1

1
Credit EssentialsNCSHAWashington DCJanuary 2008
2
Background

• Tax Reform Act of 1986
• Section 42 of IRC of 1986
• Housing Program in the Tax Code
• Statute Amended Several Times, Including 2000
• Objective to Provide Investor Equity
• Credit is a Dollar-for-Dollar Tax Reduction

3
Calculating Credits/Defining Terms

• Applicable Percentage Times Qualified Basis
  Annual Credit Amount

4
Applicable Percentage

• Two Credits
• 70 Percent Present Value Credit
• Also Known as the 9 Credit
• 30 Present Present Value Credit
• Also Known as the 4 Credit
• December 2007 Credit Rates
• 8.03 (9) 3.44 (4)
• Lock-in Election

5
4 New Construction/Substantial Rehab Credit

• Federally Subsidized
• Building Receives Tax Exempt Bonds or Below
  Market Federal Loan
• Below Market Federal Loan
• Interest Rate Below AFR (Long term annual rate is
  4.72 in December 2007)
• From Federally Appropriated Funds

6
Exceptions From Federally Subsidized Definition

• HOME Loan if 40 at 50 Targeting
• Community Development Block Grants
• Loan is Subtracted from Eligible Basis
• Section 8 and Section 9 rent subsidies
• NAHASDA of 1996

7
4 Acquisition Credit

• Existing Buildings/Acquisition Costs
• Purchase from Unrelated Party
• Ten Year Rule
• Waiver of Ten Rule from Treasury
• Certain Placements in Service Ignored
• Carryover Basis
• Acquired from Decedent

8
Acquisition credit (cont)

• Placement in Service by Governmental Unit or
  Non-Profit Entity
• Foreclosures
• Technical termination of partnership

9
Substantial RehabilitationRequirement

• Greater of
• 3,000 per Low-Income Unit or 10 of Adjusted
  Basis
• Separate New Building
• Can Get 9 Credit on the Rehabilitation Plus 4
  Credit on Acquisition if Rehab is not Federally
  Subsidized

10
Basis Calculations

• Start with calculation of Eligible Basis,
  thencalculate Qualified Basis

11
Eligible Basis

• New Construction Adjusted Basis
• Acquisition Acquisition Cost
• Substantial Rehab Capitalized Rehab
  Expenditures
• Must Subtract Federal Grants
• 130 Increase in QCTs and DDAs

12
Qualified Basis

• Applicable Fraction Times Eligible Basis
• Applicable Fraction is the Lower of
• Number of Occupied Low-Income Units vs. Total
  Units or
• Floor Space Fraction
• Calculated building by building

13
Example Of Tax Credit Calculation

• 100 Unit Project/70 Low-Income Units
• TDC (Including Land) 5.5M
• Land Cost 500K
• Eligible Basis 5.0M
• Qualified Basis 3.5M (5.0M x 70)

14
Calculation (cont)

• Applicable Percentage 8.12(Not Federally
  Subsidized)
• Annual Credit 284,200 (3.5M x 8.12)
• 10 Year Credits 2,842,000

15
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 92 Cents
  Per Tax Credit Dollar, Equity Equals 2,614,379
  (2,842,000 x 99.99 x 92)

16
Compliance Monitoring

• State Credit Agencies Monitor Projects
• Owners Recordkeeping Requirements
• Number of Low-Income Total Units
• Income certifications/Annual Re-certifications
  Backup Verifications
• Qualified Eligible Basis Amounts
• Rent Amounts
• Owner Annual Compliance Certifications

17
Low Income Units

• Threshold Election of
• 20 of Units at 50 of Area Median Income 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

18
(Continued)

• 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

19
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

20
Rent Calculation Example

• Median Income 50,000
• Two Bedroom Unit
• 3 Person (2 BR x 1.5) Income Limit 27,000
• 30 of Income Limit 8,100
• Monthly Rent (1/12) 675

21
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
  Rent Subsidies)
• Gross Rent Must Include Utility Allowance for
  Tenant-Paid Utilities (i.e., Deduct from Rent to
  Owner)

22
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

23
Recapture

• Recapture on Non-Compliance
• Accelerated Portion 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)

24
Recapture

• Recapture on Change of More Than 1/3 in Ownership
  or Sale of Project
• Bond Posting Procedure
• New Owner Steps into Sellers Shoes Upon Sale of
  Project

25
Extended Use

• Recorded Extended Use Commitment
• Extended Use Period
• At Least 30 Years, May be Longer to Gain Points
  under the State QAP
• Termination
• Upon Foreclosure
• Qualified Contract

26
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 Distributions

27
Qualified Contract (cont)

• Adjusted Investor Equity Initial Investor
  Equity to Project Inflated by COLA (up to 5)
• If no Buyer Found Within 1 Year, Property May be
  Sold or Converted to Non-Low-Income Housing,
  Subject to 3 Year Vacancy Decontrol

28
State Allocation Volume Limit

• In 2007 the cap per resident in the state is
  1.95.
• Adjusted annually for inflation
• The 2007 minimum is 2,275,000 for Small States

29
Volume Limit Rules

• Example
• State With 2M Population has 3.9M in Credits in
  2007
• Amount is for 1 Year of Credit
• 10 Non-Profit Set-Aside
• 50 Test Tax-Exempt Bonds Subject to Bond Volume
  - No Credit Allocation Needed

30
Qualified Allocation Plans

• State Must Adopt QAP to Allocate Credits
• QAP Must Set Forth Allocation Priorities
• QAP Must Give Preference to Projects with
• Lowest Income Tenants
• Longest Period of Low-Income Use
• Contributing to a Concerted Revitalization Plan
  in a QCT

31
Additional QAP Rules

• QAP Must Provide Procedure for Notifying IRS of
  Non-Compliance
• Bond Financed Projects Must Satisfy QAP

32
Project Evaluation

• Credit May Not Exceed Amount State Agency
  Determines is Necessary For Feasibility and
  Viability
• Agency Must Consider
• Sources and Uses of Funds
• Amounts Expected to be Generated by Tax Benefits
  (Equity for Credits)
• Reasonableness of Development and Operating Costs

33
Project Evaluation (cont)

• 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 for by
  Developer

34
State Allocation Process

• Carryover Allocations
• 10 of Reasonably Expected Basis Must be
  Incurred by 12/31 of Allocation Year or 6 Months
  After Allocation, if Allocation After 7/1
• Building Must be Placed in Service by 12/31 of
  2nd Year After Carryover
• Carryover Basis Includes Costs of Land and
  Depreciable Property

35
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 1
  Year Then Goes to National Pool

36
Structure
SYNDICATOR GP
INVESTOR LP
INVESTMENT PARTNERSHIP LP
LOCAL GP
DEVELOPER
OPERATING PARTNERSHIP
37
Key Business Terms

• Projects Generally Owned by Limited Partnership
  or Limited Liability Company
• LP Generally Owns Between 99--99.99 of Tax
  Credits, Losses Profits
• LP Pays in Capital Contributions in Multiple
  Installments (generally 3 or 4), Based on
  Negotiated Benchmarks
• GP Guarantees Completion, Amount of Credits and
  Funding of Deficits

38
Who Can Use Credits?

• Individuals Limited Under Passive Loss Rules to
  Approximately 8,750/Year
• C Corporations Can Use Losses and Credits Against
  Ordinary Income and Taxes
• Cannot Use Credits Against AMT
• Limitations on Closely-Held Corporations