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Affordable Rental Housing: Tax Credits & Financing AHS gratefully acknowledges the use of materials developed by the Virginia Community Development Corporation.

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Presentation on theme: "Affordable Rental Housing: Tax Credits & Financing AHS gratefully acknowledges the use of materials developed by the Virginia Community Development Corporation."— Presentation transcript:

1 Affordable Rental Housing: Tax Credits & Financing AHS gratefully acknowledges the use of materials developed by the Virginia Community Development Corporation (AHS has deleted slides and made minor edits on others )

2 Historic Tax Credits Provide a dollar for dollar reduction in taxes due to a taxing body. How do they work: Federal credit of 20% of the improvement cost of certified historic buildings – used to offset federal taxes. Virginia credit of 25% of improvement cost – used to offset VA taxes 2

3 Historic Tax Credits Historic Tax Credits (continued) Credits reduces the depreciable basis by an amount equal to the tax credit Example: A historic building costs $300,000 ($100,000 of this is land). The owner spends $700,000 to rehab the building for residential use. Historic Credit (Federal) - $140,000 (20% of $700K) Annual Depreciation - $27,636 ($200K+$700K-$140K / 27.5) 3

4 Historic Tax Credits Historic Tax Credits (continued) Property must be listed on the National Register or included in an historic district and identified as a contributing structure. Rehab must follow the Secretary of the Interiors guidelines for rehabilitation of historic properties Credits can only flow to an owner of the property 4

5 LIHTC – A Primer Everything You Need to Know but Were Afraid to Ask

6 Low Income Housing Tax Credits Low-Income Housing Tax Credits: Provide a 10-year stream of tax credits to owners in projects that provide housing for lower income families Individuals are not good targets for LIHTC investment IRS passive activity loss rules limits losses of individual taxpayers ($9600 maximum). Individuals cant use some of the other tax benefits associated with these projects 6

7 LIHTC – A Primer Credit Categories Four separate and distinct credits permitted: – Acquisition – credit of 4% for acquisition of qualified buildings – Rehabilitation – credit of =9% of the qualified rehab costs – New Construction – credit of =9% of the qualified development cost for low-income units in newly- constructed buildings – Federally-financed – credit of 4% for acquisition, rehab and or new construction of projects using Federal subsidy 7

8 LIHTC – A Primer Rehab / New Construction Credit =9% per year for 10 years Rehabilitation and related expenses must be minimum of $6,000/unit and the work must be completed within a 24-month period To achieve $6,000/unit minimum threshold, rehab expenditures may be allocated to all the units in a building If project has mixed-income units, low-income units must be similar to market units 8

9 LIHTC – A Primer Restrictions Income Restrictions – restrictions on the income of tenants Rent Restrictions – restrictions on the rent that can be charged for the units These restrictions apply for AT LEAST 15 years 9

10 LIHTC – A Primer Oversight Low-Income Housing Tax Credits are allocated to states by formula; Virginias allocation managed by Virginia Housing Development Authority (VHDA), States must detail how they will allocate credits to projects, specifically the 9% credits States prepare a Qualified Allocation Plan 10

11 LIHTC – A Primer Oversight A Qualified Allocation Plan details: Selection criteria used to determine priorities appropriate to local conditions Gives highest priority to projects with lowest intermediary costs Preference to projects serving lowest income tenants and obligated for longest periods Provides procedure for notifying IRS of non- compliance encountered 11

12 LIHTC – A Primer Oversight In developing the QAP, a States designated agency must provide opportunities for public input The public is given an opportunity to review and respond to a proposed QAP A public hearing must be held no sooner than 14 days after publishing the plan Under law, the Governor must approve a QAP following the public hearing 12

13 LIHTC – A Primer The Virginia Program Virginias allocation divided into 8 pools: Northern Virginia Richmond Tidewater Small MSA Rural Non-Profit Local Housing Authority At-Large – any unallocated credits 13

14 LIHTC – A Primer The Virginia Program Amenity Preferences – Brick siding – EarthCraft or LEED – Community rooms – Larger living spaces – Extra bathrooms – Location close to public transportation 14

15 Financing and Debt Service The long-term impact of financing

16 Financing and Debt Service Overview Financing falls into different categories depending on: The STAGE of the development process The NEED that the financing fills Some of the different types of financing include: – Predevelopment – for costs associated with the planning of a construction project – Construction – short-term financing of real estate construction – Permanent (aka Take Out Loan) – long-term financing to cover period of indebtedness of note. 16

17 Financing and Debt Service Overview Different types of financing (continued): – Bridge – temporary or interim loan made between a short- term (construction) and permanent financing. Also used to bridge between extended equity pay-in – Gap – additional funds necessary for completion of construction or purchase of property. Fills a gap between equity and debt. – Mini Perm – a construction loan that rolls into a short-term (usually five years or less) permanent loan 17

18 Financing and Debt Service Overview Financing consists primarily of grants and loans Grant – normally funds given by a public entity for an enterprise deemed advantageous. Grant funds may have conditions. Property cannot be sold or used for another purpose for a period of time. Loan – money lent with conditions: Amortizing – payment of debt in regular installments of principal and interest Deferred – payment made at a future date Forgivable – after a period of time or condition is met, debt is wiped clean Interest – amount or percentage of money charged for use of a principal sum of money Term – maturity or period of time from beginning to end of a payment of a loan 18

19 Financing and Debt Service Overview Equity Financing: consists of the owners money Owners cash downpayment Equity from the sale of Tax Credits There will be the expectation of a return on investment Fees Appreciation Cash flow Tax benefits 19

20 Financing and Debt Service Overview Loans are usually secured and grants are often secured to ensure that the conditions of the award are adhered to Security is - real or personal property pledged to help guarantee an amount of indebtedness Types of security and some security terms are: – First or Primary Position: Interest in property whereby the security is guaranteed by the value of the property and no other rights to property exist 20

21 Financing and Debt Service Overview Types of security and terms (continued): Subordinate: Interest in property which may take a second or third position behind first Title: Legal evidence that one has right of ownership to property Lien: Legal instrument placing an encumbrance against property for money. All liens are encumbrances, but not all encumbrances are liens. Normally, a secured interest created by a mortgage 21

22 Financing and Debt Service Financing Sources CDBG Administered locally or by States Can be structured as a loan or a grant – depends on project circumstances NOT treated as federal subsidy In Virginia, up to $700,000 available on competitive basis – for locally-controlled CDBG will depend on local prioritization and process Must serve people below 80% AMI 22

23 Financing and Debt Service Financing Sources Tax-Exempt Bonds Government or 501(c)(3) issued Bond purchasers dont pay taxes on interest income - allows better interest rate due to tax exempt nature Eligible for non-competitive 4% LIHTC credits if subject to volume cap and allocated to state for housing Most subject to volume cap for housing are issued by HFA or local government entity 23

24 Financing and Debt Service Financing Sources Tax-Exempt Bonds (continued) Work best for acquisition / rehabilitation projects where acquisition is a significant part of project At least 50% of project costs have to be financed by proceeds from bond Project must support debt service for 50% of project (as bond proceeds are 50%) Typically better where strong 60% market exists – allows higher rents 24

25 Limited Partnerships And other forms of ownership

26 Limited Partnerships Background Limited Partnerships are business entities that are neither corporations nor partnerships Unlike Partnerships, not all partners have the same legal involvement in the day to day management of the business Unlike Partnerships, some partners have limited liability Unlike Corporations, the benefits pass through the entity to the Partners 26

27 Limited Partnerships Summary Typically, project sponsors realize cash by using a limited partnership to sell the project to investors without relinquishing control The limited partnership is 99% owned by investors (tax credit purchasers). The sponsor retains a 1% interest, acts as the general partner, and manages the projects business affairs (retains control). As 99% owners, investors receive 99% of cash flow, tax shelter, and appreciation – the general partner can charge a reasonable fee for services 27

28 Limited Partnerships Limited Liability Company Alternative to Limited Partnership Has most of the benefits of an LP while allowing more flexibility for investor participation in management It is a corporation that is taxed like a partnership or sub S corporation Management is centralized Liability is limited State law was amended to allow LLCs 28

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