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The Low Income Housing Tax Credit Program

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. Low initial start due to difficulty of program

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The Low Income Housing Tax Credit Program

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  1. The Low Income Housing Tax Credit Program

  2. 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

  3. # of Units Completed • Low initial start due to difficulty of program • Leveled off as costs increase http://www.danter.com/taxcredit/stats.htm

  4. 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

  5. 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

  6. Tax Credits vs Tax Deductions 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

  7. 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%

  8. 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

  9. 4% Acquisition Credits • Cost of purchasing building qualifies if: • Project includes substantial rehabilitation • Meets requirements of 10 year rule • No basis boost for acquisition basis • Adjust basis for applicable fraction of low income units

  10. 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

  11. Computing the Equity Value Annual Credits $103,480 X 10 Years X 10 Total Credits $1,034,800 NPV @12% $584,685

  12. 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

  13. 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

  14. 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

  15. Sources to Fill Gap • HOME, CDBG Funds • AHP Funds • Other local funds • Deferred Developer Fee • Structured as loans not grants

  16. How to Get the Credits • Competitive process • Scoring based on QAP • Ohio QAP awards points for characteristics • Unit amenities, AC, Energy Efficiently, 2 baths • Special needs units • State/City support • GP/Developer experience • Management company experience

  17. Timeline • Apply for credits – Different for all states • Receive Reservation of Credits • Incur at least 10% of costs in year 1 • Complete project and place in service within 2 years • Tax credits begin at qualified occupancy • Keep units in compliance • Restrictions • Low income for 15 years or recapture • Many have extended use 15 more years

  18. What Happens in Year 15? • Expiring Properties numbers increasing • Property reuse options • Acquisition and continue • Acquisition and resale • Acquisition and rehab • Re-syndication • Refinance • Homeownership (lease-purchase)

  19. Exit Strategies • GP right of first refusal • Debt plus exit taxes • Fair market value sale • If property has appreciated significantly • Bargain Sale • Where fair market value exceeds debt • Withdrawal of investor

  20. 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 losses • Forgive debt • Reduce investment by 1/3 • Is this a good idea?

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