Beginner’s Guide to LIHTC

BEGINNER’S GUIDE TO LIHTC

TOPICS

• History of LIHTC• LIHTC Program Details• Credit Types• Restrictions and Other Issues

• LIHTC Utilization• Credits and Other Benefits• Ownership• Credit Calculation

• Ready to Develop?• Nuts & Bolts Sessions• Budgets and Feasibility• The Application and QAP• Construction, Asset Management, and Compliance

HISTORY OF LIHTC

• Low-Income Housing Tax Credit program is a Federal tax credit created as part of the Tax Reform Act of 1986.• Program governed by Section 42 of the Internal

Revenue Code for which the Internal Revenue Service (IRS) is the implementing agency.• Credits are allocated by formula to States (and

even territories) – about $2.30 per capita for 2014 with and Virginia has a population of 8 million.

HISTORY OF LIHTC

• Virginia Housing Development Authority manages Virginia’s LIHTC allocation and prepares, annually, a Qualified Allocation Plan, or QAP. • The QAP establishes selection criteria and in

preparing the Plan, VHDA must provide opportunities for public input.• Discussion of Virginia’s QAP for 2015 underway

down the hall right now……….

LIHTC PROGRAM DETAILS

• Handouts:• VHDA’s 2015 QAP• VHDA’s 2014 Manual and Application• Rent Limits Table• Income Limits Table• VHDA Program Timetable• LIHTC Lexicon (from Novogradac & Company)• Web Resource List (from Elizabeth Moreland Consulting)


9% Credits• Available for qualified expenses incurred in

projects involving new construction or rehabilitation (including adaptive reuse) of existing buildings.• Not available for acquisition costs.• 9% available competitively – March 2015

application.• Also known as the 70% present value credit.• Rate adjusted monthly by Treasury – 7.56% for

September 2014.


4% Credits• Available for building acquisition costs for buildings that,

generally, have been continuously owned for at least 10 years prior to applying for credits and are outside of initial compliance under a previous LIHTC award.

• Acquisition credits may be secured through applications for 9% tax credits.

• Available for acquisition and rehabilitation expenses for projects receiving loans based on tax-exempt bond proceeds – such projects may apply on an open submission basis.

• Also called the 30% present value credit – rate also adjusted monthly – for September 2014, 3.24%


Credit boosts – factors increasing credits:• Qualified Census Tract – the project is located in a

tract where more than 50% of the households have incomes at or below 60% of the Area Median Income (30% boost).• Difficult Development Area – project is in a

locality designated by HUD as having high development costs as compared to incomes (30% boost).• VHDA boost – for some 9% projects, can provide a

boost of up to 30% - VHDA utilizes this authority to provide a limited boost for certain project features.


Income restrictions – (minimum):• At least 40% of the

apartments reserved for families earning 60% or less of Area Median Income; or,• At least 20% at 50%

of AMI.

Locality 50% AMI 60% AMI

Richmond $36,450 $43,740

Arlington $53,500 $64,200

Wise Co. $26,150 $31,380


Locality 1 BR 2 BR

Richmond $684 $821

Arlington $1,003 $1,203

Wise Co. $491 $588

• Rent restrictions• Rents indexed to

30% of qualified income adjusted for family size and assuming 1.5 persons per household.• VHDA prepares a

table – available on the VHDA website.


• Credits flow for a 10 year period, but compliance requirements are in place for at least 15 years.• Compliance requirements and the benefits of the

credits lead many developers to seek credits on all of the apartments in a development.• Projects subject to Extended Use Agreements to

provide continued affordable housing benefits for at least 15 more years. These agreements and related agreements also hold developers to other promises made in applications.• EUA recorded against the property.


Among the other promises an applicant can make in an application:• Longer compliance period or provision of a

purchase option to a nonprofit• Deeper income and rent targeting• Green building certification• Accessibility• Locality financial support• Subsidy availability


Other Issues:• Noncompliance with IRS requirements can result

in loss of credits.• Noncompliance with VHDA requirements can

result in negative points for future applications.• Other funding sources may require different /

deeper promises – more apartments at 50% AMI or some at 40% AMI, for example.


Timetable:• March 9% application is for a Reservation of LIHTC• Competitive rankings revealed in May and June.• Awardees receive LIHTC agreements in Summer.• Allocation applications due by early November.• Can request a current year Allocation or a

Carryforward Allocation – Carryforward provides up to 2 years after the year credits are received to complete a project.• Must incur expenses in excess of 10% of basis

within 12 months of Carryforward Allocation.

LIHTC UTILIZATION

• Tax credits provide a dollar-for-dollar reduction in income tax liability.• In contract, a tax deduction provides an offset for

income and is calculated pre-tax, so it does not result in a dollar-for-dollar reduction in tax liability.• Low-Income Housing Tax Credits flow to owners of

affordable rental housing projects.• While some developers of LIHTC projects may

have significant tax liability, most developers and sponsors do not have enough to utilize all of the available credits.

LIHTC UTILIZATION

• Syndication involves the provision of limited ownership interests to other taxpayers in exchange for equity investments.• These investments are commonly made through

Limited Liability Companies or Limited Partnerships.• Investors enter these entities and provide capital

in exchange for LIHTC and other tax benefits.• In these structures, developers and/or sponsors

maintain day-to-day control over a project and the investors take a limited role.

LIHTC UTILIZATION

Typically 99% of the interests in an ownership LLC or LP are provided to an investor and the developer / sponsor retains a 1% interest.

Project Owner LLC

Developer / Sponsor

1%

Investor99%

owns project subject to mortgages

LIHTC UTILIZATION

• Investors are primarily corporations as there are limits on passive losses for individuals.• Individual corporations may make investments in

LIHTC projects directly – this is called a direct investment.• Corporations may also work through a syndicator

that can deploy investments through:• A fund that is established solely for deploying the

investments of a specific corporation – a proprietary fund• Funds that also include investments from other

corporations – a multi-investor fund

LIHTC UTILIZATION

The amount of capital or equity an investor will pay may vary based on the following:• Community Reinvestment Act interest for

investors that are also regulated financial institutions• To reflect risks associated with the strength of a

project or the strength of a developer or sponsor• To reflect economic factors such as the timing of

investment payments.

LIHTC UTILIZATION

Shady Acres (sample project):• Existing 20 unit property costs $200,000 - $15,000 of

this is land cost and $185,000 is building cost.• Rehabilitation costs are $1,000,000• Architect’s fees are $70,000• Construction loan fees and interest are $70,000• Cash reserves of $75,000• Permanent loan fees of $25,000• Developer’s fee of $150,000• Permanent and partnership legal of $75,000• Due diligence report costs of $25,000• Total project cost of $1,690,000

LIHTC UTILIZATION

Cost Category Total Cost Credit Basis

Land $15,000 NO

Building $185,000 $185,000

Construction $1,000,000 $1,000,000

Design $70,000 $70,000

Construction Loan Costs $70,000 $70,000

Reserves $75,000 NO

Permanent Loan Fees $25,000 NO

Developer’s Fee $150,000 $150,000

Non-Construction Legal $75,000 NO

Due Diligence Reports $25,000 $25,000

Totals $1,690,000 $1,500,000

LIHTC UTILIZATION

Shady Acres credit calculations:• 4% credits:• $185,000 in basis• Multiply by 3.24%• $5,994 in annual credits

• 9% credits:• Rest of basis - $1,315,000• Multiply by 7.56%• $99,414 in annual credits

• Total annual credits of $105,408

LIHTC UTILIZATION

• Total annual credits of $105,408 available for a 10 year period.• Investor credit pricing – after assessing earlier

factors – is $.90 per credit dollar.• Equity available for Shady Acres:• $948,672 of the $1,690,000 total development cost –

56% of the total.

• Typically, LIHTC equity can offset 45% to 65% of total development costs.

READY TO DEVELOP?

• The step, in the process of developing a project, wherein you determine what you want to do and if what you want to do is feasible is the predevelopment phase.• Predevelopment involves the evaluation of all key

factors for determining project feasibility, including:• Selecting a location• Building a team• Evaluating the market• Designing the project• Determining financial viability

READY TO DEVELOP?

Selecting a location:• Complete an evaluation of factors associated with

the location of an affordable housing project, including proximity to transportation and services, zoning, utility availability, site size, and seller involvement.• Price is a key factor in determining feasibility and

may be established by an appraisal – but may also be negotiated.• Site should be reasonably clear of environmental

hazards and a Phase I ESA may be needed.

READY TO DEVELOP?

Building a team:• The developer / sponsor is responsible for

evaluating the viability of a project, but will also need to involve others in evaluating project factors, including:• Architect• Attorney• Local government officials• Representatives of financing sources• Potential residents• Others….

READY TO DEVELOP?

Evaluating the market:• Developers / sponsors should begin to evaluate

the potential market early in project planning:• Find and evaluate Census and other data concerning area

demographics.• Seek information concerning competing projects.• Collect information on an existing project’s operating

history.• Survey potential residents.

• Order a formal Market Study from a firm on VHDA’s list of approved analysts.

READY TO DEVELOP?

Designing the project:• For the population• With all of the requirements:• VHDA standards• Green standards• Universal Design• Historic

• That includes all remedies / fixes for site and building• Feedback from contractors

READY TO DEVELOP?

Determining financial viability:• Development budget that includes all costs.• Sources for all of the development costs• Reliable income possibilities• Good expense projections• Affordable debt• Result – cash flow and a feasible project.

NUTS & BOLTS

• Budgets and Feasibility – this afternoon

• The Application and the QAP – later this afternoon

• Construction, Asset Management, and Compliance – tomorrow

• Networking in the meantime…..

Beginner’s Guide to LIHTC

Documents

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