1. 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

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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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!

17. 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?

18. The ACTION Campaign www.rentalhousingaction.org Reagan Maechling