Beginner’s Guide to LIHTC

Topics History of LIHTC LIHTC Program Details LIHTC Utilization Credit Types Restrictions and Other Issues LIHTC Utilization Credits and Other Benefits Ownership Credit Calculation Ready to Develop? Nuts & Bolts Sessions Budgets and Feasibility The Application and QAP Construction, Asset Management, and Compliance

History of LIHTC Low-Income Housing Tax Credit program is a Federal tax credit created as part of the Tax Reform Act of 1986. Program governed by Section 42 of the Internal Revenue Code for which the Internal Revenue Service (IRS) is the implementing agency. Credits are allocated by formula to States (and even territories) – about $2.30 per capita for 2014 with and Virginia has a population of 8 million.

History of LIHTC Virginia Housing Development Authority manages Virginia’s LIHTC allocation and prepares, annually, a Qualified Allocation Plan, or QAP. The QAP establishes selection criteria and in preparing the Plan, VHDA must provide opportunities for public input. Discussion of Virginia’s QAP for 2015 underway down the hall right now……….

LIHTC Program DEtails Handouts: VHDA’s 2015 QAP VHDA’s 2014 Manual and Application Rent Limits Table Income Limits Table VHDA Program Timetable LIHTC Lexicon (from Novogradac & Company) Web Resource List (from Elizabeth Moreland Consulting)

LIHTC Program DEtails 9% Credits Available for qualified expenses incurred in projects involving new construction or rehabilitation (including adaptive reuse) of existing buildings. Not available for acquisition costs. 9% available competitively – March 2015 application. Also known as the 70% present value credit. Rate adjusted monthly by Treasury – 7.56% for September 2014.

LIHTC Program DEtails 4% Credits Available for building acquisition costs for buildings that, generally, have been continuously owned for at least 10 years prior to applying for credits and are outside of initial compliance under a previous LIHTC award. Acquisition credits may be secured through applications for 9% tax credits. Available for acquisition and rehabilitation expenses for projects receiving loans based on tax-exempt bond proceeds – such projects may apply on an open submission basis. Also called the 30% present value credit – rate also adjusted monthly – for September 2014, 3.24%

LIHTC Program DEtails 4% Credits Available for building acquisition costs for buildings that, generally, have been continuously owned for at least 10 years prior to applying for credits and are outside of initial compliance under a previous LIHTC award. Acquisition credits may be secured through applications for 9% tax credits. Available for acquisition and rehabilitation expenses for projects receiving loans based on tax-exempt bond proceeds – such projects may apply on an open submission basis. Also called the 30% present value credit – rate also adjusted monthly – for September 2014, 3.24%

LIHTC Program DEtails Credit boosts – factors increasing credits: Qualified Census Tract – the project is located in a tract where more than 50% of the households have incomes at or below 60% of the Area Median Income (30% boost). Difficult Development Area – project is in a locality designated by HUD as having high development costs as compared to incomes (30% boost). VHDA boost – for some 9% projects, can provide a boost of up to 30% - VHDA utilizes this authority to provide a limited boost for certain project features.

LIHTC Program DEtails Income restrictions – (minimum): At least 40% of the apartments reserved for families earning 60% or less of Area Median Income; or, At least 20% at 50% of AMI. Locality 50% AMI 60% AMI Richmond $36,450 $43,740 Arlington $53,500 $64,200 Wise Co. $26,150 $31,380

LIHTC Program DEtails Rent restrictions Rents indexed to 30% of qualified income adjusted for family size and assuming 1.5 persons per household. VHDA prepares a table – available on the VHDA website. Locality 1 BR 2 BR Richmond $684 $821 Arlington $1,003 $1,203 Wise Co. $491 $588

LIHTC Program DEtails Credits flow for a 10 year period, but compliance requirements are in place for at least 15 years. Compliance requirements and the benefits of the credits lead many developers to seek credits on all of the apartments in a development. Projects subject to Extended Use Agreements to provide continued affordable housing benefits for at least 15 more years. These agreements and related agreements also hold developers to other promises made in applications. EUA recorded against the property.

LIHTC Program DEtails Among the other promises an applicant can make in an application: Longer compliance period or provision of a purchase option to a nonprofit Deeper income and rent targeting Green building certification Accessibility Locality financial support Subsidy availability

LIHTC Program DEtails Other Issues: Noncompliance with IRS requirements can result in loss of credits. Noncompliance with VHDA requirements can result in negative points for future applications. Other funding sources may require different / deeper promises – more apartments at 50% AMI or some at 40% AMI, for example.

LIHTC Program DEtails Timetable: March 9% application is for a Reservation of LIHTC Competitive rankings revealed in May and June. Awardees receive LIHTC agreements in Summer. Allocation applications due by early November. Can request a current year Allocation or a Carryforward Allocation – Carryforward provides up to 2 years after the year credits are received to complete a project. Must incur expenses in excess of 10% of basis within 12 months of Carryforward Allocation.

LIHTC Utilization Tax credits provide a dollar-for-dollar reduction in income tax liability. In contract, a tax deduction provides an offset for income and is calculated pre-tax, so it does not result in a dollar-for-dollar reduction in tax liability. Low-Income Housing Tax Credits flow to owners of affordable rental housing projects. While some developers of LIHTC projects may have significant tax liability, most developers and sponsors do not have enough to utilize all of the available credits.

LIHTC Utilization Syndication involves the provision of limited ownership interests to other taxpayers in exchange for equity investments. These investments are commonly made through Limited Liability Companies or Limited Partnerships. Investors enter these entities and provide capital in exchange for LIHTC and other tax benefits. In these structures, developers and/or sponsors maintain day-to-day control over a project and the investors take a limited role.

LIHTC Utilization Typically 99% of the interests in an ownership LLC or LP are provided to an investor and the developer / sponsor retains a 1% interest. Project Owner LLC Developer / Sponsor 1% Investor 99% owns project subject to mortgages

LIHTC Utilization Investors are primarily corporations as there are limits on passive losses for individuals. Individual corporations may make investments in LIHTC projects directly – this is called a direct investment. Corporations may also work through a syndicator that can deploy investments through: A fund that is established solely for deploying the investments of a specific corporation – a proprietary fund Funds that also include investments from other corporations – a multi-investor fund

LIHTC Utilization The amount of capital or equity an investor will pay may vary based on the following: Community Reinvestment Act interest for investors that are also regulated financial institutions To reflect risks associated with the strength of a project or the strength of a developer or sponsor To reflect economic factors such as the timing of investment payments.

LIHTC Utilization Shady Acres (sample project): Existing 20 unit property costs $200,000 - $15,000 of this is land cost and $185,000 is building cost. Rehabilitation costs are $1,000,000 Architect’s fees are $70,000 Construction loan fees and interest are $70,000 Cash reserves of $75,000 Permanent loan fees of $25,000 Developer’s fee of $150,000 Permanent and partnership legal of $75,000 Due diligence report costs of $25,000 Total project cost of $1,690,000

LIHTC Utilization Cost Category Total Cost Credit Basis Land $15,000 NO Building $185,000 Construction $1,000,000 Design $70,000 Construction Loan Costs Reserves $75,000 Permanent Loan Fees $25,000 Developer’s Fee $150,000 Non-Construction Legal Due Diligence Reports Totals $1,690,000 $1,500,000

LIHTC Utilization Shady Acres credit calculations: 4% credits: $185,000 in basis Multiply by 3.24% $5,994 in annual credits 9% credits: Rest of basis - $1,315,000 Multiply by 7.56% $99,414 in annual credits Total annual credits of $105,408

LIHTC Utilization Total annual credits of $105,408 available for a 10 year period. Investor credit pricing – after assessing earlier factors – is $.90 per credit dollar. Equity available for Shady Acres: $948,672 of the $1,690,000 total development cost – 56% of the total. Typically, LIHTC equity can offset 45% to 65% of total development costs.

Ready to Develop? The step, in the process of developing a project, wherein you determine what you want to do and if what you want to do is feasible is the predevelopment phase. Predevelopment involves the evaluation of all key factors for determining project feasibility, including: Selecting a location Building a team Evaluating the market Designing the project Determining financial viability

Ready to Develop? Selecting a location: Complete an evaluation of factors associated with the location of an affordable housing project, including proximity to transportation and services, zoning, utility availability, site size, and seller involvement. Price is a key factor in determining feasibility and may be established by an appraisal – but may also be negotiated. Site should be reasonably clear of environmental hazards and a Phase I ESA may be needed.

Ready to Develop? Building a team: The developer / sponsor is responsible for evaluating the viability of a project, but will also need to involve others in evaluating project factors, including: Architect Attorney Local government officials Representatives of financing sources Potential residents Others….

Ready to Develop? Evaluating the market: Developers / sponsors should begin to evaluate the potential market early in project planning: Find and evaluate Census and other data concerning area demographics. Seek information concerning competing projects. Collect information on an existing project’s operating history. Survey potential residents. Order a formal Market Study from a firm on VHDA’s list of approved analysts.

Ready to Develop? Designing the project: For the population With all of the requirements: VHDA standards Green standards Universal Design Historic That includes all remedies / fixes for site and building Feedback from contractors

Ready to Develop? Determining financial viability: Development budget that includes all costs. Sources for all of the development costs Reliable income possibilities Good expense projections Affordable debt Result – cash flow and a feasible project.

Nuts & Bolts Budgets and Feasibility – this afternoon The Application and the QAP – later this afternoon Construction, Asset Management, and Compliance – tomorrow Networking in the meantime…..