Low Inc ome H ousi ng Tax Cred it ( LIH TC) How it works

The LIHTC provides funding for the development costs of low-income

housing by allowing a taxpayer (usually the partners of a partnership that
owns the housing) to take a federal tax credit equal to a large percentage of
the cost incurred for development of the low-income units in a rental housing
project. Development capital is raised by "syndicating" the credit to an
investor or, more commonly, a group of investors. To take advantage of the
LIHTC, a developer will typically propose a project to a state agency, seek
and win a competitive allocation of tax credits, complete the project, certify
its cost, and rent-up the project to low income tenants. Simultaneously, an
investor will be found that will make a "capital contribution" to the
partnership or limited liability company that owns the project in exchange for
being "allocated" the entity's LIHTCs over a ten year period. The amount of
the credit will be based on (i) the amount of credits awarded to the project in
the competition, (ii) the actual cost of the project, (iii) the tax credit rate
announced by the IRS, and (iv) the percentage of the project's units that are
rented to low income tenants. Failure to comply with the applicable rules, or
a sale of the project or an ownership interest before the end of at least a 15-
year period, can lead to recapture of credits previously taken, as well as the
inability to take future credits. collinscapitalgrouphousing.blogspot.com/
 Sources of Affordable Housing
Financing Example LIHTC Project

Collins Capital Group Housing

 Categories of Financing

 Hard Debt
 Soft Debt
 Grants
 Tax Credit Equity
 Sponsor Equity
 Hard Debt Sizing
• Based on rental
income and appraised
as-complete value of
the property, if rental
development.
• Based on expected
sales proceeds and
appraised as-
complete value, if for-
sale development.
 Rental Income
Soft Debt Providers and Tax Credits Impose Rent Limitations
(MSA example of income and rent limitations below)

Rent (by BR size) 0-BR 1-BR 2-BR 3-BR 4-BR

50% of AMI $736 $788 $946 $1,093 $1,220

60% of AMI $883 $946 $1,135 $1,311 $1,464

Section 8 FMR $1,097 $1,164 $1,366 $1,634 $1,795

Income (by HH Size) 1 person 2 people 3 people 4 people 5 people

50% of AMI $29,450 $33,650 $37,850 $42,050 $45,400

60% of AMI $35,340 $40,380 $45,420 $50,460 $54,480

 Other Limitations on Income to
Support Rent or Mortgage Payment
Rental Housing
 Maximum Allowable Rents are Reduced by Utility Allowances for Utilities
Paid by Tenants
 Market Rental Income is Limited by Demand/Vacancy
Homeownership
 Payments on homes include “PITI” (or principal, interest, taxes and
insurance).
 Maximum mortgage payment is limited by ratios of monthly 1) housing debt
 payment to income and 2) total debt payment (including auto, credit card,
and student loan debt) to income.
 Standard Ratios are 33% and 38%, respectively.
 Soft Second Loan Program increases buying power of first time
home buyer by about 20%
 Average income served by Soft Second as of 12/31/06: 63% of AMI
 9,700 homes financed by Soft Second
 Soft Second serves households with incomes up to 100% of AMI
 Operating Expenses
for Rental Properties
• Expenses are affected by many factors,
some of which are shown below:
– Subsidy sources (e.g., tax credits)
– Third-party management fees
– Location/Project Size
– Utilities Included in Rent
– Energy Efficiency/Renewable Energy
Features
– Lender Reserve Requirements
 Sources of Soft Debt/Grants
Operating Subsidies
 Federal
– FHLB Boston AHP Grants (also subsidized advances which assist sponsor in supporting
higher hard debt amount)
– CDBG (distributed through state and local agencies)
– HOME Funds (distributed through state and local agencies)
– HUD Section 811 and 202– for disabled and elderly, respectively
– McKinney Grants for the homeless and disabled– up–front and/or ongoing grants
– Project Based Section 8 (operating subsidy which supports higher hard debt amount)
 State
– Affordable Housing Trust Fund (new production only)
– Housing Stabilization Fund (production and preservation)
– Capital Improvement and Preservation Fund (preservation only)
– Housing Innovations Fund (innovative, SRO or co-op housing)
– Community Based Housing Fund (housing for HHs at risk of institutionalization)
– Facilities Consolidation Fund (DMR/DMH clients only)
– Priority Development Fund (new construction only)
– Transit-Oriented Development Fund (25+ units and w/in 1/4 mile of transit station)
– Commercial Area Transit Housing Node Program (<25 units, in commercial areas, and w/in
1/4 mile of transit station)
 Local
– Community Preservation Act (in selected communities)
 Low Income Housing Tax Credits
 Only used for rental housing .
 Two Kinds: 4% and 9% Credits .
 9% Credits awarded through semi -annual
funding round.
 4% Credits awarded automatically with
use of private activity tax exempt bonds for
eligible rental housing .
 Sample Tax Credit Raise
Calculation for 4% Credits
Acquisition Basis (excl. land value): $20MM
Times % Low Income SF/Units: x40%
Qualified Basis: $8MM
Times Tax Credit %: x3.49%
Annual Credit Amount: $279M
Times 10 years: x10
Total Credit, 10 years: $2,792M
Times Equity Raise: x.90
Equity Raise: $2,513M
 Sample Tax Credit Raise
Calculation for 4% Credits (cont.)
Rehab Basis (include rehab costs but excl. reserves and
non-Depreciable Costs): $7,000M
Rehab Basis Boost in Diff. To Dev. Area: x1 30%
Times % Low Income SF/Units: x40%
Qualified Basis: $3,640M
Times Tax Credit %: x3.49%
Annual Credit Amount: $127M
Times 10 years: x10
Total Credit, 10 years: $1,270M
Times Equity Raise: x.90
Equity Raise: $1,143M
 Pros/Cons of 9% vs. 4% credits
 9% credits benefit projects where rehab cost is much
higher than acquisition cost.
 For 9% credit projects, the Tax Credit % on rehab basis
is 8.15% (vs. 3.49%) (check for latest tax credit %’s at :
http://www.novoco.com/low income housing/index.php)
 Cap on annual eligible basis for 9% credits is $175M per
low income (LI) unit for production projects .
 Cap on annual eligible basis for 9% credits is $170M per
LI unit for preservation projects .
 No such caps for 4% credit projects .
 Downsides of Using Federal Low
Income Housing Tax Credits
 Loss of Control– 99+% of the entity will be held by the limited
partner that purchases the tax credits.
 Additional Reserve Requirements – min 6 months DS/Operating
Exp.
 Loss of Cash Flow/Residuals– As of today, 90% of cash flow and
residuals typically go to the sponsor -owned General Partner and
10% go to the Limited Partner (LP).
 The sponsor may need to pay LP’s exit taxes to take back
ownership of the property at end of tax credit compliance period.
 Major repercussions of not complying with tax credit requirements
during 15-yr term of compliance period.
 Administrative burden of complying with tax credit reporting
requirements.
 Current Limitation on Project-Based Section 8 Rents in tax credit
projects.
 Sponsor Equity
 Sponsors may have capital to invest in a
low income property, through own cash
reserves or investor.
 Sponsor and/or private investor will have
return on equity requirements.
 Sponsor and/or private investor may
expect return on equity in timeframe that is
short and is not allowed or provided for by
low income housing programs.
Why build low income housing?
To benefit low income
people.
To help the economy
retain and grow its
employment base.
To keep our population
diverse.
State Agencies Allocating Low Income Housing Tax Credits
 Alabama Housing Finance Authority
 Alaska Housing Finance Corporation
 Arizona Department of Housing
 Arkansas Development Finance Authority
 California Tax Credit Allocation Committee
 Colorado Housing and Finance Authority
 Connecticut Housing Finance Authority
 Delaware State Housing Authority
 District of Columbia Housing Finance Agency
 District of Columbia Department of Housing and Community Development
 Florida Housing Finance Corporation
 Georgia Department of Community Affairs
 Housing and Community Development Corporation of Hawaii
 Idaho Housing and Finance Association
 Illinois Housing Development Authority
 City of Chicago Department of Housing
 Indiana Housing and Community Development Authority
 Iowa Finance Authority
 Kansas Housing Resources Corporation
 Kentucky Housing Corporation
 Louisiana Housing Finance Agency
 Maine State Housing Authority
 Maryland Department of Housing and Community Development
 MassHousing
 Massachusetts Dept. of Housing and Community Development
 Michigan State Housing Development Authority
 Minnesota Housing Finance Agency
 Mississippi Home Corporation
 Missouri Housing Development Commission
 Montana Department of Commerce, Board of Housing
 Nebraska Investment Finance Authority
 Nevada Department of Business and Industry - Housing Division
 New Hampshire Housing Finance Authority
 New Jersey Housing and Mortgage Finance Agency
 New Mexico Mortgage Finance Authority
 New York State Division of Housing and Community Renewal
 New York State Housing Finance Agency
 City of New York, Dept. of Housing Preservation and Development
 Development Authority of the North Country (New York)
 North Carolina Housing Finance Agency
 North Dakota Housing Finance Agency
 Ohio Housing Finance Agency
 Oklahoma Housing Finance Agency
 Oregon Housing and Community Services
 Pennsylvania Housing Finance Agency
 Puerto Rico Housing Finance Corporation
 Rhode Island Housing
 South Carolina State Housing Finance and Development Authority
 South Dakota Housing Development Authority
 Tennessee Housing Development Agency
 Texas Department of Housing and Community Affairs
 Utah Housing Corporation
 Vermont Housing Finance Agency
 Virgin Islands Housing Finance Authority
 Virginia Housing Development Authority
  Washington State Housing Finance Commission
 West Virginia Housing Development Fund
 Wisconsin Housing and Economic Development Authority
 Wyoming Community Development Authority

Contact Information :

Collins Capital Group

P.O. BOX 668611
Charlotte, North Carolina 28266
704.605.0127
collinscapitalgroup@yahoo.com