The Low Income Housing Tax Credit Program
The LIHTC Program
Created by Section 42 of the Internal Revenue Code
Administered by State Housing Finance Agencies
Each state allowed $1.75 per capita annually
# of Units Completed
0
20000
40000
60000
80000
100000
120000
140000
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
LIHTC Units Completed by Year
# of Units
Low initial start due to difficulty of program Leveled off as costs increase
http://www.danter.com/taxcredit/stats.htm
What is Low Income Housing?
Program is for rental housing Some lease purchase deals – 15 year
Eligibility based on tenant income 40 % of units below 60% income or 20% of units below 50% income
Maximum allowable rents set based on HUD guidelines Housing mainly for families but also includes elderly,
SRO, and special needs
What is a Tax Credit?
Tax Credit - dollar for dollar reduction in tax liability
Tax Deduction – offset to pre-tax income LIHTC projects make use of both types of
benefits
No Tax Credit/No Deduction Deduction Tax Credit
Income from Operations $100,000 $100,000 $100,000
Operating Expenses $50,000 $50,000 $50,000
Deductions None $10,000 None
Taxable Income $50,000 $40,000 $50,000
Tax Liability (@35%) $17,500 $14,000 $17,500
Tax Credits None None $10,000
Net Tax Liability $17,500 $14,000 $7,500
Tax Credits vs Tax Deductions
Types of Tax Credits
9% New construction/Rehab credit Most common credit
4% Acquisition Credit Used when purchasing an existing building
4% New construction/Rehab with federal funds Bond Deal HOPWA
Value fluctuates with interest rates Current value 9%=7.96%, 4%=3.14%
The 9% Credit
Percentage applied to eligible basis to determine amount of credit
Eligible basis included depreciable assets Development costs minus – land, building acquisition costs, grants
or other credits, fees and costs related to perm loan, syndication costs, operating expenses including reserves
Adjustments to eligible basis Qualified basis – adjusts by applicable fraction
% of units set aside for low income Most projects are 100% low income
Basis boost Qualified Census Tract (QCT) – 30% boost Difficult to Develop Area (DDA) – 30% boost
4% Acquisition Credits
Cost of purchasing building qualifies if:Project includes substantial rehabilitationMeets requirements of 10 year rule
No basis boost for acquisition basis Adjust basis for applicable fraction of low
income units
Computing the Credit Amount
Eligible Basis $1,000,000
Applicable Fraction 100%
QCT Basis Boost 30%
Total qualified basis $1,300,000
X Treasury Rate 7.96%
Annual Tax Credit $103,480
Computing the Equity Value
Annual Credits $103,480
X 10 Years X 10
Total Credits $1,034,800
NPV @12% $584,685
Equity for Losses
Example:
Operating Losses $100,000 per year
15 years losses
Tax benefit $35,000 per year 15 years
NPV @ 12% = $238,380
Total Equity
Tax Credit Equity $584,685
Loss Equity $238,380
Total Equity $823,065
Total Tax Credit $1,034,800
Equity price $0.79
Syndicating The Tax Credits
Sell credits to investors to generate equity Set up funds with Limited Liability
Corporations or Limited Partnerships Benefits flow through the partnership to
investors
Sources to Fill Gap
HOME, CDBG Funds AHP Funds Other local funds Deferred Developer Fee Structured as loans not grants
How to Get the Credits
Competitive process Scoring based on QAP Ohio QAP awards points for characteristics
Unit amenities, AC, Energy Efficiently, 2 bathsSpecial needs unitsState/City supportGP/Developer experienceManagement company experience
Timeline
1) Apply for credits – Different for all states2) Receive Reservation of Credits3) Incur at least 10% of costs in year 14) Complete project and place in service within 2 years5) Tax credits begin at qualified occupancy6) Keep units in compliance
- Restrictions - Low income for 15 years or recapture- Many have extended use 15 more years
What Happens in Year 15?
Expiring Properties numbers increasing Property reuse options
Acquisition and continueAcquisition and resaleAcquisition and rehab
Re-syndication Refinance
Homeownership (lease-purchase)
Exit Strategies
GP right of first refusalDebt plus exit taxes
Fair market value sale If property has appreciated significantly
Bargain SaleWhere fair market value exceeds debt
Withdrawal of investor
What is Exit Tax?
Cumulative losses > capital invested Must recapture with gain at disposition Who pays determined in the agreement Can begin to mitigate at year 11
Allocate lossesForgive debtReduce investment by 1/3 Is this a good idea?
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