Presentation Transcript

1. PUBLIC HOUSING AUTHORITIESANDLOW INCOME HOUSING TAX CREDITS:PUTTING THE PUZZLE TOGETHER

   April 29, 2014 J. Paul Compton, Jr. Judy Vandyke, CEO Bennett Group Consulting
2. The Federal Low-Income Housing Tax Credits Originally temporary part of 1986 Tax Reform Package. Made permanent in 1992. Amount of credits available increased as the state population as grown. Largest federally supported housing program is administered by state housing finance authorities and the IRS. Administered through Tennessee Housing and Development Agency (the state HFA)
3. Why you should be interested in it: Pay 30% to 70% of the development cost of the project. No legal restrictions on the types of conventional financing. Available for both new construction and rehabilitation. LIHTC can be combined with a number of other programs. Low rent rates usually mean that the units are easy to lease.
4. Why you should be interested in it: Developers fees (up to 15% of project costs) Improving and maintaining affordable housing stock Management fees Competitive internal rates of return (after tax) for Investors
5. LIHTC project Income Limits: At least 40% of tenants persons whose income is 60% or less of area median income; or At least 20% of tenants must be persons whose income is 50% or less of area median income. The exact percentage is a factor in determining the "qualified basis". Accordingly, if 100% of project is to get LIHTC, 100% of tenants must be persons whose income is 60% or less of area median income. HCV and PH residents are under this limit typically being at 30% AMI for new admissions.
6. Key aspects of the program LIHTC: Dollar for dollar credits against tax liability. Not merely deductions. LIHTC are subject to passive loss limits. Passive loss limits do not apply to widely held "C" corporations, such as most banks. Well developed national syndication market. Ultimate investors are almost all public companies or banks.
7. Key aspects of the program Amount of LIHTC is determined under a complicated formula. Total Eligible Basis (essentially depreciable basis; not land cost) $5,000,000 % of low-income units 80% Qualified Basis $4,000,000
8. Key aspects of the program Total Qualified Basis $4,000,000 Credit Percentage 9% Annual Credits $360,000 Years available x 10 Total Credits $3,600,000
9. Key aspects of the program Tax Credit = currently 9% of the depreciable basis per year for 10 years. Except (1) other federal funding for the project (including tax‑free bonds), the rate is based on a formula tied to interest rates and is often referred to as 4% (but is currently actually closer to 3.25%), and (2) if you are acquiring a building for rehabilitation, the cost of acquiring the building gets only a “4%” credit (though the rehab expenses get 9%).
10. Key aspects of the program Certain areas of the state, delineated by census tract, get a 30% bonus in credits because they are "difficult to develop areas". However, the amount of LIHTC is always limited to a maximum of what you have been allocated in LIHTC by the state allocating agency.
11. Key aspects of the program LIHTC allocated in TN by the Tennessee Housing Development Agency (“THDA”) Application cycles ‑ typically one per year State has about $14.9 million per year (10 years = $149,000,000) Population x $2.30
12. Key aspects of the program Elaborate scoring criteria in a "Qualified Allocation Plan" (or "QAP") Market and financial feasibility Linkage with other programs ‑‑ particularly HOME Consistency with other goals Location Characteristics of the project (amenities etc.) Experience and nature (non‑profit / MWOB) of sponsor
13. Key aspects of the program Compliance issues: The project must meet the rent and tenant income restrictions for at least 15 years even though credit is for just 10 years. Additionally, there is an "extended use period" of at least 15 more years that can only be avoided in certain circumstances. Must count on project being used for Low income housing for at least 30 years. Land use covenants are used to enforce this. Much record keeping. Monitoring by Tennessee Housing Development Agency (THDA) Credits can be "recaptured" if requirements are found not to be met.
14. Typical project structure New limited partnership Corporate or LLC general partner One limited partner and maybe an affiliated special limited partner
15. The players in LIHTC Developer/general partner Counsel for developer/general partner Tax credit consultant (sometimes accountant or lawyer) Syndicator, broker or investor Counsel for investor Construction lender Permanent lender Third party providers (studies, appraisals, reports, letters) THDA
16. Documentation in LIHTC Transaction Limited partnership agreement (or restatement of an interim agreement) Purchase or subscription agreement Tax credit guaranty Operating deficit guaranty Management agreement (often with a GP affiliate)
17. Documentation in LIHTC Transaction Construction completion guaranty Environmental indemnity Development agreement Reserve account agreements Opinion of counsel for developer
18. Documentation in LIHTC Transaction Typical commercial real estate closing docs Appraisal Phase I environmental Survey Title insurance Back‑up corporate documents Hazard insurance Utility letters Zoning letter Tenant lease form
19. Documentation in LIHTC Transaction Tax credit reservation / Form 8609 Cost certification / carry‑over certification
20. Some reasons not to pursue LIHTC: Top answers Cash flow won't cover the debt service. The time and effort is too great. It is easier to remain with status quo. HUD funding is up and down. Your agency will have to adapt to new business processes. You don’t understand tax credit financing. You don't like red tape and applications. You don't want to execute a foot high stack of binding legal documents.
21. Benefits to the PHA Leverage funding and equity FHLB CDBG HOME Equity is not a loan New and updated units increase marketability Meeting needs through conversion of units Update building systems and possible utility savings Best and highest use of property Leverage non Federal funding Provide for a non HUD cash stream
22. Negotiating Terms Partnership agreement with developer partner Partnership agreement with limited partner (investor) Fees from management or management arrangement Land lease agreement Cash that is not restricted for cost center
23. Initially, an individual Then Investor Limited Partner (Typically a financial institution or investment fund) Holly Grove, AL 99.99% interest Bennett & Company, LLC General Partner, LIHTC Application Sponsor, Guarantor, Project Developer Equity Investment Credits 00.01% interest PHA Hollyhand Companies, Inc. Property Manager (Leasing and general property management) Bennett Grove, Ltd. Project Partnership and Lessee Ground Lease General Contractor, Inc. Builder/General Contractor
24. Initially, an individual Then Investor Limited Partner (Typically a financial institution or investment fund) Holly Grove, MS Public Housing Authority (PHA) 99.99% interest Bennett & Company, LLC Co-General Partner, LIHTC Application Sponsor, Guarantor, Project Developer PHA GP, Inc. Co-General Partner (Handles routine decisions for Project Partnership) Equity Investment 00.005% interest Credits 00.005% interest PHA 00.005% interest Hollyhand Companies, Inc. Property Manager (Leasing and general property management) Bennett Grove, Ltd. Project Partnership and Lessee Ground Lease General Contractor, Inc. Builder/General Contractor
25. Collateralized Multifamily Housing Bonds “Escrow Bonds” Short-term financing through the “placed in service” date. 100% collateralized by “AAA”-rated investments. Capitalized interest is gross-funded at closing. Redemption provisions can provide flexibility in construction period. Tax Analysis Bond proceeds used to pay qualified construction costs. Bonds are repaid from subsidies, tax credit investments, or other forms of financing.
26. CMHB Structure 1 2 4 6 6 3 4 5 3 Bond Investor Bond Proceeds Bond Investor purchases the Collateralized Multifamily Housing Bonds (“CMHBs”). Trustee deposits the proceeds from the sale of CMHBs in the Project Account of the Trust Indenture. Borrower makes draw requests to Trustee, with which funds the Borrower pays construction related costs. Trustee funds the Borrower’s draw requests only after receipt of the Subsidy Dollars and/or LIHTC Proceeds. Trustee deposits the Subsidy Dollars and/or LIHTC Proceeds into the Escrow Account. The combined balance of the Project Account and Escrow Account will never drop below the outstanding principal amount of CMHBs. After the ‘placed-in-service’ date, the Trustee retires the CMHBs with amounts held on deposit in the Escrow Account. Trustee Trust Indenture Project Acct Escrow Acct Subsidy Dollars and/or LIHTC Proceeds Borrower Subsidy Provider/ LIHTC Investor
27. CMHB with Other Forms of Financing 4 5 3 5 4 2 6 6 1 Bond Investor Bond Proceeds Bond Investor purchases the Collateralized Multifamily Housing Bonds (“CMHBs”). Trustee deposits the proceeds from the sale of CMHBs in the Project Account of the Trust Indenture. Borrower makes draw requests to the Lender, with which funds the Borrower pays project related costs. The Lender releases funds to the Trustee. Trustee deposits the Lender’s loan proceeds into the Escrow Account and simultaneously releases funds in the Project Account to the Borrower. The combined balance of the Project Account and Escrow Account will never drop below the outstanding principal amount of CMHBs. After the ‘placed-in-service’ date, the Trustee retires the CMHBs with amounts held on deposit in the Escrow Account. Trustee Trust Indenture Project Acct Escrow Acct Loan Proceeds Taxable Capital Markets Lender Borrower
28. CMHB – Who and Why? Developers of multifamily projects meeting the “20/50 Test” or the “40/60 Test”, thus qualifying for low income housing tax credits (“LIHTC”). This execution is particularly attractive for: FHA-financed projects; OR Heavily subsidized projects with multiple layers of subsidy being contributed throughout the construction phase. Satisfies the “50% Test” to ensure 4% LIHTC allocation. Can be used with different types of permanent financing. Minimal direct costs of issuance (for the CMHB). Quick execution is possible. Net pricing for the CMHBs is 0.75% to 1.05% (p.a.) for a two-year construction period.* *Does not include permanent financing, if any. Who should consider CMHBs? What are the advantages of CMHBs? “20/50 Test” 20% of the units are reserved for tenants whose income is less than 50% of Area Median Gross Income (“AMGI”) and rents charged to qualifying tenants are capped at 15% of AMGI. “40/60 Test” 40% of the units are reserved for tenants whose income is less than 60% of AMGI and rents charged to qualifying tenants are capped at 18% of AMGI. “50% Test” 50% of eligible construction costs are funded with tax-exempt bonds.
29. Contact Information _________________________________________________________________ Roundabout Plaza 1600 Division Street, Suite 700 Nashville, TN 37203 Telephone: (615) 244-2582 Facsimile: (615) 252-6380 J. Paul Compton, Jr. Bradley Arant Boult Cummings LLP One Federal Place 1819 5th Avenue North Birmingham, AL 35203 Phone: (205) 521-8381 Fax: (205) 488-6381 Email: pcompton@babc.com Judy Vandyke, CEO Bennett Group Consulting Bennett Group Suites 730 N. Dean Rd, Suite 100 Auburn, AL 36830 Phone: 334-321-0529 Cell: 334-444-9494 Email: Judy@thebennettgrp.net 2615951v1