A Guide to LIHTC

282.695,000100

The tax credit program was established 28 years ago.

Over 2.6 million developments financed.

Creates over 95,000 jobs annually.

Almost $100 billion in equity capital raised to date.

A Guide to LIHTC

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CONTENTS

Low Income Housing Tax CreditsThe history of the tax credit and how the process works.

Proven Track Record A look at the success of LIHTCs.

The Need for Affordable HousingRead about the growing need for affordable housing in our communities.

More than HousingThe LIHTC program and its effects on the economy.

Supporting the CreditWays that you can help support and preserve the LIHTC program.

A Brief History

Twenty-eight years ago, Congress passed (and the President signed) the Tax Reform Act of 1986. Among many other things, the Act created the Low Income Housing Tax Credit (Housing Credit) program, whose purpose was to spur private investment in affordable housing throughout the country. This program is one of the most successful affordable housing initiatives ever launched by the federal government. The Housing Credit (also referred to as “Section 42” – its IRC code section) provides a dollar-for-dollar credit against a taxpayer’s federal income tax liability. It stimulates the bulk of all affordable rental housing developed in the U.S. today. The program is a highly effective public-private partnership that harnesses the discipline of the marketplace to efficiently build safe, decent and affordable housing.

Housing Credits are very attractive to banks, insurance companies and corporations with taxable income. As stated, the credits provide a dollar-for-dollar reduction in federal income tax liability, providing an efficient and socially responsible means for taxpayers to reduce their effective tax rate. And for financial institutions, investment in Housing Credits can be an effective way to satisfy Community Reinvestment Act requirements.

Over the past few decades the Housing Credit has become an extremely important tool for developing affordable housing. The program has helped finance more than 2.6 million quality affordable housing units, leveraging almost $100 billion in private capital.

So How Does It Work?

Each State receives a fixed amount of Housing Credits from the U.S. Treasury Department based on its population. For 2014, the Housing Credit amount is equal to a State’s population multiplied by $2.30 (with each State receiving a minimum of $2,635,000 in credits). In addition, properties financed in substantial part with the proceeds of

tax-exempt bonds are eligible for Housing Credits, the amount of which is not subject to the above formula.

Each State has a Housing Finance Agency (“HFA”) that administers the Housing Credit program. Credits are generally awarded to affordable housing developers by the HFAs on a competitive basis though an application and allocation process. The HFAs are permitted to identify and prioritize their State’s unique housing needs and goals and have wide discretion in determining which developers receive Housing Credit awards (these priorities and goals are embodied in a “Qualified Allocation Plan” or “QAP”). Once a QAP is issued, developers apply to the HFAs for credits. HFAs review and score the applications and award Housing Credits to those developments that best meet the needs of the particular State. It’s a great example of local control over a national resource.

The amount of the Housing Credit available to a property is based on a variety of factors, including (i) actual cost of construction, (ii) number of units in a development that will be rented to low-income tenants, and (iii) the amount of credits necessary to make the property financially feasible. HFAs conduct a rigorous review of each application to ensure that developments only receive enough Housing Credits to make them both financially feasible and affordable.

In addition to any prerequisites set forth in a QAP, a property must also satisfy one of the following federal requirements:

“...one of the most successful affordable housing initiatives ever launched by the federal government.”

Above: President Reagan signing the Tax Reform Bill in October of 1986 during a ceremony at the White House.

Low Income Housing Tax Credits

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“...one of the most successful affordable housing initiatives ever launched by the federal government.”

• At least 20% of the units in the development need are both rent restricted and occupied by individuals whose income is 50% or less of the area median gross income (AMI).

• At least 40% of the units in the development are both rent restricted and occupied by individuals whose income is 60% or less of the AMI.

A unit is “rent restricted” if the rent charged to the tenant is not more the 30% of the income limit applicable to the unit (generally the 60% AMI or 50% AMI limit referenced above).

Section 42 also requires that Housing Credit properties remain income-restricted and rent-restricted for an initial 15-year “Compliance Period” plus a subsequent 15-year “extended use” period. HFAs may impose lengthier affordability periods if they desire.

While the HFAs are busy reviewing applications and awarding Housing Credits, Midwest Housing creates and capitalizes investment funds (“Investment Funds”) comprised of institutional investors. When developers receive credit awards, the Investment Fund will partner with them to provide equity capital to their properties. In exchange for the equity investment, the Investment Fund (and ultimately the investors) receives the Housing Credits awarded to the underlying property (the credits flow for a period ten years). Investors thus earn a market rate of return on their investment. And, as a result of receiving the equity investment to pay for construction costs, properties need less debt, thereby allowing property owners to charge lower rents while still developing a financially viable property.

Left: Congresswoman Lynn Jenkins and John Wiechmann, President of MHEG, discussing affordable housing at the Heritage Estates Ribbon Cutting on May 30, 2013 in Neodesha, Kansas.

Midwest Housing Equity Group

Fund sponsor

Investment Fund (Limited Partnership)

- Owned 99.99% by the Fund Investors- Owned .01% by MHEG

Housing Finance Agency

Awards housing credits

Fund Investors

Banks, insurance companies, corporations

Property

- Owned 100% by the Operating Partnership LP/LLC

FUND STRUCTURE

Developer

General Partner

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Operating Partnership

- Owned 99.99% by the Investment Fund- Owned .01% by the Developer/General

Partner

The Housing Credit is “widely regarded as the most successful housing production and preservation program in the nation’s history,” stated a 2010 report issued by Harvard’s Joint Center for Housing Studies. In fact, according to a study of the program recently issued by the accounting firm CohnReznick, the annualized foreclosure rate for Housing Credits properties is only 0.65%, far below the rate for the overall multifamily rental housing asset class. That success is the result of numerous aspect of the Housing Credit program:

• Housing Credits are awarded only to those developments that best meet the housing needs of the State. Only the strongest applications receive credits. This competitive process encourages developers to design financially viable properties that offer a safe, decent and affordable place to live combined with practical amenities such as computer labs and free credit counseling classes.

• Housing Credits are subject to recapture for 15 years. Recapture is most frequently triggered by foreclosure or the failure to maintain the rent-restrictions and income-restrictions applicable to the units. Midwest Housing and the Investment Funds obviously want to avoid any recapture of the Housing Credits. Each Housing Credit property is carefully monitored by Midwest Housing to ensure it complies with the affordability restrictions. Each property is also backstopped by property-level and Fund-level reserves, providing a strong safety net in the event of unforeseen market changes.

• This public-private partnership structure, and the corresponding involvement of investors and Midwest Housing, results in the imposition of private-sector discipline that is absent from many other federal housing production programs.

The Housing Credit is an incredibly valuable tool. It creates safe, decent and affordable homes. The properties it finances revitalize the neighborhoods in which they are located. It creates jobs and opportunities for our state and local communities. And it’s all privately built, operated and managed.

Proven Track Record

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Greystone Homes in Des Moines, Iowa offers 26 single family rental homes for the Sherman Hills/Drake neighborhood.

$2B

$4B

$6B

$8B

$10B

2004 2005 2006 2007 2008 2009 2010

$4.8

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$5.7

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$8.2

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$6.9

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$3.6

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$7.3

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2011 2012 2013

$8 b

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$10

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INVESTMENTIN LIHTC

In the last 10 years over $70.5 billion has been invested into LIHTC developments.

Midwest Housing Equity Group began syndicating in 1993 with the release of our first fund, NAHF 1993, L.P., a $4.75 million fund with a total of eight investors.

Since then MHEG has released a total of 41 funds raising over $1 billion in equity capital through the investment of almost 120 banks, insurance companies and corporations.

Source: Affordable Housing Finance*Estimated

Woodson Park Apartments provides 52 rental units for seniors in the El Reno, Oklahoma community.

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According to “The State of the Nation’s Housing 2013” by Harvard’s Joint Center for Housing Studies the simple fact is, “that low-income renters far outnumber the supply of low-cost units.” Unfortunately the shortage is greatest among the extremely low-income renters, those earning up to 30 percent of area median income. Both competition from higher-income renters and poor housing quality limit the supply of low-cost decent rental housing.

In 2011, there were 6.8 million affordable rental homes available for over 12.1 million extremely low-income renters.1 This is an astonishing shortage of 5.3 million units. Over 46 percent of all renters in the U.S. pay more than 30 percent of their income on housing, and over 25 percent of all renters are severely rent burdened, meaning they pay over 50 percent of their income in rent.

As the need for affordable housing grows, the supply continues to shrink. The Joint Center for Housing Studies also states that the affordability gap widens each year as low-cost units are removed from the housing stock. Even after taking into account LIHTC’s success at creating affordable housing units, the demand is outpacing production.

In addition, there is a significant need for workforce housing in many communities - housing neccessary for business to grow. According to the Center for Housing Policy, many employers report that a lack of affordable housing makes it more difficult to recruit and retain employees. In addition to workforce housing, our aging population is causing the demand for independent senior housing to increase sharply. Continued production of affordable housing via the tax credit program is instrumental to addressing these issues.

Over 25 percent of all renters are paying over50 percent of their income in rent.

The Need for Affordable Housing

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DEMAND VS. SUPPLY

• For every 100 extremely low-income renter households, there are only 30 rental units affordable and available to them. For every 100 renters with incomes below 50 percent of the area median income, there are only 57 units avaialble.1

• Between 1997 and 2007, the number of units with real rents under $400, including utilities - about what a household earning the full-time minimum wage could afford at 30 percent of income - fell by 244,000 to 6.6 million.2

• The Government Accountability Office estimates that mortgage restrictions and rental assistance contracts on more than 1 million subsidized units expired in 2013.

1 “The State of the Nation’s Housing 2013,” Joint Center for Housing Studies of Harvard University2 “The State of the Nation’s Housing 2010,” Joint Center for Housing Studies of Harvard University

Types of jobs created during and after the construction of a 100 unit multifamily LIHTC property.

Creating Jobs

The LIHTC does more than provide affordable housing, it also generates millions of jobs for Americans and helps stimulate the economy. During the construction process, the program creates jobs for architects, carpenters, electricians, plumbers and roofers to name a few. Once the property is completed, it requires property managers, leasing agents, maintenance workers and other service providers to operate the property. In addition, the now leasing residents help support local businesses and jobs by spending their income.

According to the National Association of Home Builders, they estimate on average that building a 100 unit property provides the following in one year:

• $7.9 million in local income• $827,000 in taxes and other revenue for local governments• 122 local jobs

They also estimate on average the recurring impacts of that a 100 unit property provides annually:

• $2.4 million in local income• $441,000 in taxes and other revenue for local governments• 30 local jobs

Source: “The Local Economic Impact of Typical Housing Tax Credit Developments” National Association of Home Builders (March 2010)

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40%

60%

80%

100%

Jobs Created Directly and Indirectly by

New Construction

Jobs Supported by Spending Locally

Earned Wages

Jobs Supported by Households Occupying

New Homes

Construction Wholesale & Retail Trade

Business & Professional Services

Restaurants & Bars

Health, Education & Social Services

Local Government

Other

Source: “The Local Economic Impact of Typical Housing Tax Credit Developments” National Association of Home Builders (2010)

More than Housing

Left: Reese Estates provides 15 single family rental homes for the community of Waverly, Nebraska.

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The LIHTC program is the primary resource for the development of affordable rental housing nationwide; without the credit there would be virtually no production of affordable housing. And with the need greater now than ever, the program needs your support. With our nation’s growing fiscal challenges, Congress is considering tax reform that would reduce or possibly eliminate corporate tax expenditures, such as the LIHTC program.

One challenge that needs to be addressed is the floating credit rate. Historically, the Internal Revenue Service has calculated the 70 percent and 30 percent present value credits for newly constructed and existing properties based on medium and long-term interest rates. When applied to LIHTC investments, this floating rate system creates uncertainty and financial complexity. The Housing and Economic Recovery Act of 2008 (HERA) provided for a 9 percent fixed floor rate for newly constructed and substantially rehabilitated properties that received an allocation of tax credits on or before 12/31/13. Permanently locking the 70 percent tax credit percentage at 9 percent, as well as providing a minimum 4 percent rate for acquiring existing properties, will provide stability in the affordable housing industry and make affordable housing development more financially feasible.

It is important to stay in contact and communicate with your Congressional delegations. We must continue to educate our elected officials on the value of the LIHTC program, ensuring that it is preserved if and when tax reform takes place. One very effective communication method is to invite Senators, Representatives and other government officials to attend and participate in groundbreakings, ribbon cuttings and open houses of LIHTC developments. These events do make a difference and allow members of Congress to see the quality of our developments and to meet the residents whose lives are improved.

Another great way to support the credit is to join the A.C.T.I.O.N. coalition. Their website (www.rentalhousing.org) is an excellent source of advocacy information, which includes LIHTC talking points, background information of the credit, state-specific fact sheets, sample letters to send to members of Congress, guidelines on getting delegates to attend groundbreakings and open houses and many other tools.

Supporting the Credit

Kansas Governor Sam Brownback attends City View at St. Margaret’s Ribbon Cutting in Kansas City, Kansas on December 19, 2013.

Above: Congressman Lee Terry attends the ribbon cutting for Cypress Pointe in Omaha, Nebraska on August 16, 2013.Right: Senator Tom Harkin speaks with Senator Jack Hatch and Ryan Galloway of Hatch Development Group at the Des Moines Greystone Homes Groundbreaking on August 23, 2013 in Des Moines, Iowa.

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