how to finance affordable housing with low income housing tax credits july 10 2007
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How to Finance Affordable Housing with Low Income Housing Tax Credits July 10, 2007

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How to Finance Affordable Housing with Low Income Housing Tax Credits July 10, 2007. Outline. Overview Industry Statistics (Estimates) What Are Low-Income Tax Credits(LIHC) Administrative Roles of the States How Credits Are Awarded to LIHC Project How Are LIHC Projects Funded?

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outline
Outline
  • Overview
    • Industry Statistics (Estimates)
    • What Are Low-Income Tax Credits(LIHC)
    • Administrative Roles of the States
    • How Credits Are Awarded to LIHC Project
  • How Are LIHC Projects Funded?
  • What Are The Compliance Requirements?
  • Who Invests In LIHC Projects?
    • What Does The Developer Give To The Investor?
    • What Does The Developer Keep?
    • How Is A Tax Credit Transaction Structured?
what are low income housing tax credits
What Are Low Income Housing Tax Credits?
  • Tax Credits Are Used To Reduce Federal Income Tax
    • Individuals
    • Corporations
  • Federal Government Allocates Credits To Each State Annually
    • $1.95 Multiplied By State Population (2007)
    • State Credit Ceiling
what are low income housing tax credits4
What Are Low-Income Housing Tax Credits?
  • Available For Rental Housing Only
  • Tax Credits Are Claimed By Investors Over A 10 Year “Credit Period”
  • 15 Year “Compliance Period” - Project Must Be Rented To Low-Income Tenants
  • Extended Use Requirements - 30 Years+
  • EB x LIOP x CP x 10 = Credits
  • EB = Eligible Basis, LIOP = Low Income Occ. % & CP = Current %
administrative roles of the states
Administrative Roles Of The States
  • Responsible For Reserving and Allocating Tax Credits
    • Determine Competitive Process
    • (Beauty contest)
    • Assess Financial Feasibility
    • Monitor Development Process
  • Compliance Monitoring
  • Varies by State IRS = Minimum of 1 twice every 3 years
how are credits awarded
How Are Credits Awarded?
  • State Housing Agencies Responsible For Administering The Program
  • LIHC Allocations Made In Accordance With A Qualified Allocation Plan (QAP)
    • QAP Documents Local Affordable Housing Need
  • “Beauty Contest” Determines Which Projects Will Be Awarded LIHC
  • Application Cycles Vary From State To State
  • Program Oversubscribed In Almost Every State
how are lihc projects funded
How Are LIHC Projects Funded?
  • Equity Sources
    • Public Funds
    • Private Funds
    • Corporations
    • 30-65% Of Project Funded From Equity
how are lihc projects funded8
How Are LIHC Projects Funded
  • Balance Of Cost Funded From Debt
    • For-Profit Lenders
    • Federal, State And Local Programs
      • HOME Funds
      • Community Development Block Grants
      • Affordable housing Program
      • Other State And Local Programs
what are the compliance requirements
What Are The Compliance Requirements?
  • Tax Credits Available For “Low-Income Units” Only
  • Restrictions On Low-Income Units
    • Income Restrictions
    • Rent Restrictions
what are the compliance requirements10
What Are The Compliance Requirements?
  • Income Limitations
    • Percentage of Area Median Gross Income - HUD Limits
    • Income Limits Adjusted For Family Size-Actual Number of People Living In The Unit
    • Deeper Restrictions Often Imposed By States
  • Elections
    • 40/60 Set Aside
    • 20/50 Set Aside
what are the compliance requirements11
What Are The Compliance Requirements?
  • Rent Limitations
    • Maximum Rents Generally Equal To 30% Or Less Of Imputed Income Limits
    • 1.5 Persons Per Bedroom - Bond = 1 per bd.
    • 2 Bedrooms Is Deemed To Have Three People For Rent Restriction
    • Area Median Gross Income Figures From HUD Are Based On A Four Person Family
who invests in lihc projects
Who Invests In LIHC Projects?
  • Types Of Investors - Tax Law Governs
    • Corporate Investors
    • Individual Investors
  • Total Annual Equity Investment - Over $2.5 Billion
what does the developer give to the investor
What Does The Developer Give To The Investor?
  • Generally 99 to 99.99% Of The Partnership
    • Tax Credits
    • Losses
  • Generally 50 to 99.99% Of The Partnership
    • Available Cash
    • Residual Value Of Property
    • Capital Account Maintenance Rules Apply
what does the developer give to the investor14
What Does The Developer Give To The Investor?
  • Tax Credit Guarantees
    • Construction Completion & Deficit
    • Lease-up
    • Permanent Loan Funding
    • Tax Credits (Adjusters)
    • Tax Losses
    • Yield Maintenance
    • Compliance Monitoring
what does the developer retain
What Does The Developer Retain?
  • Developer Fees
  • Contractor Overhead And Profit
  • Property Management Fees
  • Incentive Management Fees
  • Operating Cash Flow
  • Sale Or Refinancing Proceeds
tax credit example
Tax Credit Example

9,000,000 Project Costs

1,000,000 Developer Fee(7,000,000*15%)

10,000,000 Project Costs

(1,000,000) Non-eligible Project Costs

(1,000,000) Land

8,000,000 Eligible Basis

*1.3 Difficult To Develop Area

10,400,000 Qualified Basis

tax credit example17
Tax Credit Example

10,400,000 Qualified Basis

*100% Low Income Occupancy%

10,400,000 Qualified Basis

*9% Credit Percentage

936,000 Credits Per Year

*10 Years

9,360,000 Total Credits

*.95 Credit Price

8,892,000 Equity

tax credit example18
Tax Credit Example

150 Rental Units

*400 Per Unit

60,000 Per Month Rental Income

(30,000) Operating Expense (50%)

30,000 Net Operating Income Per Month

*12 Months

360,000 Net Operating Income

/1.15 Debt Coverage Ratio

313,043 Cash Available

3,240,000 Loan

tax credit example19
Tax Credit Example

10,000,000 Project Costs

(6,575,400) Equity

( 3,240,000) Permanent Loan

184,600 Unfunded Project Costs

( 184,600) Deferred Developer Costs

0

what do best properties have in common
What Do Best Properties Have in Common?
  • Great real estate
    • Rents under market
    • Very strong market demand (no occupancy risk)
  • Very little “hard” debt
    • Developer job -- meet community needs
    • Community job -- support w/financing
    • TIF, Home loans, soft seconds, etc.
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