Federal Low-Income Housing Tax Credits 101 Section 42 Housing:  Is it worth the effort

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Today's Agenda. Program History and PurposeProgram OverviewUtah QAPProgram Facts and InformationIs it worth an application?The application processCase Studies. Low Income Housing Tax Credit Program. 1986 Tax Reform Act closed many private real estate investment loopholes.Passive real estate loss loophole was closed.As this legislation progressed, many advocates (NLIHC) became concerned about rental housing.In a late developing deal, LIHTC Program was created.

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Federal Low-Income Housing Tax Credits 101 Section 42 Housing: Is it worth the effort

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1. Federal Low-Income Housing Tax Credits 101 Section 42 Housing: Is it worth the effort? Utah Housing Coalition Conference September 19, 2006 Presented by: Jeff Bennion

2. Today’s Agenda Program History and Purpose Program Overview Utah QAP Program Facts and Information Is it worth an application? The application process Case Studies

3. Low Income Housing Tax Credit Program 1986 Tax Reform Act closed many private real estate investment loopholes. Passive real estate loss loophole was closed. As this legislation progressed, many advocates (NLIHC) became concerned about rental housing. In a late developing deal, LIHTC Program was created

4. Tax Credits: What are they? Mortgage Interest is an eligible tax deduction (This reduces taxable income.) Tax Credits don’t provide deductions, but rather direct offsets or credits against income tax liability. They directly reduce an investor’s or institution’s tax liability.

5. Low Income Housing Programs Historically, low income housing incentives have been administered by: Dept. of Housing and Urban Development U.S.D.A. Rural Development Agency Low Income Housing Tax Credit Program is administered by the U.S. Dept. of the Treasury Section 42 of the IRS code is where this program is granted statutory authorization.

6. Section 42 of the IRS Code Requires that the tax credits be administered at the state level. Utah’s “allocating agency” as defined by Section 42 is the Utah Housing Corporation (UHC). State’s can only allocate credits within their state boundaries. Significant compliance requirements for project owners Housing credits can only be used to provide housing for households earning no more than 60% of the Area Median Income.

7. Section 42 of the IRS Code Allows the “allocating agency” the ability to develop additional requirements beyond federal code. The annual allocation authority granted the agency (UHC) is based on the per capita population of the state. Utah’s population is between 2,400,000 and 2,500,000. Utah’s LIHTC allocation is $1.90 per resident—approximately $4,560,000 to $4,750,000.

8. Additional Credit Information State’s may obtain additional tax credit authority from other sources. Forfeited credits by not completed projects. Excess credits from completed projects. Additional credits from a National Pool composed of the unused credit of other states. Federal Treasury gives credits to projects that obtain tax exempt bond authority. Treasury credits must also be obtained through the Utah Housing Corporation.

9. Federal LIHTC Section 42 Program This program is the longest running multi-family housing program ever implemented at the federal level. By most accounts, it has proven to be very effective at providing housing for low and very-low income families across the country. As program has evolved, oversubscription or overapplication has become a common theme across the state agencies.

10. Utah Housing Corp. QAP Qualified Allocation Plan governs the allocation and administration of these limited resources. Robin Kemker, Director of the UHC LIHTC Program, (801) 902-8200, [email protected] 2007 QAP will govern the application process for the allocations that will be awarded. Application deadline is September 29, 2006 at 5:00 p.m. Award notifications will likely be in Nov./Dec.

11. Qualified Allocation Plan (QAP) The QAP states the following: “It is strongly suggested that project sponsors interested in utilizing the Program in their financing package contact their tax accountant and/or attorney prior to submitting an application. While UHC may respond to requests for assistance in applying for Tax Credits, applicants may not rely on UHC for tax advice.”

12. Tax Credit/Non-Tax Credit Project Development Puzzle Analogy Development process is expensive Development process is time consuming. Development process is remarkably unpredictable. Fees and start-up expenses are significant.

13. Tax Credit Application Fees One (1%) of the annual credit amount being requested. $250,000 request will require a $2,500 fee payment. Reservation Fee (If awarded credits, 2% of the amount must be paid.) Market Study ($3,500 to $5,000) Environmental Study ($500 to $3,000) Engineering & Architectural Fees (????) What is your time worth?? 100 to 200 hours??

14. Add up the costs/Is it worth it? $2,500—Application Fee $3,500—Market Study $1,500—Environmental Phase One $2,500—Engineering Fees $2,500—Architectural Fees $9,000—Time ($60 times 150 hrs.) $21,500 just to play the game!!!! Who has $20,000 laying around that they want to invest in a potential project allocation.

15. Why consider the LIHTC Program? Lifeblood for small organizations with grant-dependent budgets. Can be--significant developer fees Ongoing management fees and cash flows Meeting organizational mission/objectives Without equity, one can’t play the development game. Tax Credit equity provides an excellent option to get in the game.

16. Utah LIHTC Projects As per UHC’s website, there are 198 completed LIHTC projects in Utah. Likely 15 to 25 additional projects that have received tax credits in some phase of the development process. Will likely be 20 to 25 new applications for LIHTCs this month. Of these, 7 to 10 will probably receive allocations.

17. Utah’s LIHTC Projects # of projects with 30 or fewer units: 54 # of projects with 31 to 60 units: 60 # of projects with 61 to 99 units: 44 # of projects with 100 units or more: 36 Of the above projects, 30 have USDA RD subsidies Of the above projects, 8 have Section 8 or HUD subsidies

19. UHC’s Application Form 31 page document that requires significant information with respect to the project and the project sponsor. Available from Robin Kemker or Monica Spangle at Utah Housing Corporation. Zoning, financial information, project pro forma, environmental, community support, other sources of funds, partnership/sponsor information, design plans, project amenities, development team, architect, engineer, contractor, attorney(s), other project threshold items

20. Qualified Allocation Plan Scoring Preference or Primary Selection Criteria Lower Income Targeting, Maximum Score = 8,160 Extended Low-Income Use Period, Maximum Score = 5,000 Ready-to-go Status = Maximum Score 500 Concerted Community Revitalization Plan, Maximum Score = 500

21. Qualified Allocation Plan Scoring Secondary Selection Criteria Project Location, Maximum Score = 600 Project in HUD DDA, UHC Rural Area, or Non-participating Area Project Characteristics, Maximum Score = 600 Large Units, Project amenities Applicant Characteristics, Maximum Score = 400 Tenant Populations with Special Housing Needs, Maximum Score = 820 Service to Tenants on Public Housing Assistance, Maximum Score = 200 Housing Needs Characteristics (300) and Bonus Points (20)

22. Compliance & Monitoring Record keeping requirements Total # of residential rental units in the building, including bedrooms and sq. feet Percentage of residential rental units in building that are low income. Rent charge on each residential unit, including any utility allowances. The number and ages of occupants in each low-income unit

23. Compliance & Monitoring Status of all units needs to be tracked on Occupancy Report Annual income certification of each low-income tenant per/unit Documentation to support each low-income tenant’s income certification Eligible and qualified basis of the building at the end of the first year of the Credit period Owner is required to retain the records described in this section for at least six years. Compliance Monitoring Plan Fees—paid annually

24. Certification & Review Req. Housing credit project met the 20-50 test or the 40-60 test, whichever applies The owner has received an annual income certification from each low-income tenant Each low-income unit in the project was rent restricted All units in the project were for use by the general public Each building in the project was suitable for occupancy There was no change in the eligible basis of any building in the project All tenant facilities included in the eligible basis were provided on a comparable basis without charge to tenants If a low-income unit became vacant, reasonable attempts were or are being made to rent that unit.

25. Project Unknowns and Risks Project costs: Recent increases have made trying to tie down project costs prior to the commencement of construction essential for a cost-effective project development Project performance: If the project doesn’t find enough income-qualified tenants, do the partners have sufficient resources to come in and provide some operational capital until it operates completely in the black.

26. Case Study: Davis Behavioral Health 10-unit set aside for chronic mental health patients Their organization, prior to the application, owned some duplexes and leased those units for people with mental illness. Applied for a particular HUD grant, and were awarded a $750,000 grant They initially started the application process with Utah Nonprofit Housing Corporation

27. Case Study: Davis Behavioral Health They were successful at obtaining an allocation with Utah Nonprofit Housing Corporation. Subsequent to the allocation process, Amy Rowland was hired as a consultant. It took her some time to realize (Davis Behavioral Health did not tell her.) that they had already received an allocation. There immediately arose some structuring issues because of the $750,000 grant. Technically, the grant has to be subtracted out of basis.

28. Case Study: Davis Behavioral Health They used the grant to purchase the land Davis Behavioral Health sold the land to the project owner, a LLC Was their effort over the course of five years worth working to get 10 units??? Will their compliance and maintenance efforts be supported by the rents in the project, or will they need to feed the project?

29. Case Study: Unity Place

30. Case Study: Unity Place Uintah Basin Assistance Council Project USDA Rural Development 515 Acquisition/Rehabilitation

31. Questions to Ask Prior to Developing How much time will this project take? How much money do I, or my organization, stand to make from this project? Will this project stabilize my organization? Will this project add unnecessary risks to my organization? Does my organization have sufficient staff to handle the additional work load? Do I want to be at the call of my investors? Are the returns sufficient to mitigate the risks? What unknown factors might I not anticipate that could create a more difficult project development experience?

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