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TAX CREDITS 101

SEPTEMBER 5, 2013

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Tax Credit Team Members

CARA WALLOAsst. Director of LIHTC

Programs(804) 343-5714

J. D. BondurantStrategic Planner(804) 343-5725

Alena HendersonLIHTC Business Analyst(804) 343-5908

JAYNELL PITTMAN-SHAWSr. Tax Credit Allocation Officer(804) 343-5733

Hope RutterTax Credit Allocation Coordinator(804) 343-5518

JIM CHANDLERDirector of LIHTC Programs

(804) 343-5786

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How does the LIHTC program work?

Established by Congress with the Tax Reform Act of 1986

Significant Amendments in 1990, 1993, 2002 and 2008

Section 42 of the Internal Revenue Code

4 Illustration by Lancaster Pollard

Credit Flowchart

State Allocating Agency

TC Syndicator Developer Lender

Equity

Tax Credits

Debt

Tax

Cre

dits

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Income Levels Served

• 20% of units at 50% of median incomeor

• 40% of units at 60% of median income

• More restrictive limits elected during Application process

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9% vs. 4%

• 9% New construction or Rehabilitation credits

• 4% Acquisition credits• 4% Tax-exempt bond credits

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Tax Credit & Equity Calculation

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Equity Calculation

• Pricing based on total credits available, timing of pay-ins and market conditions

• Equity is paid in several installments based on negotiated benchmarks (ex: land transfer, substantial completion of construction, stabilization, receipt of 8609’s)

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INCREASED EQUITY FOR DEVELOPMENT RESULTS IN:• Lower Debt• Lower Rents

InvestorsTAX BENEFITS:• Tax Credits (10 yrs)• Tax Losses (15 yrs)

(Depreciation & Interest Expense)

Illustration from Nixon Peabody

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Yield and Credit Price Trends

Yield (left axis)

0.81 0.82 0.8 0.79 0.830.92 0.94 0.91

0.80.71

0.820.880.86

0%

2%

4%

6%

8%

10%

12%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Yiel

d

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

Cre

dit P

rice

Credit Price (right axis)

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How many credits are allocated to Virginia each year?

• Per Capita Credits$2.25 per person*

• Previous Allocations: • National Pool: • 5 % of 2015 Credits:• Non-competitive pool:• New Construction Pool• Estimated 2014 Credits:

$18,414,992($6,463,491)

$75,000$920,750

($ 500,000)$2,762,249

+ $15,209,500

2013 Population Estimate: 8,184,441

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Credit Pools• Non-Profit • Local Housing Authority• Regional

– New Construction– N.VA Planning District

8/Inner Washington MSA

– Northwest/North Central Virginia

– Richmond MSA– Tidewater MSA– Balance of State

• At Large• Non-Competitive

– Developments for Persons with Disabilities

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What are the responsibilities of housing credit agencies?

• Qualified Allocation Plan (QAP)• Notify local CEO of proposed

development & allow time for comment• Obtain market study• Provide a written explanation, when

requested, if an allocation is not made according to established priorities

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Qualified Allocation Plan• Sets forth selection criteria to allocate

appropriate to local conditions• Gives preference to properties

– Serving lowest income households– Remaining affordable for the longest

periods– Located in QCT’s (and the development

contributes to a concerted community revitalization plan)

• Provides procedure for monitoring compliance

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QAP: Sec 42 Selection Criteria1. Project location2. Housing needs characteristics3. Project characteristics, including existing housing as

part of community revitalization plan4. Sponsor characteristics5. Tenant populations with special housing needs6. Public housing waiting lists7. Tenant populations of individuals with children8. Intended for eventual tenant ownership9. Energy efficiency10. Historic nature of the project

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QAP: VHDA’s Selection Criteria1. Readiness2. Housing Needs Characteristics3. Development Characteristics4. Tenant Population Characteristics5. Sponsor Characteristics6. Efficient Use of Resources7. Bonus Points

– Rents < 40% AMI– Rents and Incomes < 50% AMI– Extended Compliance– Sale to Nonprofit or Local Housing Authority– Tenant Ownership Option

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Market Studies• Provide a plethora of information to help us assess

the housing needs and demands of low-income individuals and communities

• Help us determine if there’s a market for the proposed project

• Help us understand the impact on existing LIHTC communities (VHDA owned/financed - lower rents, competing amenities, etc.)

• VHDA is able to review this data objectively because of its own market data; to minimize negative impact on its existing VHDA owned/ financed properties

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Market Study Components• PROJECT OVERVIEW – address, # units, construction type

• PRIMARY MARKET AREA – where will tenants come from

• ECONOMIC OUTLOOK – employment trends

• DEMOGRAPHICS – population, age of population, household status, incomes, etc.

• SUPPLY/RENT ANALYSES – existing & pipeline projects that will compete with the subject

• DEMAND ANALYSIS – absorption, capture rate – is there sufficient demand for additional units? For the type of construction proposed?

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Market Studies – VHDA Guidelines• No study over 12 months old will be accepted

• VHDA at its sole discretion may commission an additional market study or supplementary market data

• The market study must be submitted in electronic format to VHDA directly from the applicant

• Studies deemed inadequate by VHDA will cause the application, and perhaps the analyst, to be rejected

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Market Studies – Industry Guidelines

• Standard terminology, e.g. primary market area, market demand, comparable property

• Standard methodology, e.g. absorption rate, capture rate

• Standard report format

• Membership/Best Practices

National Council of Affordable Housing Market Analysts (NCAHMA)

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Market Studies

• Before the credit allocation is made

• At the developer's expense

• Completed by a disinterested party

• Analyst approved by the Housing Credit Agency (VHDA)

A Requirement Under IRC Section 42

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2014 Allocation CycleJul 2013 2014 QAP ForumAug 2013 Release 2014 QAP changes for public

commentSep 2013 2014 QAP Focus Group Sep 2013 *2014 QAP Public Hearing/close public

commentsOct 2013 VHDA Bd of Commissioners Approve

2014 QAPJan 2014 How-to-Apply Workshops (4)Jan 2014 *CEO notification letter info deadlineMar 2014 Application for Reservation deadline

May 2014 Preliminary Rankings/ begin comment

periodMay 2014 Comment & Rebuttal period Jun 2014 Review final rankings with VHDA BoardJun 2014 Announce final rankingsNov 2014 Application for Allocation deadlineDec 2014 Finalize AllocationsDec 2016 Dev. Place in Service, then issue 8609s

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Submitting the Application

• Excel workbook having a self-score component

• Extensive documentation required but is a by-product of an objective, point based award system

• Transparent process

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Alignment With VHDA Strategic Goals and Housing Policy

• Alignment in five areas:– Green building– Accessibility– Homelessness– Sustainability– Transit-oriented development

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Alignment With VHDA Strategic Goals and Housing Policy

Significant incentives for:

LEED or EarthCraft green building standards Universal Design Standards Developments serving homeless populations Proximity to public transportation

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VHDA’s Multifamily Loan Program and LIHTC Program

• VHDA cannot require a VHDA loan as a condition of receiving a tax credit award

• We do have a unique opportunity to facilitate financing– Relationship established between developer and VHDA– Minimum Design & Construction Requirements apply to both

VHDA loans and tax credit deals

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Production Summary

– Program Inception to Date (includes 9% and Tax-Exempt Bonds)• 907 Developments• 84,921 Units

– 60% TC deals with VHDA financing

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What sets VHDA apart?

• Open, objective process

• Provide timely assistance

• We listen to stakeholder concerns and incorporate their input/suggestions into the program

• We provide program learning opportunities

• Manual and application are user friendly