Ground Leases in LIHTC Deals.PPT

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					Low-Income Housing Tax
Credits 101

June 24, 2008

Terry Kimm
Reznick Group

Tel: 301.657.7766
Fax: 301.280.3733
Terry.Kimm@reznickgroup.com
Today’s Agenda

 Background of the Low Income Housing Tax Credit

 The Different Types of Credits

 Calculating the Credit

 Turning the Credit into Equity

 Sources of the Credit

 Final Thoughts and Questions



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Credits vs. Deductions
                                          A            B
Income                                    $100         $100
Less: Deductions                            -20           0
Taxable Income                               80         100
Tax @ 20%                                    16          20
Less: Credits                                      0          -20
Net Tax Due                                       16            0




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Background

        Tax Reform Act of 1986
        Section 42 of IRC of 1986
                • Housing Program in the Tax Code
                • Statute Amended Several Times, Including 2000
        Objective to Provide Investor Equity
        Credit is a Dollar-for-Dollar Tax Reduction
        Program Administered by Each State’s Housing
         Finance Agency
        Eligibility is Based on Tenant Income


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Three Separate Tax Credits

 The 9% credit for new construction / rehabilitation

 The 4% credit for new construction / rehabilitation
    financed with tax-exempt bonds

 The 4% credit for the acquisition cost of an
    existing building to be rehabilitated




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Credit Percentage
 “9% credit” is shorthand for the percentage that will yield
    credits equal to 70% of the present value of the qualified
    basis of a building

 “4% credit” is shorthand for the percentage that will yield
    credits equal to 30% of the present value of the qualified
    basis of a building

 Credit rates are tied to interest rates and change monthly

 For June 2008, the percentages are 7.89% and 3.38%



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Acquisition of Existing Building

 Building must be acquired by Purchase

 10 years since previous placed in service date

 Never previously placed in service by an owner
    related to the tax credit partnership

 Rehabilitation work is done by the tax credit
    partnership and qualifies for the LIHTC



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Rehabilitation

 There must be a 24 month period in which the
    costs equal the greater of:
     • $3,000 per residential unit

     • 10% of the adjusted basis of the building




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  Calculating Credits/
  Defining Terms


      Eligible Basis
      x Applicable Fraction

      Qualified Basis
      x Applicable Percentage

      Annual Credit Amount


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Eligible Basis

 Very similar to depreciation basis

 Land is not in eligible basis

 Amounts of federal grants must be subtracted

 130% basis boost in certain qualified census tracts
    and difficult development areas




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Qualified Basis

 “Eligible Basis” Times “Applicable Fraction”

 “Applicable Fraction” is the Lower of:
     • Number of “Low-Income Units” vs. Total Units or

     • “Floor Space Fraction”

 Calculated building by building




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Applicable Percentage

 The Applicable 4% or 9% Tax Credit Rate

 Rates are published monthly by the IRS

 General Rule: Tax credit rate is the rate effective
    for the month in which the building is placed in
    service

 Lock in Election: An owner may elect to lock in the
    credit rate at the time of reservation or allocation

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Example Of Tax Credit Calculation
 100 Unit Project/70 Low-Income Units
 TDC (Including Land) = $5.5M
 Land Cost = $500K
 Eligible Basis = $5.0M
 Qualified Basis = $3.5M ($5.0M x 70%)
 Applicable Percentage= 8.12%
  (Not Federally Subsidized)
 Annual Credit= $284,200 ($3.5M x 8.12%)
 10 Year Credits = $2,842,000
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Turning the Credit into Money

 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 92 Cents
    Per Tax Credit Dollar, Equity Equals $2,614,379
    ($2,842,000 x 99.99% x 92%)


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Turning the Credit into Money

 The credit is claimed by the owners of the project
    in the same percentages as they claim depreciation
    and other tax losses

 The credit investor will be:

     • a 99.99% or 99.9% limited partner or LLC
         member

     • a widely held C corporation (not subject to
         passive activity loss limitations)
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Low Income Units

 Threshold Election of:
     • 20% of Units at 50% of Area Median Income 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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Credit Period
 Generally, LIHTC is claimed in equal annual
    amounts for 10 years

 In the first year, the amount will depend upon when
    the project is placed in service and what
    percentage of residential units had tenants in place
    on the last day of each month

 If the full annual amount is not claimed in the first
    year, the difference is claimed in year 11
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Two Sources of Credits

 An allocation of an amount of LIHTC from the state
    housing agency

 The allocating agency can issue a “carryover
    allocation”
     • 10% of reasonably expected costs must be incurred within
         6 months

     • Project must be placed in service by the end of the second
         year after the year of the carryover allocation

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Second Source of Credits
 Tax-exempt bond financing subject to volume cap
     • Must be either construction financing or
       permanent financing
     • Must finance 50% or more of the aggregate basis
       of building and land with tax-exempt bonds, to
       get full 4% credit on all eligible basis
 Bond deals need a “42(m) letter” saying the
  resulting amount of LIHTC does not exceed the
  amount necessary for the financial feasibility of the
  project

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Who Can Use Credits?

 Individuals Limited Under Passive Loss Rules to
    Approximately $8,750/Year

 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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Key Business Terms
 Projects Generally Owned by Limited Partnership
    or Limited Liability Company

 LP Generally Owns Between 99%--99.99% of Tax
    Credits, Losses & Profits

 LP Pays in Capital Contributions in Multiple
    Installments (generally 3 or 4), Based on
    Negotiated Benchmarks

 GP Guarantees Completion, Amount of Credits and
          Building Deficits
    Funding ofBusiness Value
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Final Thoughts

 LIHTC projects have a 15 year compliance period

 In addition, there will be at a minimum a 15 year
    extended use requirement

 Recapture rules apply in the first 15 years

 General use requirement –”for the use of the
    general public” governed by HUD & Fair Housing
    Act

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