Presentation on theme: "Basics of IRS Code Section 42 Low-Income Housing Tax Credits"— Presentation transcript:
1Basics of IRS Code Section 42 Low-Income Housing Tax Credits
2IntroductionWhat is NCHFA?Why am I here?What is the LIHTC?
3§ 105‑277.16“[D]evelopment 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.”
4§ 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.”
5§ 105‑277.16“The assessor may not consider income tax credits received under section 42 or under G.S. 105‑ in determining the income attributable to the property.”
6LIHTC housing is Always rental Many types of structures Rehabilitation and new construction2,000 units and 35 awards annuallyTotal of 50,000 units in 1,400 projectsOnly awarded by NCHFA
7IRS Code Section 42 Owners must follow rules on Income,Rent, andSuitabilityContained in recorded use agreementNCHFA monitors and reports violations to the IRS
8IRS Code Section 42 Rent limit is actually a maximum housing expense Generally is 60% area median income less utility allowanceSpecifics are very complicated for both AMI and utilities
9IRS Code Section 42 Rules apply for 30 years Are ways to exit, including foreclosureNCHFA provides DoR with a list of Section 42 propertiesIncludes all, with indicator of which are added and removed
10The List Property Name City County Cycle Address Zip Units Removed AddedAuburn SpringBurlingtonAlamance20052950 Crouse Lane2721548Auburn Trace Apartments2944 Crouse Lane80Graham Village AptsGraham1993920 E.Hanover Road2725350Cannon Place1997508 E.Parker Street74Westhampton AptsMebane19891015 Mebane Airport Road2730240Deerfield Crossing Apts1996600 Deerfield Trace118Mebane Mill Lofts2009301 W Washington Street751Ridgeway AptsTaylorsvilleAlexander1987First Ave Dr Se2868132The Oaks100 2nd AvenueRidgeview AptsSpartaAlleghany1988218 E. Whitehead St2867536Highland Village199929 Highland Village Circle30Maplewood Apts2001273 Independence RoadPine Ridge PlacePolktonAnson401 Pine Ridge Place2813516Wyndsor Downs200411 Wyndsor CourtPine Terrace AptsWadesboro100 Pine Bluff Street2817024Laurel Commons AptsBurns StreetOak Hill1331 North Greene Street72
11Common issuesNot all affordable projects qualify, some are only in other programsChanges, new and removedHow to value- NCHFA is not in a position to adviseAlways welcome to ask questions
13Actually has a simple explanation: Funds invested for the tax credit partially replace loan financingBut what does that mean?
14Loans have to be repaid (usually) A 36 unit apartment complex costs $3,380,000 to buildBorrow $3,080,000 from bank(the rest from an investor)Monthly payment of $24,228That’s $673 per household every month!
15If the project has Housing Credits… Whoever owns the building avoids $2,592,000 in taxes over 10 yearsAmount calculated on depreciable items (bulldozer test)Determined up-front
16What the rest of us get for this tax break For every dollar of the $2,592,000 a large company makes an investmentAround $0.85 per $1 in tax reductionThus $0.15 better off; expects no other return
17Now time for a little math… “price” x tax credits = investment$0.85 x $2,592,000 = $2,203,200Still a $3.38 million projectcost – investment = loan amount$3.38M - $2.20M = $1.18M loan
18Finally the conclusion Monthly payment on a $1,176,800 loan is $9,257, which = $257/unitIf built without tax credits monthly payment is $24,228, or $673/unitInvestment saves tenant households $416 each month
19Summary of the numbers MARKET Cost $3,380,000 Invest $300,000 Loan $3,080,000Payment $24,228Units 36Per unit $673TAX CREDIT$3,380,000$2,203,200$1,176,800$9,25736$257Savings $416