1. IPED HOUSING TAX CREDITS 101 Phoenix, Arizona February 22-23, 2007 Molly R. Bryson Thomas A. Giblin

2. Background Tax Reform of 1986 Section 42 of IRC of 1986 – Housing Program in the Tax Code – Statute Amended Several Times, Including in 2000 Objective to Provide Investor Equity Credit is a Dollar-for-Dollar Tax Reduction

3. Calculating Credits/Defining Terms Applicable Percentage times Qualified Basis = Annual Credit Amount

4. Applicable Percentage Two Credits: – 70 Percent Present Value Credit (the 9% Credit) – 30 Percent Present Value Credit (the 4% Credit) Credit Rates – 8.11% (9% Credit) & 3.48% (4% Credit) – February 2007 – Lowest rates in July 2003 – 7.78% and 3.33%

5. Applicable Percentage (contd) Lock-in Election upon receiving a binding commitment from the state to allocate credits (or when tax-exempt bonds issued) OR when building placed in service

6. 4% New Construction/Substantial Rehabilitation Credit Federally Subsidized – Building Receives Tax-Exempt Bonds or Below Market Federal Loan Below Market Federal Loan – Interest Rate Below AFR (Approximately 4.86% in 2/2007 for Long-Term Loans Compounded Annually) – From Federally Appropriated Funds

7. Exceptions From Federally Subsidized Definition HOME Loan if 40% at 50% Targeting CDBG Loan AHP Loan Loan is Subtracted from Eligible Basis Section 8 NAHASDA of 1996 if 40% at 50% Targeting

8. 4% Acquisition Credit Existing Buildings/Acquisition Costs Purchase from Unrelated Party Ten-Year Rule Waiver of Ten-Year Rule from Treasury

9. 4% Acquisition Credit (contd) Certain Placements in Service Ignored – Carryover Basis – Acquired from Decedent – Placement in Service by Governmental Unit or Non- Profit Entity – Foreclosure

10. Substantial Rehabilitation Requirement Greater of: – $3,000 per Low-Income Unit, or – 10% of Adjusted Basis Separate New Building Can Receive 4% plus 9% Credits

11. 9% New Construction/Substantial Rehabilitation Credit If Not Federally Subsidized

12. Basis Calculations Start with Eligible Basis, then Qualified Basis

13. Eligible Basis New Construction = Adjusted Basis Acquisition = Acquisition Cost Substantial Rehabilitation = Capitalized Rehabilitation Expenditures over 24 months Must Subtract Federal Grants 130% Increase in QCTs and DDAs

14. Qualified Basis Applicable Fraction times Eligible Basis equals Qualified Basis Applicable Fraction is the Lower of: – Number of Occupied Low-Income Units divided by the Total Number of Units, or – Floor Space Fraction

15. Low Income Units Threshold of Election of: – 20% of Units at 50% of Area Median Income (AMI), or – 40% of Units at 60% of AMI Election Upon Placement in Service Must Meet Minimum by End of 1st Credit Year HUD Publishes Area Income Figures Annually

16. Low Income Units (contd) Adjustments for Family Size like Section 8 – Family of 4 Qualifies at 60% (50%) AMI – Family of 3 Qualifies at 54% (45%) AMI – Family of 2 Qualifies at 48% (40%) AMI – Single Household Qualifies at 42% (35%) AMI

17. Rent Restricted Rent (including utilities) Cannot Exceed 30% of Qualifying Income for Assumed Family Size; Based on Bedrooms Per Unit Occupancy Assumptions: – One Person for Studio – 1.5 Persons per Bedroom

18. Rent Calculation Example Median Income = $60,000 Two Bedroom Unit 3 Person (2BR x 1.5) Income Limit = $32,400 30% of Income Limit = $9,720 Monthly Rent (1/12) = $810

19. Additional Rent Rules Rent Limits Change Annually with Publication of New Area Median Incomes Rent Will Not Decrease Below Original Floor Gross Rent Does Not Include Section 8 (or Similar Rental Subsidies) Gross Rent Must Include Utility Allowance for Tenant-Paid Utilities (i.e., Deduct from Rent to Owner)

20. Example of Tax Credit Calculation 100 Unit Project/70 Low-Income Units TDC (Including Land) = $5.5M Land Value = $500K Eligible Basis = $5.0M Qualified Basis = $3.5M ($5.0M x 70%)

21. Example Tax Credit Calculation (contd) Applicable Percentage = 8.11% (Not Federally Subsidized) Annual Credit = $283,850 ($3.5M x 8.11%) 10 Year Credits = $2,838,500

22. Equity Calculation Pricing Primarily Based on Total Amount of 10 Year Credits Available to Investor and Market Conditions Expressed as Cents Per Tax Credit Dollar In Above Example, if Investor Will Pay 90 Cents Per Tax Credit Dollar, Equity Equals $2,554,394 ($2,838,500 x 99.99% x 0.90)

23. Equity Calculation (contd) If Bond Financed 4% Deal, Equity Equals $1,096,090 ($5,500,000 - $500,000) x 70% x 3.48% x 10 x 0.90 x 99.99% = $1,096,090

24. Structure Investor LP $$$ Syndicator GP Investment Partnership LP Local GP Developer Operating Partnership

25. Key Business Terms Projects Generally Owned by Limited Partnership or Limited Liability Company Limited Partner Generally Owns 99.99% of Tax Credits, Losses & Profits Limited Partner Pays in Capital Contributions in Multiple Installments (generally 3 or 4), Based on Negotiated Benchmarks General Partner Guarantees Completion, Amount of Credits and Funding of Deficits

26. Who Can Use Credits? Individuals Limited Under Passive Loss Rules to Approximately $9,900/Year at the 39.6% rate C Corporations Can Use Losses and Credits Against Ordinary Income and Taxes Cannot Use Credits Against AMT Limitations on Closely-Held Corporations

27. Continued Compliance 15-Year Compliance Period Continued Tenant Qualification: – 40% Increase Above Eligibility OK – Vacant Units/Over-Income Units OK if Next Available Unit Rule Followed

28. Recapture Recapture on Non-Compliance: – Accelerated Portion of Credit Recaptured (1/3 of Credit 1st 10 years, Decreasing Through Year 15) – If Minimum Set-Aside Fails, All Accelerated Credits Recaptured – Otherwise, Unit-by-Unit (Extent of Decrease in Qualified Basis)

29. Recapture (contd) Recapture on Change of More Than 1/3 in Ownership of Sale of Project Bond Posting Procedure New Owner Steps into Sellers Shoes Upon Sale of Project

30. Extended Use Recorded Extended Use Commitment Extended Use Period: – At Least 30 Years, May be Longer to Gain Points Termination (with three-year vacancy de-control) – Upon Foreclosure – Qualified Contract

31. Qualified Contract State to Find Buyer If Requested by Owner After 14th Year Pursuant to Qualified Contract – Contract = Outstanding Debt + Adjusted Investor Equity + Other Capital Contributions, Less Cash Available for Distribution

32. Qualified Contract (contd) Adjusted Investor Equity = Initial Investor Equity to Project Inflated by COLA (up to 5% per year) If No Buyer Found Within One Year, Property May Be Sold or Converted to Non-Low-Income Housing, Subject to 3-Year Vacancy Decontrol

33. Compliance Monitoring State Credit Agencies Monitor Projects Owners Recordkeeping Requirements: – Number of Low-Income & Total Units – Income Certifications/Annual Re-Certifications & Backup Verifications – Qualified Basis & Eligible Basis Amounts – Rent Amounts Owner Annual Compliance Certifications

34. Congress Raised Cap in 2000 From $1.25 to $1.50 in 2001, $1.75 in 2002, Then Adjusted for Inflation $1.95 Per Person for 2007 $2,275,000 State Minimum in 2007 STATE ALLOCATION VOLUME LIMIT

35. Volume Limit Rules Example: – State With Three Million Population has $5,850,000 in Credits in 2007 Amount is for One Year of Credit 10% Non-Profit Set-Aside 50% Test: Private Activity Tax-Exempt Bonds Subject to Bond Volume Cap; No Credit Allocation Needed

36. Qualified Allocation Plans State Must Adopt QAP to Allocate Credits QAP Must Set Forth Allocation Priorities QAP Must Give Preference to: – Lowest Incomes – Longest Period of Low-Income Use – QCT Projects Contributing to a Concerted Revitalization Plan

37. Additional QAP Rules QAP Must Provide Procedure for Notifying IRS of Non-Compliance Bond Financed Projects Must Satisfy QAP

38. Project Evaluation Credit May Not Exceed Amount State Agency Determines Is Necessary For Feasibility and Viability Agency Must Consider: – Sources and Uses – Amounts Expected to Be Generated by Tax Benefits – Reasonableness of Development and Operating Costs

39. Project Evaluation (contd) Evaluation Occurs at Application, Allocation and Completion Owner Must Certify as to Amount of Subsidies For Tax-Exempt Bond Financed Projects, Issuer Must Do Similar Evaluation Agency Must Require Market Study Paid by Developer

40. State Allocation Process Carryover Allocation – 10% of Reasonably Expected Basis Must be Incurred by 12/31 of Allocation Year or 6 Months After Allocation, if Allocation After 6/30 – Building Must be Placed in Service by 12/31 of 2nd Year After Carryover – Carryover Basis Includes Costs of Land and Depreciable Property

41. Carryover Allocation Document Must be Issued by State Agency by 12/31 of Allocation Year 10 Elements Required in Document Agency Must Later Issue Forms 8609 After Buildings Complete State May Carry Forward Unused Credits for One Year; Then Goes to National Pool