texas housing conference 2014 get connected housing tax credits – an introduction july 28, 2014...

Texas Housing Conference 2014 GET CONNECTED Housing Tax Credits An Introduction July 28, 2014 Edwina Carrington President, CHK Enterprises, LLC Diana McIver President, DMA Development Company, LLC 1

Housing Tax Credits: An Introduction What you will learn: 1.What is the Low Income Housing Tax Credit (LIHTC) Program? What can be built, who can live there? What are some recent changes? 2.What is the organizational structure? Who are the players? 4.What is the application process in Texas? 5.How much Equity can be generated and how is the amount of Debt determined? 6.How are rents calculated? 7.What if Tax Credits and loan are not sufficient? How to fill the gap. 2

History of the Housing Tax Credit Program 1986 Congress through the Tax Reform Act, enacted Section 42 of the Internal Revenue Code. Section 42 created the Low Income Housing Tax Credit (LIHTC) to provide incentives to the private sector to invest in affordable housing. Credit is a dollar-for-dollar tax reduction. Credit is based on the Cost of Construction or Rehabilitation 1986 1990 LIHTC program authorized on a temporary basis. 1993 Congress made the LIHTC program permanent. 3

History, continued 2005 TDHCA removed the words Low Income from the program name. Now in Texas it is called the Housing Tax Credit (HTC) Program. 2008 Congress enacted the Housing & Economic Recovery Act of 2008 (HERA) with the most significant changes since 1986. 2009 Congress enacted American Reinvestment and Recovery Act of 2009 (ARRA) which created the Tax Credit Assistance Program (TCAP) and Tax Credit Exchange (Exchange) on a temporary basis. 4

History, continued The Tax Credit program is 28 years old and is the oldest (longest lived) supply side housing program. According to a study done in 2010: Approximately 23,762 housing credit property investments produced by the end of 2010 more than 2.4 million affordable units In 2010, median occupancy among all stabilized properties was 96.6% DSCR in 2010 was 1.24 Estimated foreclosure rate is.7% 5

What is a Housing Tax Credit? Source of Equity: Housing Tax Credits are sold to investors who use the tax credit to reduce tax liability $ for $. This infusion of cash into the project reduces the need for a large mortgage and is used to pay a large portion of the development costs Regulated by IRS Administered by a State Agency. In Texas, the program is administered by the Texas Department of Housing & Community Affairs (TDHCA) 6

Two Types of Tax Credits 9% Credit Also known as the 70% present value credit In Texas these credits are awarded annually on a competitive basis 4% Credit Also known as the 30% present value credit Available w/tax exempt bonds through the States Volume Cap Allocation 7

What is a 9% Credit? Each State receives a per capita allocation, adjusted annually. In 2014, the amount is $2.30 per capita. Approximately $61,000,000 is available in 2014 for Texas. 10 Year Credit (longer compliance period) New construction or substantial rehabilitation If rehab, building acquisition costs qualify only for a 4% credit 8

What is a 4% Credit? 4% Credit is used in tandem w/Private Activity Bonds. States have $100 per capita limit on ALL Private Activity Bonds, also called Volume Cap. Texas receives annual allocation of approximately $2.6 billion Eligible Uses are many from sewage plants to student loans to affordable housing Approximately $581,860,000 is reserved in Texas for multifamily housing bonds When used with Private Activity Bonds, the 4% Credit is a 10 year Credit (Compliance is 30 years). Texas Legislature has established development requirements for tiers of competition based on affordability factors, and also provided a system for allocating bond cap throughout the 13 Regions. 9

4% LIHTCs, continued Issuers of Bonds can be Housing Finance Agencies, Housing Authorities, Public Facility Corporations, Texas State Affordable Housing Corporation (TSAHC) or TDHCA, but only TDHCA can award the 4% tax credits and application must be filed timely. New Requirement (effective 9/1/13): Must have local resolution of NO OPPOSITION, regardless of bond issuer. No TDHCA scoring applies to 4% Tax Credits, but must meet Threshold Requirements of the QAP, including notifications, design, amenities, etc. Undersubscribed for past seven years, but this is changing The 4% Credit program did not receive any favorable treatment from HERA or ARRA. Therefore, the amount of the credit floats monthly and is not fixed at 4%. 10

Major Federal Legislative Changes In response to the financial crisis in 2008, the Congress enacted two major pieces of legislation designed to ensure the continuation of affordable housing under the Housing Tax Credit Program. The Housing & Economic Recovery Act of 2008 (HERA), which included significant reform for the Housing Tax Credit Program, and The American Reinvestment & Recovery Act of 2009 (ARRA), which created the Tax Credit Assistance Program (TCAP) and Tax Credit Exchange Program (Exchange). 11

Housing & Economic Recovery Act of 2008 On July 26, 2008, the Congress passed the Housing and Economic Recovery Act of 2008 (HERA), the most comprehensive and substantial housing bill to pass the Congress in decades. Major Changes include: 1.Fixed Credit rate at 9% for projects that received an allocation of credits by 12/31/2013. 2.Redefined Federal Subsidy and allowed federal grants (such as HOME, 202, etc.) to be included in eligible basis 3.Created 3 rd type of high cost area, allowing States to give the 130% credit boost for other than projects located in Qualified Census Tracts (QCTs) or Difficult Development Areas (DDAs) 12

HERA, Major Changes, cont. 4.Modified related party rule and 10 year waiver rules for existing buildings 5.Added a Hold Harmless protection for properties located in areas with reductions in Area Median Gross Income (AMGI) 6.Allowed rural properties to use a National Non-metro Median Income standard in determining both incomes and rents 13

What Can Be Built under the HTC Program? Housing Types can be multiple types, but must meet the definition of qualified residential rental property Multifamily Rental, e.g., workforce housing Senior Rental (age 55+) Single Room Occupancy (SROs) for Homeless 14

Affordability Requirements 40% of the units @ rents based on 60% Area Median Income (AMI), or 20% of the units @ rents based on 50% AMI Must keep project affordable for at least 30 years (some states may require longer). In Texas, extra points are awarded to 9% HTC developments for keeping the housing affordable for 35 years. Credits are only awarded on the units that meet the long term affordability test. Although Market Rate units are allowed, no tax credits are available for these units. 15

How Does TDHCA Ensure the Units Stay Affordable? Compliance is a big part of this program. Each Tax Credit project files a Land Use Restriction Agreement (LURA) with TDHCA and records it in the County records. TDHCA, as well as the tax credit investor and the mortgage lender, have regular inspections of the property and review of tenant files. Violations may result in loss of tax credits to the investor, and subsequent financial penalties to the developer/general partner. It can also result in debarment of the developer/general partner. 16

Can a Housing Tax Credit Project Be Sold? The Housing MUST stay affordable during the Extended Use Commitment (30 or 40 years). If the Owner requests to sell after the 14 th year, they must ask the State to find a Buyer pursuant to Qualified Contract rules. Qualified Contract Price = Outstanding Debt + Adjusted Investor Equity + Other Capital Contributions Cash Distributions. Right of First Refusal given to nonprofits and tenant purchasers 17

Who Can Live in a Tax Credit Community? Families w/incomes at or below 60% AMGI, or Seniors w/incomes at or below 60% AMGI w/head of household at least age 55 Caveat: Must be able to afford the rent A resident with a voucher from a housing authority can live in Tax Credit Housing and pay 30% of their income for rent. 18

Getting Started: First Steps 1.Assemble the needed learning tools Texas Qualified Allocation Plan (Scoring Criteria) TDHCA Uniform Multifamily Rules, which include Compliance Rules (Threshold Criteria) TDHCA Multifamily Procedures Manual TDHCA Real Estate Analysis Rules & Guidelines 2.Meet with City or County officials in your community 3.Identify potential sites 4.Begin assembling Development Team 19

Who Can Develop HTCs? For Profit Developers Nonprofit Developers (10% set-aside for Nonprofits), including Housing Authorities TDHCA has special qualifications to be eligible in NP set-aside For Profits and Nonprofits can Joint Venture 20

Typical Organizational Structure of an Operating Partnership 21 ABC Apartments, LP 100% (Single Asset LP*) * can also be an LLC Managing General Partner.01% Investor 99.99%

The Limited Partnership Owner HTC Developments create an ownership entity, a limited partnership or a limited liability company, to serve as the Development Owner. This structure is necessary to allow the tax credits to flow through to the Limited Partner (Investor) 22

Managing General Partner Responsible for the Asset both during construction and throughout compliance. Provides personal and corporate $$ guaranties. Compensation is through cash flow during operations, asset management fees, back end residuals, developer fees, guaranty fees, etc. Hires the team, including the developer. Can be an individual, a partnership, a corporation. Usually is an LLC, with ownership interest of.01%. Can be made up of more than one entity. 23

Limited Partner (Investor/Equity Partner) Limited Partner Buys the credits: receives tax benefits (10 yrs) + depreciation (15 yrs) + generally a small cash flow distribution (15 yrs). Monitors the project throughout the compliance period, receiving an asset management fee for this service. Sets certain performance requirements for the development. Owns the largest share of the limited partnership (generally 99.99%). 24

Special Limited Partner Special Limited Partner can be used to bring special skills and resources to the partnership, sometimes structured as a Class B partner. Nonprofits and/or inexperienced developers can benefit by having a Guarantor in this role. Frequently, an Investor creates a SLP for a different purpose, possibly to serve in the role of GP, if removal of the Managing GP is necessary. 25

The Developer Developer Can be for profit or nonprofit. Puts the transaction together & sees it through stabilization; compensation is all or a portion of the Developer Fee. Fees to the developer are limited to 15% of the eligible basis and any ineligible hard costs, including any fees to consultants The Developer may be the same as the General Partner, but this is not essential. Frequently asked to provide financial guaranties. 26

Other Development Team Members Tax Credit Consultant Architect Engineers (Civil/Structural/MEP) Contractor Market Analyst Accountant Attorney(s) Lender (Construction and Permanent) Title Company Property Management Company Service Providers 27

How Does The Tax Credit Program Operate? The Qualified Allocation Plan (QAP) Every state is required to prepare a Qualified Allocation Plan (QAP) governing its Tax Credit Program. The QAP outlines the policy objectives and application processes. It has three elements: 1) Set-asides, 2) Threshold Requirements, and 3) Preferences (Scoring) In Texas, the administering agency for the Housing Tax Credit Program is the Texas Department of Housing and Community Affairs (TDHCA) In Texas, the State Legislature establishes certain parameters for the operation of the program, including major scoring criteria. 28

QAP, cont. Each year, TDHCA posts a draft QAP in early September for public comment. TDHCA implements the legislated requirements, both state and federal, as part of its QAP. QAP must be signed by the Governor no later than December 1. TDHCA accepts applications on an annual basis. Credits must be allocated by July 31 of each year. Each years application is different due to changes in the QAP. 2 Year QAP was authorized by the Texas Legislature in 2011, but due to varying factors this has not been implemented. 29

Is the Tax Credit Program Competitive? Yes! 2011: 1 in 3.5 awards selected from 139 Full Applications 2012: 1 in 3.25 Awards from 162 Full Applications. 2013: TDHCA received 276 Pre-Applications and 133 Full Applications. Of these, 64 received Awards. This equates to a 52% success rate (or 1 in 2) for full applications or if you factor in pre-apps, a 23% survival rate! 2014: TDHCA received 302 Pre-Applications and 161 Applications. Of these, 152 are still active and 66 are being recommended for Awards this week. This equates to a 43% success rate (or 1 in 2.3) for full applications or if you factor in pre-apps, a 22% survival rate! 30

How Are 9% Credits Allocated State-wide? TDHCA prepares a formula for distribution, known as the Regional Allocation Formula (or RAF), to the 13 State Regions based on population, housing conditions and participation in other funding programs. Allocation for each Region is split between Urban and Rural, referred to as sub-regions. New in 2012 was a requirement that an Applicant could not apply for more than 150% of the amount available in the sub-region. Additionally, there are mandated set-asides: Nonprofit 10% (Statewide) * At Risk 15% (Statewide) of this, one-third is allocated for Rural Development (USDA financing) NEW: In 2014 certain Public Housing Projects were eligible to compete in the At Risk category. * Not a true set-aside, as nonprofits compete in all categories but if 10% dont rise to top, they trump other projects. 31

32 R EGIONAL A LLOCATION F ORMULA 13 U NIFORM S TATE S ERVICE R EGIONS

Regional Allocation Formula 33

How Long Is the Application Process? 2015 Estimated Time Line for 9% Applications 01/15/15Pre-applications due 02/27/15Full applications due 02/27/15City/County Resolutions relating to de-concentration factors, Community Revitalization Plans (CRP) and Local Political Subdivision (LPS) Commitments due 04/01/15Market Study due 04/01/15City/County Resolutions of support due 04/01/15Letter from State Rep due 07/30/15Awards made at TDHCA Board Meeting 34

Basic Rules & Threshold Requirements Project Size: Minimum of 16 units. No greater than 80 units in a Rural Community. No other limitations. Developer Experience: Developer must meet minimum experience requirement, the development of at least 150 units. Site Control, acceptable to TDHCA Mandatory Site features: Must have 6 positive site features. Site must not contain any negative site features (next to landfill, etc.) Supportive services Must pick at least 8 services from a list of 20 Architectural Design/Drawings Must meet minimum energy standards Comply with 504 accessibility guidelines Provide an amenity package (common area and units) Minimum unit sizes 35

Speaking of Good Design.... 36 These 2013 Plumber Awards were provided compliments of Barry Kahn.

Threshold Requirements, cont. Third Party Reports: Market Study, Environmental Study, Appraisals for identity of interest transactions and Rehab, Property Condition Assessment (PCA) for Rehab, Site Design and Development Feasibility Report Preliminary commitments from lenders and investors Notifications to public officials Applicant must not have any unresolved compliance issues Maximum Credit Allocation: $1.5M in credits for single project ($2M for At-Risk) and $3M cap per individual Developer/Applicant. Limit applies only to 9% developments. 37

Scoring Priorities (2014) Criteria Promoting Development of High Quality Housing Points Size & Quality of Units (TX Statute) 15 8 points for unit sizes 7 points for unit features / amenities Sponsor Characteristics (HUB or NP) (TDHCA) 1 38

Scoring Priorities (2014) Criteria to Serve and Support Texans Most in Need Points Income Levels of Tenants (TX Statute) 12/14/16 Rent Levels (TX Statute) 7/11/13 Maximum 13 points for Supporting Housing under NP Set Aside Maximum 11 points for other developments Tenant Services (TX Statute) 10/11 Maximum 11 points for Supportive Housing under NP Set Aside Maximum 10 points for other developments Opportunity Index (TDHCA / Remedial Plan directed) 1/3/5/7 High income areas, good schools, family housing (criteria varies between urban and rural), proximity to services for rural Educational Excellence (TDHCA) 1/3 Underserved Area Family/Supp Housing only (TX Statute)2 Special Housing Needs (TDHCA) 2 39

Scoring Priorities (2014) Criteria Promoting Community Support and Engagement Points Local Government Support (TX Statute) 7/8.5/14/17 Commitment of Funding from LPS * (TX Statute) 7 to 14 Declared Disaster Area (TX Statute) 10 Quantifiable Community Participation (TX Statute) 0/4/6/8/9 Support from State Representative (TX Statute) -8/0/8 Input from Community Organizations (TDHCA) 0/2/4 Community Rev. Plan (TDHCA / Remedial Plan directed) ** 2/4/6 Urban developments Community revitalization plan required Rural developments New or expanded infrastructure required * Local Political Subdivision ** Community Revitalization Points can only be claimed if no points are claimed for Opportunity Index 40

Scoring Priorities (2014) Criteria Promoting Efficient Use of Limited Resources and Applicant Accountability Points Financial Feasibility (TX Statute) 16/18 Cost of Development per Square Foot (TX Statute) 10/11/12 Pre-Application Participation (TX Statute) 6 Leveraging Private, State, Federal Resources (TX Statute) 1/2/3 Extended Affordability (TX Statute) or Historic Pres (TDHCA) 2/4 Right of First Refusal (TX Statute) 1 Funding Request Amount (Leveraging) (TDHCA) 1 And the dreaded PENALTY POINTS! Applicants can have up to 5 points deducted for bad behavior (missing deadlines, not building what you said you would) on previous tax credit awards. 41

Scoring Detail: NEW: Effective 2014, a resolution of support from the local government is the second highest scoring item! Applications receive: 17 points for a resolution of support voted on and adopted by the local governing body (e.g., city or county), or 14 points for a resolution of no objection. For developments located in Extra Territorial Jurisdictions (ETJs): 8.5 points for resolution of support or 7 points for resolution of no objection from City, and 8.5 points for resolution of support or 7 points for resolution of no objection from the County. This year the Resolution had to be passed prior to April 1, 2014 and submitted BY April 1, 2014. 42

Funding by Local Political Subdivisions (LPS) These points are awarded to applicants who use local leveraging. 11 points: Commitment = to lesser of Population x.15 in funding per low income unit, or $15k per low income unit (e.g., population of 20,000 x.15 x 60 LI units would be $3,000 per unit or $180,000 for 60 units) 10 points: Lesser of Population x.10 per LI unit, or $10,000 per LI unit 9 points: Lesser of Population x.05 per LI unit, or $5,000 per LI unit 8 points: Lesser of Population x.025 per LI unit, or $1,000 per LI unit 7 points: Lesser of Population x.01 per LI unit, or $500 per LI unit Additionally, you get 2 additional points if the municipality provides a firm commitment of funds and 1 additional point if the contribution is a grant or permanent loan (minimum 15 year loan, maximum 3% interest). 43

Eligible Sources for LPS Funding In addition to Cities and Counties, funding from their instrumentalities can be considered IF: 1.The instrumentality first awards the funds to the city or county for their administration, or 2.At least 60% of the governing board of the instrumentality consists of city council members from the city in which the development is located, or county commissioners from the county in which the site is located, or 3.100 percent of the governing board of the instrumentality is appointed by the elected officials of the city (or county) in which the site is located. The governing instrumentality MAY NOT be a Related Party to the Applicant. 44

Community Revitalization Plans: Urban Areas Applicants in Urban Areas can get up to 4 points for having a valid revitalization plan, funded and approved by the City. An applicant can receive two additional points if the City selects it as the most deserving revitalization project and a city can only designate one project each year. This resolution is due with the Application. 45

Community Revitalization Points: Rural Areas Applications may qualify for up to 4 points (2 points for one item and 4 points for 2 items) for governmentally funded improvements. Must be completed between January 2014 and January 2016 (One year back/one year forward) New paved roadway, or expansion, within mile New (or extension) water line of 500 within mile New (or extension) wastewater service line of 500 within mile New law enforcement or emergency service station within 1 mile Construction of new hospital or expansion within 5 miles Requires documentation from governmental entity or private utility provider. 46

What is Quantifiable Community Participation (QCP)? Support from a Neighborhood Organization on record w/State (TDHCA) or County by application deadline. Even if an organization has gone on record in previous years, they have to re-up each year and be on record with TDHCA by the Application Deadline each year. Must be an organization of persons living near one another with a purpose to maintain/improve general welfare of neighborhood Tax credit applicant can provide technical assistance in creation or placing on record of Neighborhood Organization. Applies only if there is no Neighborhood Organization in existence or on record. 47

Scoring for QCP Group that has opposed other developments in past 3 years but supports yours = 9 points Support Development = 8 points Group that has opposed other developments in past 3 years but neutral about yours = 6 points No neighborhood organization or one that remains neutral = 4 points Oppose Development = 0 points If no Neighborhood Organization exists that includes site, or if one exists but does not meet the requirements of the QAP, applicant can qualify for additional points (up to 4) for community support letters from local nonprofits. 48

Support/Opposition from State Representative 8 Points for Letter of Support from State Representative 0 Points for Neutral Letter or no letter -8 Points for Letter of Opposition from State Representative New in 2014: This scoring item has been reduced in priority by the Legislature. Letters from State Senators have been eliminated altogether. 49

Scoring Tie Breakers (2014) Tie Breakers Ties within a set-aside, rural regional allocation or urban regional allocation Highest score on Opportunity Index scoring item Greatest distance from nearest existing Housing Tax Credit development Ties between sub-regions Sub-region with no recommended At-Risk applications in the current application round Sub-region that was most underserved in the last application round NOTE: Two Mile Same Year Rule. In Counties over 1M population (Dallas, Tarrant, Harris, Bexar, Travis), two projects within two miles of each other cannot be funded in the same year. 50

Cities have a voice in concentration issues. A resolution of support from the City and/or County is required in order to overrule the following: The 1 mile/3 year rule (Bexar, Tarrant, Dallas, Harris, and Travis Counties, only): A new tax credit development cannot be approved within one mile of a development of the same type that has received a tax credit award in the past three years. The 2x per capita rule: No development can be funded in a municipality that has more than twice the state average of units per capita supported by HTCs. Prohibition of additional units in a Census Tract with more than 20% HTC units per total households, unless municipality has population less than 100,000 These resolutions are due at the time the Application is submitted to TDHCA. 51

My Score Looks Great!! Why worry? Applications can be Terminated for not following the rules TDHCA does its own scoring Deficiencies require quick response You can appeal scoring deduction TDHCA miss something? Your competitors wont! Challenges to other applications are accepted through early-May. Carefully check infrastructure distance, ETJ, Community Revitalization Plans Take Application deadline dates seriously Do Your Homework! 52

Scoring High is Good, but... IS YOUR PROJECT FEASIBLE??? TDHCA will underwrite your deal to determine if it is feasible and aligns with Department standards as they relate to construction costs, operating expenses, and financing standards. IF you receive an allocation of tax credits, the amount of credits you receive will be based on this underwriting criteria and determined by TDHCAs calculation of your Eligible Basis. 53

What is Basis? The majority but not all of development costs are considered eligible to be counted toward the basis on which the tax credit award will be determined as defined in IRS Code Subsection 42. Generally this includes construction and development costs, but does not include land and costs associated with syndication and permanent loan financing. Eligible Basis is the amount of costs that may be included in the calculation of housing tax credits. Qualified Basis refers to the dollar amount that is eligible for housing tax credits and factors in any applicable fraction prorations for mixed-income developments. This may be increased by a basis boost for eligible projects. Credits on any deal are calculated by multiplying the Qualified Basis by the credit percentage to determine the amount of the award. Two credit percentages are set federally and published each month. One is for 9% credit transactions; the other for 4% credits. (9% credits are calculated at 9% for projects which received an allocation of credits by December 31, 2013. For 2014, the rate floats, currently 7.56%. 4% credits float and the July 2014 rate is 3.24%) 54

How Does This Work? 1.Developer provides a development budget. 2.Depreciable development costs are counted as eligible basis. 3.If you are proposing some market-rate units, then you will apply another percentage factor an applicable fraction so you only get tax credits on your affordable units. This is your qualified basis. 4.This number is multiplied by 130% if you have the boost. 5.Then you multiply by the monthly credit percentage (e.g., 9%, 7.56%, 3.24%). 6.The credit amount per year is multiplied by 10 since the tax credit flows each year for 10 years. (However, a minimum of 15 years for compliance!) 55

I Have an Allocation of Tax Credits Now What? The Equity raised through sale of tax credits is generally 60% to 70% of total development costs. This Equity reduces the amount of needed debt so that developments can serve lower income households. The balance must be funded through some type of mortgage or grants supportable by the affordable rents charged the residents of the development. The Developer/GP will sell 99.99% of these credits to an investor who will become the Limited Partner (LP) in Partnership. 56

How Do I Find an Investor? Attend the TAAHP Conference & Network! If you have a great project and a strong development team, investors will seek YOU out! Read trade journals to see who is investing where! 57

How Much Will an Investor Pay? Today Investors are purchasing tax credits for anywhere from $.83 to $.98 on the dollar. What do they look for? Strength of Developer & General Partner Financial strength (deep pockets) Experience on similar projects Location of Development Bank needs CRA Credit Strong market for proposed housing type/population served Major metropolitan areas are favored today Good site (Location, Location, Location) New Construction vs. Rehab Timing of capital contributions Aggressive pay-in = Lower $$ Time is Money 58

What Do You Negotiate? Price for Tax Credits Pay-in Schedule Early and Late Delivery Adjustors Schedule for Developer Fee payments Cash Flow Waterfall (including distributions to LP and GP) Reserves what kind, how much, and how long Guaranties by whom and caps on amounts Management Fees Asset Management Fees to Investor 59

What Are 9% Tax Credits Worth? $9,800,000 Cost to develop $9,000,000 Eligible Basis costs X.0756 Monthly credit percentage $680,400Annual Credit Allocation X 10Years $6,804,000 10 Year Credit Allocation X.89 Todays Credit Pricing $6,055,560 Potential Purchase Price X 99.99%Investor Percentage $6,054,954Investor Equity 60

What about 4% Tax Credits? $ 9,800,000 Cost to develop $9,000,000 Eligible Basis costs X.0324 Monthly credit percentage $291,600Annual Credit Allocation X 10Years $2,916,000 10 Year Credit Allocation X.90 Todays Credit Pricing $2,624,400 Potential Purchase Price X 99.99%Investor Percentage $ 2,624,138Investor Equity 61

Is your Site in a Qualified Census Tract (QCT)? Housing constructed in a QCT or in a County designated as a Difficult Development Area (DDA) is eligible for a credit boost of 30%, although TDHCA has excluded DDAs. 9% Only Under a new law, States have the right to allocate a 30% credit boost for certain areas or project types. The Texas 2014 QAP allowed this boost for projects in rural areas, projects in High Opportunity Areas, those which propose deeper targeting, and which offer supportive housing units. Additionally, the boost is offered for non-elderly developments covered by revitalization plan. These projects qualify for 130% tax credits instead of 100%, resulting in more credits to sell to the investor. Instead of $6,054,954 in equity, this project would receive $7,871,440! An increase of nearly $2M! 62

The Debt Side The Amount of Debt is determined by the gap between total development costs and the amount of the investor equity. The lower the rents, the less debt a project can support. The equity raised through the sale of the Housing Tax Credits to an investor reduces the debt so that developments can serve lower income households. 63

How Much Loan Will the Project Need? $9,800,000 Total Development Cost - $6,054,954 Total Equity $3,745,046 Debt Requirement Or $1,928,560 IF located in a QCT or 130% boost area NOTE: The debt MUST be able to be repaid through rent collections. 64

How are Tax Credit Rents Calculated? Favorable rent, but not subsidized Based on 30% of Area Median Income (AMI) level, e.g., 30% of 60% AMI, or 30% of 50% AMI No rental assistance Band of affordability: 40 60% AMI What about Texas? Are all rents the same? Most definitely not! San Antonio and Austin are only 75 miles apart, but their income limits for 4 person families differ by nearly $10,000. 65

Austin Income Limits July 2014 Family Size60% AMI 50% AMI 1 Person$31,680 $26,400 2 Person$36,240 $30,200 3 Person$40,740 $33,950 4 Person$45,240 $37,700 5 Person$48,900 $40,750 6 Person$52,500 $43,750 66

San Antonio Income Limits July 2014 Family Size60% AMI 50% AMI 1 Person$24,720 $20,600 2 Person$28,260 $23,550 3 Person$31,800 $26,500 4 Person$35,280 $29,400 5 Person$38,160 $31,800 6 Person$40,980 $34,150 67

Austin Tax Credit Rent Example: Calculating Rent on a 2BR Unit Two Bedroom Rent assumes 3 person family (1.5 persons per bedroom) Imputed income at 60% of AMI: $40,740 Multiplied by: x30% Maximum Annual Rent: $12,222 Divided by (months): 12 Maximum Monthly Rent: $1,018* *must include both rent and utilities approx. utility allowance on 2BR is $123. Max rent would be $895. 68

San Antonio Tax Credit Rent Example: Calculating Rent on a 2BR Unit Two Bedroom Rent assumes 3 person family (1.5 persons per bedroom) Imputed income at 60% of AMI: $31,800 Multiplied by: x30% Maximum Annual Rent: $9,540 Divided by (months): 12 Maximum Monthly Rent: $795* *must include both rent and utilities approx. utility allowance on 2BR is $84. Max rent of $711. 69

How Much Debt Can Be Serviced by Affordable Rents? Variables Unit Mix (1, 2, 3 & 4 BR units) Income Targeting Number of units at 30% and 50% rents? Expenses (utilities & taxes on the rise) Interest Rate charged by Lender and term of loan (standard is 18 year term, 30 year amortization) Debt Service Coverage Requirement 70

When Equity and Debt Arent Sufficient Gap Financing Developer Fee (Deferred) HOME/CDBG Funds (from Local Govts or TDHCA) Local Contributions (grants, low-interest loans) Housing Trusts (State/Local) Affordable Housing Program (FHLB) Foundations/Private Sources 71

Can You Combine HOME $ and Tax Credits? Yes very definitely. To calculate HOME Assisted Units, divide the total amount of HOME $$ by the HOME Eligible Costs. The resulting percentage is your percentage of units that are considered HOME Assisted. If you are using TDHCA HOME funds, you will be required to provide up to a 5% match. 72

Example: Sources of Funds Tax Credit Equity $6,054,954 Mortgage $2,800,000 HOME Funds $600,000 Deferred Developer Fee $345,046 Total Sources $9,800,000 73

Example: Uses of Funds Land $525,000 Construction Costs $7,500,000 Soft Costs $400,000 Developer Fees $1,000,000 Syndication/Financing Fees $50,000 Reserves $225,000 Total Uses $9,800,000 74

And thus, dear students, we have arrived at the formula for understanding the Housing Tax Credit Program... 75

Questions & Answers Edwina Carrington, President CHK Enterprises, LLC 404 Cedar Oak Drive West Lake Hills, TX 78746 512.797.4493 [email protected] Diana McIver, President DMA Development Company, LLC 4101 Parkstone Heights Drive, Suite 310 Austin, TX 78746 512.328.3232 x 4504 [email protected] 76

texas housing conference 2014 get connected housing tax credits – an introduction july 28, 2014...

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