Introduction to Low Income Housing Tax Credits & MHEG

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PowerPoint describing Section 42 of the IRC, Low Income Housing Tax Credits & the role of Midwest Housing Equity Group, Inc as a Tax Credit Syndicator.

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Introduction to Low Income Housing Tax Credits & MHEG

  1. 1. Jim Rieker President & Chief Executive Officer Andrea Frymire Executive Vice President Oklahoma Okl h
  2. 2. OUR MISSION & OBJECTIVE Midwest Housing Equity Group, Inc. (MHEG) was created in 1993 under the g q y p ( ) direction of then Governor Ben Nelson. The objective was to raise equity capital to invest into affordable rental housing throughout Nebraska. MHEG later expanded, starting in 2000, into Kansas, Iowa and Oklahoma. Our mission today: Changing lives for a better tomorrow by promoting the development and sustainability of quality affordable housing. housing. We look for quality affordable properties that meet our mission and standards. Important Fact: Dollars raised in Oklahoma, stay in Oklahoma! 2
  3. 3. OUR DEDICATION AND SUCCESS TO DATE, MHEG HAS: , - raised over $570 million in equity - developed over 240 projects in rural, suburban and urban communities - created and renovated over 6,700 units of affordable rental housing 2009 HIGHLIGHTS: - Closed $40 million in equity (13 deals) to date, with $49 million in pending deals for 2010 - Raised $41 million in equity - $15 million in corporate organizational reserves Our developments range from 6 to over 200 units and include: - single family homes - multi-unit and multi-building complexes - duplexes - hi t i l renovations historical ti - specialty needs developments: elderly, assisted living, transitional homeless facilities, and developmentally disabled residents 3
  4. 4. MHEG PORTFOLIO MHEG TOTALS NEBRASKA - 29 Funds - 14 Funds - $582 million raised - $292 million raised - 247 projects closed - 131 projects closed - 6,748 6 748 units created - 3,136 3 136 units created IOWA OKLAHOMA - 5 Funds - 3 Funds - $105 million raised - $72 million raised - 38 projects closed - 20 projects closed - 1,347 units created - 864 total units created KANSAS - 7 Funds - $113 million raised - 58 projects closed - 1,401 units created 4
  5. 5. EQUITY RAISED & PORTFOLIO GROWTH CHART * As of 1/15/2010 Total Equit Raised i n Millions Total Units Cre ated ty 5
  6. 6. OKLAHOMA PORTFOLIO OEF I L.P. I, L P - $25.81 million raised* - 13 projects closed - 564 units created OEF II, L.P. - $40 million raised - 7 projects closed - 300 units created OF III, L.P. III L P - currently open * Equity raised total also includes side-by-side investments or direct investments 6
  7. 7. HOUSING UNITS BY COUNTY – OKLAHOMA Total Housing Units in OK 864 Type of Units Multifamily Senior Single Family Special Needs Transitional 7
  8. 8. ORGANIZATIONAL CHART MHEG Board of Directors Audit / Investment President/CEO Committee Iowa Operations CFO/COO & Investment Committee Executive Vice Kansas Operations Accounting President(s) of ( ) & Investment Department State Operations Committee Development & Oklahoma Operations Asset Management Underwriting & Investment Department Department Committee Information Management Due Diligence Department Department IT Department MHEG has 30 full-time employees and 2 part- Compliance Department time employees with offices in Iowa, Kansas, Nebraska d Oklahoma. N b k and Okl h *as of 1/2010 8
  9. 9. BOARD OF DIRECTORS Sister Marilyn Ross Richard Schenck Stephen Bodner David Fisher Dick Hoiekvam Chairperson Vice Chairperson U.S. Bank p FHLBank Topeka Deloitte & Touche Holy Name Housing Wells Fargo CDC Corporation Rick Jackson Brad Krieger James Laphen Barry Sandstrom Jim Rieker Capitol Federal Arvest TierOne Bank Home Federal Midwest Housing Savings Bank Savings & Loan Equity Group MHEG is governed by a Board of Directors with the President being responsible for the day-to-day operations. 9
  10. 10. OPERATIONS & INVESTMENT COMMITTEE Roger Beverage Dennis Brand Brad Krieger Oklahoma Bankers Association BancFirst Arvest Kenyon Morgan Bob Spinks Jim Rieker Prime Time Environments, LLC United Way of Oklahoma City Midwest Housing Equity Group q y p The Operations and Investment Committee is an appointed sub-committee of the MHEG Board with the Executive Vice President being responsible for the day-to-day operations of Oklahoma. 10
  11. 11. BEHIND THE SCENES: BENEFITS MHEG PROVIDES - Underwriting-financial feasibility - Identifying sources of potential financing - Assist with/Reviewing applications for funding - Compliance with Section 42 and other financing sources - Accounting for construction/rehab period and then for ongoing operations - Preparation of carryover forms and cost certification -A Annual audit and t return preparation l dit d tax t ti - Partnership with MDHF, a CDFI set up to offer a variety of predevelopment loans and permanent loans - Training for development and management 11
  12. 12. CRA BENEFITS FOR BANK PARTICIPANTS - Allows for CRA credit regardless of project locations as long as it is within the g g fund’s trade territory (i.e. a Tulsa bank can receive credit for a project in Oklahoma City)* - Regulators do vary on the scope of inclusion. Please check with your Regulator for their interpretation. - See OCC report dated 2/08 – further adopted by FDIC and Federal Reserves - 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. - All documentation that the Examiners require is provided by MHEG. 12
  13. 13. BENEFITS TO EACH STATE - Capacity Building: In addition to working with established developers and sponsors, g MHEG also works with rural housing authorities, Community Housing Development Organization’s, Community Action Program’s and other small developers that are developing tax credit properties in their own communities. - Housing Where it’s Needed the Most: We fund projects that are really needed but are sometimes more expensive and difficult to put together, such as small rural properties, inner city, i fill and special needs projects i it infill d i l d j t - No Extra Risk: By investing in smaller properties with local developers, we do not accept any more risk than national syndicators. In fact we are able to spend much more time on an investment and mitigate our risk. MHEG Funds are right in your back yard and are strictly state specific! 13
  14. 14. UNDERWRITING GUIDELINES - Geographical location - Size of investment (% of total of Fund) - Guarantees - Reserve accounts - Structure of debt to property - Experience and strength of development team, general partner and property manager - Project site-zoning, stability, accessibility - Market Study/Analysis - Title and Survey - Insurance: property, contractor (insurance and bonds) -QQuarterly risk rating f lif of i l i k i for life f investment - Environmental studies: Phase I mandatory, Phase II if needed - Reasonable and substantiated operating assumptions: rent levels, vacancy factors, expense estimates, level of must pay debt, and lease-up period estimates debt lease up - Construction parameters and oversight - Rent Level Analysis - Operating Expense Comparison and Analysis to MHEG’s extensive database MHEG s 14
  15. 15. TAX CREDIT CALCULATION $1,000,000 Total Project Cost $ 200,000 Project Cost Not Eligible for Credits $ 800,000 Eligible Basis for C ed ts g b e as s o Credits* x 9% Tax Credit Percentage $ 72,000 Credits Received/year x 10 Years credits are received $ 720,000 Credits received x .70 Price paid for credits $ 504,000 Equity into project from MHEG Allows for low debt on project enabling developers to keep rents affordable * States may allow 130% basis boost (not shown here) here). 15
  16. 16. TYPICAL DEAL STRUCTURE Tax Credit Equity Soft Debt / GP Equity 55% (70% with basis 25%* boost) Hard Debt < 20% * Funded By: F d dB  AHP  HOME  TCAP  Exchange  Developer Fee  Various Contributions  Certain Grants 16
  17. 17. WHAT IS THE REAL RISK? - Ownership risks of multifamily low-income rental housing p p y g pools Mitigated by MHEG’s investment policies, ongoing management and financial oversight, as well as MHEG’s financial strength - Compliance risk Mitigated by MHEG’s continuing compliance practices and oversight - Changes in current law Highly improbable any law change would affect any current investments - Reputation Risk We take “the high road”, we know that we represent our fund participants who are financial pillars of th i communities fi i l ill f their iti 17
  18. 18. MHEG FUND PARTICIPANTS vs. DIRECT PARTICIPANTS WHAT ARE THE ADVANTAGES: - Pool of projects diversifies risk - Structured for strong reserves at the project and fund level, with additional reserves at MHEG - Disciplined and conservative underwriting guidelines - Investment decisions lie with investors - MHEG professional staff manage all aspects of investment - Comprehensive quarterly reporting to fund participants – available in electronic format - Independent financial audits performed at the project and fund level - Legal documents uniform and comprehensive - Delayed investment pay-in schedule increases yield - MHEG tax credit purchasers could take minimal construction risk - MHEG Fund participants do not need an expert tax credit specialist on staff, MHEG’s staff provides tax credit expertise 18
  19. 19. PROJECT SELECTION PROCESS After a developer presents a potential deal to MHEG, the project goes through several g g steps to ensure the deal meets our standards and approval. - Development/Underwriting & Due Diligence Departments review project e e op e t/U de t g ue ge ce epa t e ts e e p oject - SCRUB Meeting: internal loan and project committee examine potential project - Technical Review: technical advisors, tax lawyers & accountants assess potential project - F d Participant Approval Fund P ti i tA l - MHEG Board / Investment Committee approval 19
  20. 20. WHAT DO YOU GET IN RETURN??? - Optimal Tax Planning Strategy - 10 full years of federal tax credits - 15 full years of depreciation and other passive deductions - Periodic Write-down of Paid in Capital - CRA Investment Credit, if applicable - Marketing and PR opportunities - Stabilizing and Investing in your local communities - Stable proven track record of a performing asset class - Accurately forecasted tax benefits - Quarterly Reporting and Asset Management update 20
  21. 21. POINTS TO CONSIDER - MHEG does not want the capital you need for normal operations. - The dollars you are considering placing with MHEG are actually dollars you owe to the IRS as a result of your successful operations. - You receive no monetary return with your payment to the IRS. - You will receive an above market return and a CRA Investment Credit, if applicable, when you purchase tax credits with MHEG. - Your participation benefits the community and you receive a monetary return without jeopardizing your normal business capital capital. 21
  22. 22. WHAT TO EXPECT IN THE FUTURE - 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. - Th general partner or managing member i most cases h a right of fi t The l t i b in t has i ht f first refusal to purchase our interest for an amount stipulated in the IRS code. - Since the project still has restricted rents it will not be able to refinance m ch additional rents, ill much 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. (note: this narrative is greatly oversimplified, but does represent the results of a typical exit) 22
  23. 23. SHARE OPTIONS Deferred Pay-In over 6 years (Class “A” Shares) - By choosing the deferred pay-in method you will pay in a smaller portion of the capital commitment as each project closes and then pay the remainder in over the remaining term of the capital contribution contribution. BIG ADVANTAGE – your new quarterly tax estimate plus capital contribution payment could be less than your old quarterly tax estimates, which equates to little or no cash flow impact and higher internal rate of return (IRR). One Time Pay-In (Class “B” Shares) - Capital is called on a pro-rate share of the capital commitment as each project is closed , with the total capital commitment paid-in within approximately 18-24 months. 23
  24. 24. MHEG ASSOCIATIONS: The National Association of State and Local Equity Funds (NASLEF) is a professional, nonprofit association formed in 1994 to promote the efficient management of state and local equity funds. - All State and Local Equity Funds belong (currently 16 members, representing 41 states) - Members do not compete with each other, each represents certain states - Members share information from how they operate to what they learn - Collectively, NASLEF Members are one of the nation’s largest and leading tax credit syndicators: - have raised over $6.5 billion in equity - invested in over 100,000 affordable housing units - Many large, national tax credit purchasers prefer NASLEF members over other national syndicators because of: - local presence - stronger portfolio - better fund oversight MHEG IS A CHARTER MEMBER OF NASLEF! 24
  25. 25. Visit our website at www.mheginc.com h i to learn more about MHEG and view our properties.

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