Novogradac LIHTC 101: The Basics Webinar Copyright 2016 Novogradac & Company LLP

Transcription

1 Wayne Michael, CPA, NPCC, HCCP Director of Eternal Education Novogradac & Company LLP Tom Schneider, CPA Manager Novogradac & Company LLP 10-minute break 1:00 ET 4:00 ET or 1

2 You should be able to hear through your computer speakers or QUESTIONS PANE Need help with audio or other technical support? Questions about webinar content for the panelists? Use the Questions Pane! AUDIO If you prefer to listen on the phone, select Use Telephone, in the audio pane dial: Phone number Access code RECORDING You will receive an with information to access the recording of this webinar within 2 business days. The recording will be available for your personal viewing for one year! HANDOUT CERTIFICATE OF ATTENDANCE POST-WEBINAR SURVEY If you haven t yet downloaded the handout, the link can be found in the Handouts Pane. Log in individually (or use group sign-in sheet) for the entire program and respond to the polling questions Within 5 business days! Will take two minutes to complete Appears as soon as you eit the webinar ADVISORY: This live webinar (and its recording) are available for viewing only to individuals who ve purchased a registration. Although individuals within an organization may choose to watch the webinar in a group, each attendee must be a paid registrant. Paid registrants must not share the link with others. To order additional registrations, go to or contact events@novoco.com. wayne.michael@novoco.com or tom.schneider@novoco.com 2

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4 Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture or 4

5 10 years Ta Liability Investor Low-Income Housing Ta Credit Partnership LLC S-Corp DEBT Equity Ta Liability Developer/ Owner Total Project Costs Participation in the LIHTC program enables developers to access capital from investors in echange for delivery of ta credits. Low-income households are able to rent apartment units at limited rental rates. Income limits Rent limits Suitability for occupancy Why would the developer of a residential rental property most likely participate in the low-income housing ta credit program? a. To get more rental revenue b. To reduce the amount of debt financing for the property c. To significantly lower the developer s federal ta liability wayne.michael@novoco.com or tom.schneider@novoco.com 5

6 Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture 10.8mil Louisiana pop.: 2016 Appro 4.6 mil 2.35 Appro 10.8 mil 10 = Each state (and U.S. territory) is allocated a pool of per capita. This is the state s 9% credit pool. See IRC 42(h)(3) wayne.michael@novoco.com or tom.schneider@novoco.com 6

7 2.69mil Montana pop.: 2016 Appro 1mil 2.35 Appro 2.35mil 2.69mil Small-pop. state min. 10 = See IRC 42(h)(3) 2.69mil 10 = Source: Calculated by Novogradac & Company LLP from U.S. Census population figures ( ) and IRS Notices and Revenue Procedures ( ) See IRC 42(h)(3) wayne.michael@novoco.com or tom.schneider@novoco.com 7

8 16.3mil Developer/ Owner Private Activity Ta-Eempt Bonds 10.8mil Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil Total Project Costs A B Eligible basis 6mil 4mil Although a depreciable fied asset, commercial property is specifically ecluded from eligible basis. Off-site improvements are generally ecluded from eligible basis. wayne.michael@novoco.com or tom.schneider@novoco.com 8

9 10.8mil Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil Total Project Costs A B Eligible basis 6mil 4mil See IRC 42(d)(5)(B) QCT = DDA 1. Projects located in Difficult Development Areas (DDAs), which are areas that have high construction, land, and utility costs relative to area median gross income. IRC 42(d)(5)(B)(iii) 2. Projects located in Qualified Census Tracts (QCTs), which are census tracts in which 50 percent or more of the household have an income which is less than 60 percent of the area median income for such year or which has a poverty rate of at least 25 percent. IRC 42(d)(5)(B)(ii) This map depicts Washington, DC neighborhoods around the White House. The census tracts in green have been identified by HUD as being QCTs for The orange triangles represent eisting LIHTC properties. NOTE: the 30% basis boost is NOT based on whether they are in a QCT now but whether they were in a QCT when the owners had originally applied for credits. wayne.michael@novoco.com or tom.schneider@novoco.com 9

10 2,819 Zip Code Tabulation Areas (ZCTAs) in 311 metro areas among 45 states effective July 1, 2016 Only 35 Metro DDAs among a handful of states in 2015 See IRC 42(d)(5)(B) DDA See IRC 42(d)(5)(B) DDA wayne.michael@novoco.com or tom.schneider@novoco.com 10

11 To view the 2016 DDA-QCT webinar, go to See IRC 42(d)(5)(B) DDA 10.8mil Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil Total Project Costs A B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) 6mil 130% 7.8mil 4mil 130% 5.2mil 3. 9% projects not already in a DDA or QCT that the state allocating agency chooses to award up to a 30% basis boost so that the project may be financially feasible. Housing and Economic Recovery Act of 2008 (HERA) See IRC 42(d)(5)(B) wayne.michael@novoco.com or tom.schneider@novoco.com 11

12 A ta credit property is located in both a DDA and a QCT. By what percentage can the eligible basis be increased? a. 30% b. 60% c. Neither Building X Scenario No. 1 Scenario No. 2 A B Unit Fraction: Floor-Space Fraction: 50% 35% Unit Fraction: Applicable 50% fraction Floor-Space Fraction: 65% Lesser Low-Income Units Market-Rate Units Lesser See IRC 42(c)(1) wayne.michael@novoco.com or tom.schneider@novoco.com 12

13 10.8mil Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil 25% Market- Rate Units Total Project Costs A B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis 6mil 130% 7.8mil 75% 5.85mil 4mil 130% 5.2mil 100% 5.2mil See IRC 42(c)(1) An LIHTC building with an eligible basis of 1 million has ten residential units of which nine are LIHTC qualified. The total square footage of the building s residential units is 10,000 sq. ft. The total square footage of the LIHTC units is 9,200 sq. ft. What is the building s qualified basis? a. 90% b. 92% c. 900,000 d. 920,000 e. 1,000,000 wayne.michael@novoco.com or tom.schneider@novoco.com 13

14 10.8mil Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil Total Project Costs A B Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis 6mil 130% 7.8mil 75% 5.85mil 4mil 130% 5.2mil 100% 5.2mil Annual ta credits Ten years Total ta credits See IRC 42(b) 70% present value credit 10.8mil Total Project Costs Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil A OCT % B The 70% PV credit percentage selected by Treasury is one that Treasury calculates would generate total ta credits having a present value of 70% of qualified basis. PV of Total Credits = 70% QB JUL 11 Eligible basis 7.68% DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Annual ta credits Ten years Total ta credits 6mil 130% 7.8mil 75% 4mil 130% 5.2mil 100% 5.85mil 449k mil 5.2mil * * 389k mil See IRC 42(b) 4.1mil 8.38mil wayne.michael@novoco.com or tom.schneider@novoco.com 14

15 70% present value credit 10.8mil Total Project Costs Ineligible costs: 800k Land Marketing P ship org. costs Commercial property Off-site improvements* Eligible Basis = 10mil A OCT % B As of December 2015 ta law, non-bond-financed (9%) deals are able to utilize 9% if the 70% PV rate is less than 9%. The 9% floor was originally instituted in July of 2008 as part of the Housing and Economic Recovery Act (HERA), but it epired and was renewed once prior to being made permanent in December JUL 11 Eligible basis 7.68% DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Annual ta credits Ten years Total ta credits 6mil 130% 7.8mil 75% 5.85mil 527k mil 4mil 130% 5.2mil 100% 5.2mil 468k mil See IRC 42(b) 9% deals ( competitive/per-capita credits ) If an ownership team pursues private activity bonds instead of per-capita ( 9% ) credits, they will obtain the benefit of subsidized bond debt, but their credit rate is not 9%. Their rate will be the 30% PV rate published by Treasury, which has hovered around 3.20% over the past 24 months. 16.3mil QB 7.35% to 9.27% = QB 3.15% to 3.97% = Developer/ Owner Private Activity Ta-Eempt Bonds 4% deals wayne.michael@novoco.com or tom.schneider@novoco.com 15

16 What is the official name of the low-income housing ta credit based on states populations as defined in the internal revenue code? a. The 9% credit b. The 70% present value credit c. The competitive credit Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture or 16

17 LP GP Ta Liability Investor Asset Management Syndicator GP Fund LP Upper Tier Lower Tier Developer/ Owner In a tiered structure, investor corporations contribute capital to a fund managed by a syndicator. The syndicator manages the investor s capital. The syndicator receives a fee. The developer/owner receives partnership management fees as well as a developer fee. In a multi-tiered partnership structure, which entity underwrites the risk of the properties for the investor(s)? a. The developer b. The syndicator c. The lower-tier limited partnership d. The IRS wayne.michael@novoco.com or tom.schneider@novoco.com 17

18 A couple of factors affecting credit pricing: 1. Overall demand for credits in the market 2. Timing of capital contributions Syndicator Ta Liability Investor Fund Developer/ Owner 99.9%+ of the ta credits will flow to the investor(s). The price per credit is the number of cents that the developer will receive in equity contributions in echange for producing one dollar in ta credits for the investor(s). This chart reflects pricing trends from Novogradac sources. The circles within the vertical lines represent the average credit price for each month. or 18

19 10.8 Mil 8.46M Equity 78% Total Project Costs A B At a credit price of 0.85, 9.95 million in ta credits would bring in capital contributions of 8.46 million, which would finance approimately 78% of this 10.8 million project. (Note that if the applicable fraction for Building A were greater than 75%, more ta credits and more equity would be generated.) Eligible basis DDA/QCT basis boost Eligible basis (adjusted) Applicable fraction Qualified basis Annual ta credits Ten years Total ta credits 6mil 130% 7.8mil 75% 5.85mil 527k mil 4mil 130% 5.2mil 100% 5.2mil 468k mil Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture wayne.michael@novoco.com or tom.schneider@novoco.com 19

20 mil See IRC 42(m)(1) Qualified Allocation Plan QAP IRC 42(m) Responsibilities of housing credit agencies. (1) Plans for allocation of credit among projects. (B) Qualified allocation plan (ii) gives preference among selected projects to (I) projects serving the lowest income tenants, (II) projects obligated to serve qualified tenants for the longest periods, and (III) projects which are located in qualified census tracts (C) Certain selection criteria must be used. The selection criteria set forth in a qualified allocation plan must include (i) project location, (ii) housing needs characteristics, (iii) project characteristics, including whether the project includes the use of eisting housing as part of a community revitalization plan, (iv) sponsor characteristics, (v) tenant populations with special housing needs, (vi) public housing waiting lists, (vii) tenant populations of individuals with children, (viii) projects intended for eventual tenant ownership, (i) the energy efficiency of the project, and () the historic nature of the project. (2) Credit allocated to building not to eceed amount necessary to assure project feasibility. Iowa 2013 Qualified Allocation Plan (90 pages) 10% 5% mil 10% of eisting affordable housing 15% 10% 10% The Iowa 2013 qualified allocation plan allocated credits in five different tiers with the remainder being designated as part of the general pool. See IRC 42(m)(1) wayne.michael@novoco.com or tom.schneider@novoco.com 20

21 Iowa 2013 Qualified Allocation Plan (90 pages) Other items of note: mil Credit cap for single property: Credit cap for single developer: Vacancy rates: Vacancy rates for projects w/ 25 units: Debt Service Coverage Ratio for first 15 years: Reserves Operating: Replacement: Developer fees new construction First 36 units: Remaining units: Zoning Minimum construction thresholds Compliance, review, inspections See IRC 42(m)(1) 5.5 Mil 3.8M Equity Total Project Costs 70% 6.92mil Total project costs = 5.5 Mil A B Let s set the total project costs at 5.5 million and set the applicable State fraction Allocating to Agency be 100% so our eample from here on out will generate a nice, round 4.5 million in ta credits that we ll use to show how credits are earned and claimed. Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits 2.78 Mil 2.22 Mil 100% 100% 2.78 Mil 2.22 Mil 9% 250k Mil 4.5 Mil 9% 200k 10 2 Mil wayne.michael@novoco.com or tom.schneider@novoco.com 21

22 Applicants must persuade the state allocating agency that they ve lined up a solid team of players to carry out the project development. The state agency may reserve the amount of credits requested or it may reserve fewer than requested. Reservation Lenders 6.92mil Investor(s) Application Contractors Developer/ Owner Architect Property Management Company Credit amount for a building will be zero unless a comprehensive market study of the housing needs of low-income individuals in the area to be served by the project is conducted before the credit allocation is made and at the developer's epense by a disinterested party who is approved by such agency IRC 42(m)(1)(A)(iii) See IRC 42(m)(1) Reservation Placed-in-service due date Placed-in-service due date 12 mo. 12/31/12 12/31/13 Carryover 5.3M 12/31/14 12/31/ mil 10% Test Carryover Request Document Developer/ Owner Land counts! 10% = 530k Reasonably Epected Basis (Fied assets at construction completion) The 10% test requires awardees to incur 10% of reasonably epected basis within 12 months of the carryover allocation date. Passing the 10% test allows the partnership to postpone the project placed-in-service date to the end of the second calendar year after the reservation year. See IRC 42(h)(1)(E) wayne.michael@novoco.com or tom.schneider@novoco.com 22

23 Reservation Placed-in-service due date Placed-in-service due date 12 mo. 12/31/12 12/31/13 Carryover 12/31/14 12/31/15 Reservation 5.3M 6.92mil 10% Test See IRC 42(h)(1)(E) Carryover Request Document Developer/ Owner 10% = 530k Reasonably Epected Basis (Fied assets at construction completion) Failing the 10% test means the partnership will NOT be able to postpone the project placed-in-service date and must have placed the project in service at the default date (close of the reservation calendar year). This effectively means the partnership will lose its allocation of credits, which will be returned back to the pool to subsequently allocate to a future applicant. What is the penalty for failing the 10% test? a. The awardee must postpone claiming the ta credits by two years b. The awardee will be able to claim only 90% of the ta credits c. The awardee will forfeit the ability to place the property in service 2 years after the end of the reservation year, which means it will effectively lose its reservation of credits d. The awardee must postpone claiming the credits by 12 months wayne.michael@novoco.com or tom.schneider@novoco.com 23

24 1. Upon completion of the buildings, a city inspector issues certificates of occupancy 2. The property manager leases units to tenants 3. The owner submits a placed-in-service package to the state allocating agency 4. Upon approving the placed-in-service package, the state allocating agency will issue a Form 8609 to the owner for each residential rental building Reservation 6.92mil Form Form Certificate of Occupancy Certificate of Occupancy Placed-In- Service Package Developer/ Owner Property Manager Low-Income Households Certificates of occupancy Loan documents Architectural agreements Permits Final Cost Certification Lots of other documents (for buildings placed in service after 12/31/07) Offset AMT Here s an eample of how the top Taportion of the Form 8609 Ta for our Building A would show the amount of Return Return qualified basis that would produce 250,000 in credits each year. 10 = Ta Liability Investor 6.92mil XX XX 2013 Fund 250, Form Form Developer/ Owner Property Manager 2,777, Form 8609 wayne.michael@novoco.com or tom.schneider@novoco.com 24

25 (for buildings placed in service after 12/31/07) Offset AMT Ta Return 10 = Ta Liability Investor Fund 6.92mil Form Form Certificate of Occupancy Certificate of Occupancy Placed-In- Service Package Regulatory Agreement Developer/ Owner 1. The state allocating agency and the owner will enter into a regulatory Property Manager agreement binding the owner to operate the property in accordance with IRC 2. The owner reviews the Form Loan 8609 documents (as well as completes and signs the bottom portion of the Form, Architectural which we ll agreements discuss later) before sending to the Philadelphia Permits office of the IRS 3. Since the buildings are in service Final Cost and the Certification units are being lease to qualified, low-income households at reduced rental rates, the properties will now be claiming credits 99%-plus of which will be Low-Income claimed Households on the investor s ta returns Timeline of a Typical 9% Deal Formation of Partnership Line up attorneys, architect, contractor, accountants, lenders, etc. Preparation of forecast to woo investors Market study Apply for ta credits Receive reservation of credits Pass a 10% Test Investor/Fund enters somewhere here Lease up Finish construction Final Cost Certification Placed in Service Package Regulatory Agreement Reception of 8609s Yearly audits and ta returns wayne.michael@novoco.com or tom.schneider@novoco.com 25

26 Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture Construction Method Form 8609 New Constr. 9% new construction Acq/Rehab 9% acq/rehab Form 8609 All deals that are financed without ta-eempt bonds that have been awarded credits from the state s per-capita pool are referred to as either 9% new construction or 9% acq/rehab deals. According to of the Internal Revenue Code, a building s acquisition and rehabilitation costs are considered their own respective buildings, which mean they have separate ta credit calculations and separate Forms wayne.michael@novoco.com or tom.schneider@novoco.com 26

27 Acq/Rehab Quirk No. 1 Ta Credit Percentages 9% new construction New Constr. Acq/Rehab Acq Rehab 9% 3.XX% 9% 9% acq/rehab wayne.michael@novoco.com or tom.schneider@novoco.com 27

28 Acq/Rehab Quirk No. 2 30% Boost to Eligible Basis New Constr. 1. DDA 2. QCT 3. State Award Acq/Rehab Acq NO Rehab 1. DDA 2. QCT 3. State Award State Allocating Agency QCT = DDA Newly constructed buildings and rehab buildings qualify for the 30% boost to eligible basis if the project is in a DDA or QCT at the time of application. (Recall that 9% deals could receive up to the 30% boost if the state allocating agency deems it necessary.) Acquisition buildings do NOT qualify for a 30% boost to eligible basis even if the project is in a DDA or QCT. New Constr. Acq/Rehab 9% new construction 9% acq/rehab Summary Building Type 30% Boost to Eligible Basis Ta Credit Percentage New or Rehab - not federally subsidized Available if in DDA or QCT; or can be awarded by state allocating agency As of Dec law, the 9% floor has been permanently etended for properties not using ta-eempt bonds; unless the published rate were to again eceed 9%, the 70% PV rate will no longer apply to new properties; however, annual credits for pre-2008 properties would have been based on the 70% PV rate Eisting (or Acquisition ) Boost is unavailable to acquisition buildings 30% PV rate for month the acquisition is placed in service wayne.michael@novoco.com or tom.schneider@novoco.com 28

29 Now assume our eample is a 9% acq/rehab property. The acquisition buildings were placed in service in August Rehab on the two buildings was completed in January 3.16% February 3.17% March 3.18% April 3.19% May 3.18% June 3.17% July 3.20% August 3.24% September 3.24% October 3.27% November 3.25% December 3.25% Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits Form 8609 Form 8609 Acq Rehab Acq Rehab A A B B 1.25 Mil 1.53 Mil 100% 100% 1.25 Mil 1.53 Mil 3.24% 40.5k 10 9% 138k k 1.38 Mil Form 8609 Form Mil 1.22 Mil 100% 100% 1.00 Mil 1.22 Mil 3.24% 32.4k 10 9% 110k k 1.10 Mil Now assume our eample is a 9% acq/rehab property. The acquisition buildings were placed in service in August Rehab on the two buildings was completed in Assume now the property was in a QCT Acq Rehab Acq Rehab A A B B Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits 1.25 Mil 1.99 Mil 100% 100% 1.25 Mil 1.99 Mil 3.24% 40.5k 9% 179k k 1.79 Mil 1.00 Mil 1.59 Mil 100% 100% 1.00 Mil 1.59 Mil 3.24% 32.4k 10 9% 143k k 1.43 Mil wayne.michael@novoco.com or tom.schneider@novoco.com 29

30 A colleague says he just finished a "9% acq/rehab" property. What can you properly infer about this property s buildings based on the label your colleague gave it? a. The property was NOT financed with ta-eempt bonds b. The qualified basis of the acquisition "buildings" will be multiplied by 9% c. Both a. and b. are correct d. Both a. and b. are incorrect Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture wayne.michael@novoco.com or tom.schneider@novoco.com 30

31 Two components of property compliance: 1) Households Are they LIHTC qualified? 2) Units What s the rent level? Suitability for occupancy? Percentage Ta Liability Investor of total units set aside as low income? 6.92mil Reservation % A B Property Manager Low-Income Households As a condition of claiming ANY credits, a partnership must elect and abide by one of the two minimum set-asides identified in the internal revenue code. 6.92mil Reservation % Property Manager Minimum Set-Aside: Set aside at least 20% of units for households with incomes at or below 50% of area median income OR Set aside at least 40% of units for households with incomes at or below 60% of area median income See IRC 42(g)(1) Low-Income Households wayne.michael@novoco.com or tom.schneider@novoco.com 31

32 Form 8609 MAX 6.92mil 1/2 40% 40% 50k Median 40 at 60 % UNITS INCOME (% of AMI) Selecting the 40-at-60 minimum set-aside on Form 8609 (it would have been determined in the planning and application phase previously, but this is where it is formally elected) opens up more potential renters to the property (and provides for higher rent limits since rent limits are based on income limits and 60% income limits are higher than 50% income limits. 30k 25k 60% 50% MIN Area Incomes 1/2 Form 8609 MAX 6.92mil 1/2 70% 10% 50k Median 40 at 60 % UNITS INCOME (% of AMI) 30k 25k The default for meeting the minimum set-aside is on a building-by-building basis; however, partnership may elect to meet the minimum set-aside as a property to create more fleibility in meeting the set-aside as well as in transferring tenants between buildings without having to certify their income as if they are a new household. 60% 50% MIN Area Incomes 1/2 wayne.michael@novoco.com or tom.schneider@novoco.com 32

33 No matter what size household actually occupies the units, ALL twobedroom LIHTC units in Cedar Rapids, Iowa operating under the 40-at- 60 minimum set-aside and subject to the 2016 HUD-published rent limits (actually 2015 limits were higher, so eisting projects will still be held harmless at 2015 levels) will have a rent limit of 1,054/mo., which is 30% of the imputed income for a three-person household. (Rent limits are based on imputed household sizes of 1.5 persons per bedroom.) 6.92mil 2016 Rent Limits: (based on 2015 placed-in-service) HUD 2 Bedroom Unit Cedar Rapids, Iowa 40-at-60 minimum set-aside (30% of imputed income for unit size) Income limits for actual households: 3-person household 42,180 30% 1,054/mo (12,654/yr) Imputed Household Size = 1.5 No. of BDR Imputed Income Rent Limit True or False: The rent limit for a four-person household will be higher than for a two-person household for the same sized unit within the same building. a. TRUE b. FALSE The actual size of households occupying the units is irrelevant when determining rent limits. wayne.michael@novoco.com or tom.schneider@novoco.com 33

34 Ta Return 10 = Ta Liability Investor Search earning claiming LIHTC 6.92mil on to see a video recap of this section! Developer/ Owner Ta credits are earned over a 15-year compliance period but claimed over a 10-year ta credit period (IRC 42(f)(1)). This means that through Year 10, fully one third of credits claimed each year will not have yet been earned. ⅓ Property Manager ⅔ Ta Credit Period Accelerated Credits Year See IRC 42(f)(2)(B) - Disallowed 1st year credit allowed in 11th year Ta Return Form = Income Rent Physical Condition Ta Liability Investor 6.92mil Developer/ Owner Property Manager Discovery of noncompliance by the state compliance monitor will lead to the state issuing a Form 8823, which will be sent to the IRS, which MAY lead to credit recapture, which would UNDOUBTEDLY lead to the developer having to pay the investor to make up for lost credits Year wayne.michael@novoco.com or tom.schneider@novoco.com 34

35 Ta Return 10 = Ta Liability Investor Assume the state compliance monitor discovers noncompliance that first occurs in Year 4. If it truly first occurred in Year 6.92mil 4 (and not prior), two thirds of the credits claimed in Years 1-3 will have been truly earned and would not be in danger of recapture. The accelerated Developer/ portion of the Owner credits claimed in Years 1-3 (405k) would be in danger of recapture proportionate to the reduction in qualified basis. The same proportion of currentyear credits (of the full amount, not just of the 1/3, since nothing had been earned) would also not be claimed. Property Manager Disallowance of current-year credits 210k 105k 405K Claimed credits 1,215,000 Earned credits - 810,000 Accelerated credits 405,000 In danger of disallowance because they haven t been earned yet Year Ta Return 10 = Ta Liability Investor Disallowance of current-year credits 6.92mil Developer/ Owner As the ta credit period approaches Year 10, the greatest amount of credits are in danger of being recaptured. If a violation of LIHTC rules first occurs in Year 10, now million in credits from Years 1 through 9 would have been claimed prior to being earned as well as the credits in Year 10 itself. Property Manager Million 210k 105k Year wayne.michael@novoco.com or tom.schneider@novoco.com 35

36 Ta Return 10 = Ta Liability Investor 6.92mil One fifth of the accelerated credits now becomes earned in each of Developer/ the five years of Owner the compliance period after Year 10. If the noncompliance first occurs in Year 14, only two-fifteenths (600k) of the credits claimed will still not have been earned. Therefore, only 600k in credits (proportionate to the drop in qualified basis) will be in danger of recapture. Property Manager 600K 210k Year During what year of the compliance period would the highest amount of credits be in danger of recapture? a. Year 2 b. Year 9 c. Year 15 wayne.michael@novoco.com or tom.schneider@novoco.com 36

37 Outline Affordable Housing Overview How Ta Credits Are Calculated Typical Ownership Structure Development Timeline Acq/Rehab Deals Program Rules and Avoiding Recapture Upcoming LIHTC Webinars, Webinar Recordings and on-demand courses: AUG 18 Principles of LIHTC Eligible Basis SEP 8 Reviewing Lower-Tier LIHTC Ta Returns for Non-CPAs SEP 16 Alternative Utility Allowances Recording Recording Recording Recording Recording 2016 HUD Rent and Income Limits and Your Ta Credit Property Initial Lease Up and Maimizing First-Year Credits Year 15 Acq/Rehab Basics Developer-Syndicator Relationship On-Demand LIHTC 101: The Basics On-Demand Private Activity Bond and 4% LIHTC Basics wayne.michael@novoco.com or tom.schneider@novoco.com 37