iped housing tax credits 101 phoenix, arizona february 22-23, 2007 molly r. bryson thomas a. giblin
TRANSCRIPT
IPED HOUSING TAX CREDITS “101”
Phoenix, ArizonaFebruary 22-23, 2007
Molly R. BrysonThomas A. Giblin
Background
• Tax Reform of 1986
• Section 42 of IRC of 1986– Housing Program in the Tax Code– Statute Amended Several Times, Including in 2000
• Objective to Provide Investor Equity
• Credit is a Dollar-for-Dollar Tax Reduction
Calculating Credits/Defining Terms
• Applicable Percentage times Qualified Basis = Annual Credit Amount
Applicable Percentage
• Two Credits:– 70 Percent Present Value Credit (the “9% Credit”)– 30 Percent Present Value Credit (the “4% Credit”)
• Credit Rates– 8.11% (9% Credit) & 3.48% (4% Credit) –
February 2007– Lowest rates in July 2003 – 7.78% and 3.33%
Applicable Percentage (cont’d)
• “Lock-in Election” upon receiving a binding commitment from the state to allocate credits (or when tax-exempt bonds issued) OR when building placed in service
4% New Construction/Substantial Rehabilitation Credit
• “Federally Subsidized”– Building Receives Tax-Exempt Bonds or Below Market
Federal Loan
• “Below Market Federal Loan”– Interest Rate Below AFR (Approximately 4.86% in
2/2007 for Long-Term Loans Compounded Annually)– From Federally Appropriated Funds
Exceptions From Federally Subsidized Definition
• HOME Loan if 40% at 50% Targeting
• CDBG Loan
• AHP Loan
• Loan is Subtracted from Eligible Basis
• Section 8
• NAHASDA of 1996 if 40% at 50% Targeting
4% Acquisition Credit
• Existing Buildings/Acquisition Costs
• Purchase from “Unrelated Party”
• Ten-Year Rule
• Waiver of Ten-Year Rule from Treasury
4% Acquisition Credit (cont’d)
• Certain Placements in Service Ignored– Carryover Basis– Acquired from Decedent– Placement in Service by Governmental Unit or Non-
Profit Entity– Foreclosure
Substantial Rehabilitation Requirement
• Greater of:– $3,000 per Low-Income Unit, or– 10% of Adjusted Basis
• “Separate New Building”
• Can Receive 4% plus 9% Credits
9% New Construction/Substantial Rehabilitation Credit
• If Not Federally Subsidized
Basis Calculations
• Start with “Eligible Basis”, then “Qualified Basis”
“Eligible Basis”
• New Construction = Adjusted Basis
• Acquisition = Acquisition Cost
• Substantial Rehabilitation = Capitalized Rehabilitation Expenditures over 24 months
• Must Subtract Federal Grants
• 130% Increase in “QCTs” and “DDAs”
“Qualified Basis”
• “Applicable Fraction” times “Eligible Basis” equals “Qualified Basis”
• “Applicable Fraction” is the Lower of:– Number of Occupied “Low-Income Units” divided by
the Total Number of Units, or– “Floor Space Fraction”
“Low Income Units”
• Threshold of Election of:– 20% of Units at 50% of Area Median Income (“AMI”),
or – 40% of Units at 60% of AMI
• Election Upon Placement in Service
• Must Meet Minimum by End of 1st Credit Year
• HUD Publishes Area Income Figures Annually
Low Income Units (cont’d)
• Adjustments for Family Size like Section 8– Family of 4 Qualifies at 60% (50%) AMI– Family of 3 Qualifies at 54% (45%) AMI– Family of 2 Qualifies at 48% (40%) AMI– Single Household Qualifies at 42% (35%) AMI
“Rent Restricted”
• Rent (including utilities) Cannot Exceed 30% of Qualifying Income for Assumed Family Size; Based on Bedrooms Per Unit
• Occupancy Assumptions:– One Person for Studio– 1.5 Persons per Bedroom
Rent Calculation Example
• Median Income = $60,000
• Two Bedroom Unit
• 3 Person (2BR x 1.5) Income Limit = $32,400
• 30% of Income Limit = $9,720
• Monthly Rent (1/12) = $810
Additional Rent Rules
• Rent Limits Change Annually with Publication of New Area Median Incomes
• Rent Will Not Decrease Below Original Floor• Gross Rent Does Not Include Section 8 (or Similar
Rental Subsidies)• Gross Rent Must Include Utility Allowance for
Tenant-Paid Utilities (i.e., Deduct from Rent to Owner)
Example of Tax Credit Calculation
• 100 Unit Project/70 Low-Income Units
• TDC (Including Land) = $5.5M
• Land Value = $500K
• Eligible Basis = $5.0M
• Qualified Basis = $3.5M ($5.0M x 70%)
Example Tax Credit Calculation (cont’d)
• Applicable Percentage = 8.11%
• (Not Federally Subsidized)
• Annual Credit = $283,850 ($3.5M x 8.11%)
• 10 Year Credits = $2,838,500
Equity Calculation
• Pricing Primarily Based on Total Amount of 10 Year Credits Available to Investor and Market Conditions
• Expressed as “Cents Per Tax Credit Dollar”
• In Above Example, if Investor Will Pay 90 Cents Per Tax Credit Dollar, Equity Equals $2,554,394 ($2,838,500 x 99.99% x 0.90)
Equity Calculation (cont’d)
• If Bond Financed “4% Deal”, Equity Equals $1,096,090
• ($5,500,000 - $500,000) x 70% x 3.48% x 10 x 0.90 x 99.99% = $1,096,090
Structure
Investor LP$$$
Syndicator GP
InvestmentPartnership LP
Local GP
Developer
OperatingPartnership
Key Business Terms
• Projects Generally Owned by Limited Partnership or Limited Liability Company
• Limited Partner Generally Owns 99.99% of Tax Credits, Losses & Profits
• Limited Partner Pays in Capital Contributions in Multiple Installments (generally 3 or 4), Based on Negotiated Benchmarks
• General Partner Guarantees Completion, Amount of Credits and Funding of Deficits
Who Can Use Credits?
• Individuals Limited Under Passive Loss Rules to Approximately $9,900/Year at the 39.6% rate
• C Corporations Can Use Losses and Credits Against Ordinary Income and Taxes
• Cannot Use Credits Against AMT
• Limitations on “Closely-Held” Corporations
Continued Compliance
• 15-Year “Compliance Period”
• Continued Tenant Qualification:– 40% Increase Above Eligibility OK– Vacant Units/Over-Income Units OK if “Next Available
Unit Rule” Followed
Recapture
• Recapture on Non-Compliance:– Accelerated Portion of Credit Recaptured (1/3 of
Credit 1st 10 years, Decreasing Through Year 15)– If Minimum Set-Aside Fails, All Accelerated Credits
Recaptured– Otherwise, Unit-by-Unit (Extent of Decrease in
Qualified Basis)
Recapture (cont’d)
• Recapture on Change of More Than 1/3 in Ownership of Sale of Project
• Bond Posting Procedure
• New Owner Steps into Seller’s Shoes Upon Sale of Project
Extended Use
• Recorded “Extended Use Commitment”
• “Extended Use Period”:– At Least 30 Years, May be Longer to Gain Points
• Termination (with three-year vacancy de-control)– Upon Foreclosure– “Qualified Contract”
“Qualified Contract”
• State to Find Buyer If Requested by Owner After 14th Year Pursuant to “Qualified Contract”– Contract =
• Outstanding Debt +• “Adjusted Investor Equity” +• Other Capital Contributions, Less• Cash Available for Distribution
Qualified Contract (cont’d)
• “Adjusted Investor Equity” = Initial Investor Equity to Project Inflated by COLA (up to 5% per year)
• If No Buyer Found Within One Year, Property May Be Sold or Converted to Non-Low-Income Housing, Subject to 3-Year Vacancy Decontrol
Compliance Monitoring
• State Credit Agencies Monitor Projects• Owners’ Recordkeeping Requirements:– Number of Low-Income & Total Units– Income Certifications/Annual Re-Certifications & Backup
Verifications– Qualified Basis & Eligible Basis Amounts– Rent Amounts
• Owner Annual Compliance Certifications
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
'00 '01 '02 '03 '04 '05 '06 '07
•Congress Raised Cap in 2000 From $1.25 to $1.50 in 2001, $1.75 in 2002, Then Adjusted for Inflation
•$1.95 Per Person for 2007
•$2,275,000 State Minimum in 2007
STATE ALLOCATION VOLUME LIMIT
Volume Limit Rules
• Example:– State With Three Million Population has $5,850,000 in
Credits in 2007• Amount is for One Year of Credit • 10% Non-Profit Set-Aside• 50% Test: Private Activity Tax-Exempt Bonds
Subject to Bond Volume Cap; No Credit Allocation Needed
“Qualified Allocation Plans”
• State Must Adopt QAP to Allocate Credits
• QAP Must Set Forth Allocation Priorities
• QAP Must Give Preference to:– Lowest Incomes– Longest Period of Low-Income Use– QCT Projects Contributing to a Concerted
Revitalization Plan
Additional QAP Rules
• QAP Must Provide Procedure for Notifying IRS of Non-Compliance
• Bond Financed Projects Must “Satisfy” QAP
Project Evaluation
• Credit May Not Exceed Amount State Agency Determines Is Necessary For Feasibility and Viability
• Agency Must Consider:– Sources and Uses– Amounts Expected to Be Generated by Tax Benefits– Reasonableness of Development and Operating Costs
Project Evaluation (cont’d)
• Evaluation Occurs at Application, Allocation and Completion
• Owner Must Certify as to Amount of Subsidies
• For Tax-Exempt Bond Financed Projects, Issuer Must Do Similar Evaluation
• Agency Must Require Market Study Paid by Developer
State Allocation Process
• “Carryover Allocation”– 10% of “Reasonably Expected Basis” Must be
Incurred by 12/31 of Allocation Year or 6 Months After Allocation, if Allocation After 6/30
– Building Must be Placed in Service by 12/31 of 2nd Year After Carryover
– Carryover Basis Includes Costs of Land and Depreciable Property
Carryover Allocation Document
• Must be Issued by State Agency by 12/31 of Allocation Year
• 10 Elements Required in Document
• Agency Must Later Issue Forms 8609 After Buildings Complete
• State May Carry Forward Unused Credits for One Year; Then Goes to National Pool