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?