Tax Credits & Mheg


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  • Thank for your taking time to meet with Cindy and I. We are pleased to be here and hope you find the meeting informative and beneficial. Tonight we are going to talk about affordable housing. More specifically, the low-income housing tax credit. Perhaps some of you are familiar with the program? Lender, sponsor, developer, investor.
  • The LIHTC was created by Congress to replace other tax benefits. It’s the first housing program to have direct tax benefits based on compliance with tax regulations. The Internal Revenue Service wrote the regulations in Section 42 of the Internal Revenue Code (Tax Code). The program delivers a federal income tax credit. In other words, a dollar for dollar reduction of a federal tax liability. The program brings private and public funds together to create affordable housing
  • The Nebraska Investment Finance Authority (aka NIFA) is responsible for allocating credits and monitoring the program to ensure owners are in compliance with rules. First round of 2007 NIFA received over 23 applications totaling credits of $6.4M. NIFA only allocates up to $1.5M during the first round. 5 projects were awarded for a total of $1.376M. Annually NIFA will hold public meetings to encourage participation as to suggestions and comments regarding the allocation process.
  • For Lyons, NE (Burt County) the rent limits are… Compliance Period is 15 years and since 1990 the Extended Use Period is applicable and subsequently extends the low income use of the property (usually at least an additional 15 years). LURA – Land Use Restriction Agreement is executed and actual deed restriction which includes the specific state requirements.
  • The key point on this slide is the percent of ownership. Since the LP is purchasing the tax credits the investors ownership is 99% in order to receive the tax credit benefit and depreciation and operating losses of the real estate.
  • We service four states: Nebraska, Kansas, Iowa and Oklahoma. We have offices in each state. Main office in Omaha with satellites in the other states. I’ve brought copies of our latest annual report which provides extensive information about MHEG such as staff, board, investors and projects. Please take a copy for your review.
  • I believe the average size of project we do is around 24 units. We have developed all across the state. From Scottsbluff to South Sioux City to Alma.
  • Tax Credits & Mheg

    1. 1. “ A Blueprint to Affordable Housing” The Low-Income Housing Tax Credit Program
    2. 2. The Facts: <ul><li>Tax Reform Act of 1986 </li></ul><ul><li>Internal Revenue Code, Section 42 </li></ul><ul><li>Owners receive a federal income tax credit </li></ul><ul><li>Effective financing tool for “affordable” rental housing production </li></ul>
    3. 3. The Facts (continued): <ul><li>2010 - Nebraska Investment Finance Authority (NIFA) will have approximately $4.1M of Low Income Housing Tax Credits (LIHTC) based on the Bureau of Census Current Population Report for Nebraska multiplied by $2.30 and approximately $9M of LIHTC for the Midwest Disaster Areas </li></ul><ul><li>NIFA responsible for allocating credits </li></ul><ul><li>Generally program over-subscribed: 3 to 4:1 </li></ul><ul><li>Administration under the “Qualified Annual Plan” that is approved by the NIFA Board of Directors and the Governor </li></ul>
    4. 4. Program Requirements: <ul><li>Units must be rented to households making 60% or less of area median income </li></ul><ul><li>Rents, including utilities, restricted to 30% of qualifying income. </li></ul><ul><li>Minimum affordability Period (30 years) </li></ul>
    5. 5. 2009 Maximum Gross Income for Saunders County (Ceresco) <ul><li>2 Bedroom Units – 2 residents </li></ul><ul><ul><li>50% of AMI - $26,150 </li></ul></ul><ul><ul><li>60% of AMI - $31,380 </li></ul></ul>
    6. 6. 2009 Maximum Gross Rent Limit for Saunders County (Ceresco) <ul><li>2 Bedroom Units – 2 residents </li></ul><ul><ul><li>50% AMI - $736 </li></ul></ul><ul><ul><li>60% AMI - $883 </li></ul></ul><ul><ul><li>*Market will determine rent charges </li></ul></ul>
    7. 7. Types of Credits: <ul><li>9% </li></ul><ul><li>Construction (new/rehab) without federal subsidy </li></ul><ul><li>Generally allocated over two rounds </li></ul><ul><li>Most popular among developers </li></ul><ul><li>4% </li></ul><ul><li>Construction (new/rehab) financed with tax exempt bonds </li></ul><ul><li>Acquisition of existing building to be substantially rehabed </li></ul><ul><li>Applications accepted monthly </li></ul><ul><li>Least popular among developers </li></ul>
    8. 8. Ownership Structure: Tax Credit Project Limited Partnership General Partner (Sponsor/Developer) 1% Limited Partner (Tax Credit Investor) 99%
    9. 9. Responsibilities of General Partner/Managing Member: <ul><li>Oversee the daily activities of the development throughout the compliance period (15 years) to ensure the project preserves “affordability” status, has ample cash flow to service obligations and maintains the integrity of the premises (interior/exterior) to provide quality housing for the community. </li></ul>
    10. 10. Obligations of General Partner/Managing Member: <ul><li>Development Completion – Schedule & Cost </li></ul><ul><li>Compliance - Credit Recapture </li></ul><ul><li>Operating Deficits </li></ul><ul><li>Environmental Indemnity </li></ul>
    11. 11. How Credits are Calculated: <ul><li>Total Development Costs $3,000,000 </li></ul><ul><li>Eligible Basis (less land) $2,800,000 </li></ul><ul><li>Applicable Tax Credit 9% </li></ul><ul><li>Annual Tax Credits $252,000 </li></ul><ul><li>Tax Credit Period (years) 10 </li></ul><ul><li>Total Tax Credits $2,520,000 </li></ul><ul><li>Equity Rate .65 </li></ul><ul><li>LIHTC Sales Proceeds $1,638,000 </li></ul>
    12. 12. Calculation of Debt Service & Loan (Simplified Example – 20 units) <ul><li>Annual Gross Rents $114,000 </li></ul><ul><li>($475/unit/mo) </li></ul><ul><li>Annual Operating Expenses $80,000 </li></ul><ul><li>(4,000/unit/mo) </li></ul><ul><li>Net Operating Income (NOI) $34,000 </li></ul><ul><li>Debt Service @ 1.20 DSCR $28,333 </li></ul><ul><li>Loan Amount @ 8% for 30 yrs $319,000 </li></ul>
    13. 13. Financing Summary <ul><li>Project Cost $3,000,000 </li></ul><ul><li>Source of Funds </li></ul><ul><ul><li>LIHTC Sales Proceeds (55%) $1,638,000 </li></ul></ul><ul><ul><li>First Mortgage (11%) $319,000 </li></ul></ul><ul><ul><li>Funding Gap (41%) $1,242,000 </li></ul></ul>
    14. 14. Filling the Development Gap: <ul><li>Affordable Housing Program (HOME or Trust Funds from NDED) </li></ul><ul><li>Historic Tax Credits </li></ul><ul><li>Federal Home Loan Bank of Topeka (AHP) </li></ul><ul><li>Tax Increment Financing (TIF) </li></ul><ul><li>Community Development Block Grant (CDBG) </li></ul><ul><li>USDA Rural Housing Service </li></ul><ul><li>Developer Note or Capital Contribution </li></ul><ul><li>Qualified Census Tracts (30% boost in credits) </li></ul>
    15. 15. Midwest Housing Equity Group, Inc. <ul><li>Created in 1993 (Equity Fund of Nebraska) </li></ul><ul><li>Non-profit corporation </li></ul><ul><li>In 2001 changed name to Midwest Housing Equity Group, Inc. (MHEG) to reflect expansion of business market </li></ul><ul><li>Over $570M raised and invested in affordable housing </li></ul><ul><li>Created over 240 housing developments and over 6,700 rental units </li></ul>
    16. 16. Mission Statement: <ul><li>Midwest Housing Equity Group, Inc. changes lives for a better tomorrow by promoting the development and sustainability of quality affordable housing </li></ul>
    17. 17. Nebraska <ul><li>14 Funds </li></ul><ul><li>$292M raised </li></ul><ul><li>131 projects closed </li></ul><ul><li>3,136 units created </li></ul><ul><li>As of 12/31/2008: </li></ul><ul><ul><li>40 Counties </li></ul></ul><ul><ul><li>51 cities/towns </li></ul></ul>
    18. 18. Technical Assistance Provided by MHEG: <ul><li>Underwriting financial feasibility </li></ul><ul><li>Identify sources of potential financing </li></ul><ul><li>Assist with review of applications for funding </li></ul><ul><li>Compliance with Section 42 and other financing sources </li></ul><ul><li>Accounting for construction/rehab period and for compliance period </li></ul><ul><li>Annual audit and tax return preparation </li></ul><ul><li>Training for development and management </li></ul><ul><li>Partnership with MHDF that provides a predevelopment loans and permanent loans for projects </li></ul><ul><li>Preparation of carryover forms and cost certification </li></ul>
    19. 19. For further Information about MHEG: <ul><li>Visit our website at: </li></ul><ul><li>Visit our office in Omaha at 13520 California Street, Suite 250 </li></ul><ul><li>Phone: 402-334-8899 </li></ul><ul><li>Email: [email_address] or </li></ul><ul><ul><li> [email_address] </li></ul></ul>