Introduction to Low Income Housing Tax Credits & MHEG

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Jim Rieker Jim Rieker President & Chief Executive Officer Andrea Frymire Executive Vice President Okl h Oklahoma

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PowerPoint describing Section 42 of the IRC, Low Income Housing Tax Credits & the role of Midwest Housing Equity Group, Inc as a Tax Credit Syndicator.

Transcript of Introduction to Low Income Housing Tax Credits & MHEG

Page 1: Introduction to Low Income Housing Tax Credits & MHEG

Jim Rieker Jim Rieker President & Chief Executive Officer

Andrea FrymireExecutive Vice President

Okl hOklahoma

Page 2: Introduction to Low Income Housing Tax Credits & MHEG

Midwest Housing Equity Group, Inc. (MHEG) was created in 1993 under the

OUR MISSION & OBJECTIVEg q y p ( )

direction of then Governor Ben Nelson. The objective was to raise equity capital toinvest into affordable rental housing throughout Nebraska. MHEG later expanded,starting in 2000, into Kansas, Iowa and Oklahoma. Our mission today:

Changing lives for a better tomorrow Changing lives for a better tomorrow by promoting the development and sustainability by promoting the development and sustainability by promoting the development and sustainability by promoting the development and sustainability

of quality affordable housingof quality affordable housing..

We look for quality affordable properties that meet our mission and standards.

Important Fact: Dollars raised in Oklahoma, stay in Oklahoma!

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stay in Oklahoma!

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TO DATE, MHEG HAS:

OUR DEDICATION AND SUCCESS

,- raised over $570 million in equity - developed over 240 projects in rural, suburban and urban communities - created and renovated over 6,700 units of affordable rental housing

2009 HIGHLIGHTS:- Closed $40 million in equity (13 deals) to date, with $49 million in pending deals for 2010Raised $41 million in equity- Raised $41 million in equity

- $15 million in corporate organizational reserves

Our developments range from 6 to over 200 units and include:Our developments range from 6 to over 200 units and include:- single family homes- multi-unit and multi-building complexes- duplexeshi t i l ti- historical renovations

- specialty needs developments: elderly, assisted living, transitional homeless facilities, and developmentally disabled residents

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MHEG TOTALS

MHEG PORTFOLIO

NEBRASKAMHEG TOTALS- 29 Funds - $582 million raised- 247 projects closed

6 748 units created

NEBRASKA- 14 Funds- $292 million raised- 131 projects closed

3 136 units created - 6,748 units created

IOWA - 5 Funds

- 3,136 units created

OKLAHOMA- 3 Funds

- $105 million raised- 38 projects closed- 1,347 units created

- $72 million raised- 20 projects closed- 864 total units created

KANSAS- 7 Funds- $113 million raised

58 projects closed- 58 projects closed- 1,401 units created

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EQUITY RAISED & PORTFOLIO GROWTH CHART* As of 1/15/2010

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OEF I L P

OKLAHOMA PORTFOLIO

OEF I, L.P. - $25.81 million raised*- 13 projects closed- 564 units created

OEF II, L.P. - $40 million raised- 7 projects closed- 300 units created

OF III L POF III, L.P.- currently open

6* Equity raised total also includes side-by-side investments or direct investments

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HOUSING UNITS BY COUNTY – OKLAHOMATotal Housing Units in OK 864

Type of Units

Multifamily

Senior

Single Family

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Special Needs

Transitional

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ORGANIZATIONAL CHART

MHEG Board of Directors

President/CEOAudit / Investment

Committee

CFO/COO

Accounting Executive Vice President(s) of

Kansas Operations & Investment

Iowa Operations & Investment

Committee

Development & UnderwritingDepartment

Asset ManagementDepartment

Department( )

State Operations& Investment

Committee

Oklahoma Operations & Investment

Committee

Information ManagementDepartment

Due DiligenceDepartment

Compliance Department

IT Department

MHEG has 30 full-time employees and 2 part-time employees with offices in Iowa, Kansas,N b k d Okl hNebraska and Oklahoma.

*as of 1/2010 8

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BOARD OF DIRECTORS

David Fisher

FHLBank Topeka

Dick Hoiekvam

Deloitte & Touche

Sister Marilyn Ross Chairperson

Richard Schenck Vice Chairperson

Stephen Bodner

U.S. Bank pHoly Name Housing

CorporationWells Fargo CDC

Brad Krieger

Arvest

Rick Jackson

Capitol Federal Savings Bank

Barry Sandstrom

Home Federal Savings & Loan

Jim Rieker

Midwest Housing Equity Group

James Laphen

TierOne Bank

MHEG is governed by a Board of Directors with the President being responsible for the day-to-day operations.

Savings Bank Savings & Loan Equity Group

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OPERATIONS & INVESTMENT COMMITTEE

Roger Beverage

Oklahoma Bankers Association

Brad Krieger

Arvest

Dennis Brand

BancFirstOklahoma Bankers Association ArvestBancFirst

Bob Spinks

United Way of Oklahoma City

Kenyon Morgan

Prime Time Environments, LLC

Jim Rieker

Midwest Housing Equity Group

10The Operations and Investment Committee is an appointed sub-committee of the MHEG Board with the Executive Vice President being responsible for the day-to-day operations of Oklahoma.

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- Underwriting-financial feasibility

BEHIND THE SCENES: BENEFITS MHEG PROVIDES

- Identifying sources of potential financing

- Assist with/Reviewing applications for funding

- Compliance with Section 42 and other financing sourcesCompliance with Section 42 and other financing sources

- Accounting for construction/rehab period and then for ongoing operations

- Preparation of carryover forms and cost certification

A l dit d t t ti- Annual audit and tax return preparation

- Partnership with MDHF, a CDFI set up to offer a variety of predevelopment loans and permanent loans

- Training for development and management

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CRA BENEFITS FOR BANK PARTICIPANTS- Allows for CRA credit regardless of project locations as long as it is within theg gfund’s trade territory (i.e. a Tulsa bank can receive credit for a project in OklahomaCity)*- Regulators do vary on the scope of inclusion. Please check with your Regulator for their interpretation.- See OCC report dated 2/08 – further adopted by FDIC and Federal Reserves

- By purchasing tax credits in a MHEG fund banks can potentially fulfill theInvestment portion of the CRA exam, typically the most difficult portion for mostbanks to meet, as well as opportunities to meet the lending and service tests.

- All documentation that the Examiners require is provided by MHEG.

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- Capacity Building: In addition to working with established developers and sponsors,

BENEFITS TO EACH STATEg

MHEG also works with rural housing authorities, Community Housing DevelopmentOrganization’s, Community Action Program’s and other small developers that aredeveloping tax credit properties in their own communities.

- Housing Where it’s Needed the Most: We fund projects that are really needed but aresometimes more expensive and difficult to put together, such as small rural properties,i it i fill d i l d j tinner city, infill and special needs projects

- No Extra Risk: By investing in smaller properties with local developers, we do not acceptany more risk than national syndicators. In fact we are able to spend much more time onan investment and mitigate our risk.

MHEG Funds are right in your back yard MHEG Funds are right in your back yard and are strictly state specific!and are strictly state specific!

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- Geographical location

UNDERWRITING GUIDELINES

- Size of investment (% of total of Fund)- Guarantees- Reserve accounts- Structure of debt to property- Experience and strength of development team, general partner and property manager- Project site-zoning, stability, accessibility- Market Study/Analysis- Title and Survey- Insurance: property, contractor (insurance and bonds)Q l i k i f lif f i- Quarterly risk rating for life of investment

- Environmental studies: Phase I mandatory, Phase II if needed- Reasonable and substantiated operating assumptions: rent levels, vacancy factors, expense estimates level of must pay debt and lease up periodexpense estimates, level of must pay debt, and lease-up period

- Construction parameters and oversight- Rent Level Analysis- Operating Expense Comparison and Analysis to MHEG’s extensive database - Operating Expense Comparison and Analysis to MHEG s extensive database

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TAX CREDIT CALCULATION

$1,000,000 Total Project Cost$ 200,000 Project Cost Not Eligible for Credits$ 800,000 Eligible Basis for Credits*$ 800,000 g b e as s o C ed ts

x 9% Tax Credit Percentage$ 72,000 Credits Received/year

x 10 Years credits are received$ 720,000 Credits received

x .70 Price paid for credits$ 504,000 Equity into project from MHEG

Allows for low debt on project enabling developersto keep rents affordable

* States may allow 130% basis boost (not shown here) States may allow 130% basis boost (not shown here).

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TYPICAL DEAL STRUCTURE

Soft Debt / GP EquitySoft Debt / GP Equity25%*25%*

Tax Credit Equity Tax Credit Equity 55% (70% with basis 55% (70% with basis

boost)boost)Hard DebtHard Debt< 20%< 20%

boost)boost)

* F d d B* Funded By: AHP HOME TCAP Exchange

Developer Fee

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Developer Fee Various Contributions Certain Grants

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- Ownership risks of multifamily low-income rental housing pools

WHAT IS THE REAL RISK?

p y g pMitigated by MHEG’s investment policies, ongoing management and financial oversight, as well as MHEG’s financial strength

- Compliance risk Mitigated by MHEG’s continuing compliance practices and oversight

- Changes in current lawHighly improbable any law change would affect any current investments

- Reputation Risk We take “the high road”, we know that we represent our fund participants who are fi i l ill f th i itifinancial pillars of their communities

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WHAT ARE THE ADVANTAGES:

MHEG FUND PARTICIPANTS vs. DIRECT PARTICIPANTS

- Pool of projects diversifies risk- Structured for strong reserves at the project and fund level, with additionalreserves at MHEG

- Disciplined and conservative underwriting guidelines- Investment decisions lie with investors- MHEG professional staff manage all aspects of investment- MHEG professional staff manage all aspects of investment- Comprehensive quarterly reporting to fund participants – available in electronic formatIndependent financial audits performed at the project and fund level- Independent financial audits performed at the project and fund level

- Legal documents uniform and comprehensive- Delayed investment pay-in schedule increases yield- MHEG tax credit purchasers could take minimal construction risk- MHEG Fund participants do not need an expert tax credit specialist on staff,MHEG’s staff provides tax credit expertise

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PROJECT SELECTION PROCESSAfter a developer presents a potential deal to MHEG, the project goes through severalg gsteps to ensure the deal meets our standards and approval.

- Development/Underwriting & Due Diligence Departments review projecte e op e t/U de t g & ue ge ce epa t e ts e e p oject

- SCRUB Meeting: internal loan and project committee examine potential project

- Technical Review: technical advisors, tax lawyers & accountants assess potential project

F d P ti i t A l - Fund Participant Approval

- MHEG Board / Investment Committee approval

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- Optimal Tax Planning Strategy

WHAT DO YOU GET IN RETURN???

- 10 full years of federal tax credits

- 15 full years of depreciation and other passive deductions- 15 full years of depreciation and other passive deductions

- Periodic Write-down of Paid in Capital

- CRA Investment Credit, if applicable

- Marketing and PR opportunities

- Stabilizing and Investing in your local communities

- Stable proven track record of a performing asset class

- Accurately forecasted tax benefits

- Quarterly Reporting and Asset Management updateQuarterly Reporting and Asset Management update

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- MHEG does not want the capital you need for normal operations.

POINTS TO CONSIDER

- The dollars you are considering placing with MHEG are actually dollars you owe to the IRS asa result of your successful operations.

- You receive no monetary return with your payment to the IRS.

- You will receive an above market return and a CRA Investment Credit, if applicable, when you purchase tax credits with MHEG.

- Your participation benefits the community and you receive a monetary return withoutjeopardizing your normal business capitaljeopardizing your normal business capital.

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- At the end of the 15-year tax credit compliance period, our goal is to exit the partnership in

WHAT TO EXPECT IN THE FUTURE

a manner that allows the property to continue to comply with the states extendedcompliance period.

Th l t i b i t h i ht f fi t- The general partner or managing member in most cases has a right of firstrefusal to purchase our interest for an amount stipulated in the IRS code.

Since the project still has restricted rents it ill not be able to refinance m ch additional- Since the project still has restricted rents, it will not be able to refinance much additionaldebt. Our exit usually does not generate significant cash or create a tax event. Therefore,we do not include any residual value in our analysis of return to investors.

(note: this narrative is greatly oversimplified, but does represent the results of a typical exit)

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Deferred Pay-In over 6 years (Class “A” Shares)

SHARE OPTIONS

- By choosing the deferred pay-in method you will pay in a smaller portion of the capitalcommitment as each project closes and then pay the remainder in over the remainingterm of the capital contributionterm of the capital contribution.

BIG ADVANTAGE – your new quarterly tax estimate plus capital contribution paymentcould be less than your old quarterly tax estimates, which equates to little or no cash

One Time Pay-In (Class “B” Shares)

flow impact and higher internal rate of return (IRR).

- Capital is called on a pro-rate share of the capital commitment as each project isclosed , with the total capital commitment paid-in within approximately 18-24 months.

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The National Association of State and Local Equity Funds (NASLEF) is a

MHEG ASSOCIATIONS:

professional, nonprofit association formed in 1994 to promote the efficientmanagement of state and local equity funds.

- All State and Local Equity Funds belong (currently 16 members, representing 41 states)

- Members do not compete with each other, each represents certain states- Members share information from how they operate to what they learn- Collectively, NASLEF Members are one of the nation’s largest and leading tax credit syndicators:

- have raised over $6.5 billion in equity- invested in over 100,000 affordable housing units

- Many large, national tax credit purchasers prefer NASLEF members over other national syndicators because of:

local presence - local presence - stronger portfolio- better fund oversight

24MHEG IS A CHARTER MEMBER OF NASLEF!

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Visit our website at h ih iwww.mheginc.comwww.mheginc.com

to learn more about MHEG and view our properties.