Lihtc Property Management Handbook
Lihtc Property Management Handbook – The LIHTC program was established as part of the Tax Reform Act of 1986 and is commonly known as section 42, the applicable section of the Internal Revenue Code (IRC). The LIHTC program provides tax incentives to encourage individual and corporate investors to invest in the development, acquisition, and rehabilitation of affordable rental housing.
The LIHTC is an indirect federal subsidy that finances affordable housing. This allows investors to claim tax credits on their federal income tax returns. The tax credit is calculated as a percentage of the costs incurred in developing affordable home ownership and is claimed annually over a 10-year period. some investors
Lihtc Property Management Handbook
The capital raised with the LIHTCs can be used for newly constructed and substantially rehabilitated affordable rental housing for low-income households, and for the acquisition of such properties in buyout/rehab deals. LIHTCs provide equity equal to the present value of 30 percent (referred to in this report as the 4 percent credit) or 70 percent (referred to as the 9 percent credit) of the eligible costs of a low-income housing project, depending in part on whether tax-exempt bonds are used to finance the project.
Q&a: How Do We Account For Unborn Children?
To qualify for the credit, a project must meet the requirements of a qualified low-income project. Project sponsors/developers (project sponsors) must set aside at least 40 percent of units for renters earning no more than 60 percent of the area median income (the 40/60 test)
20 percent of units for renters earning at or below 50 percent of the area median income (the 20/50 test).
These units are subject to rent restrictions such that the maximum allowable gross rent, including an allowance for utilities, must be less than 30 percent of
State screening procedures for tax credit awards often encourage project sponsors to provide more than the minimum number of affordable units and more than the minimum level of affordability. Because these credits are available only for affordable rental units, many applications designate 100 percent of the units in properties as affordable and reserve some units for renters earning well below 50 percent of the area median income.
Fundamentals Of Low Income Housing Tax Credit (lihtc) Management Certification
The LIHTC program works as follows. The Internal Revenue Service (IRS) allocates federal tax credits to state Housing Credit Agencies (HCAs) based on the population of each state. For the 9 percent credits, project sponsors (who have general partner interests in the developments’ ultimate ownership entities) of proposed low-income housing projects apply through a competitive process for awards state HCA tax credits. State agencies award LIHTC for qualified affordable housing projects based on point systems that reflect each state’s priorities for the desired type, location, and ownership of affordable housing. The project sponsors use the tax credits to raise capital from private investors. Equity investment reduces the debt burden on the tax credit property, making it financially feasible to offer lower and more affordable rents. Institutional investors, such as banks, often use tax credits and real estate losses to reduce their federal tax liabilities.
Once a property is placed in service, tax credits are claimed annually over a 10-year period; however, the project must meet specific low-income housing compliance standards for the entire 15-year compliance period. If the project does not comply with the LIHTC program rules during the 15-year compliance period, the IRS can recover the credits previously claimed. The property must remain affordable for at least 30 years; however, after the initial 15-year compliance period ends, the IRS cannot recover the tax credits.
Investors can exit the partnership at any time and not face recapture of tax credits as long as the property continues to operate as affordable housing through the end of year 15. Most of the time, investors exit between year 11 and on the 16th, having collected the tax credits for 10 years or more.
To limit investors’ exposure to financial risk. This structure allows the benefits of tax credits and real estate losses to be passed on to investors.
Low Income Housing Tax Credit
Investment in a LIHTC-funded project occurs in one of two ways: through a direct investment in a single project through a partnership, as shown in Figure 1, or through an investment in an LIHTC syndicated equity fund, as shown in figure 2 .
Figure 1 illustrates the typical legal structure for a direct investment in a LIHTC-funded project. The project sponsor/developer applies to a state HCA for an LIHTC allocation for a specific affordable housing project. If approved, the tax credits are allocated to the affordable housing project. Tax credits provide an incentive for equity investors. The project sponsor offers investors an ownership interest in the affordable housing project. By making a direct investment, an investor acquires all or part of 99.99 percent ownership of the company. Although he has an ownership interest, the investor has no management authority. The direct investor receives tax credits and real estate losses through the partnership in proportion to the investor’s ownership interest in the project.
Figure 2 illustrates the typical legal structure for an investment in a LIHTC syndicated equity fund. The syndicate organizes one or more investors and forms an investment fund, and the fund invests in one or more affordable housing projects. Thus, a two-tier partnership structure is created with investor funds combining into the top-tier investment company and joint-venture funds funding multiple lower-tier holding companies. Investors own 99.99 percent ownership of the investment fund; the syndicator, as a general partner or managing member, owns 0.01 percent ownership.
Figure 2 illustrates investment by the investment fund in three lower-tier real estate associations (AHP 1, AHP 2, and AHP 3 projects). Each ownership partnership receives an allocation of LIHTC from a state HCA and then uses those credits to attract investors.
New York City Department Of Housing Preservation And Development. Low Income Housing Tax Credit Program. Compliance Manual
As a result of its investment, the fund holds 99.99 percent ownership of each project; the developer/general partner of each property has 0.01 percent ownership. The tax credits flow from the lower-tier companies to the higher-tier company, where investors share in the credits based on their proportion of ownership in the fund.
Equity funds offer LIHTC investors lower barriers to entry because syndicates often set lower minimum investment amounts than the minimum required for direct investments. In multi-investor funds, minimum investments start at around $1 million, while regional funds focused on community banks and smaller corporations may have lower investment minimums. Across the country, national, state and regional LIHTC funds are available to investors.
Equity funds offer investors different risk/reward profiles in terms of pooled investments, portfolio diversity, the syndicator’s expertise in finding and financing quality projects, and lower administrative costs. Section IV discusses the risks of investments in LIHTC.
Tax Reform Act of 1986, Public Law 99-514, 100 Stat 2085, HR 3838, 99th Congress, 2nd Session, October 22, 1986. For LIHTC provisions, see UL26 IRC 42. Because LIHTCs are known Commonly referred to as housing tax credits or tax credits, these terms are used interchangeably in this report. The LIHTC program became permanent under the Omnibus Budget Reconciliation Act of 1993.
I. What Is The Lihtc?
, Novogradac & Co., Sections 2.1 and 2.17, 2011. The number of taxpayers who can benefit from LIHTCs is limited by passive activity and alternative minimum tax rules. Widely owned corporations are not subject to passive loss rules and, as such, are, according to the author, ideal investors in low-income housing tax credit projects.
Return on investment in LIHTC may include (1) cash flow from LIHTC, (2) periodic distributions of funds from operations, (3) distribution upon sale of the project, and (4) periodic allocations of profits and losses from the project, including deductions for depreciation, operating gains or losses, and gains or losses attributed to a capital event. See Wayne H. Hykan, “Pricing the Equity of a Tax Credit Project,” Journal of Affordable Housing and Community Development Law, vol. 5, no. 4, 1996.
For buildings placed in service after 2007, LIHTCs can be used to offset both ordinary taxes and the alternative minimum tax. See 26 IRC 38(c)(4).
In New York City, a special 25/60 test is used instead of the 40/60 test. See 26 IRC 42(g)(4) and 142(d)(6).
Accessing Opportunity: Recommendations For Marketing And Tenant Selection In Lihtc And Other Housing Programs (megan Haberle, Ebony Gayles, & Philip Tegeler, December 2012)
Calculating rents for tax credit units is complicated because the imputed number of people per bedroom (ie, 1.5 people) and the number of bedrooms in a unit are included. For more information on income limits, see www. huduser.org/portal/datasets/il.html. For LIHTC calculators, see www.novoco.com/products/rentincome.php and www. danter.com/TAXCREDIT/getrents.HTML.
For more information on default and possible recovery of tax credits, see 26 IRC 42(j). There are no consequences for an original investor after the 15-year compliance period; however, the property owner is subject to legal action by the HCA in the event of noncompliance issues.
Under federal income tax law, LIHTCs can only be claimed by owners who have the benefits and burdens of the property. This includes all partnerships (LPs, LLCs, and other equity investors) in the properties. For example, if a bank has a 99.99 percent interest in a partnership, it receives 99.99 percent of tax credits and real estate losses, including but not limited to depreciation and interest expense.
One such example is the National Equity Fund, a syndicate of LIHTC and other tax credits. For more information, see www.nefinc.org. Throughout the country, there are
Lihtc Compliance Processing
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