Tax Credits 101 Basic Training and Case Studies - Roy Lowenstein - Ashleigh Finke
Key elements of the tax credit program Finances housing affordable and rented to households under 60% of area median income 30-year affordability commitment in most cases New construction & rehabilitation, urban & rural, for families, seniors, people with special needs Involves private sector investors and lenders; investors buy the credits as a tax shelter Created by section 42 of 1986 tax code A federal program largely delegated to state housing agencies to administer: in Ohio, the Ohio Housing Finance Agency (OHFA)
How are credits calculated and used? Tax credits are computed based on the cost of construction and associated soft costs, in tax terminology, the depreciable costs. Multiply this total by 9%, boosted by 30% if eligible and then taken each year for 10 years The owner can also take various deductions This stream of credits and deductions is sold by developers to investors in exchange for the investors taking a 99.9% ownership share. Pricing is currently at an all-time high
What does OHFA do? Adopt and enforce Qualified Allocation Plan (QAP) consistent with section 42 IRC Accept, review, rank and award LIHTC applications once a year; administer each funding agreement, carryover, cost certification Underwriting at 4 stages Compliance monitoring long-term Administer many other funding programs; some (HDAP, HDL) are used in LIHTC projects
What is specific to Ohio? OHFA has a highly interactive process to create its QAP, some priorities change year to year 2017 policy goals favor: Balanced distribution by population served (families, seniors, special needs), geographic regions of Ohio, urban/rural, new construction/rehab/historic Collaboration with local partners; political support Redevelopment of vacant properties High income/high opportunity areas, good schools Locations near other real estate development Green construction (energy efficient, cutting edge tech)
What s specific to Ohio? 2017 policy goals favor: Proximity to amenities Accessibility, visitability, universal design Units set aside for 30% AMI affordability Leveraging OHFA resources Cost reasonableness Innovative partnerships Existing subsidized housing with high rehab needs Projects prioritized by urban Mayors; in rural areas by Rural Development
What can you build? Apartment complexes for families Elevator buildings or cottages for seniors Single-family homes for families Supportive housing for individuals with special needs (homeless, mental disabilities) Affordable housing can be combined with market rate housing and/or commercial space, but tax credits only apply to affordable housing
What can you build?
Arthur Place, Delaware, OH 80-unit senior cottage development, built 2008-09; equal mix of 1-BR and 2-BR units Less than $10K/unit in tax credits Financing plan helped by $480K grant from FHLB in addition to OHFA s HDAP loan 10% of units committed at 35% AMI gross rents ($450 and $540), remainder at $585 and $685 Rented up in 4 months!
What can you build?
Taylorsville Place, Taylorsville, KY 24-unit family development in rural county seat with limited affordable housing Mix of accessible ranch units and 2-BR and 3-BR townhouses, all w/garages Lots of brick Used ARRA funding, built 2010-2011 Leased up quickly, but tight operationally
What can you build?
Greenway Senior Housing, Ashtabula, OH 51 senior units in 3-story elevator bldg. All two-bedroom units QCT location on former light-industrial site PIRHL and Buckeye Community Hope Foundation are partners, with PIRHL as developer/builder; Buckeye is general partner, managed by RLJ Financing includes City loan, OHFA HDAP 36 months of pre-development, preconstruction and construction
Greenway Senior Housing Ashtabula, OH
What can you build?
Gates Green, Marietta, OH
Gates Green, Marietta, OH
Gates Green, Marietta, OH
Gates Green, Marietta, OH 20-unit acquisition/rehab of USDA Rural Development 515 complex Most units subsidized; 1-BR rents are $410, 2-BR rents are $460 ARRA funds allowed project to take on no new hard debt Rehab of $58,000/unit
What can you build?
Marion Meadows, Marion, OH 39 homes and clubhouse Conversion to condominiums after 15 years of rental use Single-family homes work well in lowgrowth markets Rent commitments at 35%, 50% & 60% AMI; net rents $300-600, tenants pay all utilities
Development Process: The Development Team Addresses These Areas Financial Project Legal/ Organizational Construction/ Physical Development
Development Process Pre-Development Activities Create a project concept that meets QAP priorities, find the location Discuss with local government & partners Secure site control for sufficient period Pre-development design planning Market study: is there demand for this housing at this price at this location? Possibly survey or other engineering Environmental Phase I Does zoning permit the project?
Development Process Pre-Development Activities Assemble qualified development team Examine financial feasibility What rents will meet the market? What will the project cost to develop and operate? What resources can we anticipate? Can resources cover costs both to develop and operate? Confirm interest by lender and investors
Development Process (continued) Apply for and hopefully receive tax credits (must understand what the QAP will reward) plus grants, loans, etc.; submit 2 nd stage application to OHFA 90 days after award Complete pre-development activities Make Carryover (acquire site, 10% test ) Close on equity and debt financing Construction Lease-up and Operations
Development Team Sponsor/Developer Builder Architect Property Manager Attorney(s) Accountant Syndicator Lender(s)
Sources of Gap Financing HOME CDBG Housing Trust Fund OHFA Development Loan Federal Home Loan Bank AHP Donations of Money or Materials Your Own Money
Risks to Developer Risks Loss of start-up money Public opposition/nimby Project runs over budget (Construction risk) Tax Credits delivered late ( Credit adjuster ) Project loses money operating (Operating deficit guarantees) Tenant problems, marketing Risk Mitigation Limit up-front expenditures; spread the risk Site selection that is good but also smart; Knowledge and skill with local politics Select strong builder, architect; Monitor progress & quality; Bond or Letter of Credit? Strong builder; Under-promise, over-deliver Realistic budget and RESERVES! Experienced manager; Good package of site, design, amenities, market and price
Developer Benefits New housing tangible results; mission Serving selected target populations Choose housing type and design Earn development fees Potential for management fees Potential cash flow Potential ownership of project in 15 years Publicity/enhance reputation in community
Case Studies About OTRCH Mission: To develop and manage resident-centered affordable housing to build inclusive community and benefit low-income residents. Vision: Quality stable housing for all in a socially, racially and economically inclusive community. Formed out of 2 groups that have been developing and managing affordable housing in OTR since 1978 and 1988. State and City Community Housing Development Organization (CHDO) and Community Development Corporation (CDC) 35 staff members
OTRCH 4 th largest property owner in OTR Own 136 properties, 82 buildings Manage 405 apartments Manage 9 Commercial Spaces
OTRCH Resident Demographics Special Needs Renters 7 Supportive Housing Programs 328 Formerly Homeless 40% from Shelter 60% from the Street Income Ranges $0-10,000 50% $10-19,000 25% $20-29,000 17% $30-39,000 2% >$40,000 2% Income Sources Employment 51% Social Security 28% Disability 6% No Income 16%
Building Community is More Than Bricks and Mortar
Resident Engagement Activities
Over-the-Rhine Community Housing Current Development Projects: Cutter Apartments (Scattered Sites in Pendleton): 40 units of existing affordable housing, partnering with Wallick- Hendy to rehabilitate the units, will be complete in 1 week! Morgan Apartments (19-27 West Clifton, 53 East Clifton, 1900 Vine, 1902-1904 Vine, 2 East McMicken): 48 units of affordable housing, 9% LIHTC, Federal Historic Tax Credits, Ohio Housing Finance Agency, City of Cincinnati HOME funding Carrie s Place (Properties on East Clifton, Peete Street, Pleasant and W. 15 th ): 43 units (22 units PSH), 9% LIHTC, Federal Historic Tax Credits, OHFA HDAP
Morgan Apartments Over-the-Rhine Neighborhood Cincinnati, Ohio
Project Team Developers: Over-the-Rhine Community Housing and The Model Group Management Company: Over-the-Rhine Community Housing and Brickstone General Contractor: Model Construction Architect: City Studios Architecture LEED Consultant: SOL Design + Consulting
Project Description 48-unit scattered site project in OTR 10 historic buildings on 6 sites 19-27 West Clifton are occupied and subsidized with a mod-rehab subsidy through CMHA 1900 Vine and 2 East McMicken are occupied and subsidized with a HUD Housing Assistance Payment contract The other 2 buildings (53 East Clifton and 1902-1904 Vine) are vacant historic buildings. Both were formerly affordable housing. Funding: 9% LIHTC, Housing Development Assistance Program (HDAP), Federal Historic Tax Credits, City of Cincinnati CDBG funding
Project Sites
19-27 West Clifton 1902-1904 and 1900 Vine, 2 E. McMicken 53 East Clifton VINE STREET Findlay Market Area
The Properties 19-27 W.CLIFTON 1900 VINE and 2 EAST MCMICKEN
The Properties 1902-1904 VINE 53 E. CLIFTON
Unit Type # of Units Proposed Improvements Studio 1-Bed 2-Bed 3-Bed 4-bed 5-bed 3 Units 13 Units 20 Units 9 Units 2 Unit 1 Unit Interior and exterior renovation of all of the buildings to federal historic standards Enterprise Green Communities certified improvements including new windows, and new Energy Star rated HVAC units, lighting, and appliances and water saving fixtures. New interior finishes, fixtures, cabinetry, and flooring. New energy efficient central heating and cooling systems installed in each unit. Converting 3 units to fully accessible and visitable units.
Loan Type Project Sources Construction Sources Permanent Sources Construction Loan $6,625,099 ($6,625,099) 1 st Mortgage Term Loan $0 $575,000 OHFA CHDO HOME loan $562,500 $625,000 City of Cincinnati CDBG $315,000 $350,000 Deferred Developer Fee $0 $176,480 Tax Credit Equity $276,148 $8,835,045 OHFA Equity Bridge Loan $1,500,000 ($1,500,000) Post Construction Costs $1,462,778 $0 Owner Equity $0 $180,000 Total Sources $10,741,525 $10,741,525
Calculating Tax Credit Equity Credit calculation example $9,477,602 Eligible basis -$1,835,235 Less the historic tax credit =$7,642,367 Net Eligible Basis X 1.3 Increased Basis Boost for QCT =$9,935,077 Total Qualified Eligible Basis X 0.09 Applicable 9% LIHTC Rate = $894,157 Annual LIHTC credit X 10 years = $8,947,157 Total Maximum LIHTC Credit
Project Uses Cost Type Development Costs Acquisition Costs $644,319 Construction Costs $7,335,243 Soft Costs/Professional Fees $674,068 Developer Fee $1,450,000 LIHTC Fees $90,200 Financing Fees $327,376 Reserves $220,319 Total Sources $10,741,525
Income and Rent Targeting All units will have project-based rental subsidy so tenants would only pay 30% of their income on rent and utilities. 5 units will serve people and families with incomes at or below 30% AMI. EX: a two-person household at 30% of AMI would have an annual income of $17,100 or $1,425 per month and would pay no more than $428 a month for rent + utilities (2015 data for Hamilton County, Ohio). 42 units will serve people and families with incomes at or below 60% Area Median Income (AMI). EX: a two-person household at 60% of AMI would have an annual income of $34,200 or $2,850 per month and would pay no more than $855 a month for rent + utilities (2015 data for Hamilton County, Ohio).
Why Develop Morgan Apartments? Rehabilitates 2 vacant and blighted properties Preserving Affordability 19-27 (15 units) West Clifton has not been well maintained and were at risk to market conversion before OTRCH stepped in. They are occupied and have rental subsidy. Keeps 32 units of existing affordable housing with rental subsidy in OTR after from The Community Builders sale of OTR property to 3CDC.
The Impact of LIHTC in OTR North Rhine I and II 99 Units - 1992 Sharp Village - 36 Units - 1998 Sharp Village Annex - 40 Units - 2001 St. Anthony Village 22 Units 2002 Vine St. People s Coop 25 Units - 2003 OTR Revitalization 94Units 2005 Magnolia Heights 98 Units - 2007 North Rhine Heights 65 Units 2012 Losantiville (Elm Street Sr. Housing) - 2014
OTR Changing Demographics
OTR Changing Demographics Some of Greater Cincinnati s priciest homes, per square foot, aren t in the region s toniest addresses Indian Hill, Hyde Park or freshly built suburbs far from downtown. They re in Over-the-Rhine, a neighborhood that 10 years ago had barely any home ownership and a reputation for violent crime and drug dealing. Cincinnati Business Courier April 11, 2014
OTR Sales Prices $219,059 Average List Price of Current Condos Of the 44 new listings for OTR condos in April, 8 were priced above $300 per square foot A recent sale includes a 965 sq ft condo that sold for $321,000; that is $332 per sq ft. $195,398 Average Sale Price This makes some of OTR homes the priciest homes in the region. Cincinnati Business Courier April 11, 2014
Ensuring an Inclusive Neighborhood
Ensuring an Inclusive Neighborhood
Ensuring an Inclusive Neighborhood
Low-Income Housing Tax Credits More Important Now Than Ever to Maintain an Inclusive OTR
Ashleigh Finke, HDFP, LEED AP Director of Real Estate Development afinke@otrch.org 513-381-1171 ext. 114
Questions?