Basics of IRS Code Basics of IRS Code Section 42Section 42

Low-Income Housing Low-Income Housing Tax CreditsTax Credits

Basics of IRS Code Basics of IRS Code Section 42Section 42

Low-Income Housing Low-Income Housing Tax CreditsTax Credits

IntroductionWhat is NCHFA?

Why am I here?

What is the LIHTC?

§ 105‑277.16“[D]evelopment to which [NCHFA] allocated a federal tax credit under section 42 is designated a special class of property under… the NC Constitution and must be appraised, assessed, and taxed in accordance with this section.”

§ 105‑277.16“The assessor must use the income approach as the method of valuation for property classified under this section and must take rent restrictions that apply to the property into consideration in determining the income attributable to the property.”

§ 105‑277.16“The assessor may not consider income tax credits received under section 42 or under G.S. 105‑129.42 in determining the income attributable to the property.”

LIHTC housing isAlways rental

Many types of structures

Rehabilitation and new construction

2,000 units and 35 awards annually

Total of 50,000 units in 1,400 projects

Only awarded by NCHFA

IRS Code Section 42Owners must follow rules on

– Income,

– Rent, and

– Suitability

Contained in recorded use agreement

NCHFA monitors and reports violations to the IRS

IRS Code Section 42Rent limit is actually a maximum

housing expense

Generally is 60% area median income less utility allowance

Specifics are very complicated for both AMI and utilities

IRS Code Section 42Rules apply for 30 years

Are ways to exit, including foreclosure

NCHFA provides DoR with a list of Section 42 properties

Includes all, with indicator of which are added and removed

The List

Property Name City County Cycle Address Zip Units Removed AddedAuburn Spring Burlington Alamance 2005 2950 Crouse Lane 27215 48   Auburn Trace Apartments Burlington Alamance 2005 2944 Crouse Lane 27215 80   Graham Village Apts Graham Alamance 1993 920 E.Hanover Road 27253 50   Cannon Place Graham Alamance 1997 508 E.Parker Street 27253 74   Westhampton Apts Mebane Alamance 1989 1015 Mebane Airport Road 27302 40   Deerfield Crossing Apts Mebane Alamance 1996 600 Deerfield Trace 27302 118   Mebane Mill Lofts Mebane Alamance 2009 301 W Washington Street 27302 75   1Ridgeway Apts Taylorsville Alexander 1987 First Ave Dr Se 28681 32   The Oaks Taylorsville Alexander 1996 100 2nd Avenue 28681 40   Ridgeview Apts Sparta Alleghany 1988 218 E. Whitehead St 28675 36   Highland Village Sparta Alleghany 1999 29 Highland Village Circle 28675 30   Maplewood Apts Sparta Alleghany 2001 273 Independence Road 28675 30   Pine Ridge Place Polkton Anson 1993 401 Pine Ridge Place 28135 16   Wyndsor Downs Polkton Anson 2004 11 Wyndsor Court 28135 32   Pine Terrace Apts Wadesboro Anson 2001 100 Pine Bluff Street 28170 24   Laurel Commons Apts Wadesboro Anson 2001 Burns Street 28170 24   Oak Hill Wadesboro Anson 2004 1331 North Greene Street 28170 72   

Common issuesNot all affordable projects qualify, some

are only in other programs

Changes, new and removed

How to value- NCHFA is not in a position to advise

Always welcome to ask questions 919.877.5645 mshelburne@nchfa.com

How do LIHTCs make housing affordable?

YIKES!

Actually has a simple explanation:Funds invested for the tax credit

partially replace loan financing

But what does that mean?

Loans have to be repaid (usually)A 36 unit apartment complex costs

$3,380,000 to build

Borrow $3,080,000 from bank

(the rest from an investor)

Monthly payment of $24,228

That’s $673 per household every month!

If the project has Housing Credits…Whoever owns the building avoids

$2,592,000 in taxes over 10 years

Amount calculated on depreciable items (bulldozer test)

Determined up-front

What the rest of us get for this tax breakFor every dollar of the $2,592,000 a

large company makes an investment

Around $0.85 per $1 in tax reduction

Thus $0.15 better off; expects no other return

Now time for a little math…•“price” x tax credits = investment

•$0.85 x $2,592,000 = $2,203,200

Still a $3.38 million project

•cost – investment = loan amount

•$3.38M - $2.20M = $1.18M loan

Finally the conclusionMonthly payment on a $1,176,800

loan is $9,257, which = $257/unit

If built without tax credits monthly payment is $24,228, or $673/unit

Investment saves tenant households $416 each month

Summary of the numbers

MARKETCost $3,380,000Invest $300,000Loan $3,080,000Payment $24,228Units 36Per unit $673

TAX CREDIT$3,380,000$2,203,200$1,176,800

$9,25736

$257Savings $416