Asset Management for LIHTC Properties Maximizing the Potential Value of the Credits

1. Asset Management for LIHTC PropertiesMaximizing the Potential Value of the Credits

2. 1st Year of the Credit Period Majority of credits lost are lost during the 1st year of the credit period Need to manage the handoff of the property from development to management to maximize the value of the credit allocation Often a gulf between development team and management team that can be bridged by a proactive Asset Manager

3. Year 1 con� Credits lost from the impact of the Two Thirds Rule Credits lost from the impact of the Averaging Convention Credits lost due to poor tenant income certifications Asset Managers need to understand how to manage the 1st year of the credit period to maximize the value of the credits

4. Two Thirds Rule Provides incentive to owners to rent their low income units ASAP The credits generated by units first occupied by eligible residents during the 1st year of the credit period are more valuable than the credits generated by units first occupied by eligible residents after the 1st year of the credit period

5. Two Thirds Rule con. For a unit first occupied by an eligible households during the 1st year of the credit period, the owner may take 1/10th of the total tax credit for the unit each year of the 10 year credit period. One-third of the tax credit taken is referred to as the accelerated portion.

6. Two Thirds Rule con. For a unit first occupied by an eligible household after the close of the first year of the credit period, the owner may take 1/15th of the total tax credit for the unit each year of the 15 year compliance period beginning with the first year an eligible household occupies the unit.

7. Two Thirds Rule An owner may take two-thirds of the regular, per unit tax credit for a unit first occupied by an eligible household after the close of the first year of the credit period. Example

8. Example 100 unit building with 100% Allocation $3,000 credit for units rented year 1 $2,000 credit for units rented after year 1 Scenario A 100 units rented during year 1 100 units x $3,000 = $300,000 credit $300,000 x 10 years = $3,000,000 total tax credits

9. Example con. Scenario B 80 units rented during year 1 20 units rented during year 2 80 units x $3,000 = $240,000 1st Yr Credit 80 units x $3,000 = $240,000 20 units x $2,000 = $40,000 Tax Credit Years 2-10 = $280,000

10. Example con. Scenario B Total Tax Credits $240,000 + ($280,000 x 9 years) + ($40,000 x 5 years) = $240,000 + $2,520,000 + $200,000 = $2,960,000 Owner�s tax credits total $40,000 less when 20 of the units not occupied by eligible residents until year 2

11. Two Thirds Rule con. With fewer total credits, and the slower pace at which 20 of the low income units will generate credits, the investors will pay less for every tax credit dollar generated by the building Example

12. Example Scenario A $3,000,000 credits over 10 years Investors pay 90 cents per credit $1 $3,000,000 x 90 cents Equity Raised = $2,700,000 Scenario B $2,960,000 credits over 15 years Investors pay 84 cents per credit $1 $2,960,000 x 84 cents Equity Raised = $2,486,400

13. Strategies for Avoiding Impact of the Two Thirds Rule Ensure property management understands the importance of renting all low income units during year 1 Include incentives/penalties in management agreement For multi-building properties, ensure property management knows what year the developer plans on beginning the credit period for each building Example

14. Example 100 unit property with 10 buildings Acquisition/Rehab 100% LIHTC property Date of Acquisition is 4/1/06 Developer will complete the rehab and begin the credit period in 2006 for buildings 1-4; in 2007 for buildings 5-10 Management should ensure all units in buildings 1-4 are occupied by eligible tenants by the end of 2006; by the end of 2007 for buildings 5-10

15. Strategies con� Hire property management experienced in the LIHTC program Develop a coherent strategy for negotiating with ineligible residents to vacate their units Implement a quality control program to ensure 1st year tenant income certifications are correct Store 1st year files in multiple locations to ensure their availability in case of an IRS audit

16. Averaging Convention Owner wants to PIS and rent the low income units as early as possible Owner may take tax credits on the first year�s tax return for that portion of the year the units were actually rented to low income tenants Owner takes remaining portion of the credit for the 1st year of the credit period on the tax return for the 11th year of the compliance period

17. Division of the 1st Year Credit Determine the 1st year low income occupancy % as of 12/31 and calculate the tax credit for the 1st year of the credit period Determine the average low income occupancy % for the 1st year of the credit period and determine how much of the tax credit for the first year may be taken on the 1st year�s tax return Note: A building must be in service a full calendar month before it can begin to generate credits.

18. Division of the 1st Year Credit con� Subtract the tax credit taken on the first year�s tax return from the tax credit for the first year of the credit period to determine that portion of the 1st year�s credit the owner must take on the return for the 11th year of the compliance period Example

19. Example 100 unit 100% tax credit building $3,000 credit/low income unit rented yr 1 Owner places credits in service 8/1 Low Income Occupancy % on 8/31 = 40% Low Income Occupancy % on 9/30 = 60% Low Income Occupancy % on 10/31 = 80% Low Income Occupancy % on 11/30 = 100% Low Income Occupancy % on 12/31 = 100% First Year Low Income Occupancy % = 100% Yr 1 Credit = $3,000 x 100 units = $300,000

20. Example con� Average Year 1 Low Income Occupancy % = (40% + 60% + 80% + 100% + 100%)/12 mos 380%/12 mos = 31.67% $300,000 x 31.67% = $95,010 Portion of Yr 1 Credit Taken on Yr 1 Return $300,000 - $95,010 = $204,990 Portion of Yr 1 Credit Taken on Yr 11 Return

21. Averaging Convention con� Further impacts how much equity investors willing to pay per credit $ Earlier in the year the credits are PIS and the units are occupied by eligible households, the more investors will pay per credit $ Later in the year the credits are PIS and the units are occupied by eligible households, the less investors will pay per credit $

22. First Year of the Credit Period Generally, owner begins the credit period for a building the same year s/he places the credits in service Owner may elect to begin the credit period the year following the PIS date Example

23. Example PIS Date is 8/1/05 Owner begins credit period in 2005 Owner may elect to begin credit period in 2006 Owner considers impact of both the Two Thirds Rule and the Averaging Convention

24. General Considerations Investors pay less per credit $ if they cannot begin taking credits until the year following the PIS date Investors pay less per credit $ the smaller the portion of the first year�s tax credit they can take on the first year�s tax return If all units are leased to eligible families on 1/1/06, and the owner elects to begin credit period in 2006, owner may take entire tax credit for the first year of the credit period in 2006.

25. Strategies for Minimizing Impact of the Averaging Convention Begin certifying applicants eligible within 90 days of the projected PIS date so they can take occupancy and begin generating credits ASAP Offer incentives to encourage households to take occupancy sooner than they planned Example

26. Example Management certifies applicant eligible in early August Household plans on moving into unit in early September Management offers the household an incentive to take occupancy on or before August 31st Note: Any unit occupied by an eligible household by the end of a month is included in the low income occupancy % for that month

27. Existing Residents Do not grandfather into LIHTC program Must be certified eligible or Vacate their units to make way for new, eligible tenants Developer surveys existing residents and in planning on how soon units will begin to generate credits considers the following �

28. Developer Considerations Does the owner have the legal right to terminate a resident�s lease? Does the owner have the legal right to not renew a resident�s lease? How long until the end of the current lease term for an ineligible resident? How much would it cost to motivate an existing resident to move compared to the size of the tax credit at risk?

29. Existing Residents con. Based on developer�s findings Project 1st year low income occupancy % based on units likely occupied by eligible residents at end of 1st year Budget for incentives for ineligible residents to move to meet qualified basis Don�t make commitments to investors that units will generate credits when occupied by ineligible residents unlikely to vacate

30. Ineligible Existing Residents Peril in promising 100% tax credits for HUD subsidized buildings HUD subsidized tenants protected by HUD model lease Asset Manager often involved in negotiations with ineligible tenants to vacate their units

31. Acquisition/Rehab Credits Must begin the credit period the same year for both sets of credits August 2000 IRS issued PLR stating a project was considered in service as of the date of acquisition Calculate the average 1st year low income occupancy % the same for both sets of credits

32. Acquisition/Rehab Credits con. Owner selects period of time, 24 month max, to accumulate rehab costs If owner completes rehab the same year as acquisition, may begin credit period the year of acquisition If owner does not complete rehab the same year as acquisition, may begin the credit period the year s/he completes the rehab activities

33. Rehab Complete Year of Acquisition Owner wants building occupied by eligible residents on date of acquisition Sales agreement may require seller to assist buyer in completing initial income certifications within 90 days and prior to the date of acquisition Example

34. Example Date of Acquisition is 4/1/05 Owner Completes Rehab during 2005 Owner Completes Initial TICs 1/1/05 � 4/1/05 Units begin generating acquisition & rehab credits as of 4/1/05

35. Rehab Complete Year after Acquisition Owner wants building occupied by eligible residents as of 1/1 of the year s/he completes the rehabilitation Owner should complete initial TICS within 90 days prior to the 1st of the year s/he plans on completing the rehab Example

36. Example Date of Acquisition is 4/1/05 Owner Completes Rehab on 6/1/06 Owner Completes Initial TICS 10/1/05 � 12/31/05 Acquisition and Rehab Credits flow from 1/1/06

37. Developer Needs new C of O If the rehabilitation involves the relocation of the tenants and the owner must obtain a new C of O, units are not in service and may not generate credits until date on C of O Remember possibilities of obtaining a temporary C of O Example

38. Example Date of Acquisition is 4/1/05 Owner completes rehab and obtains new C of O on 10/1/06 Units can begin to generate credits on 10/1/06 Units begin to generate credits when occupied by eligible households

39. Property Management Asset Manager should be proactive in finding property management with successful experience in managing LIHTC properties Single building, 100% LIHTC properties are easiest to manage 100% LIHTC properties are easier to manage than mixed income properties

40. Property Management Asset Manager should ensure property management staff actually assigned to the property has LIHTC experience Site Manager should not be learning how to complete tenant income certifications during the 1st year of the credit period Management should be well versed in the Compliance Manual for their state�s monitoring agency

41. Liz Bramlet Affordable Housing Consultant 202/363-0541 Bramlet6@aol.com