CPA 2 Hour CPE Course LIHTC

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2 Hour CPE course regarding Low Income Housing Tax Credits.

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CPA 2 Hour CPE Course LIHTC

  1. 1. THE Affordable Housing Tax credit PROGRAM<br />Presented by Midwest Housing Equity Group<br />
  2. 2. Panelists<br />Jim Rieker<br />President /CEO<br />Andrea Frymire<br />Executive Vice President<br />
  3. 3. Background<br /><ul><li>The Tax Reform Act of 1986 signed by President Reagan
  4. 4. Curbed tax shelters and introduced Section 42
  5. 5. Pre-1986 multifamily housing developments sold primarily to individual investors
  6. 6. Post-1986 Section 42 multifamily housing developments sold to corporate investors
  7. 7. The Omnibus Budget Reconciliation Act of 1993 signed by President Clinton – made the LIHTC permanent
  8. 8. From 1987 through August 1993, the LIHTC program was subject to various sunsets</li></ul>1<br />
  9. 9. Tax Credit Calculation<br />$1,000,000 Total Project Cost<br />$ 200,000 Project Cost Not Eligible for Credits<br /> $ 800,000 Eligible Basis for Credits*<br />x 9% Tax Credit Percentage<br /> $ 72,000 Credits Received/year<br />x 10 Years credits are received<br /> $ 720,000 Credits received<br /> x .70 Price paid for credits<br />$ 504,000 Equity into project from MHEG<br /> Allows for low debt on project enabling developers to keep rents affordable<br />* States may allow 130% basis boost (not shown here).<br />2<br />
  10. 10. Typical Deal Structure – 55%<br />Soft Debt / GP Equity 25%*<br />Tax Credit Equity 55%<br />Hard Debt &lt; 20%<br />* Funded By:<br /><ul><li> AHP
  11. 11. HOME
  12. 12. TCAP
  13. 13. Exchange
  14. 14. Developer Fee
  15. 15. Various Contributions
  16. 16. Certain Grants</li></ul>3<br />
  17. 17. Typical Deal Structure – 70%<br />Soft Debt / GP Equity 25%*<br />Tax Credit Equity 70%<br />Hard Debt &lt; 5%<br />4<br />
  18. 18. K-1 Example<br />5<br />
  19. 19. 6<br />
  20. 20. Form 1120<br />7<br />
  21. 21. Form 3800<br />8<br />
  22. 22. Tax Credit Pricing<br /><ul><li>Initially investors were any corporation looking for a good return
  23. 23. Many corporate controllers/ treasurers were skeptical of an unproven product LIHTC
  24. 24. Result – pricing was in the mid .40 range in 1987-1988 producing 20%+ IRR
  25. 25. Early in mid-1990s – Financial institutions embrace LIHTC
  26. 26. Banks, GSE’s – fair return plus Community Reinvestment Act (CRA) credit</li></ul>9<br />
  27. 27. Tax Credit Pricing<br /><ul><li>2000-2007 – Substantially all of the LIHTC purchased by financial institutions and GSE’s
  28. 28. 2008 – Sub-Prime mortgage crisis followed by full scale financial meltdown – Investors retreat
  29. 29. Housing and Economic Recovery Act of 2008 intended to boost returns bringing non-financial investors to the LIHTC market
  30. 30. 2009 – Many 2007 and 2008 deals unfunded and little prospect for 2009
  31. 31. American Recovery & Reinvestment Act intended to jumpstart the LIHTC industry</li></ul>10<br />
  32. 32. C-Corp vs. S-Corp vs. Individuals<br /><ul><li>Corporations can offset credits and losses
  33. 33. Limited only by tax liability
  34. 34. Sub-S flows through to owners
  35. 35. Requires passive income
  36. 36. Rental real estate can materially participate
  37. 37. Business activities that one doesn’t materially participate
  38. 38. Individuals – same as S-Corps
  39. 39. Makes less than $100,000
  40. 40. 25,000 passive offset
  41. 41. Can offset credits up to 8,250</li></ul>11<br />
  42. 42. Purchaser Profile<br /><ul><li>Corporate Accredited Investor
  43. 43. Accredited as per Regulation D of the Securities and Exchange Act
  44. 44. $5,000,000 or more in assets (varies by syndication firm, many much higher)
  45. 45. Can withstand losses due to depreciation or even loss of investment
  46. 46. Usually a C Corporation
  47. 47. Has to forecast a taxable need for credits
  48. 48. Must utilize the credits themselves
  49. 49. SEC issues when buy credits to resell
  50. 50. Many Banks for CRA purposes
  51. 51. Insurance Companies for both economic and social responsibility
  52. 52. No set standard for an exact profile other than paying taxes </li></ul>12<br />
  53. 53. Legislative Movements<br /><ul><li>HERA of 2008
  54. 54. The Housing and Economic Recovery Act of 2008 signed by President Bush on July 30, 2008
  55. 55. ARRA of 2009
  56. 56. The American Recovery & Reinvestment Act of 2009 signed by President Obama on February 17, 2009</li></ul>13<br />
  57. 57. HERA of 2008<br /><ul><li>Temporary provisions:
  58. 58. Increase in-state LIHTC allocation authority by 10% = .20 (per capita) for 2008 and 2009
  59. 59. Additional $11 billion nationally of Tax-Exempt Housing Bonds in 2008 (additional 38.6% for each state)
  60. 60. Temporarily fix at 9% the credit rate for new construction and substantial rehabilitation costs</li></ul>14<br />
  61. 61. 2009 OHFA Allocation<br /> 3,642,361 Population of Oklahoma per IRS for 2009 LIHTC<br />x 2.30Times two dollars and thirty cents per capita<br /> $8,377,430 Total 2009 Credits available per capita<br />+$305,2312008 unused credit ceiling from 8610 carryovers to 2009<br /> $8,682,661 Tax Credits available to award in 2009 <br />-$4,206,112 Amount of 1st cycle 2009 awards<br />+1,678,057 Amount of 2009 Credits returned by TCAP Applicants<br />-$4,000Amount of tax credits awarded for ARRA applicants<br /> $6,150,606 Amount of Tax Credits Available to award 2nd cycle 2009<br />15<br />
  62. 62. HERA of 2008 (continued)<br /><ul><li>Permanent provisions:
  63. 63. Alternative Minimum Tax (AMT) Relief
  64. 64. HUD Moderate Rehabilitation projects are no longer prohibited from participation in the LIHTC program. Effective for buildings placed into service after July 30, 2008.
  65. 65. The 10-year hold provision for acquisition credits is no longer applicable to federally or state assisted buildings. HUD Section 8, 221(d)3, 221(d)4, 236 and RD section 515 properties and similarly assisted properties under various state programs.
  66. 66. Allowable Related Party interest in subsequent ownership is increased to 50% from 10%.</li></ul>16<br />
  67. 67. HERA of 2008 (continued)<br /><ul><li>Permanent provisions (continued):
  68. 68. 30% basis boost previously allowed for properties located in qualified census tracts or difficult to develop areas is allowed for any project that needs additional credits to be financially feasible as determined by the state housing finance agencies. Apples to projects placed in service after July 30, 2008. Does not apply to Tax Exempt bond financed properties.
  69. 69. The definition of federal subsidy no longer includes “or any below market federal loan” allowing HOME, RD and section 515 projects to utilize the 9% credit for new construction or substantial rehabilitation costs. Tax Exempt bond financed projects are still limited to the 4% tax credit.
  70. 70. Federal Grants received after construction no longer reduce tax credit basis – relief for IRP financed deals and other properties receiving federal operating subsidies.
  71. 71. Allowable eligible basis for community service facilities increased to 25% of total cost up to $15M; plus 10% of total cost in excess of $15M.</li></ul>17<br />
  72. 72. HERA of 2008 (continued)<br /><ul><li>Permanent provisions (continued):
  73. 73. Minimum threshold to qualify for substantial rehabilitation is increased to $6,000 per unit or 20% of acquisition basis from $3,000 or 10%. Indexed for inflation going forward.
  74. 74. LIHTC bond posting requirement is eliminated provided investor agrees to extend statute of limitations to three years after IRS notification.
  75. 75. Extends the time period to satisfy the 10% cost incurred test necessary for carryover to 1 year from 6 months.
  76. 76. Tenant re-certifications no longer required for 100% LIHTC properties.</li></ul>18<br />
  77. 77. Example<br /><ul><li>Change in Maximum Credits due to 9% and Basis Boost:</li></ul> Adjusted Eligible Basis 10,000,000 10,000,000<br /> X 130% Basis Boost 100% 130%<br /> X Applicable Percentage 7.94% 9.00%<br /> = Total Annual Credits 794,000 1,170,000<br /> X 10 Years (Total Credits) 7,940,000 11,700,000<br />47.35% Increase<br />Obviously, HERA put substantially more resources on the table to attract other non-financial investors back into the LIHTC market.<br />19<br />
  78. 78. ARRA of 2009<br /><ul><li>Not withstanding the tremendous resources included in the HERA legislation to boost the LIHTC industry, many 2007 and most 2008 allocated properties had not closed due to the frozen LIHTC market. In response to this, ARRA included provisions to “jump start” stalled projects.
  79. 79. Section 1602: Grants to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits
  80. 80. aka the “Credit Exchange Program”
  81. 81. State HFA’s have the ability to exchange eligible LIHTC allocations with Treasury for $0.85 per dollar of credit allocation exchanged. The proceeds from the exchange are to be used by the HFA to provide funds to projects with or without an allocation of LIHTC in the form of grants or forgivable loans.</li></ul>20<br />
  82. 82. ARRA of 2009 (continued)<br /><ul><li>The amount of LIHTC an HFA may exchange for $0.85 is equal to the following:
  83. 83. 100% of the state housing credit ceiling for 2009 attributable to unused and returned credits from the 2008 housing credit ceiling plus any amount of state housing credit ceiling returned in 2009. (This provisions applies to 2007 and 2008 allocations).
  84. 84. 40% of the state housing credit ceiling for 2009 attributable to the 2009 ceiling including any amounts reallocated from other states with unallocated credits. Amounts exchanged under this provision serve to reduce the state’s 2009 credit ceiling.</li></ul>21<br />
  85. 85. ARRA of 2009 (continued)<br /><ul><li>Grants or loans received by the project from exchange funds are not includable in taxable income and do not reduce basis. Treat as tax exempt interest income.
  86. 86. Treatment at the state level may vary
  87. 87. Funds received cannot exceed 85% of the amount Recipients of exchange funds must demonstrate a good faith effort to obtain private equity commitments. Good faith effort is determined by each state HFA.
  88. 88. of buildings eligible basis including any increase for buildings located in high cost areas. Direct tracing is not required.
  89. 89. Funds received under this program must be expended by December 31, 2011 – originally this date was December 31, 2010</li></ul>22<br />
  90. 90. Carry Back of Credits<br /><ul><li>Can be carried back 1 year
  91. 91. Can be carried forward 20 years
  92. 92. Legislation introduced to go back 5 and forward 15
  93. 93. Help some companies free up unclaimed credits
  94. 94. Gives them the sense of security if they can’t use the credits</li></ul>23<br />
  95. 95. Fund Investment Structure<br />MHEG<br />Tax Credit Syndicator<br />Investors<br />OF III, L.P.<br />Owned 99.99% by Investors<br />Owned 00.01% by MHEG<br />Project A<br />Lower Tier Partnership LP/LLC<br />Owned .01% by Developer/GP<br />Owned 99.99% by Fund<br />OHFA<br />Tax Credits<br />24<br />
  96. 96. Why Do Investors Invest<br /><ul><li>Optimal Tax Planning Strategy
  97. 97. 10 full years of federal tax credits
  98. 98. 15 full years of depreciation and other passive deductions
  99. 99. Periodic Write-down of Paid in Capital
  100. 100. CRA Investment Credit, if applicable
  101. 101. Marketing and PR opportunities
  102. 102. Stabilizing and Investing in your local communities
  103. 103. Stable proven track record of a performing asset class
  104. 104. Accurately forecasted tax benefits
  105. 105. Quarterly Reporting and Asset Management update</li></ul>25<br />
  106. 106. Why Do Investors Invest (cont.)<br /><ul><li>Tax Planning Strategy
  107. 107. Keep your tax dollars in Oklahoma instead of Washington
  108. 108. You know where they are going and how being used
  109. 109. You have a say in those dollars usage
  110. 110. You generate a decent return versus a 0% (or cost) with sending to Washington
  111. 111. Spread the credits over 10 years
  112. 112. The Warren Buffet Rule
  113. 113. What other program can you do something for society and have society give you something in return</li></ul>26<br />
  114. 114. CRA Bank Benefits for Banks<br /><ul><li>Shortage- Allows for CRA credit regardless of project locations as long as it is within the fund’s trade territory (i.e. a Tulsa bank can receive credit for a project in Oklahoma City)*
  115. 115. Regulators do vary on the scope of inclusion. Please check with your Regulator for their interpretation.
  116. 116. See OCC report dated 2/08– further adopted by FDIC and Federal Reserves
  117. 117. By purchasing tax credits in a MHEG fund banks can potentially fulfill the Investment portion of the CRA exam, typically the most difficult portion for most banks to meet, as well as opportunities to meet the lending and service tests.
  118. 118. All documentation that the Examiners require is provided by MHEG.</li></ul>27<br />
  119. 119. Fund vs. Direct vs. Proprietary Funds<br /><ul><li>Funds
  120. 120. Offer Diversity
  121. 121. Multiple investors
  122. 122. Multiple projects
  123. 123. Fund General Partner has financial risk
  124. 124. Fund level of reserves
  125. 125. Less concerns over FIN 46, consolidation issues
  126. 126. Less need for tax credit expertise by the investor
  127. 127. Direct
  128. 128. No diversity-all eggs in one basket
  129. 129. Do get specific project in investors area
  130. 130. More of a say in investment terms
  131. 131. Direct (cont.)
  132. 132. Less reserves and no financial backing from Fund General Partner
  133. 133. Sole investor-FIN 46 comes into play
  134. 134. May need staff expertise
  135. 135. Proprietary
  136. 136. Some diversity, usually fewer projects
  137. 137. Usually specifies where projects must be located
  138. 138. Usually dictates deal terms
  139. 139. Less chance of Fund General Partner taking financial risk
  140. 140. Most likely FIN 46 comes into play
  141. 141. Usually has tax credit staff expertise</li></ul>28<br />
  142. 142. What is the Real Risk?<br /><ul><li>Ownership risks of multifamily low-income rental housing pools
  143. 143. Mitigated by MHEG’s investment policies, ongoing management and financial oversight, as well as MHEG’s financial strength
  144. 144. Compliance risk
  145. 145. Mitigated by MHEG’s continuing compliance practices and oversight
  146. 146. Changes in current law
  147. 147. Highly improbable any law change would affect any current investments
  148. 148. Reputation Risk
  149. 149. We take “the high road”, we know that we represent our fund participants who are financial pillars of their communities</li></ul>29<br />
  150. 150. Underwriting Guidelines<br /><ul><li>Geographical location
  151. 151. Size of investment (% of total of Fund)
  152. 152. Guarantees
  153. 153. Reserve accounts
  154. 154. Structure of debt to property
  155. 155. Experience and strength of development team, general partner and property manager
  156. 156. Project site-zoning, stability, accessibility
  157. 157. Market Study/Analysis
  158. 158. Title and Survey
  159. 159. Insurance: property, contractor (insurance and bonds)
  160. 160. Quarterly risk rating for life of investment
  161. 161. Environmental studies: Phase I mandatory, Phase II if needed
  162. 162. Reasonable and substantiated operating assumptions: rent levels, vacancy factors, expense estimates, level of must pay debt, and lease-up period
  163. 163. Construction parameters and oversight
  164. 164. Rent Level Analysis
  165. 165. Operating Expense Comparison and Analysis to MHEG’s extensive database </li></ul>30<br />
  166. 166. Points to Consider<br />MHEG does not want the capital you need for normal operations. <br /><ul><li>The dollars you are considering placing with MHEG are actually dollars you owe to the IRS as a result of your successful operations.
  167. 167. You receive no monetary return with your payment to the IRS.
  168. 168. You will receive an above market return and a CRA Investment Credit, if applicable, when you purchase tax credits with MHEG.
  169. 169. Your participation benefits the community and you receive a monetary return without jeopardizing your normal business capital.</li></ul>31<br />
  170. 170. What to Expect in the Future<br /><ul><li> At the end of the 15-year tax credit compliance period, our goal is to exit the partnership in a manner that allows the property to continue to comply with the states extended compliance period.
  171. 171. The general partner or managing member in most cases has a right of first refusal to purchase our interest for an amount stipulated in the IRS code.
  172. 172. Since the project still has restricted rents, it will not be able to refinance much additional debt. Our exit usually does not generate significant cash or create a tax event. Therefore, we do not include any residual value in our analysis of return to investors.</li></ul>(note: this narrative is greatly oversimplified, but does represent the results of a typical exit)<br />32<br />
  173. 173. Tax Credit Syndicator - MHEG<br /><ul><li>Non-profit organization established in 1993 at the request of Governor Ben Nelson - rural areas underserved
  174. 174. Mission: Change lives for a better tomorrow by promoting the development and sustainability of quality affordable housing
  175. 175. Service area today includes Nebraska, Kansas, Iowa and Oklahoma</li></ul>33<br />
  176. 176. MHEG Profile<br /><ul><li>Our developments range from 6 to over 200 units and include:
  177. 177. single family homes
  178. 178. multi-unit and multi-building complexes
  179. 179. duplexes
  180. 180. historical renovations
  181. 181. specialty needs developments: elderly, assisted living, transitional homeless facilities, and developmentally disabled residents</li></ul> Number of Developments: 245 Number of Counties Represented: 105<br /> Number of Housing Units: 6,708 Number of Cities Represented: 128<br /> Equity raised: $570 million<br />Current as of 12/15/09<br />34<br />
  182. 182. Oklahoma Profile<br /><ul><li>OEF I, L.P.
  183. 183. $25.81 million raised*
  184. 184. 13 projects closed
  185. 185. 564 units created
  186. 186. OEF II, L.P.
  187. 187. $40 million raised
  188. 188. 7 projects closed
  189. 189. 300 units created
  190. 190. OF III, L.P.
  191. 191. currently open</li></ul>35<br />* Equity raised total also includes side-by-side investments or direct investments<br />
  192. 192. Oklahoma Map<br />Multifamily<br />Senior<br />Single Family<br />Special Needs<br />Transitional<br />Type of Units<br />Total Housing Units in OK 864<br />36<br />
  193. 193. Oklahoma Developments<br />CHARMED-Perkins<br />Perkins, OK<br />Quail Ridge Homes<br />Broken Bow, OK<br />Cottage Park<br />Midwest City, OK<br />Broadway Pointe<br />Seminole, OK<br />Woodson Park Apts.<br />El Reno, OK<br />Parkland Town Homes<br />Prague, OK<br />37<br />
  194. 194. Questions ???<br />

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