IPED HOUSING TAX CREDITS

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IPED HOUSING TAX CREDITS 101Phoenix,
ArizonaFebruary 22-23, 2007Molly R.
BrysonThomas A. Giblin
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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

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Calculating Credits/Defining Terms

• Applicable Percentage times Qualified Basis
  Annual Credit Amount

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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

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Applicable Percentage (contd)

• 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

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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

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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

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4 Acquisition Credit

• Existing Buildings/Acquisition Costs
• Purchase from Unrelated Party
• Ten-Year Rule
• Waiver of Ten-Year Rule from Treasury

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4 Acquisition Credit (contd)

• Certain Placements in Service Ignored
• Carryover Basis
• Acquired from Decedent
• Placement in Service by Governmental Unit or
  Non-Profit Entity
• Foreclosure

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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

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9 New Construction/Substantial Rehabilitation
Credit

• If Not Federally Subsidized

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Basis Calculations

• Start with Eligible Basis, then Qualified
  Basis

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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

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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

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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

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Low Income Units (contd)

• 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

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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

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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

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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)

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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)

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Example Tax Credit Calculation (contd)

• Applicable Percentage 8.11
• (Not Federally Subsidized)
• Annual Credit 283,850 (3.5M x 8.11)
• 10 Year Credits 2,838,500

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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)

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Equity Calculation (contd)

• 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

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Structure
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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

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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

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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

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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)

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Recapture (contd)

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

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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

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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

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Qualified Contract (contd)

• 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

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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

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STATE ALLOCATION VOLUME LIMIT

• 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

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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

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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

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Additional QAP Rules

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

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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

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Project Evaluation (contd)

• 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

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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

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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