Basics of IRS Code Section 42 Low-Income Housing Tax Credits

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Basics of IRS Code Section 42Low-Income Housing
Tax Credits
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Introduction

• What is NCHFA?
• Why am I here?
• What is the LIHTC?

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105-277.16

• Development to which NCHFA allocated a
  federal tax credit under section 42 is designated
  a special class of property under the NC
  Constitution and must be appraised, assessed, and
  taxed in accordance with this section.

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105-277.16

• The assessor must use the income approach as the
  method of valuation for property classified under
  this section and must take rent restrictions that
  apply to the property into consideration in
  determining the income attributable to the
  property.

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105-277.16

• The assessor may not consider income tax credits
  received under section 42 or under G.S.
  105-129.42 in determining the income attributable
  to the property.

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LIHTC housing is

• Always rental
• Many types of structures
• Rehabilitation and new construction
• 2,000 units and 35 awards annually
• Total of 50,000 units in 1,400 projects
• Only awarded by NCHFA

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IRS Code Section 42

• Owners must follow rules on
• Income,
• Rent, and
• Suitability
• Contained in recorded use agreement
• NCHFA monitors and reports violations to the IRS

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IRS Code Section 42

• Rent limit is actually a maximum housing expense
• Generally is 60 area median income less utility
  allowance
• Specifics are very complicated for both AMI and
  utilities

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IRS Code Section 42

• Rules apply for 30 years
• Are ways to exit, including foreclosure
• NCHFA provides DoR with a list of Section 42
  properties
• Includes all, with indicator of which are added
  and removed

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The List
Property Name City County Cycle Address Zip Units Removed Added
Auburn Spring Burlington Alamance 2005 2950 Crouse Lane 27215 48    
Auburn Trace Apartments Burlington Alamance 2005 2944 Crouse Lane 27215 80    
Graham Village Apts Graham Alamance 1993 920 E.Hanover Road 27253 50    
Cannon Place Graham Alamance 1997 508 E.Parker Street 27253 74    
Westhampton Apts Mebane Alamance 1989 1015 Mebane Airport Road 27302 40    
Deerfield Crossing Apts Mebane Alamance 1996 600 Deerfield Trace 27302 118    
Mebane Mill Lofts Mebane Alamance 2009 301 W Washington Street 27302 75   1
Ridgeway Apts Taylorsville Alexander 1987 First Ave Dr Se 28681 32    
The Oaks Taylorsville Alexander 1996 100 2nd Avenue 28681 40    
Ridgeview Apts Sparta Alleghany 1988 218 E. Whitehead St 28675 36    
Highland Village Sparta Alleghany 1999 29 Highland Village Circle 28675 30    
Maplewood Apts Sparta Alleghany 2001 273 Independence Road 28675 30    
Pine Ridge Place Polkton Anson 1993 401 Pine Ridge Place 28135 16    
Wyndsor Downs Polkton Anson 2004 11 Wyndsor Court 28135 32    
Pine Terrace Apts Wadesboro Anson 2001 100 Pine Bluff Street 28170 24    
Laurel Commons Apts Wadesboro Anson 2001 Burns Street 28170 24    
Oak Hill Wadesboro Anson 2004 1331 North Greene Street 28170 72    
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Common issues

• Not all affordable projects qualify, some are
  only in other programs
• Changes, new and removed
• How to value- NCHFA is not in a position to
  advise
• Always welcome to ask questions 919.877.5645
  mshelburne_at_nchfa.com

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How do LIHTCs make housing affordable?
YIKES!
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Actually has a simple explanation

• Funds invested for the tax credit partially
  replace loan financing
• But what does that mean?

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Loans have to be repaid (usually)

• A 36 unit apartment complex costs 3,380,000 to
  build
• Borrow 3,080,000 from bank
• (the rest from an investor)
• Monthly payment of 24,228

Thats 673 per household every month!
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If the project has Housing Credits

• Whoever owns the building avoids 2,592,000 in
  taxes over 10 years
• Amount calculated on depreciable items (bulldozer
  test)
• Determined up-front

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What the rest of us get for this tax break

• For every dollar of the 2,592,000 a large
  company makes an investment
• Around 0.85 per 1 in tax reduction
• Thus 0.15 better off expects no other return

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Now time for a little math

• price x tax credits investment
• 0.85 x 2,592,000 2,203,200
• Still a 3.38 million project
• cost investment loan amount
• 3.38M - 2.20M 1.18M loan

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Finally the conclusion

• Monthly payment on a 1,176,800 loan is 9,257,
  which 257/unit
• If built without tax credits monthly payment is
  24,228, or 673/unit
• Investment saves tenant households 416 each month

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Summary of the numbers

• MARKET
• Cost 3,380,000
• Invest 300,000
• Loan 3,080,000
• Payment 24,228
• Units 36
• Per unit 673

• TAX CREDIT
• 3,380,000
• 2,203,200
• 1,176,800
• 9,257
• 36
• 257
• Savings 416