Non LIHTC Sources for LIHTC Projects

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CALIFORNIA TAX CREDIT APPLICATION WORKSHOP
MARCH 2, 2007 LOS ANGELES, CA
KEITH STANLEY JOY HAN NOVOGRADAC COMPANY LLP
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Agenda

• Introduction
• Review of 9 v. 4
• Set Asides and Available Credits
• Brief overview of State Credits
• Noteworthy changes 2007 Regulations
• Underwriting Standards
• Basic Thresholds/Project Scoring
• Deadlines/Requirements

3
Credit Percentages

• 9 Credit
• New construction
• Rehabilitation
• 4 Credit
• Federally Subsidized
• Tax-Exempt Bonds
• Acquisition

4
Benefit of Bond 4 Credit

• Lower interest rate on debt
• CDLAC undersubscribed
• CDLAC TCAC open enrollment
• Higher limits on construction costs
• Higher developer fee
• Higher project size limits
• Automatic 4 credit

5
Cost of Bond 4 Credit

• Complex structure with less equity
• Higher closing costs
• More deferred fees
• Multiple regulatory agreements

6
Benefit of 9 Credit

• Simple structure
• Low closing costs
• More equity w/ less debt

7
Cost of 9 Credit

• TCAC is oversubscribed
• Scoring criteria more restrictive resulting in
  lower rents
• TCAC mandatory housing type
• Lower limits on construction costs
• Lower developer fee allowed
• Project size limited to 150 units (80 units
  rural)
• Rehab minimum is 20K per unit.
• Experience required

8
Bond 4 Credit
9
9 Credit Structure
LIHC Partnership Borrower
10
9 Credit Tiered Structure
Corporate Investor
General Partner Fund L.P.
L.P. Investor Fund
99
1
99.99
General Partner 501(C)(3)
General Partner S-Corp./LLC
LIHC Partnership Borrower
.005
.005
11
2006 Outcomes 9 Credits

• Funded 71 Projects
• 4,249 total units
• 4,135 affordable units
• New Construction 65 projects
• Acquisition/Rehab 6 projects
• Oversubscription rate 2.171

12
9 Credits Awards cont.

• Median federal credit award 1,029,454
• Median project size 60 units
• Also receiving State credits 17 projects
• State credit exchanges 6 projects
• Median state credit awards 3,994,918

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Demand for 9 Credits

• Projects submitted
• Yr. 2000 - 269
• Yr. 2001 - 174
• Yr. 2002 - 248
• Yr. 2003 - 200
• Yr. 2004 - 141
• Yr. 2005 - 124
• Yr. 2006 - 146

14
Awardees Organizational Type

• 42 Joint Ventures (59)
• 27 Non-profits (38)
• 2 For-profits (3)

15
State Tax Credits/Bond Projects

• Total available State credit 89,542,508
• 15 of the available total for 4 Bond Projects
  equals 13,431,376
• Total available for the two 9 Rounds
  76,111,132
• State credits available in the first 9 round is
  38,055,566 (50 total)
• (Note Numbers on Available Credits List differ)

16
Set-Asides
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Set Asides Nonprofit (10)

• 2006
• 10 projects awarded (3 family, 2 senior, 1 SRO, 4
  special needs)
• 5 homeless assistance programs
• Projected Set Aside 6,860,000
• Actual allocation
• 6,920,000 in federal credits

• 2005
• 7 projects awarded (4 family, 1 senior, 1 SRO, 1
  special needs)
• 2 homeless assistance programs
• Projected Set Aside 6,685,100
• Actual allocation
• 6,982,018 in federal credits

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Set Asides Rural (20)

• 2005
• 16 projects awarded (13 family, 3 senior)
• No RHS projects
• Projected Set Aside 13,370,198
• Actual allocation
• 14,360,986 in federal credits

• 2006
• 13 projects awarded (12 family, 1 senior)
• No RHS projects
• Projected Set Aside 13,700,000
• Actual allocation
• 13,965,677 in federal credits

19
Set Asides Small Develop (2)

• 2005
• 5 projects awarded
• Projected Set Aside 1,325,543
• Actual allocation
• 1,554,313 in federal credits

• 2006
• 4 projects awarded
• Projected Set Aside 1,370,000
• Actual allocation
• 1,500,000 in federal credits

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Set Asides At-Risk (5)

• 2005
• 3 projects awarded
• Projected Set Aside 3,342,550
• Actual allocation
• 1,715,044 million in federal credits

• 2006
• 1 project awarded
• Projected Set Aside 3,400,000
• Actual allocation
• 218,300 in federal credits

21
Set Asides Special Needs/SRO (2)

• 2005
• No projects awarded
• Projected Set Aside 1,325,543
• Actual allocation
• 0 in federal credits

• 2006
• 2 projects awarded
• Projected Set Aside 1,370,000
• Actual allocation
• 1,700,000 in federal credits

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Geographic
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2006 Geographic Results (M)
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Geographic LA County (33)

• 11 projects awarded
• Available credits 14.4 M
• Actual allocation 13.1 M

• 20 projects awarded
• Available credits 19.5 M
• Actual allocation 22 M

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Geographic Central Region (10)

• 6 projects awarded
• Available credit 4.5 M
• Actual allocation 7.7 M

• 3 projects awarded
• Available credit 2.3 M
• Actual allocation 2.2 M

26
Geographic North East Bay (10)

• 3 projects awarded
• Available credit 4.5 M
• Actual allocation 4.5 M

• 1 project awarded
• Available credit 5.5 M
• Actual allocation 4.4 M

27
Geographic San Diego (10)

• 5 projects awarded
• Available credit 4.9 M
• Actual allocation 5.5 M

• 3 projects awarded
• Available credit 4.9 M
• Actual allocation 5.6 M

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Geographic Inland Empire (8)

• 5 projects awarded
• Available credit 3.8 M
• Actual allocation 7.3 M

• 1 project awarded
• Available credit 0.9 M
• Actual allocation 1.8 M

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Geographic Orange County (8)

• 3 projects awarded
• Available credit 3.9 M
• Actual allocation 5.6 M

• 3 projects awarded
• Available credit 2.6 M
• Actual allocation 3.4 M

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Geographic South West Bay (6)

• 1 project awarded
• Available credit 2.3 M
• Actual allocation 0.9 M

• 2 projects awarded
• Available credit 4.7 M
• Actual allocation 4.8 M

31
Geographic Capital/Northern (6)

• 3 projects awarded
• Available credit ??
• Actual allocation 2,957,091

• 2 projects awarded
• Available credit 1.5
• Actual allocation 2.4 M

32
Geographic Coastal (5)

• 1 project awarded
• Available credit 2.9 M
• Actual allocation 0.7 M

• 5 projects awarded
• Available credit 4.9 M
• Actual allocation 5.2 M

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Geographic San Francisco (4)

• 2 projects awarded
• Available credit 3.6 M
• Actual allocation 3.0 M

• 1 project awarded
• Available credit 4.4 M
• Actual allocation 1.7 M

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2007TCAC Regulation Changes

• Scattered Site Scoring
• Contracted Service Off-Site
• Rural 2nd Tiebreaker Eliminated
• Low Scoring Applicants
• Updates to At-Risk Provisions
• 4 Tax Credit Applicants Revised Basis Limit
  Boosts
• 9 Credits Additional Boosts in Selected Areas

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TCAC Regulation Changes

• Scattered Site Scoring
• Section 10325(c) Score scattered site
  proportionately by units within distances.
• Reason To reward projects wherein most residents
  are proximate to amenities and within
  revitalizing areas.

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TCAC Regulation Changes

• Contracted Services Off-Site
• Section 10325(c)(5)(B) Clarifies that services
  may be contracted if within ½ mile and free to
  residents.
• Reason To eliminate ambiguous text.

37
TCAC Regulation Changes

• Rural 2nd Tiebreaker Eliminated
• Section 10325(c)(12) Location within a QCT or
  other zone no longer a competitive advantage.
• Reason Could lead to over concentration and
  exclusion of other needy areas, and contribute to
  higher land pricing.

38
TCAC Regulation Changes

• Low Scoring Applications
• Section 10325(d)(2) Committee given clear
  authority to decline low-scoring applicants and
  to set a per-round pass point.
• Reason Clarifying changes provide Committee
  ability to decline low-scoring applications.

39
TCAC Regulation Changes

• Updates to At-Risk Provisions
• Section 10325(g)(5) Established a 5 year look
  back condition and specifies that the project
  must be at risk of losing affordability.
• Reason Incorporates statutory changed and
  clarifies qualifying terms.

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Underwriting Standards

• Contractor profit, OH, and General Requirements
• Cost limitation of 14 of site work and
  structures
• Excludes general liability insurance

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Underwriting Standards

• Developer Fee Consultant Fee - 9
• New construction
• 15 of eligible basis
• 2,000,000 in cost 1,400,000 in basis
• Acquisition/rehabilitation
• 5 of acquisition basis
• 15 of rehabilitation basis
• 2,000,000 in cost 1,400,000 in basis

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Underwriting Standards

• Developer Fee Consultant Fee - 9
• New construction
• 15 of eligible basis
• 2,000,000 in cost 1,400,000 in basis
• Acquisition/rehabilitation
• 5 of acquisition basis
• 15 of rehabilitation basis
• 2,000,000 in cost 1,400,000 in basis
• (15 for projects with at least 15,000 hard
  costs per unit or where at least 30 of the units
  are restricted at 50 AMGI)

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Underwriting Standards

• Project Feasibility
• Threshold basis limits
• Eligible basis adjustments
• DDAs/QCTs
• Land building costs limited to appraisal
• Commercial portion separated

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Underwriting Standards

• Permanent Financing
• Loan terms identified in app
• Ceiling rate used on variable rate loans
• Applicant resources

45
Underwriting Standards

• Funding gap
• Deferred developer fee
• Deferred fees not to exceed 7.5 of EB prior to
  Dev fee
• If eligible, may apply for state tax credits to
  fill funding gaps

46
Underwriting Standards

• Operating analysis
• Operating expense minimums
• Vacancy factor 5 (family, senior, at risk) or
  10 (special needs, SROs)
• Property taxes at 1 replacement cost, or
  identified 501(c)(3) general partner
• Minimum DCR 1.10
• Cash flow limited to 25 of debt service or 8 of
  gross income in 1st 3 years

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Underwriting Standards

• Reserve requirements
• 300/unit annually replacement reserve for
  rehabilitation projects
• New construction or senior projects only
  250/unit annually
• Operating reserve 3 months of operating
  expenses and debt service

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California Basic Thresholds

• Housing need and demand (market study)
• Site control (title report)
• Financing commitments
• Local approvals and zoning
• Financial feasibility

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California Basic Thresholds

• Sponsor characteristics
• Minimum construction standards
• Deferred payment financing, grants and subsidies
• Project size and credit amount
• 150 LIHC unit max, except 80 for Rural set-aside
• Rehab minimums

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California Basic Thresholds

• Additional Thresholds
• Large Family
• Senior
• SRO
• Special Needs
• At risk

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Project Scoring

• Leveraging (20 points)
• Cost efficiency
• Credit reduction (at least 2 points)
• Public funds

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Project Scoring

• Experience (9 points)
• General Partner (CPA certification)
• Previously owned is acceptable
• Management company
• Executed management agreement

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Project Scoring

• Housing needs (10 points)
• Large Family
• SRO
• Special needs
• Seniors
• At-Risk

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Project Scoring

• Amenities (25 points)
• Site amenities (15 points)
• Transit, park, library, grocery, medical clinic
  or hospital, pharmacy
• School/Senior Center/Special Needs Facility (if
  applicable)
• Color photos, contact info
• Service amenities (10 points)
• 10 years, physical space, budget, contract
• TCAC recommends Microsoft Streets and Trips

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Project Scoring

• Neighborhood Revitalization (9 points)
• Plan adopted (2 points)
• 3rd party letters (up to 2 points)
• Narrative (2 points)
• Letter from official (up to 3 points)

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Project Scoring

• Balanced communities (9 points)
• Rural set aside N/A
• Neighborhood revitalization points N/A
• Local government providing funds of 5 of total
  costs

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Project Scoring

• Sustainable building methods (8 points)
• Exceed Title 24 by 10 (4 points)
• Other energy efficiencies (1-2 points each)
• Architect/engineer certification required

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Project Scoring

• Lowest income targeting (52 points)
• Must score at least 45 points
• Only Rural set-aside can use 55 AMI column
• 10 at 30 AMI spread across bedroom sizes 2
  addl points
• Maintain for 55 years

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Project Scoring

• Readiness to Proceed (20 points)
• 150 day requirement
• Site plan approval
• Construction financing committed
• Public approvals (except building permits)
• Design review approval
• State credit substitution (2 points)

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Project ScoringTiebreaker Criteria

• First..Housing Type goals
• Second..QCT or RC, EZ, or EC (if 8 points under
  Revitalization), or if not in one of these areas,
  scored 9 points in Revitalization or Communities
  or a Rural project in a QCT, RC, EZ, EC, or CC

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Project ScoringTiebreaker Criteria

• Third, the application with the lowest ratio of
  requested unadjusted eligible basis to total
  residential project costs, excluding developer
  fee, total land cost, GP/sponsor funds or loans
  from the investor unless the loan is the
  permanent loan. This ratio can not increase at
  placed in service.

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Project Ranking

• Beginning with top-ranked
• Set-asides
• 1 left set aside gets funded
• Geographic areas 1 project per area in each
  funding round
• 125 and 50 and 5 point considerations

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Deadline

• March 22, 2007 at 500 pm deadline!!!
• (You can FedEx/UPS them now!!!)
• Application fee 2,000 cashiers check
• One original and one copy of app
• Sign notarize Applicant Statement
• No missing documents!!!

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QUESTIONS? Keith Stanley [phone] Keith.Stan
ley_at_Novoco.com Joy Han [phone] Joy.Han_at_Novo
co.com
free tax credit resources www.novoco.com