanne.Redondo@azhousing.gov 602-771-1031

Developers, Syndicators, and Investors Understanding the players and deal structure

Low Income Housing Tax Credit Developers and Investors Types of developers: Nonprofit organizations For-profit organizations Types of investors: Individuals Corporations Large real estate firms Insurance companies Utility providers Manufacturing firms

Syndicator role and purpose of involvement Syndicators are financial intermediaries who stand between developers and investors in the LIHTC marketplace. Buy tax credits Organize the investment vehicle Educate prospective investors Evaluate and select LIHTC properties

Syndicator role and purpose of involvement Continued Negotiate price and adjusters Negotiate guarantees Monitor progress Provide asset management Continually assess risk Syndicator role and purpose of involvement Continued

The Partnership & Partnership Agreement Tax credit projects are generally owned by operating partnerships comprised of a general partner (developer), and a limited partner (investor) Percent of ownership Partnership Agreement: A contractual document that outlines all business terms

Partnership Agreement Some important provisions of the Partnership Agreement include: Purpose of the business Contribution amounts Allocation of profits, losses and tax credits Distributions Powers, rights and duties of the general and limited partners Transfer rights and obligations Dissolution Partnership Agreement

What investors get in exchange for their equity Tax credits Tax deductions Cash distributions Sale proceeds What investors get in exchange for their equity

What syndicators look for in a LIHTC deal & partner Deals vary depending on the specifications of the project and the experience of the developer. Syndicators want deals most likely to perform This decreases the risk to their investment Syndicators want partners that will deliver credits and meet compliance guidelines And they want partners that understand the direct relationship between a well built property and the cost of operating the project for at least 15 years

Guarantees/Risk and the partner who shoulders it Performance Guarantees: Construction completion Lease-up Long term operating deficits Tax credit delivery Basis adjustor First year of credits/ on going years Repurchase obligations Recapture: What is it When does it occur Guarantees/Risk and the partner who shoulders it

Questions? Cynthia Boston Boston Affordable Housing Advisors Cynthia.boston01@gmail.com 480-298-2795

How are LIHTC properties appraised?

Approaches to Value Cost Approach Sales Comparison Approach (Market) Income Approach

How are cap rates for LIHTC projects estimated? Market rate sales LIHTC sales (limited) Brokers/sellers/buyers Anecdotal evidence

LIHTC / Section 8 Rents – External Obsolescence (continued)

Brekan Nava Allen Group Questions? Albert Nava, MAI, SGA Brekan Nava Allen Group a.nava@brekannava.com 480-990-9090