The Low Income Housing Tax Credit Program

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The Low Income Housing Tax Credit Program
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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

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of Units Completed
http//www.danter.com/taxcredit/stats.htm

• Low initial start due to difficulty of program
• Leveled off as costs increase

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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

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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

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Tax Credits vs Tax Deductions
No Tax Credit/ No Deduction Deduction T
ax Credit Income from Operations 100,000 100,00
0 100,000 Operating Expenses 50,000 50,000
50,000 Deductions None 10,000 None Taxable
Income 50,000 40,000 50,000 Tax Liability
(_at_35) 17,500 14,000 17,500 Tax
Credits None None 10,000 Net Tax
Liability 17,500 14,000 7,500
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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 97.96, 43.14

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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

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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

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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 7.96
• Annual Tax Credit 103,480

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Computing the Equity Value

• Annual Credits 103,480
• X 10 Years X 10
• Total Credits 1,034,800
• NPV _at_12 584,685

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Equity for Losses

• Example
• Operating Losses 100,000 per year
• 15 years losses
• Tax benefit 35,000 per year 15 years
• NPV _at_ 12 238,380

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Total Equity

• Tax Credit Equity 584,685
• Loss Equity 238,380
• Total Equity 823,065
• Total Tax Credit 1,034,800
• Equity price 0.79

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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

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Sources to Fill Gap

• HOME, CDBG Funds
• AHP Funds
• Other local funds
• Deferred Developer Fee
• Structured as loans not grants

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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

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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

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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)

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Exit Strategies

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

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What is Exit Tax?

• Cumulative losses gt 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?