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2 The Goal of this Training The purpose of this training is to provide information for all interested personnel to successfully provide housing under affordable Housing programs by learning to analyze key governing documents. Specifically, we will take a tour of IRS form Zeffert & Associates

Tour of Form 8609 State Agencies State HFA s are used by the IRS to fulfill the following functions: IRS Reg 1.42-17 & -5 Rev.Proc. 2001-52 1. THE HFA allocates the credits.

15, with a per-state minimum of $2,465,000. In 2012, the per capita amount is $2.20, with a minimum of $2,525,000.

Besides requiring compliance with Section 42 program requirements, the state may add its own requirements that the owner agrees to follow by virtue of applying for tax credits.

3 Tour of Form 8609 State Agencies State HFA s are used by the IRS to fulfill the following functions: IRS Reg & -5 Rev.Proc THE HFA allocates the credits. Each year, each state is given a certain amount of credits to distribute (allocate) to developers. This amount is adjusted for inflation each year. For example, in 2011 the per capita amount was $2.15, with a per-state minimum of $2,465,000. In 2012, the per capita amount is $2.20, with a minimum of $2,525,000. The Qualified Allocation Plan (QAP) is the Game Plan that states use to decide who gets credits each year using a scoring system. Besides requiring compliance with Section 42 program requirements, the state may add its own requirements that the owner agrees to follow by virtue of applying for tax credits. Owners may also elect to take on additional requirements in order to get extra points and a higher score. 2. The HFA also monitors for compliance with IRS and state requirements. IRS Form 8609 This form represents the official allocation of credits from the state HFA for each building. Part I Allocation of Credits Completed by Housing Credit Agency only. Subsequent to placing a building in service and completing a cost certification to establish the eligible basis, the state HFA completes the top portion and sends to owner (with instructions). They also submit a copy to the IRS with their annual submission of form IRS Part II First Year Certification Completed by building owner with respect to the first year of the credit period. The owner completes the bottom portion and submits it at the time of the first year tax returns. Rev.Proc The 8609 is now only submitted by the owner once, not annually. Note: updates to the 8609 and its instructions will be posted exclusively here in the future: Zeffert & Associates Page 1

8609 - Part I Helpful Hint: Be sure to tie the physical address (Item A) to the specific BIN (Item E)!

4 Part I Helpful Hint: Be sure to tie the physical address (Item A) to the specific BIN (Item E)! Building Identification Numbers - BIN s IRS Notice Every LIHTC building is defined by a number. A building is usually, but not always, the same as the physical structure. Building Identification Numbers have a specific format: MO MO = the state s postal code (in this case, Missouri ) -14 = the year that the building was allocated credits (in this case, 2014 ) = the remaining 5-numbers are state-specific Helpful Hints: In cases of noncompliance, check maximum qualified basis (Line 3a). Decreased applicable fraction may not result in credit loss. Note: 1a will be blank for bond-related credits. While the Housing and Economic Recovery Act of 2008 made the student rules and the Available Unit Rules the same at LIHTC/bond properties, the $5,000 asset affidavit allowable under the Section 42 rules might not be permissible. Bond Allocations 42 (h)(4) 146 If at least 50% of the aggregate basis for a property (land and building) is financed with tax exempt bonds, the allocation comes from a bond cap, not from the state s LIHTC allocating limit. This make the application/allocation process less competitive or even non-competitive in some states. Zeffert & Associates Page 2

5 Placed-In-Service (PIS) 42 (e)(3)(a) IRS Notice A BIN places in service when it becomes available for its intended purpose. For new construction, the owner provides a cost certification to establish eligible basis once the building is certified for occupancy. The deadline for PIS for a carryover allocation is the end of the 2 nd year after the year of allocation. New Construction getting the Certificates of Occupancy (or substantial completion) often marks the PIS date. Acquisition/Rehab There will be two placed-in-service dates for acq/rehab projects. Acquisition PIS is based on the date the project is purchased (acquired). Rehab PIS is based on an expenditure test. The owner selects a time over a 24-month period when at least the greater of 20% of the adjusted basis or $6,200 per unit is spent. A sufficient eligible basis must have also been achieved. The 1 st state audit of a project will be no later than the end of the second calendar year after the last building in a project is placed in service. Example: The last building is PIS 6/1/12 1 st visit must be no later than 12/31/14 The state will return at least every 3 rd year thereafter. Income Limits and PIS Dates Quiz: Limits 8823 Guide Income/gross rent limits will never go down for an LIHTC property. TRUE or FALSE circle one 2. A project placed in service in the year or earlier may select HERA Special limits if available in the county. The Multi-family Tax Subsidy Program ( MTSP ) LIHTC/bond limits for each county can be found at The LIHTC/bond MTSP income limits used at a project never go down from one year to the next once a specific property is placed in service. New limits must be implemented within 45 days of release. Rural and HERA Special Income Limits Some counties have special limits available to them. These are counties that either: 1. Had their income limits frozen under past HUD hold harmless policies or 2. Are in rural areas that have income limits that are less than the National Non-Metropolitan limit (note: the rural limits are only available to 9% (non-bond-funded) projects). You may use this income limit: If this applies: Last Year s MTSP Limits 1. The published income limits for the project s county went down for the current year. 2. The project was in service prior to the release of the new limits. HERA Special 1. HUD lists this option for the property s county. 2. The project was placed in service in 2008 or earlier. National Non-metro 1. The project isn t funded with tax-exempt bonds. 2. The project is in an area determined by USDA (Rural Development) to be rural. Zeffert & Associates Page 3

Applicable Credit Percentage 42 (b) and (i)(2) 8823 Guide Chapter 9 To convert the qualified basis to a yearly tax credit, we use the applicable credit percentage.

6 Applicable Credit Percentage 42 (b) and (i)(2) 8823 Guide Chapter 9 To convert the qualified basis to a yearly tax credit, we use the applicable credit percentage. The percentage changes and is published by the Treasury Department every month. There are 2 categories of credit percentages: 4 and 9 percent credits (also known as 30 and 70% present-value credits) 4% before HERA (buildings PIS prior to ) Acquisitions Federally subsidized ( below market-rate interest) loans resulted in 4% credits. Examples: tax exempt bonds, HOPE VI, HUD Section 8, 236, RD 515, HOME - with an exception. 4% after HERA (buildings PIS after ) Acquisitions Tax exempt bonds 9% Financing not mentioned above results in 9% credits. HERA Housing & Economic Recovery Act 2008 These are categories of credits. The actual rates change monthly. For example, in July 2008 the 4% credit rate was 3.40%, and the 9% credit rate was 7.93% HERA temporarily set the 9% credit at an actual 9%, or the current rate, whichever is higher. [For buildings placed in service after 7/30/08 until 12/31/13] This percentage locks in during development (no later than the placed in service (P.I.S.) date). 4% Elections 9% Elections Zeffert & Associates Page 4

7 9% HOME and NAHASDA Deals 42 (i)(2)(e) Rev. Rul D. Q6 Under current law (since HERA was passed in 2008), all properties get full 9% credits except acquisitions and bond-financed deals. Prior to HERA, however, a special rule allowed 9% credits to be claimed for HOME and NAHASDA funded BINs that placed in service prior to July 30 th, This rule required that 40% of the units in EACH BUILDING be rented to households below the 50% limit. NOTE: rents are not necessarily based on 50% limits. Example: in two 10-unit buildings, 4 must be rented in each building to people below the 50% limit. Workshop: Completing the Puzzle LIHTC and HOME Vital Note: This is an LIHTC Rule, not a HOME rule. Because of some similarities to HOME rules (such as having 50% setaside units), some managers have tragically allowed the number of very-low units to decrease below 40% in some buildings. HOME units may float, and may require fewer very-low units. If this rule is violated, over half of the credits may disappear, and the 8823 Guide indicates that there is no way to correct the noncompliance Exercise: Based on the following facts, complete the property map on the following page, designating correct unit set-asides: HOME Agreement: 5 HOME units, 20% LOW HOME LIHTC 8609s: 9% LIHTC property, pre-hera project. 100% LIHTC (12 units, 4 buildings). LOW HOME 50% HIGH HOME 60% HIGH HOME 60% Triplex # 1 Triplex # 2 HIGH HOME 60% HIGH HOME 60% Triplex # 3 Triplex # 4 Zeffert & Associates Page 5

8 Nonprofit Set-Aside IRC 42(h)(5) 469(h) 8823 Guide Chapter 22 10% of credits allocated annually must be allocated to non-profit general partners. The GP must materially participate, not simply rubber stamp a for-profit partner s decisions. To do so would be noncompliance reported on form 8823 line 11q. Zeffert & Associates Page 6

9 Part II When calculating the annual tax credits a building will produce, we need to determine how much of the money that went into the building was used for tax credit units. This is called the qualified basis. To get this number, we apply the following formula: [1] Eligible Basis X [2] Applicable Fraction= [3] Qualified Basis The Tax Credit Formula: [1] Eligible Basis or how much the building cost 42 (d) and IRS Reg Guide Chapter 8 The first step in determining the value of the tax credits is establishing how much was spent. This dollar amount is the eligible basis. The acquisition or construction costs (minus) cost of land (minus) cost of federal grants (minus) some soft costs = eligible basis 8609 Line 3b A 130% eligible basis is available if a building is in a Difficult Development Area (DDA) or a Qualified Census Tracts (QCT). A list of these areas can be found at: HERA Housing & Economic Recovery Act 2008 HERA gave states the option of giving the 30% enhancement to any property if they determine that it is necessary to ensure financial viability. [For buildings placed in service after 7/30/08] The Tax Credit Formula: [2] Applicable Fraction or the percentage of the units are LIHTC 42 (c)(1)(b)-(d) Now that we know how much money we have spent (the eligible basis), we must determine how much of that money is going to provide housing to low-income residents. The applicable fraction is the fraction of the residential units that house tax credit households calculated as the LOWER of: The number of residential rental units OR the square footage of the residential rental units. The fraction is figured as follows: The total LIHTC portion of the building The total residential rental portion of the building Notes: Common (non-residential) area is excluded from this calculation. Except for the 1 st and 11 th year credits are claimed, the applicable fraction is based on the units in compliance as of the last day of the year. Zeffert & Associates Page 7

10 [3] Qualified Basis The Tax Credit Formula: or how much of the cost of the building went to LIHTC units Since we now know the eligible basis (the total cost of the building) and the applicable fraction (portion of residential units that are LIHTC) we can determine: the qualified basis. The eligible basis X the applicable fraction= the portion of the building cost that is QUALIFIED for LIHTC benefits. Quiz: Qualified Basis When does the Eligible Basis equal the Qualified Basis? When units are LIHTC so the Applicable Fraction is. Example: Credit Calculations A building has a $1,000,000 eligible basis. It has a 90% applicable fraction and it has a 7.91% credit percentage (and was placed in service before July 2008). $1,000,000 X 90% = $900,000 X 7.91% = $71,190 qualified applicable potential annual tax credit basis credit % From information on the 8609 (eligible and qualified bases), we can calculate the applicable fraction. $1,000,000 X 90% = $900,000 (a x b = c) is mathematically the same as $900,000 $1,000,000 = 90% (c a = b) Therefore Line 8a (qualified basis) Line 7 (eligible basis) =The applicable fraction The Multi-Building Election It is important to distinguish the term project from the terms property or development. Example: All six buildings that are part of the development Lincoln Shores Apartments may or may not be part of the same project. It could be one project - or from two to six, depending on how the 8609 elections were made. Zeffert & Associates Page 8

For Section 42, project is defined by the election made by the owner on 8609 line 8b. There are several important compliance factors related to this important election. Some of them are listed below.

2004-82, Q&A #8 Transfers of households between BINs within the same project (per Line 8b) do not need to be treated as new move-ins.

11 For Section 42, project is defined by the election made by the owner on 8609 line 8b. There are several important compliance factors related to this important election. Some of them are listed below. Multi-Building Detail 1: Unit Transfers 8823 Guide 4-23 &24 Rev. Rul , Q&A #8 Transfers of households between BINs within the same project (per Line 8b) do not need to be treated as new move-ins. The only restriction in the code is that an over-income (over 140% of the current income limit) household is restricted to transfers within the same BIN. Per the IRS, the qualifying paperwork and lease will move with household. Recertifications (if required at the project) are still due on the original move-in anniversary. Multi-Building Detail 2: Recertification 142(d)(3)(A) 42(g)(4) 8823 Guide % LIHTC PROJECTS are exempt from income recertification requirements, per line 8b. Multi-Building Detail 3: Income and Rent Limits 8823 Guide 4-2 Application of HERA held-harmless and HERA Special limits depend on the line 8b election. If all buildings are one project, the limits for the entire project are based on the PIS date of the 1st building. If each building is its own project, the limits are based on the PIS date of each building. Therefore different buildings within a development may have different limits. Multi-Building Detail 4: Minimum Set-Aside 42(g)(1) 8823 Guide Chapter 10 The minimum set-aside is a project rule. If each building is its own project, then the MSA must be met at each building. If each building is part of a multi-building project, then the MSA must be met across the entire project. We will return to the MSA in a later section. Workshop: MSA & Multi-BIN Lincoln Shores has a minimum set-aside of It consists of six single-family homes. Scenario 1: How many units must be LIHTC (minimum) if line 8b is checked YES? Scenario 2: How many units must be LIHTC (minimum) if line 8b is checked NO? Zeffert & Associates Page 9

$42-15 IRS RR 2004-82 8823 Guide Chapter 14& 15 Common opinion: If all buildings are part of a multi-building project (per line 8b), then the applicable fraction and Available Unit Rule must be met$ $across the entire project. Unfortunately, this is false! The applicable fraction and the Available Unit (140%) Rule are always building specific rules, regardless of the line 8b election.$

12 Multi-Building Detail 5: Applicable Fraction and Available Unit Rule 42 (g)(2)(d) & IRS Reg IRS RR Guide Chapter 14& 15 Common opinion: If all buildings are part of a multi-building project (per line 8b), then the applicable fraction and Available Unit Rule must be met across the entire project. Unfortunately, this is false! The applicable fraction and the Available Unit (140%) Rule are always building specific rules, regardless of the line 8b election. Helpful Hint: The following elections are irrevocable. They cannot be changed without a private letter ruling. This process is expensive and has uncertain results. A GP should be sure that these items are correct before the form is submitted. Deferred Credits Rev Proc Guide 4-28 & 29 Credits may be claimed the year the property is placed in service, or the start of credits may be deferred to the following year, allowing a higher applicable fraction to be met. The year that credits are first claimed becomes the first year of the credit period. Note: An income test may need to be run on in-place households at the beginning of the first credit year, if they have been in the property more than 120 days before the start of the first year. The household's eligibility is not in question but the Available Unit Rule may come into effect. Zeffert & Associates Page 10

13 Adding LIHTC units after Year 1 42 (f)(3) When additional LIHTC units are added after the first year credits are claimed, there is a 2/3rds adjustment made to the credit percentage for credits, and they must be claimed over 15 years for the additional units. The credits for these units are worth considerably less than full credits. Placed in service 1st year credits 10 year credit period Chart: Credit, Compliance and Extended Use Periods 15 year compliance period 30+ year extended use period 11 th year (last pro-rated credits claimed) Workshop: Compliance Period An Owner s Taxable Year ends December 31 The building is placed in service on March 17, 2010 The first year credits are claimed in Were the credits deferred (circle one): YES NO 2. Lease-up had to be completed no later than by what date: 3. On what date does the compliance period end: Zeffert & Associates Page 11

Minimum Set Aside Every LIHTC property has a minimum set-aside. There are 3 options: 1. 20-50 2. 40-60 8823 Guide Chapter 10 3. 25-60 This set-aside applies to New York City only.

This is always figured on the number of units, regardless of the size of each unit. The test for this is on the last day of each year. 2.

Quiz: Minimum Set-Aside What percentage of units may be above the 50% income limits, but below the 60% at a 20-50 property?

14 Minimum Set Aside Every LIHTC property has a minimum set-aside. There are 3 options: Guide Chapter This set-aside applies to New York City only. The minimum set-aside establishes two things: 1. What % units (minimum) must be LIHTC AT ALL TIMES (20%, 25% or 40%). This is always figured on the number of units, regardless of the size of each unit. The test for this is on the last day of each year. 2. The definition of low income at the property (50% or 60% MTSP). All units that will be counted as LIHTC in the property must be at or below this limit. Quiz: Minimum Set-Aside What percentage of units may be above the 50% income limits, but below the 60% at a property? VITAL Note about the Minimum Set-Aside: Instructions to IRS Form 8823 If the property fails to meet the minimum set-aside by the deadline, no credits can ever be claimed. SUBSEQUENT violations of the set-aside results in recapture of all previously claimed credits and credits cannot be claimed until set-aside is met again. Zeffert & Associates Page 12

15 Owner Signature and Filing The 8609 form is no longer filed with tax returns, which will likely be filed electronically. It is now sent to Philadelphia IRS office. Also, be sure to submit a copy of the completed form back to the state HFA. The state must know the Part II elections made by the owner in order to properly monitor compliance for the BIN. Zeffert & Associates Page 13

16 A Few Words of Encouragement We All Do this Job Well The last Government Accountability Office (GAO) review of the program was positive. It is a challenge to learn this program well, but the more effort something takes, the more gain is realized. The LIHTC is active in all states and qualified personnel are in demand. Not all jobs provide personal challenge, portability, opportunity for growth, a degree of job security and are also beneficial to Society. We strongly feel that LIHTC-related jobs are. Zeffert & Associates Page 14

THE ABC S OF AFFORDABLE HOUSING DEVELOPMENT

THE ABC S OF AFFORDABLE HOUSING DEVELOPMENT Presentation Overview Page Tax Credit Program Fundamentals 3 Qualified Allocation Plan Review 22 What Makes a Successful Application 32 2 Tax Credit Program Fundamentals 3 Housing Priorities Increase the