Asset Management for LIHTC Properties Maximizing the Potential Value of the Credits

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Asset Management for LIHTC PropertiesMaximizing
the Potential Value of the Credits
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1st Year of the Credit Period

• Majority of credits lost are lost during the 1st
  year of the credit period
• Need to manage the handoff of the property from
  development to management to maximize the value
  of the credit allocation
• Often a gulf between development team and
  management team that can be bridged by a
  proactive Asset Manager

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Year 1 con

• Credits lost from the impact of the Two Thirds
  Rule
• Credits lost from the impact of the Averaging
  Convention
• Credits lost due to poor tenant income
  certifications
• Asset Managers need to understand how to manage
  the 1st year of the credit period to maximize the
  value of the credits

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Two Thirds Rule

• Provides incentive to owners to rent their low
  income units ASAP
• The credits generated by units first occupied by
  eligible residents during the 1st year of the
  credit period are more valuable than the credits
  generated by units first occupied by eligible
  residents after the 1st year of the credit period

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Two Thirds Rule con.

• For a unit first occupied by an eligible
  households during the 1st year of the credit
  period, the owner may take 1/10th of the total
  tax credit for the unit each year of the 10 year
  credit period.
• One-third of the tax credit taken is referred to
  as the accelerated portion.

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Two Thirds Rule con.

• For a unit first occupied by an eligible
  household after the close of the first year of
  the credit period, the owner may take 1/15th of
  the total tax credit for the unit each year of
  the 15 year compliance period beginning with the
  first year an eligible household occupies the
  unit.

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Two Thirds Rule

• An owner may take two-thirds of the regular, per
  unit tax credit for a unit first occupied by an
  eligible household after the close of the first
  year of the credit period.
• Example

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Example

• 100 unit building with 100 Allocation
• 3,000 credit for units rented year 1
• 2,000 credit for units rented after year 1
• Scenario A
• 100 units rented during year 1
• 100 units x 3,000 300,000 credit
• 300,000 x 10 years 3,000,000
• total tax credits
  
  

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Example con.

• Scenario B
• 80 units rented during year 1
• 20 units rented during year 2
• 80 units x 3,000 240,000 1st Yr Credit
• 80 units x 3,000 240,000
• 20 units x 2,000 40,000
• Tax Credit Years 2-10 280,000

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Example con.

• Scenario B Total Tax Credits
• 240,000 (280,000 x 9 years) (40,000 x 5
  years)
• 240,000 2,520,000 200,000
• 2,960,000
• Owners tax credits total 40,000 less when 20 of
  the units not occupied by eligible residents
  until year 2

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Two Thirds Rule con.

• With fewer total credits, and the slower pace at
  which 20 of the low income units will generate
  credits, the investors will pay less for every
  tax credit dollar generated by the building
• Example

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Example

• Scenario A
• 3,000,000 credits over 10 years
• Investors pay 90 cents per credit 1
• 3,000,000 x 90 cents
• Equity Raised 2,700,000
• Scenario B
• 2,960,000 credits over 15 years
• Investors pay 84 cents per credit 1
• 2,960,000 x 84 cents
• Equity Raised 2,486,400

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Strategies for Avoiding Impact of the Two Thirds
Rule

• Ensure property management understands the
  importance of renting all low income units during
  year 1
• Include incentives/penalties in management
  agreement
• For multi-building properties, ensure property
  management knows what year the developer plans on
  beginning the credit period for each building
• Example

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Example

• 100 unit property with 10 buildings
• Acquisition/Rehab 100 LIHTC property
• Date of Acquisition is 4/1/06
• Developer will complete the rehab and begin the
  credit period in 2006 for buildings 1-4 in 2007
  for buildings 5-10
• Management should ensure all units in buildings
  1-4 are occupied by eligible tenants by the end
  of 2006 by the end of 2007 for buildings 5-10

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Strategies con

• Hire property management experienced in the LIHTC
  program
• Develop a coherent strategy for negotiating with
  ineligible residents to vacate their units
• Implement a quality control program to ensure 1st
  year tenant income certifications are correct
• Store 1st year files in multiple locations to
  ensure their availability in case of an IRS audit

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Averaging Convention

• Owner wants to PIS and rent the low income units
  as early as possible
• Owner may take tax credits on the first years
  tax return for that portion of the year the units
  were actually rented to low income tenants
• Owner takes remaining portion of the credit for
  the 1st year of the credit period on the tax
  return for the 11th year of the compliance period

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Division of the 1st Year Credit

• Determine the 1st year low income occupancy as
  of 12/31 and calculate the tax credit for the 1st
  year of the credit period
• Determine the average low income occupancy for
  the 1st year of the credit period and determine
  how much of the tax credit for the first year may
  be taken on the 1st years tax return
• Note A building must be in service a full
  calendar month before it can begin to generate
  credits.

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Division of the 1st Year Credit con

• Subtract the tax credit taken on the first years
  tax return from the tax credit for the first year
  of the credit period to determine that portion of
  the 1st years credit the owner must take on the
  return for the 11th year of the compliance
  period Example

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Example

• 100 unit 100 tax credit building
• 3,000 credit/low income unit rented yr 1
• Owner places credits in service 8/1
• Low Income Occupancy on 8/31 40
• Low Income Occupancy on 9/30 60
• Low Income Occupancy on 10/31 80
• Low Income Occupancy on 11/30 100
• Low Income Occupancy on 12/31 100
• First Year Low Income Occupancy 100
• Yr 1 Credit 3,000 x 100 units 300,000

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Example con

• Average Year 1 Low Income Occupancy
• (40 60 80 100 100)/12 mos
• 380/12 mos 31.67
• 300,000 x 31.67 95,010
• Portion of Yr 1 Credit Taken on Yr 1 Return
• 300,000 - 95,010 204,990
• Portion of Yr 1 Credit Taken on Yr 11 Return

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Averaging Convention con

• Further impacts how much equity investors willing
  to pay per credit
• Earlier in the year the credits are PIS and the
  units are occupied by eligible households, the
  more investors will pay per credit
• Later in the year the credits are PIS and the
  units are occupied by eligible households, the
  less investors will pay per credit

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First Year of the Credit Period

• Generally, owner begins the credit period for a
  building the same year s/he places the credits in
  service
• Owner may elect to begin the credit period the
  year following the PIS date
• Example

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Example

• PIS Date is 8/1/05
• Owner begins credit period in 2005
• Owner may elect to begin credit period in 2006
• Owner considers impact of both the Two Thirds
  Rule and the Averaging Convention

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General Considerations

• Investors pay less per credit if they cannot
  begin taking credits until the year following the
  PIS date
• Investors pay less per credit the smaller the
  portion of the first years tax credit they can
  take on the first years tax return
• If all units are leased to eligible families on
  1/1/06, and the owner elects to begin credit
  period in 2006, owner may take entire tax credit
  for the first year of the credit period in 2006.

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Strategies for Minimizing Impact of the Averaging
Convention

• Begin certifying applicants eligible within 90
  days of the projected PIS date so they can take
  occupancy and begin generating credits ASAP
• Offer incentives to encourage households to take
  occupancy sooner than they planned
• Example

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Example

• Management certifies applicant eligible in early
  August
• Household plans on moving into unit in early
  September
• Management offers the household an incentive to
  take occupancy on or before August 31st
• Note Any unit occupied by an eligible household
  by the end of a month is included in the low
  income occupancy for that month

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Existing Residents

• Do not grandfather into LIHTC program
• Must be certified eligible or
• Vacate their units to make way for new, eligible
  tenants
• Developer surveys existing residents and in
  planning on how soon units will begin to
  generate credits considers the following

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Developer Considerations

• Does the owner have the legal right to terminate
  a residents lease?
• Does the owner have the legal right to not renew
  a residents lease?
• How long until the end of the current lease term
  for an ineligible resident?
• How much would it cost to motivate an existing
  resident to move compared to the size of the tax
  credit at risk?

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Existing Residents con.

• Based on developers findings
• Project 1st year low income occupancy based on
  units likely occupied by eligible residents at
  end of 1st year
• Budget for incentives for ineligible residents to
  move to meet qualified basis
• Dont make commitments to investors that units
  will generate credits when occupied by ineligible
  residents unlikely to vacate

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Ineligible Existing Residents

• Peril in promising 100 tax credits for HUD
  subsidized buildings
• HUD subsidized tenants protected by HUD model
  lease
• Asset Manager often involved in negotiations with
  ineligible tenants to vacate their units

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Acquisition/Rehab Credits

• Must begin the credit period the same year for
  both sets of credits
• August 2000 IRS issued PLR stating a project was
  considered in service as of the date of
  acquisition
• Calculate the average 1st year low income
  occupancy the same for both sets of credits

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Acquisition/Rehab Credits con.

• Owner selects period of time, 24 month max, to
  accumulate rehab costs
• If owner completes rehab the same year as
  acquisition, may begin credit period the year of
  acquisition
• If owner does not complete rehab the same year as
  acquisition, may begin the credit period the year
  s/he completes the rehab activities

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Rehab Complete Year of Acquisition

• Owner wants building occupied by eligible
  residents on date of acquisition
• Sales agreement may require seller to assist
  buyer in completing initial income certifications
  within 90 days and prior to the date of
  acquisition
• Example

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Example

• Date of Acquisition is 4/1/05
• Owner Completes Rehab during 2005
• Owner Completes Initial TICs 1/1/05 4/1/05
• Units begin generating acquisition rehab
  credits as of 4/1/05

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Rehab Complete Year after Acquisition

• Owner wants building occupied by eligible
  residents as of 1/1 of the year s/he completes
  the rehabilitation
• Owner should complete initial TICS within 90 days
  prior to the 1st of the year s/he plans on
  completing the rehab
• Example

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Example

• Date of Acquisition is 4/1/05
• Owner Completes Rehab on 6/1/06
• Owner Completes Initial TICS 10/1/05 12/31/05
• Acquisition and Rehab Credits flow from 1/1/06

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Developer Needs new C of O

• If the rehabilitation involves the relocation of
  the tenants and the owner must obtain a new C of
  O, units are not in service and may not generate
  credits until date on C of O
• Remember possibilities of obtaining a temporary C
  of O
• Example

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Example

• Date of Acquisition is 4/1/05
• Owner completes rehab and obtains new C of O on
  10/1/06
• Units can begin to generate credits on 10/1/06
• Units begin to generate credits when occupied by
  eligible households

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Property Management

• Asset Manager should be proactive in finding
  property management with successful experience in
  managing LIHTC properties
• Single building, 100 LIHTC properties are
  easiest to manage
• 100 LIHTC properties are easier to manage than
  mixed income properties

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Property Management

• Asset Manager should ensure property management
  staff actually assigned to the property has LIHTC
  experience
• Site Manager should not be learning how to
  complete tenant income certifications during the
  1st year of the credit period
• Management should be well versed in the
  Compliance Manual for their states monitoring
  agency

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• Liz Bramlet
• Affordable Housing Consultant
• 202/363-0541
• Bramlet6_at_aol.com