1. The Low Income Housing Tax Credit Program

2. The LIHTC Program Created by Section 42 of the Internal Revenue Code
Administered by State Housing Finance Agencies
Each state allowed $1.75 per capita annually

3. # of Units Completed Low initial start due to difficulty of program
Low initial start due to difficulty of program
Leveled off as costs increase

4. What is Low Income Housing?
Program is for rental housing
Some lease purchase deals – 15 year
Eligibility based on tenant income
40 % of units below 60% income or
20% of units below 50% income
Maximum allowable rents set based on HUD guidelines
Housing mainly for families but also includes elderly, SRO, and special needs

5. What is a Tax Credit?
Tax Credit - dollar for dollar reduction in tax liability
Tax Deduction – offset to pre-tax income
LIHTC projects make use of both types of benefits

6. Tax Credits vs Tax Deductions
No Tax Credit/ No Deduction Deduction Tax Credit
Income from Operations $100,000 $100,000 $100,000
Operating Expenses $50,000 $50,000 $50,000
Deductions None $10,000 None
Taxable Income $50,000 $40,000 $50,000
Tax Liability $17,500 $14,000 $17,500
Tax Credits None None $10,000
Net Tax Liability $17,500 $14,000 $7,500

7. Types of Tax Credits 9% New construction/Rehab credit
Most common credit
4% Acquisition Credit
Used when purchasing an existing building
4% New construction/Rehab with federal funds
Bond Deal
HOPWA
Value fluctuates with interest rates
Current value 9%=7.96%, 4%=3.14%

8. The 9% Credit
Percentage applied to eligible basis to determine amount of credit
Eligible basis included depreciable assets
Development costs minus – land, building acquisition costs, grants or other credits, fees and costs related to perm loan, syndication costs, operating expenses including reserves
Adjustments to eligible basis
Qualified basis – adjusts by applicable fraction
% of units set aside for low income
Most projects are 100% low income
Basis boost
Qualified Census Tract (QCT) – 30% boost
Difficult to Develop Area (DDA) – 30% boost

9. 4% Acquisition Credits Cost of purchasing building qualifies if:
Project includes substantial rehabilitation
Meets requirements of 10 year rule
No basis boost for acquisition basis
Adjust basis for applicable fraction of low income units

10. Computing the Credit Amount
Eligible Basis $1,000,000
Applicable Fraction 100%
QCT Basis Boost 30%
Total qualified basis $1,300,000
X Treasury Rate %
Annual Tax Credit $103,480

11. Computing the Equity Value
Annual Credits $103,480
X 10 Years X 10
Total Credits $1,034,800
$584,685

12. Equity for Losses Example: Operating Losses $100,000 per year
15 years losses
Tax benefit $35,000 per year 15 years
12% = $238,380

13. Total Equity Tax Credit Equity $584,685 Loss Equity $238,380
Total Tax Credit $1,034,800
Equity price $0.79

14. Syndicating The Tax Credits
Sell credits to investors to generate equity
Set up funds with Limited Liability Corporations or Limited Partnerships
Benefits flow through the partnership to investors

15. Sources to Fill Gap HOME, CDBG Funds AHP Funds Other local funds
Deferred Developer Fee
Structured as loans not grants

16. How to Get the Credits Competitive process Scoring based on QAP
Ohio QAP awards points for characteristics
Unit amenities, AC, Energy Efficiently, 2 baths
Special needs units
State/City support
GP/Developer experience
Management company experience

17. Timeline Apply for credits – Different for all states
Receive Reservation of Credits
Incur at least 10% of costs in year 1
Complete project and place in service within 2 years
Tax credits begin at qualified occupancy
Keep units in compliance
Restrictions
Low income for 15 years or recapture
Many have extended use 15 more years

18. What Happens in Year 15? Expiring Properties numbers increasing
Property reuse options
Acquisition and continue
Acquisition and resale
Acquisition and rehab
Re-syndication
Refinance
Homeownership (lease-purchase)

19. Exit Strategies GP right of first refusal Fair market value sale
Debt plus exit taxes
Fair market value sale
If property has appreciated significantly
Bargain Sale
Where fair market value exceeds debt
Withdrawal of investor

20. What is Exit Tax? Cumulative losses > capital invested
Must recapture with gain at disposition
Who pays determined in the agreement
Can begin to mitigate at year 11
Allocate losses
Forgive debt
Reduce investment by 1/3
Is this a good idea?