The ABCs of Tax Credits The Role of Housing and Historic Tax Credits in Affordable Housing

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The ABCs of Tax CreditsThe Role of
Housing and Historic Tax Credits in Affordable
Housing
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Low Income Housing Tax Credits (LIHTC)

• Program that encourages private development of
  affordable housing (for profit and
  not-for-profit)
• Governed by the IRS / Implemented by housing
  agencies in each state
• Program is taxpayer funded by 1.75 contribution
  per person / per state (VA 9 million
  15,750,000 annually)
• A Tax Credit represents a dollar for dollar
  reduction in an investors federal tax liability
  (encourages participation / investment by large
  corporations)

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How do you receive an allocation of Tax Credits?

• Locate a potential development opportunity
• Complete Due Diligence (Approvals, Market
  Analysis, Feasibility)
• Submit an application to the state agency in
  which the development is proposed
• Application requirements are outlined in a
  Qualified Allocation Plan (QAP) that is provided
  by each agency
• Applications are typically awarded on a highest
  score basis
• Scoring is based on numerous factors (project
  readiness, efficient use of the credits,
  community need/support)

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Barriers to Entry

• Community Opposition (NIMBYism)
• High pre-development costs (to be competitive)
• Ultra-competitive (most states are usually
  oversubscribed by 4 to 1)
• Market challenges (low rents, high land costs,
  impact fees)

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Critical Program Requirements

• Credits are awarded on a project-specific basis
• Development must serve individuals whose combined
  household income is at or below 60 of the Area
  Median Income (50K - 30K max. income roughly
  15 / hour)
• Development must commit to serve low-income
  residents for a minimum of 15 years

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The Numbers
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Calculating the Tax Credit
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The Numbers (contd)
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Generating Tax Credit Equity

• Corporate Investors buy the tax credits and
  become equity partners in the development
• Credits are purchased for less than face value
  each dollar of credit is valued by market demand
  (usually between .75 and .80 per dollar of
  credits)
• Investor can reduce annual federal tax liability
  by face amount of annual tax credit (717,750)
  but they only paid 574,200 (143,550 tax savings)

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Generating Tax Credit Equity

• Credits can be claimed once a year for 10 years
• Full equity investment (5,742,000) is paid in
  cash in first year based on an agreed upon
  payment schedule
• Example represents a 1,435,500 tax savings for
  investor (7,177,500 (value of credit) -
  5,742,000 (amount corporation paid for credits))

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New Construction LIHTC Developments
Senior Housing
Family Housing
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Historic Rehabilitation Tax Credits

• Similar in nature to the LIHTC structure
• Rule of Thumb Buildings are typically 50 years
  or older
• Must be located within an existing historic
  district or individually listed as historic
  structure
• Program overseen by the National Parks Service /
  governed by the US Department of the Interior
• State Historic Preservation Officer (SHPO)
  oversees the program at each state level

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Nomination Process

• Part I Building is presented to SHPO to
  determine if it is deemed eligible to be listed
  as a historic structure
• Part II Developer outlines proposed improvements
  to the structure with emphasis on maintaining the
  buildings historical integrity
• Part III Confirmation the building was
  rehabilitated to specifications outlined in Part
  II and granting of tax credits

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Program Overview

• Federal 20 of eligible basis
• Some states also issue credits (can be coupled
  with Federal)
• Credits last for 5 years and require compliance
  of all historically significant changes
• Heavy emphasis on exterior of the structure
  (windows, brickwork, penetrations)
• Less strict on interior rehabilitations

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Pros / Cons

• Can offset a reasonable portion of the
  construction costs reducing debt requirements
• Can be coupled with LIHTC
• Encourages historic preservation
• Extremely high construction costs
• Must be used in a trade or business or held for
  the production of income
• Not available to governmental bodies, non-profits
  or tax-exempt entities

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The Numbers
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Calculating the Historic Credit
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Coupling the Credits
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Historic Rehab