1. Twists and Turns of the Tax Code: What it Means for Housing Credit
at the 2018 New Mexico Housing Summit
September 12, 2018

2. Twists and Turns of the Tax Code: What it Means for Housing Credit
at the 2018 New Mexico Housing Summit
3:30 PM - 5:00 PM
SPEAKERS
Jeff Nishita, CPA
Melissa Chung, CPA
Novogradac & Company LLP
Novogradac & Company LLP
September 12, 2018

3. Agenda Tax Reform Income Averaging Opportunity Zones
September 12, 2018

4. Low-Income Housing Tax Credit
Effects of Tax Reform on Development and Credit Pricing
Lower Corporate Rate Change in CPI Interest Expense Deductibility Limit 100 Percent Expensing
Low-Income Housing Tax Credit
September 12, 2018

5. Effects of Tax Reform on the Lower Corporate Tax Rate
9 Percent Property
35%
21%
$0.95
$0.82
$1.00
$0.87
$1.05
$0.90
$1.10
Price per Credit
4 Percent Tax Exempt Bond Property
35%
21%
$0.95
$0.81
$1.00
$0.86
$1.05
$0.89
$1.10
$0.93
Price per Credit
MATCH the data from the blog post
Assumes 4.5% – 5.0% investor level yield in all scenarios
Results may differ based on a change in underlying assumptions. Property not eligible for 30% basis bonus
September 12, 2018

6. Effects of Tax Reform on Development and Credit Pricing
September 12, 2018

7. Effects of Tax Reform on the Change to CPI
September 12, 2018

8. Effects of the Omnibus Bill on LIHTC
September 12, 2018

9. Effects of Omnibus Spending Bill - 12.5% Increase in Volume Cap
FY 18 Omnibus
12.5% allocation increase , , $2,700,522, $1,038,662,500
Percentage gained % % % %
New Law ,289, ,457, $122,617,032, $47,160,397,100
September 12, 2018

10. Effects of Tax Reform on Development and Credit Pricing 9 Percent LIHTC Allocations
FY18 Omnibus
2028 $2.85
2018 $2.70
HERA
2022 $2.55
2009
$2.30
2008
$2.20
2017 $2.35
2007
$1.95
2002
$1.75
2010
$2.10
Per capita credit set at $1.25
ACTUAL
PROJECTED
September 12, 2018

11. Effects of Tax Reform Interest Expense Deductibility Limit
30%
EXCLUDE
Real Property Trade or Business Election
30 year for post 2017 PIS
40 year (?) for pre 2018 PIS
of adjusted taxable income
depreciation until 2022
September 12, 2018

12. Effects of Tax Reform Interest Expense Deductibility Limit Post-2017 PIS Properties, Pre-2018 PIS Properties
PRE-2018 PIS
POST-2017 PIS
Need to analyze properties one-by-one
9% properties might defer election to 2022 (when depreciation & amortization are removed from the ATI)
Tax-exempt bonds – recent transactions elect to deduct all interest => convert to 40 year life
Generally elect to deduct all interest => 30 year life on building instead of 27.5 year life
2015
2016
2017
2018
2019
2020
September 12, 2018

13. Effects of Tax Reform Interest Expense Deductibility Limit Comparison
Example:
September 12, 2018

14. Effects of Tax Reform on Bonus Depreciation 100 Percent Expensing
for personal property and land improvements
SEPT. 27, 2017
Property PIS after this date is eligible, subject to binding contract limitation.
DEC. 31, 2022
100 percent begins phase-down
100%
80%
60%
40%
20%
2018
2019
2020
2022
2023
2024
2025
2026
2017
2021
Used property eligible
Cost segregation studies
September 12, 2018

15. Agenda Tax Reform Income Averaging Opportunity Zones
September 12, 2018

16. What is Income Averaging?
Two main aspects to keep in mind 1. 2.
Income averaging is a new minimum set-aside option, operates like the other two
Applies to both rent and income
At least 40% of units must be LIHTC with an average income/rent limit of 60%
Bedroom mix and unit size are not considered
Elected at 8609
Applies to how units are designated
Not the households themselves
No keeping track of a running average household incomes
September 12, 2018

17. Reasons for Income Averaging
AMI
Reasons for Income Averaging
($50,000)
AMI
80%
61%
Income too high
60%
60%
($30,000)
50%
57%
($25,000)
20%
19%
Can’t afford rent
September 12, 2018

18. Effective Date Part of the Omnibus Spending Bill
Effective for minimum set-aside elections made after enactment (March 23rd)
Earlier elections are irrevocable
States will have discretion on when and what projects are allowed to use income averaging
September 12, 2018

19. Minimum Set-Asides Pre-March 23rd OR
Set aside at least 20% of units in a project to be rent restricted for households with incomes at or below 50% of area median income
Pre-March 23rd OR
Set aside at least 40% of units in a project to be rent restricted for households with incomes at or below 60% of area median income
September 12, 2018

20. Minimum Set-Asides Form 8609, Line 10c September 12, 2018

21. Minimum Set-Asides Pre-March 23rd NOW! OR OR
Set aside at least 20% of units in a project to be rent restricted for households with incomes at or below 50% of area median income
Pre-March 23rd OR
Set aside at least 40% of units in a project to be rent restricted for households with incomes at or below 60% of area median income
NOW! OR
Set aside at least 40% of units in a project to be rent restricted and have household income limits (designated in 10% increments from 20% to 80%) that on average are at or below 60% of area median income
September 12, 2018

22. Minimum Set-Asides
IRC § 42(g)
September 12, 2018

23. Designating Units
Must be 20%, 30%, 40%, 50%, 60%, 70% or 80% (both rent and income)
Can reach 60% average in a number of ways
No federal requirement to designate a pro-rata share among bedroom sizes
Agencies could adopt policies that are more restrictive
September 12, 2018

24. Extended use agreement
Designating Units
Application
Carryover allocation
Extended use agreement
Form 8609
When does it happen?
Can units change designations and, if so, how?
Definitely will need to shift some if not all units are LIHTC
September 12, 2018

25. Failing the Minimum Set-Aside
Scenario
Single-building, 100% LIHTC project utilizing income averaging
Nine equally sized units—3 units at 20% AMI and 6 units at 80% AMI
One of the 20% AMI units becomes unqualified
Question: What is the effect on the minimum set-aside?
Answer: We don’t know yet! !
A few possible interpretations:
The minimum set-aside is failed!
Only the 20% unit is out of compliance
Other units should be excluded to bring the average back to 60%
20%
80%
20%
20%
20%
FAIL
80%
80%
80%
80%
80%
80%
62.86%
AVG
60%
65%!
60%
September 12, 2018

26. Multiple Buildings Project Form 8609 40% 80% September 12, 2018

27. Designating Larger Units to Support More Debt
2018 HUD MTSP Limits
Hennepin County, MN
Monthly Rent Revenue
80%
MKT
20%
40%
50%
70%
80%
1 BDR
$354
$708
$855 -
3 BDR -
$1,716
$1,962
80%
50%
80%
40%
80%
40%
70%
20%
3BDR
1BDR
AVG
60%
$2,625
$9,564
$12,189
September 12, 2018

28. Designating Larger Units to Support More Debt
2018 HUD MTSP Limits
Hennepin County, MN
Monthly Rent Revenue
80%
MKT
20%
40%
50%
70%
80%
1 BDR
$354
$708
$855 -
3 BDR -
$1,716
$1,962
80%
50%
80%
40%
80%
40%
70%
20%
3BDR
1BDR
AVG
60%
$2,625
$9,564
$12,189
September 12, 2018

29. Designating Larger Units to Support More Debt
2018 HUD MTSP Limits
Hennepin County, MN
Monthly Rent Revenue
70%
MKT
20%
40%
50%
70%
80%
1 BDR -
$1,416
3 BDR
$490
$981
$1,226
$1,716 -
Diff
$136
$273
$371 -
($546)
50%
80%
40%
80%
40%
80%
20%
80%
3BDR
1BDR
AVG
60%
$5,664
$5,394
($1,131)
$11,058
September 12, 2018

30. Designating Larger Units to Support More Debt
2018 HUD MTSP Limits
Hennepin County, MN
$11,058
September 12, 2018

31. Designating Larger Units to Support More Debt
2018 HUD MTSP Limits
Hennepin County, MN
Income Averaging
9 x 60%
3BDR
1BDR
70%
MKT
20%
40%
50%
80%
3BDR
1BDR
80%
MKT
70%
20%
50%
40%
3BDR
1BDR
60%
MKT
With a DSCR of 1.15, at 5% interest, $7,032 more revenue could support $95K more debt. And if there were 10 buildings, that means nearly $1 million more debt!
Monthly Revenue
x 12 mo. x
$12,189 12 x
$11,058 12 x
$11,603 12
Annual Revenue
$146,268
$132,696
$139,236
$7,032 more with income averaging
September 12, 2018

32. Tax-Exempt Bonds Law didn’t change minimum set-aside for bonds
Income averaging still works with bonds, just have to meet both bond and LIHTC requirements
September 12, 2018

33. (Assume single-building project)
Bonds
LIHTC
Tax-Exempt Bonds
(Assume single-building project)
MKT
80%
70%
30%
Only 3 of the 10 units are below 60% AMI limits!
8 units w/ avg 60% AMI limits
However, 3 of the 10 units are below 50% AMI limits. 8 3
30% =
80% = 10 10
September 12, 2018
IRC §142(d)(1)
IRC §42(g)(1)

34. Resyndication Give tenants the right to enforce
What about post Y15 properties?
Even more unknown than setting and shifting designations
Existing extended use agreements
Have 60% rent maximums, and
Give tenants the right to enforce
State laws limit owners’ and agencies’ ability to remove or make changes
September 12, 2018

35. Agenda Tax Reform Income Averaging Opportunity Zones
September 12, 2018

36. Qualified Opportunity Funds (QOFs)
Taxpayers can get
capital gains
tax deferral
(& more)
for making timely investments in
Qualified Opportunity Funds (QOFs)
which invest in
Qualified Opportunity Zone Property
September 12, 2018

37. Three Tax Incentive Benefits1. 2. 3.
Gain Deferral
Partial forgiveness
Forgiveness of additional gains
September 12, 2018

38. Effects of Tax Reform on Opportunity Zone Funds Investing in Opportunity Act
Allows investors with capital gains from sale of assets to defer those gains
Similar in concept to Section 1031 “Like-Kind” exchanges
Creates new incentive to invest capital gains in low-income communities
Authorizes the designation of “opportunity zones”
Governors (and DC Mayor) responsible for designating these zones
Encourages investors to pool resources and risks in “Opportunity Funds” (O Zone Funds). Investors can temporarily defer capital gains recognition if they reinvest in these zones
Incentivizes long-term investment by stepping up basis
10 percent step-up after 5-year hold, 15 percent step-up after 7-year hold
Provides shallower subsidies per investment than the NMTC, but can be used on a greater scale
September 12, 2018

39. September 12, 2018

40. Effects of Tax Reform on Opportunity Zone Funds Sample Investment
Jan. 2, 2018
Taxpayer enters into a sale that generates $1M of capital gain
Taxpayer is deemed to have a $0 basis in its QOF investment
QOF Invests the $1MM in Qualified Opportunity Zone Property
June 30, 2018
(Within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund
2018
2019
2020
2021
2022
2023
2024
2026
2027
2028
2029
September 12, 2018

41. Effects of Tax Reform on Opportunity Zone Funds Sample Investment
June 30, 2023
(After 5 years), Taxpayer’s basis in investment in QOF increases from $0 to $100k
June 30, 2025
(After 7 years), Taxpayer’s basis in investment in QOF increases from $100k to $150k
2018
2019
2020
2021
2022
2023
2024
2025
2026
2028
Jan. 1, 2018
Taxpayer enters into a sale that generates $1M of capital gain
June 30, 2018
(Within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund
Taxpayer is deemed to have a $0 basis in its QOF investment
QOF Invests the $1MM in Qualified Opportunity Zone Property
Dec. 31, 2026
$850K of the 1MM of deferred capital gains are taxed and the basis in QOF investment increases to $1MM.
September 12, 2018

42. Effects of Tax Reform on Opportunity Zone Funds Sample Investment
June 30, 2028
(after 10 years) , Taxpayer sells its investment for $2.0MM. Basis in the investment is deemed to be FMV. The effect is no tax on appreciation in investment.
2018
2019
2020
2021
2022
2023
2024
2025
2027
2028
Jan. 1, 2018
Taxpayer enters into a sale that generates $1M of capital gain
June 30, 2018
(Within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund
Taxpayer is deemed to have a $0 basis in its QOF investment
QOF Invests the $1MM in Qualified Opportunity Zone Property
September 12, 2018

43. Opportunity Zone Incremental Benefit
23.8% Tax Rate
5 Year
7 Year
12/31/2026
10 Year
Standard After Tax IRR
6.00%
Incremental OZ Benefit
2.08%
1.95%
1.71%
3.08%
OZ Investment IRR
8.08%
7.95%
7.71%
9.08%
Percentage Increase
35%
32%
29%
51%
September 12, 2018

44. September 12, 2018

45. Who are the Likely Investors?
September 12, 2018

46. Individuals
Banks
“C” Corporations
September 12, 2018

47. Where will “Ozone” capital come from?
For individuals, investing in an “Ozone” fund is a superior strategy to Sec since it affords a wider range of eligible investments, potential forgiveness of 15% of the original gain and the potential for tax free appreciation in their Ozone fund investment. The only negative is that the Ozone investment benefits will be limited to the gain being deferred versus 100% of the proceeds from an asset sale
Any losses from the Ozone fund will shelter income being taxed up to the 37% statutory max rate. However, most individuals are likely to be passive investors meaning that any tax losses or credits generated by their investment will be suspended until their investment is disposed of due to the passive activity limitations
September 12, 2018

48. Where will Ozone capital come from?
We expect that Ozone Funds will be offered to individual investors attracted to the idea of investing in low-income areas and building long-term appreciation on a tax-free basis. Individual investors will need to consider that the state tax treatment of their investment may be different
Developers that own appreciated assets have a significant opportunity to sell such assets to third parties and invest the gains in self-directed opportunity funds that invest in a business or real estate project that constitutes qualified Ozone property.
September 12, 2018

49. Where will Ozone capital come from?
A number of developers are considering sponsoring their own opportunity funds and raising capital from various sources.
Developers should consider Ozone projects that also qualify for new markets and/or historic rehabilitation tax credits
We expect a variety of managed Ozone funds organized for individual investors will be offered by registered investment advisors
September 12, 2018

50. Where will Ozone capital come from?
% of the equity capital invested in LIHTC projects comes from banks subject to the CRA and it is likely that Ozone fund investments that finance affordable housing will earn “positive consideration” towards their investment test goals
However, it appears that most banks do not have capital gains as they are generally not permitted to own equities
Two important exceptions may be banks with investment banking affiliates and banks that own older LIHTC investments with large negative capital accounts. Triggering “phantom” capital gains for banks that are already planning to make LIHTC investments may be a good strategy
September 12, 2018

51. Where will Ozone capital come from?
Publicly traded companies own lots of appreciated assets and they can be expected to be drawn to Ozone projects. However, most “C” corps will likely be attracted to commercial real estate projects, plant expansion, infrastructure and other investments with higher rates of return than will be available from LIHTC investments
Life insurance companies may be a viable alternative capital source as a number of them were LIHTC investors in 2010 & As a result, these firms are familiar with the asset class, they like to make large investments and properly structured projects located in opportunity zones should, in theory, offer them premium yields
September 12, 2018

52. How LIHTC Properties Qualify
September 12, 2018

53.
“All rental real estate, including residential real estate, located in OZs appears to be eligible to be a Qualified Opportunity Zone (QOZ) property as long as the real estate is newly constructed, or acquired after Dec. 31, 2017 and substantially improved, and meets the active conduct standard provided in the statute.”
September 12, 2018

54. Qualified Opportunity Fund
Purpose:
An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property (QOZP).
Self Certify
September 12, 2018

55. Qualified Opportunity Fund
Qualified Opportunity Zone Property (QOZP)
Qualified Opportunity Zone Stock
Qualified Opportunity Zone Partnership Interest
Qualified Opportunity Zone Business Property
September 12, 2018

56. Qualified Opportunity Zone Stock and Partnership Interests
The investment must be acquired after December 31, 2017 in exchange for cash;
Must be a qualified opportunity zone business, or is being organized for the purpose of being a qualified opportunity zone business;
Must remain a qualified opportunity zone business for substantially all of the qualified opportunity fund’s holding period
September 12, 2018

57. Qualified Opportunity Zone Businesses (QOZB)
A trade or business in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property (QOZBP) and:
Percent -> %
At least 50% of income derived from Active Conduct
Substantial portion of intangible property used in active conduct of business
< 5 percent unadjusted basis of property is nonqualified financial property
September 12, 2018

58. Qualified Opportunity Zone Business Property (QOZBP)
Tangible property used in a trade or business
Acquired by purchase from an unrelated party (20% standard) after December 31, 2017
During substantially all of holding period, substantially all the use is in a QOZ
Original use in the QOZ commences with the taxpayer OR
Taxpayer substantially improves the property
during any 30-month period after acquisition, additions to basis exceed an amount equal to the adjusted basis of such property at the beginning of such period
September 12, 2018

59. Business/Tax Issues
September 12, 2018

60. Timing Investor gain realization vs. staged capital contributions
Six month testing dates for Opportunity Fund
Cash needs of LIHTC partnerships
September 12, 2018

61. Practical Issues How will the “Ozone benefit” be split? Timing issues
Unable to sell the asset versus selling the partnership interest
Typical structures
Issues with land
Guidance???
September 12, 2018

62. QUESTIONS?
September 12, 2018