tax credit basics

Nebraska Investment Finance Authority © 2005

Tax Credit Basics


Source of Funds

• Funds originated from the Internal Revenue Code, Section 42.

• Tax Reform Act of 1986.

• The amount of tax credits issued to each state is based on $1.90 per capita per year.

• Amount to Allocate in 2006 (estimated): $3,319,707

• Generally over-subscribed: 3:1


Types of Credits and Unit Requirements

• To qualify: 20% of Units at 50% AMI* or40% of Units at 60% AMI*

*AMI = Area Median Income

• Types of Credits:– Annual “9% cycle” for construction (new/rehab)

• First Round Applications Due: 9/12/2005

• Second Round Applications Due: 2/20/06

• CRANE Applications: Accepted monthly

– 4% credits with Tax Exempt Bonds: Applications accepted monthly.


Ownership Structure

Tax Credit Apartments, Limited Partnership

General Partner(Sponsor\Developer)

1%

Limited Partner(Tax Credit Investor)

99%

Tax Credits

Equity


Ownership Structure

• The Limited Partner (L.P.) owns 99% or more and receives 99% or more of the credits.

• The L.P. pays the General Partner (Applicant/Developer) generally between $.75 and $.85 per credit.


Commitment to Affordability

• Only get credits for the low income units (qualified basis).

• Retain affordability period for 15 year compliance period plus a 15 year extended use period.

• Income and rent restrictions.

• NIFA offers points for longer affordability periods.


Syndication Rate and Gap

Equity is generated from an award of Tax Credits.

• Annual credit amount x 10 year credit period x syndication rate.

• Cash from sale of credits fills the gap between the permanent loan and the total development cost.


2006 Set-Asides

2006 Per Capita Allocation: $3,139,707

• At least 10% to Qualified Non-profits

• 50% Rural \ 50% Urban (MSAs)

• $1 million for CRANE projects


Qualified Allocation Plan and Rules

• The QAP governs the annual distribution of tax credits.

• Points are awarded for specific items.

• Applicants must meet threshold requirements.

• The QAP and Application can be downloaded from NIFA website: www.nifa.org


Threshold Requirements• Development Costs Determined

• Preliminary Plans and Specifications

• Site Control (valid for 90 days)

• Zoning Approved (or conditional use permit)

• Utilities are available and adequate

• List of Board of Directors

• State and/or Local Subsidies


Threshold Requirements Continued

• Syndicator Interest Letter (valid for 6 months)

• Construction/Permanent Financing (valid for 6 months)

• 15 Year Operating Proforma

• Site Specific Market Study

• Pre-notification to the Mayor

• Capital Needs Assessment (for Rehab Only)


Underwriting

• Site information

• Construction design

• Estimated development costs

• Financing structure

• Organization Structure (capacity at G.P level?)

• Market Study

• Financial Feasibility


Calculations of Tax Credits & Equity

Total Development Cost $3,000,000Less: Non-eligible (i.e. land-soft cost) (200,000)Eligible Basis $2,800,000

Applicable fraction (% of LIHTC units) X 100%Qualified Basis $2,800,000

Tax Credit Applicable Percentage X 9%Annual Tax Credit $ 252,000

Tax Credit Period X 10 yrs.$2,520,000

Equity at $.80 per Credit X .80$2,016,000

Total Development Cost $3,000,000Less: Equity (2,016,000)Required Debt $ 984,000


In today’s market the average development must has a least two or three sources of funding.• Low-Income Housing Tax

Credits

• Affordable Housing Trust Fund

• Federal Home Loan Bank

• HOME funds

• USDA – Rural Development funding

• CDBG

• TIF funds

• Historic Tax Credits

• Tax Exempt Bond Financing

• Developer Note

• Grants


Other Important Dates

• Conditional Reservation:– Follow-up information due within 60 days of Board

approval.

• Carry-over Application:– Due November 1 for projects receiving allocations prior to

June 30. Projects receiving allocations after June 30 have 5 months from the date of conditional reservation.

• Cost Certification Application– Due 60 days from the Placed In Service (PIS) date.

• Annual Compliance Reports:– Due by January 15th following the PIS date, and each

year thereafter.


LIHTC Fees

• Application Fee: Greater of 1% of annual credit request or $500. (CRANE Application fee = $500)

• Reservation/Carry-over Fee: 2% of annual credit request.

• Allocation Fee: Due at Cost Certification: 2% of annual credit actually allocated.

• Annual Compliance Fee: 2% of annual credit actually allocated.


Maximums

• NIFA does not prescribe maximum per unit costs.

• NIFA allows no more than 18% of annual LIHTC authority per development. Developers no more than 34% of total annual allocation.

• Developer Fees and Contractor Profit/Overhead combined can be no more than 20% of eligible basis.


Compliance Monitoring

• Annual Owner Certification of Continuing Compliance Report required.

• File review and inspection required no later than the end of the 2nd year following PIS.

• On-site reviews and inspections required at least every three years thereafter.


Contact for Allocation Questions

• Robin A. Ambroz

Manager of LIHTC Program

1230 “O” Street, Suite 200

Lincoln, NE 68508

Phone: 402-434-2947

Fax: 402-434-3921

Email: [email protected]


Contacts for Compliance

Dudley Beyer 402-434-6931

[email protected]

Jim Hubka 402-434-6939

[email protected]

Kelly Schultze 402-434-3907

[email protected]

Teresa Kile 402-434-3916

[email protected]


NIFA Website

http://www.nifa.org

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