WWSSHHFFCCIntroduction toIntroduction to

Low Income Housing Tax CreditsLow Income Housing Tax Credits

AGENDAAGENDA

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What Are Low Income Housing TaxCredits?

How do Tax Credits Work?

The Role of the Commission

Outcomes

The Tax Credit Development Process

Questions & Answers

Began with Tax Reform Act of 1986; tax credits are now the primary vehicle for low-income rental housing construction and rehabilitation in the U.S.

Federal tax incentive to encourage the production of low-income housing (Section 42 of the Internal Revenue Code)

Dollar for dollar reduction in federal tax liability for ten years

Through partnerships, investors receive tax credits in return for equity investments

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What is the Low-Income Housing What is the Low-Income Housing Tax Credit?Tax Credit?

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New Life Villa I – MabtonNew Life Villa I – Mabton

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New Century Village – EverettNew Century Village – Everett

Text

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1811 Eastlake - Seattle1811 Eastlake - Seattle

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Why the Tax Credit Program WorksWhy the Tax Credit Program Works

Investors realize return on equity investment

Creates affordable housing

Supports housing

industry professionals

Spurs economic development

Credits provide a dollar for dollar reduction in federal tax liability

Investors give $$’s to a development in exchange for tax credits

The credits are allocated over a 10 year period to investors in the development

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How are the Credits Turned Into How are the Credits Turned Into Equity for the Project?Equity for the Project?

How Do Tax Credits Work?How Do Tax Credits Work?

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Tax CreditsLimited

Partnership/ LLC

General Partner/Managing Member/Developer

Limited Partner/Member

Equ

ity $

$ fo

r P

roje

ct

Tax Credits & Other Real Estate Benefits

Credit to EquityCredit to Equity

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Amount of credit is based on theType of projectDevelopment costs% qualified low-income unitsNature and amount of financing

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Calculating the CreditCalculating the Credit

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Two Credit Allocation ProcessesTwo Credit Allocation Processes

Competitive Credit 9% credit – new

construction 4% / 9%

acquisition/rehab 130 points minimum One round annually

Tax-Exempt Bond Credit

4% credit only 50% test 50 points minimum Open application

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Why 4% Tax Credits?Why 4% Tax Credits?

Federal Subsidies:

A project is federally subsidized if it is financed with tax-exempt bonds or a federal loan with an

interest rate below market

Acquisition

Federal Subsidies

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Two Credit CalculationsTwo Credit Calculations

Qualified Basis

Equity Gap

Credit amount is based on the lesser of these two calculations

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Calculating the CreditCalculating the Credit

The project’s Qualified Basis =

Eligible Basis X Applicable Fraction

The project’s Equity Gap =

Total Project Costs – Sources of Funds

(other than the equity from the credit)

Calculating the CreditCalculating the Credit

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Example : Total Project Cost $7,400,000

Basis Calculation Gap Calculation

eligible basis $5,800,000

x applicable fraction 100%

qualified basis $5,800,000

x applicable percentage 9%

= credit amount $522,000

total funding $2,516,000- total costs $7,400,000= gap ($4,784,000)tax credit factor .92= credit amt $5,200,00010 years = $520,000

Credit Amount is $520,000

Credit to EquityCredit to EquityExample : $520,000 in credit

Owner[Limited Partnership]

Developer[General Partner(s)]

Investor(s)[Limited Partner(s)]

HOUSING EQUITY

TAX CREDITS TAX SAVINGS

$520,000/yr......… over 10 yrs...........equals $5,200,000

$4,784,000

WWSSHHFFCCWith a .92 Tax Credit Factor, $520,000 in credit =

$4,784,000 in equity to build project

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Roles and ResponsibilitiesRoles and Responsibilities

What is the Role of the HFA?What is the Role of the HFA?

Develop and administer the Low-Income Housing Tax Credit program in Washington State

Develop a Qualified Allocation Plan and Policies to

govern the allocation of credits

Determine which projects best further the goals of

the Qualified Allocation Plan and the Policies

Allocate $1.95 in credit per resident in 2007 (about

$12.5 million in Washington), plus any credit for

eligible tax-exempt bond projects

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HFA HFA RoleRole (continued(continued))

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Report tax credit allocations annually to the

Internal Revenue Service, Governor and

Legislature

Monitor the compliance of projects receiving

tax credits (about 40 years)

IRS requires that preference be given to projects serving the lowest income tenants for the longest period of time

Projects are ranked based on an objective point system

Points are awarded in 20 categories which reflect housing and policy priorities statewide

Commission considers staff recommendations and makes final decision

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Project SelectionProject Selection

Sample Allocation CriteriaSample Allocation Criteria

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Additional Low-Income Housing Set-Aside (the “lowest”)

% of units beyond the income limits required by the IRS CodeWorth a maximum 50 points

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Sample Allocation Criteria (cont’d)Sample Allocation Criteria (cont’d)

Additional Low-Income Housing Use Period (the “longest”)

Add up to 22 years to the minimum 15 year requirement2 points for every year = up to 44 points 100% of our competitive applications select the maximum totaling 40 years

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Sample Allocation Criteria (cont’d)Sample Allocation Criteria (cont’d)

Special Needs Housing Set-Asides For:

Farmworkers 20-25 pts.Large Households 5-10 pts.Persons who are Elderly 10 pts.Persons with Disabilities 5-10 pts.Housing for the Homeless 5-20 pts.

Competitive Credit Set-Asides

20%

15%5%

50%

10%

Qualified Nonprofit (10%) HOPE VI (20%)

Rural Housing (15%) Rural Dev. Program (5%)

General Pool (50%)

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OutcomesOutcomes

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WSHFC Tax Credit Program WSHFC Tax Credit Program AccomplishmentsAccomplishments

Approximately 37,000 low-income units were completed from 1987 through 2007

In 2007, awarded over $12.4 million in competitive 9% tax credits to 26 projects, which will result in approximately 1,160 low-income housing units

In 2006, awarded over $13 million in 4% tax credits to 23 bond-financed projects, which will result in over 3,300 low-income housing units

Competitive (9%) Competitive (9%) Low-Income Tax Credit UnitsLow-Income Tax Credit Units

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Allocated 1987 through 2007

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Bond –Financed LIHTC UnitsBond –Financed LIHTC Units1987 - 20061987 - 2006

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Pantages Apartments – Seattle Pantages Apartments – Seattle

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Nooksack TribeNooksack TribeNooksack Homes I - EversonNooksack Homes I - Everson

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The Borning Building – Spokane The Borning Building – Spokane

Stuart PlaceStuart Place –– OlympiaOlympia

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Rose Hill at Talus - IssaquahRose Hill at Talus - Issaquah

Development ProcessDevelopment Process

Pre-DevelopmentYear OneYear TwoYear ThreeBeyond Placed-In-Service

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To Learn MoreTo Learn More……

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• www.wshfc.org/tax-credits• Refer to the Commission's Requirements Included in:

– 2007 Application Packet

• Qualified Allocation Plan

• Program Policies

– Review Sec 42 of the Code and Other Treasury Regs.

• Seek Professional Assistance From:– Consultants

– Legal Counsel

– Tax and Financial Advisors

– Accountant

– Refer to the Resource List

• Tax Credit Guide Books

• CALL US: 1-800-767-HOME