1. Virginia Housing Coalition 2013 Housing Credit Conference Deal Structuring, Fundamentals, and Financing and Legal Issues

2. Discussion Topics  Tax Credits and Low-Income Housing Tax Credits  Structuring LIHTC Projects  Fundamentals of LIHTC Projects  Project Feasibility  Credit Basis and Other Calculations  Q & A 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

3. Tax Credits and LIHTC  What are tax credits?  Dollar for dollar reduction in a taxpayer’s tax responsibility - $1 in credits offset $1 in income tax responsibility  Not a tax deduction – a tax deduction reduces the income calculation upon which a tax is calculated  Low-Income Housing Tax Credits  Authorized in 1980s – now a permanent part of the IRS Code – Section 42  Credits available to States as per Code – VHDA manages Virginia’s LIHTC program – see QAP 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

4. Tax Credits and LIHTC  Low-Income Housing Tax Credits  Credits available to projects that commit to Income and Rent restrictions  Income Restrictions – restrictions on the income of potential residents - at least 40% of apartments reserved for 60% AMI households or at least 20% for 50% AMI households – most developers reserve 100% of apartments for eligible households  Rent Restrictions – restrictions on rent that can be charged for the apartments - must be at or below 30% of income adjusted for household size 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

5. Tax Credits and LIHTC  Low-Income Housing Tax Credits  Restrictions for 15 years  VHDA QAP:  Extended compliance  Deeper income and rent targeting  Serving households with special needs  “Green” building  Amenities  Efficiencies 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

6. Structuring LIHTC Projects  Most developers can’t use credits directly – lack income tax liability  Credits available to owners of housing  Typically create Limited Partnership or Limited Liability Company as owner  Entities with tax liability enter as Limited Partner  Provide cash in exchange for credits and other benefits  Developer often manages day-to-day affairs 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

7. Fundamentals of LIHTC Projects  Developers evaluate a number of factors in planning a project:  Mission  Site Selection and Control  Cost  Availability  Environmental Considerations  Utilities  Zoning  Purchase Option / Fee Simple Ownership / Lease 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

8. Fundamentals of LIHTC Projects  Developer issues (continued):  Design  Target Market  Market Area conditions  Special resident needs  Development Team  Architect  Attorney  Board  Consultants  Builders 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

9. Project Feasibility  Financial feasibility involves careful preparation of a development budget and an operating budget  Development budget – includes all of the costs necessary to build a project  Operating budget – captures projected income, expenses, debt costs, and cash flow 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

10. Project Feasibility  Development Budget:  Construction / contractor costs:  Offsite and onsite improvements  Demolition  Hard construction costs  Contractor general conditions, overhead, and profit  Bond / letter of credit costs  Fixtures / appliances 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

11. Project Feasibility  Development Budget:  Architecture costs  Engineering costs  Permits  Tap fees  Construction loan fees and interest  Taxes and insurance during construction  Legal costs – construction loan closing and other legal costs  Permanent loan fees  Consulting fees – mortgage banker or historic consultant 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

12. Project Feasibility  Development Budget:  Land and building costs  Cash reserves  Contingency  Developer fees  Add all of these development costs to calculate total development cost 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

13. Project Feasibility  Development sources – funding available to pay for development costs (aka development uses).  Sources include:  Equity from investors based on availability of credits  Loan proceeds  Grants – preferably structured as loans  Developer contributions  Seller soft loans  Deferred developer fees  Construction loans repaid by permanent sources 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

14. Project Feasibility  Calculating LIHTC  Eligible basis costs  Ineligible basis costs  Eligible basis reductions  QCT or DDA increases  Calculation of credits / credit rates  Bond tests 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

15. Project Feasibility  Operating budget  Income  Rent – restricted by program  Subsidies  Other Income  Maximum rents adjusted for utility allowances and vacancy rates  Expenses  Management Fees  Other Management / Administrative  Management Salaries  Marketing  Legal  Supplies and Phone 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues

16. Project Feasibility  Operating budget  Expenses (continued)  Utilities  Maintenance  Maintenance and grounds costs  Exterminating  Trash  Turnover  Property and Other Taxes  Insurance  Compliance and Audit Fees  Replacement Reserves  Management Fees  Income less expenses equals Net Operating Income – amount available to pay debt costs and provide cash flow 2013 Housing Credit Conference - Deal Fundamentals, Structuring, and Financing and Legal Issues