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

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Presentation on theme: "Basics of IRS Code Section 42 Low-Income Housing Tax Credits"— Presentation transcript:

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

2 Introduction What 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.”

6 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

7 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

8 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

9 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

10 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 2944 Crouse Lane 80 Graham Village Apts Graham 1993 920 E.Hanover Road 27253 50 Cannon Place 1997 508 E.Parker Street 74 Westhampton Apts Mebane 1989 1015 Mebane Airport Road 27302 40 Deerfield Crossing Apts 1996 600 Deerfield Trace 118 Mebane Mill Lofts 2009 301 W Washington Street 75 1 Ridgeway Apts Taylorsville Alexander 1987 First Ave Dr Se 28681 32 The Oaks 100 2nd Avenue Ridgeview Apts Sparta Alleghany 1988 218 E. Whitehead St 28675 36 Highland Village 1999 29 Highland Village Circle 30 Maplewood Apts 2001 273 Independence Road Pine Ridge Place Polkton Anson 401 Pine Ridge Place 28135 16 Wyndsor Downs 2004 11 Wyndsor Court Pine Terrace Apts Wadesboro 100 Pine Bluff Street 28170 24 Laurel Commons Apts Burns Street Oak Hill 1331 North Greene Street 72

11 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

12 How do LIHTCs make housing affordable?

13 Actually has a simple explanation:
Funds invested for the tax credit partially replace loan financing But what does that mean?

14 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 That’s $673 per household every month!

15 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

16 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

17 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

18 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

19 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

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