LIHTC 101: The Basics for the 2019 North Carolina Affordable Housing Conference Rebecca Darling Chris Key Partner Principal Novogradac & Company LLP Novogradac.

LIHTC 101: The Basics for the 2019 North Carolina Affordable Housing Conference Rebecca Darling Chris Key Partner Principal Novogradac & Company LLP Novogradac & Company LLP October 7, 2019

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Disclaimer Novogradac & Company LLP (“Novogradac”) is the copyright owner of this slide deck. Novogradac is making the printed version (but not the PowerPoint file) of this slide deck and any other handouts branded with the Novogradac logo (collectively the “Materials”) available to attendees and/or viewers of this workshop for informational and/or educational purposes only. The Materials and attendance at the workshop are not a substitute for professional advice. By accessing the Materials and attending the workshop, you agree to the terms of this disclaimer. You agree not to make business, financial, and/or tax decisions based solely on the Materials and you agree that we are not responsible for any such business, financial and/or tax decisions made by you based on the information contained in the Materials. You agree not to make audio or video recordings of the workshop instruction. Other than as may be permitted under the Fair Use Doctrine of US copyright law, you may not copy, cite to, or distribute the Materials, in whole or in part, without the prior written consent of an authorized officer of Novogradac. All rights reserved 2019 by Novogradac & Company LLP. Novogradac & Company LLP is a registered trademark of Novogradac. October 7, 2019

Let’s begin.

Outline Affordable Housing Overview
Credit Calculation at the Building Level Typical Ownership Structure Development Timeline Minimum Set-Aside, Income Limits, Rent Limits How Credits Are Earned, Claimed, and Recaptured

Affordable Housing Overview

Affordable Housing Overview
Total Project Costs Sorry. $6.38M DEBT $700 Developer/ Owner Developer/ Owner Can you lower your rent to $400/month? $400

Intro to LIHTC and Section 42
Basic Zoom (out) ‘86 x 10 years TAX CREDITS IRS Tax Liability Investor IRC Section 42 $ “Low-Income Housing Tax Credit” Partnership LLC Total Project Costs DEBT DEBT Equity ? Developer/ Owner Developer/ Owner TAX CREDITS Tax Liability Income limits Rent limits Suitability for Occupancy

Outline Credit Calculation at the Building Level
Affordable Housing Overview Credit Calculation at the Building Level Typical Ownership Structure Development Timeline Minimum Set-Aside, Income Limits, Rent Limits How Credits Are Earned, Claimed, and Recaptured

9% credits vs. bonds and 4% credits
IRC Section 42 LIHTCs $17.5mil State Allocating Agency

9% credits vs. bonds and 4% credits
IRC Section 42 LIHTCs $17.5mil State Allocating Agency State Allocating Agency

Eligible basis, DDA and QCT and basis boost
Total development costs Less: ineligible costs Eligible basis 1.8Mil 200k 1.6Mil $ - $10.8mil Ineligible costs: Land Marketing P’ship org. costs Commercial property Other $800k Eligible costs: Building and paving Construction loan interest Developer fee Site work Off-site improvements (under certain circumstances) IRC Section 42 Eligible Basis = $10mil A Total Project Costs B 30% Eligible basis 6mil $ 4mil $ State Allocating Agency “QCT” Projects located in Qualified Census Tracts (QCTs), which are census tracts “in which 50 percent or more of the households have an income which is less than 60 percent of the area median income for such year or which has a poverty rate of at least 25 percent.” IRC §42(d)(5)(B)(ii) Projects located in Difficult Development Areas (DDAs), which are areas that have “high construction, land, and utility costs relative to area median gross income.” IRC §42(d)(5)(B)(iii) 1 2 3 $2.44B “DDA” See IRC § 42(d)(5)(B) Private Activity Tax-Exempt Bonds $2.44B

QCT and basis boost 1 2 3 30% “QCT” “DDA” 1.8Mil 200k 1.6Mil $ -
See IRC § 42(d)(5)(B)

QCT and basis boost 1.8Mil 200k 1.6Mil $ - 30% “QCT” 1 2 3 “DDA” See IRC § 42(d)(5)(B)

Eligible basis, DDA and QCT and basis boost
Total development costs Less: ineligible costs Eligible basis 1.8Mil 200k 1.6Mil $ - $10.8mil Ineligible costs: Land Marketing P’ship org. costs Commercial property Other $800k Eligible costs: Building and paving Construction loan interest Developer fee Site work Off-site improvements (under certain circumstances) IRC Section 42 Eligible Basis = $10mil A Total Project Costs B 30% Eligible basis DDA/QCT basis boost Eligible basis (adjusted) 6mil 130% 7.8mil $ x 4mil 130% 5.2mil $ x 1 9% projects not already in a QCT or DDA that the state allocating agency chooses to award up to a 30% basis boost so that the project may be “financially feasible.” Housing and Economic Recovery Act of 2008 (HERA), IRC §42(d)(5)(B)(v) 2 3 See IRC § 42(d)(5)(B) Private Activity Tax-Exempt Bonds $2.44B

Tax credit calculation, continued
Total development costs Less: ineligible costs Eligible basis 1.8Mil 200k 1.6Mil $ - $10.8mil IRC Section 42 Eligible Basis = $10mil A Total Project Costs B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction 6mil 130% 7.8mil $ x 4mil 130% 5.2mil $ x 1 2 3 $2.44B See IRC § 42(c)(1) Private Activity Tax-Exempt Bonds $2.44B

Applicable fraction Building X Scenario No. 1 Scenario No. 2 B A
Low-Income Units Market-Rate Units Unit Fraction: Floor-Space Fraction: 50% 35% 65% Building X Scenario No. 1 Scenario No. 2 B A Applicable fraction Lesser Lesser See IRC § 42(c)(1)

Qualified basis 1 2 3 Eligible Basis 25% Market-Rate Units = $10mil A
Total development costs Less: ineligible costs Eligible basis 1.8Mil 200k 1.6Mil $ - $10.8mil 25% Market-Rate Units IRC Section 42 Eligible Basis = $10mil A Total Project Costs B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis 6mil 130% 7.8mil 75% 5.85mil $ x 4mil 130% 5.2mil 100% $ x 1 2 3 $2.44B See IRC § 42(c)(1) Private Activity Tax-Exempt Bonds $2.44B

Annual credits, total credits
$10.8mil Eligible Basis = $10mil A Total Project Costs B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits 6mil 130% 7.8mil 75% 5.85mil 10 $ x 4mil 130% 5.2mil 100% 10 $ x LIHTCs Private Activity Tax-Exempt Bonds See IRC § 42(b) 2,439,100,000

Tax Credit Calculation: 70% PV Rate
$10.8mil 9% 9% credits Eligible Basis = $10mil 70% present value credit A Total Project Costs B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits 6mil 130% 7.8mil 75% 5.85mil 10 $ x 10 4mil 130% 5.2mil 100% $ x LIHTCs Private Activity Tax-Exempt Bonds See IRC § 42(b)

Tax Credit Calculation: 70% PV Rate
9% FEB ‘ % JUL ‘ % $10.8mil 9% credits Eligible Basis = $10mil 70% present value credit A Total Project Costs B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits 7.57% 443k 10 4.43mil 6mil 130% 7.8mil 75% 5.85mil $ x 7.68% 399k 10 3.99mil 4mil 130% 5.2mil 100% $ x * * LIHTCs $8.42mil Private Activity Tax-Exempt Bonds See IRC § 42(b)

Tax Credit Calculation: 9% Floor
FEB ‘ % JUL ‘ % $10.8mil 9% credits Eligible Basis = $10mil 70% present value credit A Total Project Costs B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits 9% 527k 10 5.27mil 6mil 130% 7.8mil 75% 5.85mil $ x 4mil 130% 5.2mil 100% 9% 468k 10 4.68mil $ x The ability to use 9% as the credit rate (rather than 7.57% and 7.68%), produces approximately 18% more credits for our example Buildings A and B. LIHTCs 18% $9.95mil Private Activity Tax-Exempt Bonds See IRC § 42(b) 2,439,100,000 Jul 2015 7.52%

Outline Typical Ownership Structure Affordable Housing Overview

Typical ownership structure
LP Tax Liability Investor GP $ “Asset Management” Syndicator Syndicator $ $ Credits 9% Developer Fee Fund Losses “Upper Tier” $ GP $ LP $ Developer/ Owner Developer/ Owner “Lower Tier” Credits Losses $ LIHTCs Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

Outline Development Timeline Affordable Housing Overview

! Ten Percent Test ? $450k 10% Test 10% = $530k
Placed-in-service due date Placed-in-service due date Placed-in-service due date Placed-in-service due date Reservation 12/31/15 12/31/16 12/31/17 12/31/18 12/31/17 12/31/18 12 mo. IRC Section 42 Carryover ? Reservation $5.3M $450k ! 10% Test Carryover Request Document Developer/ Owner LIHTCs 10% = $530k “Reasonably Expected Basis” (Fixed assets at construction completion) State Allocating Agency See IRC § 42(h)(1)(E)

Finish construction, inspection, COO
Syndicator Tax Liability Investor IRC Section 42 $ Certificate of Occupancy $ Certificate of Occupancy Reservation $450k Developer/ Owner Developer/ Owner LIHTCs State Allocating Agency Property Manager

Placed-in-service package, 8609s, etc.
Tax Liability Investor IRC Section 42 Loan documents Architectural agreements Permits Final Cost Certification Certificate of Occupancy Certificate of Occupancy LIHTCs $450k $6.92mil Final Cost Certification Placed-In- Service Package Developer/ Owner Regulatory Agreement State Allocating Agency Form 8609 Form 8609 Property Manager “Low-Income” Households

Placed-in-service package, 8609s, etc.
Tax Return $450k Tax Return $450k IRS x 10 = $4.5 M $450k Tax Liability Investor IRC Section 42 Fund LIHTCs $450k XX XX 2016 240,000.00 $450k $450k 9.00 Developer/ Owner Developer/ Owner 2,666,666.67 State Allocating Agency Form 8609 Form 8609 0 0 Property Manager Form 8609

Timeline of a Typical 9% Deal
Timeline summary Timeline of a Typical 9% Deal Formation of Partnership Line up attorneys, architect, contractor, accountants, lenders, etc. Market study Preparation of forecast to “woo” investors Apply for tax credits Receive reservation of credits Investor/fund enters somewhere here Pass a 10% Test Finish construction Lease up Final Cost Certification Placed in Service Package Regulatory Agreement Reception of 8609s Yearly audits and tax returns

Outline Minimum Set-Aside, Income Limits, Rent Limits

State Allocating Agency
Minimum Set-Aside Investor Tax Liability IRC Section 42 Reservation % 2 LIHTCs $450k $6.92mil B A State Allocating Agency Property Manager 1 “Low-Income” Households

Minimum Set-Aside ! Minimum Set-Aside: Investor Tax Liability 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 IRC Section 42 OR Reservation % 2 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 LIHTCs $450k $6.92mil State Allocating Agency OR (as of 3/23/18) Property Manager 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 1 See IRC § 42(g)(1) “Low-Income” Households

Minimum Set-Aside 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 Investor Tax Liability IRC Section 42 MAX MIN Area Incomes Median 1/2 LIHTCs $450k $6.92mil Form 8609 Project Project State Allocating Agency $50k 20% 20% 40% 40% 80% $30k at 60% $25k 50% % UNITS INCOME (% of AMI) Avg. 40%

Minimum Set-Aside Investor Tax Liability IRC Section 42 MAX MIN Area Incomes Median 1/2 LIHTCs $450k $6.92mil Form 8609 Project Project Project Project Project State Allocating Agency $50k 70% 50% 40% 10% 40% 30% $30k at 60% % UNITS INCOME (% of AMI)

2 Bedroom Unit – Bremer County, Iowa 40-at-60 minimum set-aside
Rent Limits Investor Tax Liability IRC Section 42 2019 MTSP Income Limits HUD LIHTCs $450k $6.92mil 2019 Rent Limits: Income limits for actual households: 3-person household ? 2 Bedroom Unit – Bremer County, Iowa 40-at-60 minimum set-aside $46,440 State Allocating Agency 30% 30% $1,161/mo ($13,932/yr) Income Limit Rent Limit Imputed Household Size = 1.5 x No. of BDR (30% of income limit for imputed household size)

Outline How Credits Are Earned, Claimed, and Recaptured

Noncompliance Investor Tax Liability IRC Section 42 LIHTCs $450k $6.92mil Noncompliance State Allocating Agency Property Manager 1. 2. 3. Minimum Set-Aside Income Limits Rent Limits “Low-Income” Households

Earning and claiming tax credits
Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k Building A Tax Credit Period Developer/ Owner Compliance Period State Allocating Agency ⅓ Property Manager 80k 80k 80k 80k 80k 80k 80k 80k 80k 80k ⅔ 160k 160k 160k 160k 160k 160k 160k $2.4 M 160k 160k 160k 160k 160k 160k 160k 160k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15 See IRC § 42(f)(1) – Tax credit period equals ten taxable years

Earning and claiming tax credits
Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k $6.92mil Building A Tax Credit Period Developer/ Owner State Allocating Agency ⅓ Property Manager 80k 80k 80k 80k 80k 80k 80k 80k 80k 80k Accelerated Credits ⅔ 160k 160k 160k 160k 160k 160k 160k 160k 160k 160k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15 See IRC § 42(f)(2)(B) - Disallowed 1st year credit allowed in 11th year

Recapture and/or Disallowance!
Non-compliance, Form 8823 Recapture and/or Disallowance! Tax Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 ! Incomes vs. Income Limits Rents vs. Rent Limits Suitability for Occupancy Noncompliance! Form 8823 $ LIHTCs $450k Building A Tax Credit Period Developer/ Owner Credits Eligible to be Recaptured Recapture potential: Unearned credits, proportionate to reduction in qualified basis State Allocating Agency Property Manager 80k 80k 80k 80k 80k 80k 80k 80k 80k Accelerated Credits ! Earned Credits are not in danger of being recaptured 160k 160k 160k 160k 160k 160k 160k 160k 160k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15

Tax Credit Recapture Calculations
Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k $6.92mil Recapture Building A Developer/ Owner $220K State Allocating Agency Property Manager 80k 80k ! Claimed credits Earned credits Accelerated credits $ 660,000 ,000 220,000 60k 160k 160k 120k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15

Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 Disallowance of current-year credits LIHTCs $450k Recapture Building A Developer/ Owner $220K 160k 80k State Allocating Agency Property Manager 80k 80k ! In danger of disallowance because they haven’t been earned yet 60k 160k 160k 120k Claimed credits Earned credits Accelerated credits Units out of compliance Recapture amount 10% 6.25% + Interest 16,625 33,250 $49,875 $2,500,000 - 2,167,500 332,500 $2,000,000 - 1,734,000 266,000 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15

Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 Disallowance of current-year credits LIHTCs $450k $6.92mil Recapture Building A Developer/ Owner $700K 160k 80k State Allocating Agency Property Manager 80k 80k 80k 80k 80k 80k 80k 80k ! 60k 160k 160k 160k 160k 160k 160k 160k 160k 120k Claimed credits Earned credits Accelerated credits Units out of compliance Recapture amount 10% 6.25% + Interest 16,625 33,250 $49,875 $2,500,000 - 2,167,500 332,500 $2,000,000 - 1,734,000 266,000 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15

Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k Building A $4.5M Developer/ Owner $2.4 Million $320K x .133 80k $598.5k State Allocating Agency Property Manager ! 60k 160k 160k 160k 160k 160k 160k 160k 160k 160k 120k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15

Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k $6.92mil Building A Developer/ Owner $220K 160k 80k State Allocating Agency Property Manager 80k 800k ! 60k 160k 160k 120k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15 Claimed credits Earned credits Accelerated credits Units out of compliance Recapture amount $2,500,000 - 2,167,500 332,500 10% $2,000,000 - 1,734,000 266,000 6.25% 33,250 16,625 $49,875 + Interest

Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k $6.92mil Building A Developer/ Owner $320K State Allocating Agency Property Manager ! 160k 160k 160k 160k 160k 160k 160k 160k 160k 120k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15 Claimed credits Earned credits Accelerated credits Units out of compliance Recapture amount $2,500,000 - 2,167,500 332,500 10% 6.25% $2,000,000 - 1,734,000 266,000 33,250 16,625 $49,875 + Interest

Return $450k IRS x 10 = $4.5 M Tax Liability Investor IRC Section 42 LIHTCs $450k $6.92mil Building A Developer/ Owner $700K 300k 80k State Allocating Agency Property Manager 80k 80k 80k 80k 80k 80k 80k 80k ! 60k 160k 160k 160k 160k 160k 160k 160k 160k 120k 10 9 8 7 6 5 4 3 2 11 1 Year 12 13 14 15 Claimed credits Earned credits Accelerated credits Units out of compliance Recapture amount 10% $2,500,000 - 2,167,500 332,500 6.25% $2,000,000 - 1,734,000 266,000 33,250 16,625 $49,875 + Interest

Outline Affordable Housing Overview

LIHTC 101: The Basics for the 2019 North Carolina Affordable Housing Conference Rebecca Darling Chris Key Partner Principal Novogradac & Company LLP Novogradac & Company LLP October 7, 2019

LIHTC 101: The Basics for the 2019 North Carolina Affordable Housing Conference Rebecca Darling Chris Key Partner Principal Novogradac & Company LLP Novogradac.

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LIHTC 101: The Basics for the 2019 North Carolina Affordable Housing Conference Rebecca Darling Chris Key Partner Principal Novogradac & Company LLP Novogradac.

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