Housing Affordability and LIHTCs National Development Council 1 - PowerPoint PPT Presentation

Housing Affordability and LIHTCs National Development Council 1

Why the Public Sector Is Involved in Housing Finance • Two types of housing problems • Affordability and lack of investment • Housing for low/moderate households is weak on economic benefits • Cash Flow, Appreciation and Tax Benefits • The private sector generally cannot provide affordable, decent, safe and sanitary housing for low/moderate households without public assistance

A Fundamental Problem in Affordable Housing Finance • Equity- Profit Maximizers • Low/moderate income housing provides marginal ROI • Rents lower, vacancy/collection losses higher, little appreciation • Debt- Risk minimizers • Debt sized as a function of cash flow or as a percent of value • Lower value or cash flow results = smaller loans 3

A Fundamental Problem in Real Estate Finance • Total Project Costs (TPC) are often greater than a project’s Fair Market Value (FMV) as Completed • But...debt and equity are a function of value, not cost • Where TPC > FMV, there’s often a need for public economic, housing and community development resources to get the project done 4

Defining the “Financing Gap” • A project’s financing gap is defined as the difference between projected costs (uses) and the debt and equity (sources) it can reasonably attract as follows: Total Project Costs - Bank Loan - Equity = Financing Gap 5

Cost-Value Differential Example Market Rate and Affordable Rental Development Residential Units 100 Cost/Unit $140,000 Total Development Costs $14,000,000 • If same quality is achieved, development costs do not differ 6

Cost-Value Differential Example Market Rate Operating Income $ 700,000 Available for Debt Payments $ 583,333 Maximum Loan Supported $ 10,812,974 Equity Attracted $ 2,121,212 Other Sources Needed $ 1,065,814 Affordable Operating Income (40% less) $ 420,000 Available for Debt Payments $ 365,217 Maximum Loan Supported $ 6,627,060 Equity Attracted $ 684,783 Other Sources Needed $ 6,688,157 7

Cost-Value Differential Example Market Rate TPC $14,000,000 - Less Debt $ 10,812,974 -Less Equity $ 2,121,212 Gap (surplus) $1,065,814 Affordable TPC $14,000,000 - Less Debt $ 6,627,060 -Less Equity $ 684,783 Gap (surplus) $6,688,157 8

Low Income Housing Tax Credit - LIHTC • Created in 1986, 2M tax credit units • Increases benefits for investing in LIHTC projects • Direct, dollar-for-dollar reduction of tax liability • Often, investors pay less than $1 for a $1 reduction in tax liability • Annual credit for 10 years • Project must qualify on three criteria • Income/occupancy • Rent • State approval • 9 percent and “4 percent” credits 9

Low-Income Housing Tax Credits (cont.) • Income / Occupancy • At least 20 percent of the units must be occupied by tenants with incomes below 50 percent of the median • At least 40 percent of the units must be occupied by tenants with incomes below 60 percent of the median OR • Income Averaging

Low-Income Housing Tax Credits (cont.) • Rent restrictions • All units receiving LIHTCs have rent restrictions • Rent cannot exceed 30 percent of income qualifier (either 50 or 60 percent of median) for the assumed household size • Maximum rent includes all utilities, except telephone

LIHTC Rent Restrictions (cont.) • Computation for two-bedroom unit- Lawrence MSA • Imputed household size is 2 x 1.5 persons/bedroom = three- person household • Median income for three-person household is $73,800 • 60 percent of median is .60 x $73,800 = $44,280 or $3,690 per month • Maximum two-bedroom rent is 30 percent of $3,690 per month or $1,107 per month • If utility allowance for two-bedroom unit is $75 per month, maximum contract rent is $1,107 - $75 = $1,032 per month

Low-Income Housing Tax Credits (cont.) • State approval • In 2019, each state received $2.75625 in LIHTCs per resident per year ($3,166,875 million minimum) • State agency allocates credits • At least 10 percent set aside for non-profits • Qualified allocation plan must consider energy efficiency and historic preservation

Low-Income Housing Tax Credits (cont.) • Kansas QAP- Kansas Housing Resources Corporation (KHRC) • ~$7,865,000 of annual tax credits • Kansas’ Priority Housing Needs • Less than 10,000 in population • Preservation of HUD Section 8 or HAP contract or anything from a PHA • Special need populations • Gross rent for all units up to 60% that is below fair market rent • Second or later phase of a property where there is a current waiting list

Low-Income Housing Tax Credits (cont.) • Evaluation Rankings: • Property Location • Housing Needs Characteristics • Development Characteristics • Applicant/Sponsor Characteristics • Tenant Population Characteristics • Public Housing, Government Assisted and Conventionally Financed Waiting Lists • Bonus Points

Low-Income Housing Tax Credits (cont.) A. Property Location (not to exceed 50 points) Maximum Points Score 1. A property is located in a HUD defined Qualified 10 points Census Tract or Difficult Development Area where a concerted community revitalization plan has been established (See Exhibit Q) 2. A property is located in a county of the State with a 10 points median income greater than the statewide non- metro average. 3. A property is located in a county with a population 10 points of 60,000 or less. 4. Site locations will be further evaluated for 20 points community support, neighborhood consistency, and site usability, accessibility and marketability. (See Exhibit A for specific criteria).

Low-Income Housing Tax Credits (cont.) C. Development Characteristics (not to exceed 80 points) 1. Highest priority will be given to applications with the lowest percentage of intermediary costs. 25 points (These costs may include, but are not limited to, attorney fees, engineering fees, and architect fees). Points awarded on a sliding scale up to 5% of total costs. Points deducted on a sliding scale beginning with 6% of total costs. 2. Lowest equity gap with points awarded on a sliding scale and separated into new construction 20 points and rehab/conversions. 3. Development creates single-family housing that is 10 points intended for eventual tenant ownership. 4. Development involves the use of housing as part 20 points of a community revitalization plan, including the adaptive reuse of a building that is eligible for the historical register or is sited in an officially declared historic district or developments that are eligible for a real estate tax exemption based on state statute or local ordinance, or similar equivalent local contributions.

Low-Income Housing Tax Credits (cont.) • Eligible Improvement costs determine basis • Land not included but acquisition is • DDAs and QCTs increase basis by 30% Include Exclude • Construction Costs • Permanent Financing Expenses • Permits & Fees • Reserves • Construction Financing expenses • Marketing (interest, fees, appraisal, inspections) • Tax Credit Application Fee • Property Taxes & Insurance • Syndication Costs (legal, audit, • Architectural & Engineering consultant, etc.) • Performance Bonds • Acquisition • Furnishings • Off-site Improvements • Environmental Assessment • Costs for Non-Residential • Developer Fee • Costs for Market-Rate Residential • Contingency (if spent) • Organizational Expense • Development Consulting • Any Expense Paid for with Tax-exempt Bonds

Value of Credit- Affordable Example $9,800,000 Eligible Basis (70% of TDC) X 1 or 1.3 Basis increase? $9,800,000 Credit Basis X 9% Credit Rate- 9% or 4% Revised Sources with LIHTC $882,000 Maximum Annual LIHTC TPC $ 14,000,000 - Less Debt $ 6,769,862 - Less Equity $ 7,232,400 Equity Gap (surplus) $ (2,262) $ 882,000 Annual LIHTCs X 10 years $ 8,820,000 Total LIHTCs X $.82 Credit Price $ 7,232,400 Equity

Low-Income Housing Tax Credits (cont.) • Example #2– New Construction Project in QCT Uses Equity $ 2,000 Land $ 1,229 Annual LIHTCs $ 10,500 Res Construction X 10 $ 1,500 not incldued in basis $ 12,290 Total LIHTCs $ 14,000 Total X .93 Credit Price $ 11,430 Equity LIHTCs Sources $ 10,500 Res Construction $ 6,627 Bank Loan X 1.3 $ 11,430 Equity $ 13,650 Credit Basis $ 18,057 Total X .09 Credit Rate $ 1,229 Maximum Annual LIHTC

Closing the Financing Gap • Affordable housing faces challenges attracting capital – debt and equity • Amount of capital to a project is a function of the benefits received by those providers • Public financing tools enhance benefits or reduce risks, resulting in more capital to projects • LIHTCs are one of the most effective public tools to encourage investment into affordable housing 21

For more information Jeff Jewell, Director National Development Council New Braunfels, TX (830) 515-9509 jjewell@ndconline.org www.ndconline.org Atmosphere Studios Salt Lake City, Utah 22