Housing 101

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Housing 101

• Developing Affordable Rental Housing

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Vermont's Housing Stock
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Vermont's Rental Units
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Housing Wage
The housing wage is the income necessary to pay
the Fair Market Rent (40th percentile rent plus
utilities).
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Vermont Incomes Fall Short
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Shifts in Federal Rental Affordability Delivery
Mechanisms

• Public Housing
• Section 8
• Tax Credits

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Developing Affordable Rental Housing

• Local groups identify need or opportunity.
• Connect with experienced community or regional
  housing nonprofit.
• Conduct feasibility analysis.
• Secure property.
• Design and permit development.
• Secure financing.
• Begin construction.
• Occupy.

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Federal Low Income Housing Tax Credit

• Created by the Tax Reform Act of 1986.
• Intended to offer investors incentive to invest
  in affordable rental housing.
• Provides a 10-year stream of federal tax credits
  in exchange for equity investment.
• Promotes affordability by minimizing debt
  service.
• Projects must meet occupancy and affordability
  criteria.
• IRS sets rules. Administered by VHFA.

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LIHTC Project Eligibility Requirements

• Occupancy
• At least 20 of the units occupied by families
  with incomes 50 of HUD AMI or
• At least 40 of the units occupied by families
  with incomes 60 of the HUD AMI.
• Affordability
• Gross rent cannot exceed 30 of the applicable
  qualifying income.
• Rent does not fluctuate based on size of family
  in unit.

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Maximum LIHTC Gross Rents
Location 1 Bedroom 2 Bedrooms 3 Bedrooms
Burlington 794 952 1,101
Barre 737 885 1,021
Rutland 662 795 918
Brattleboro 677 813 939
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Other Features

• Federally required 30-year use restriction.
• VHFA requires restrictive covenant requiring that
  low income occupancy in assisted units continues
  in perpetuity.
• Nonprofits arrange in advance through right of
  first refusal to purchase property after initial
  15-year compliance period for pre-determined
  price (outstanding debt any tax liability).

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Generic LIHTC Process

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The Investors' Perspective

• Why do investors participate?
• Community Reinvestment Act (banks).
• Return on investment.
• Local Involvement.
• What are the investors risks?
• Loss of credits.
• Reduction in return due to late credit delivery.
• Poor financial performance which results in need
  for additional capital investment.

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Calculating LIHTC Equity Available

• Determine eligible basis.
• Compute percentage of total units which are tax
  credit units.
• Determine qualified basis by multiplying eligible
  basis by percentage of LIHTC units.
• If applicable, multiply qualified basis by
  QCT/DDA adjustment of 130.
• Multiply qualified basis by 9 (allocated) or 4
  (bond).
• Result is tax credit which can be taken annually
  for 10 years.
• Multiply LIHTC available by credit pricing.

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Example

• Assumptions
• Conventional financing.
• 50 units, 45 of which are LIHTC units.
• Property is not eligible for 130 boost.
• Total development cost 6 million.
• Land and other non-depreciable costs 1.2
  million.
• Calculations
• Eligible basis 6 m less 1.2 m 4.8 million.
• Percentage of LIHTC units 45 50 90.
• Qualified basis 4.8 m X 90 4,320,000.
• Maximum annual LIHTC 4,320,000 X 9 388,800.

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Amount of Equity Created

• Assume that investors are paying 83 cents per
  LIHTC dollar.
• In our simplified example
• 388,800 X 10 years 3,888,000.
• 3,888,000 X 83 3,227,040.
• We these assumptions, the use of LIHTC would
  produce 3,227,040 in equity.

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Other Tax Credits

• Federal Historic Rehabilitation Credit
• One time tax credit equal to 20 of the qualified
  rehabilitation costs in a certified historic
  building.
• Rehab must be approved by US Department of
  Interior.
• Credit is available when project is placed in
  service.
• State Tax Credits
• Affordable Housing Credit.
• Downtown Credits.

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Sample Development Budget

• Assumptions
• 30-unit, new construction project.
• 25 LIHTC units (applicable fraction 83.33).
• LIHTC qualified basis 6,606,637 (includes 130
  adjuster).
• Tax credit percentage 8.15.
• Maximum LIHTC available 539,015
• LIHTC used 531,700.
• LIHTC available over 10 years 5,317,000.
• LIHTC price 83 cents.
• Tax credit equity raised 4,413,110.

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Uses
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Uses (continued)
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Sources
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First Year Operating Expenses