Tax Credit 101. Plan.Build.House. Presented By: Darrell Beavers and Sammy Ehtisham Date/Time: Tuesday, August 21 st at 3:00 PM

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1 Tax Credit 101 Presented By: Darrell Beavers and Sammy Ehtisham Date/Time: Tuesday, August 21 st at 3:00 PM Presenting Sponsor

2 Presenter Background Darrell Beavers Housing Development Director at OHFA Has responsibility for several of their affordable housing finance programs, chief amongst which is the Affordable Housing Tax Credit Program. Beavers is also an adjunct college professor in finance and real estate, is an active CCIM real estate broker and investor, is a frequent moderator at NCSHA meetings, and the author of The Affordable Housing Handbook A Comprehensive Resource Guide for Affordable Housing in Oklahoma.

3 Presenter Background Sammy Ehtisham Assistant Vice President of Acquisitions for Midwest Housing Equity Group. Work exclusively with developments that utilize the Federal Low Income Housing Tax Credit. Also have Historic Tax Credits and State Low Income Housing Tax Credits on some deals. 2,200+ units of affordable housing in nearly 70 developments across Oklahoma, Kansas, Missouri, and Arkansas over the past 11 years representing over $330 million in development costs.

4 Oklahoma Housing Finance Agency The Oklahoma Housing Finance Agency (OHFA) is a nonprofit public trust that provides affordable housing financing resources and guidance to developers/builders and homebuyers/renters. OHFA does not build, own, or manage affordable housing; we finance it.

5 Oklahoma Housing Finance Agency Resources Our resources are primarily federal funds where we have been designated administrator of those monies by the federal government. Developers/Builders Affordable Housing Tax Credits Tax Exempt Bonds and 4% Tax Credits HOME Investment Partnerships Program Oklahoma Housing Trust Fund National Housing Trust Fund

6 Oklahoma Housing Finance Agency Guidance Our guidance consists of our knowledge of and contacts with other affordable housing financing resources and our experience in combining/layering the various sources of funding to make projects viable. We also provide extensive, detailed technical assistance regarding all of our funding programs.

7 Midwest Housing Equity Group, Inc. We are a 501 (c)(3) tax credit syndicator specializing in LIHTC investment in the Midwest. Created in 1992 in Nebraska. Now operate in 11 Midwest states from Texas to North Dakota, and from Colorado to Arkansas. To date we ve created over 16,000 units in 525 LIHTC developments. Nearly $1.8 billion in private equity investments!

8 Today s Discussion The Low Income Housing Tax Credit Program What is the LIHTC program? Who governs the LIHTC program? How do you get LIHTCs? Key Players in the developments What can you do with the LIHTC?

9 Today s Discussion (cont.) Syndicator roles and purpose of involvement Layering LIHTCs with Other Financing Sources

10 What is the LIHTC Program?

11 What is the LIHTC Program? The Federal Low Income Housing Tax Credit program was created under the Tax Reform Act of 1986, as amended. This program creates affordable rental housing through a partnership of public and private partners. The program is responsible for the creation of over 3 million units of affordable housing since inception.

12 What is the LIHTC Program? What is a tax credit? Dollar for dollar reduction in your tax liability Not the same as a tax deduction LIHTC Credits go to the owner annually over a 10 year period (known as the Credit Period) Requires a 15 year compliance period There are two types 4% and 9% credits.

13 Who governs the LIHTC program?

14 Who Governs the LIHTC Program? Being a Federal Tax program, the LIHTC program is governed by the Internal Revenue Service. Specifically Section 42 of the Internal Revenue Code.

15 Who Governs the LIHTC Program? Each state also plays a significant role in the LIHTC program. Required to develop Qualified Allocation Plans (QAP) that detail the process by which applicants can apply for these credits. Required to perform long term Compliance and report non-compliance to the IRS.

16 Qualified Allocation Plan (QAP) IRS establishes minimum compliance requirements and relies on each state to develop their QAP States can choose to be more restrictive than Section 42 requirements, but not less restrictive. Allows each state to align the program with its respective housing goals.

17 Qualified Allocation Plan (QAP) QAP will establish the threshold and selection criteria items that will be considered when applicants apply for LIHTCs in each state. QAP establishes application deadlines. Each state determines their acceptable minimum underwriting standards through the QAP.

18 Qualified Allocation Plan (QAP) The QAP will specifically limit the amount of developer fee and contractor fees that can be earned. Some states even limit architecture fees and consultant fees. Will establish maximum LIHTC allocation amounts per development. Will also set maximum cost per unit limitations.

19 Qualified Allocation Plan (QAP) OHFA evaluates the QAP annually. The public development community has opportunities to provide comments related to changes they would like to see incorporated. While not all of those comments will be included, they are considered by the Agency.

20 How do you get LIHTCs?

21 How do you get LIHTCs? Each state administers the LIHTC program through their Housing Finance Agency (OHFA, ADFA, TDHCA, NIFA, KHRC, etc.) Applications received are awarded via a competitive scoring process non competitive 4% allocations are considered separately from the 9% applications.

22 How do you get LIHTCs? Comprehensive applications are submitted to the Agency that include numerous attachments: Market Study Public Notice Requirements Preliminary Plans and Specs Prior Performance Information Capital Needs Assessment Development Budgets, Including Operating Budgets And Many Others..

23 How do you get LIHTCs? 9% allocations - each state receives an annual credit ceiling of LIHTCs to allocate For 2018 it is the greater of $2.70 per person (OK population for 2018 per the IRS is 3,930,864) in each state or $3,105,000. Beginning in 2018, and continuing for 3 more years, the credit ceiling is increased by 12.5% annually. In Oklahoma the 2018 credit ceiling is $11,939,998. Annual credit authority applies only to 9% developments.

24 How do you get LIHTCs? 4% allocations These credits are not subject to the same credit ceiling limits as the 9% allocations. There are essentially endless 4% LIHTCs available. As was mentioned, these applications are not considered in the same pool as the competitive 9% applications. 4% credit awards must be allocated to developments financing at least 50% of their costs with Tax Exempt Bond Financing.

25 How do you get LIHTCs? Tax Exempt Bond Information OHFA must be the issuer of these bonds Can be used with new construction or acquisition/rehab Oklahoma has a large bond cap available, so there shouldn t be an issue with availability.

26 Key Players in the Developments

27 Key Players in the Developments Federal Government Credits allocated to each state, IRS oversees Compliance State Housing Finance Agencies Perform their own underwriting analysis of each project Credits are allocated to developers per HFA s QAP

28 Key Players in the Developments Developer/General Partner Masterminds behind the concept for the projects Manage day to day operations and provide guarantees Lenders Performs their own underwriting analysis of each project Provide construction and/or permanent financing.

29 Key Players in the Developments Syndicator/Limited Partner Equity Provider Performs their own underwriting analysis of each project Long-term partner Monitor compliance, financials, physical condition for 15 years Property Management Company Day to day site management Lease project to qualified residents in accordance with Section 42

30 Key Players in the Developments Attorneys/Accountants Accountants certify costs (10% test, cost cert) and perform annual audit & tax returns Issue tax opinions

31 What can you do with the LIHTC? How do they benefit developments?

32 What can you do with LIHTC? Types of Projects New Construction Adaptive reuse Acquisition Rehab Acquisition Rehab on Historic Buildings Single or Multi Family

33 What can you do with LIHTC? Can combine with commercial space Can include some market rate units Can layer with other financing sources

34 What can you do with LIHTC? Types of buildings Apartments Duplexes Single Family Homes Assisted Living

35 What can you do with LIHTC? Rental housing only But can do homeownership in certain instances after year 15.

36 How Do They Benefit Developments? Provide between 65% and 90% of the total development costs for a project. Large equity means lower permanent debt which translates to lower rents for residents.

37 How Do They Benefit Developments? Require all residents to earn at or below 60% of the Area Median Income (AMI) for the county the project is located in. Most states give points for targeting lower AMI populations

38 Sample LIHTC Calculation w/o Boost $1,000,000 Total Project Cost $ 100,000 Project Cost Not Eligible for Credits $ 900,000 Eligible Basis for Credits* x 9% Tax Credit Percentage $ 81,000 Credits Received/year x 10 Years credits are received $ 810,000 Credits received x.85 Price paid for credits $ 688,500 Equity into project from MHEG Allows for low debt on project enabling developers to keep rents affordable * States may allow 130% basis boost (not shown here).

39 Sample LIHTC Calculation w/ Boost $1,000,000 Total Project Cost $ 100,000 Project Cost Not Eligible for Credits $ 900,000 Eligible Basis for Credits 130% Basis Boost $1,170,000 x 9% Tax Credit Percentage $ 105,300 Credits Received/year x 10 Years credits are received $ 1,053,000 Credits received x.85 Price paid for credits $ 895,050 Equity into project from MHEG

40 Syndicator Role and Purpose of Involvement

41 Syndicator Role and Involvement Role Limited Partner contribute equity and become a partner Usually require 99.99% ownership in owning entity (whether an Limited Partnership or LLC) Require monthly (some quarterly) reporting to monitor projects

42 Syndicator Role and Involvement Perform regular inspections of units and files Long term partner Thru 15 year compliance period.

43 Syndicator Role and Involvement Typical Structure

44 Syndicator Role and Involvement Purpose of Involvement $$$$$$$$ These projects need the cash to reduce the amount of debt needed to construct/rehab the project. Pricing market is constantly moving. Have seen higher demand for these credits in recent years.

45 Syndicator Role and Involvement Provide investors a way to get SIGNIFICANT tax benefits. This helps keep the credit pricing strong. Also a good way for banks to get CRA credit.

46 Layering LIHTC with Other Financing Sources

47 Layering LIHTC Here are some of the other possible financing sources we see paired with LIHTC transactions: Federal Historic Tax Credits State Historic Tax Credits State Low Income Housing Tax Credits (relatively new to OK)

48 Federal Historic Credits Federal Historic Tax Credits are available for the rehabilitation of historic, income producing buildings that are determined by the Secretary of the Interior, through the National Park Service, to be certified historic structures. The State Historic Preservation Office (SHPO) and the National Park Service (NPS) work to ensure that the rehab complies with the Secretary of Interior s standards for rehabilitation. These rehab standards add SIGNIFICANT costs! Be aware!

49 Federal Historic Credits A 20% tax credit is available The IRS defines the qualified rehab expenditures on which the credit may be taken. Used to be a 1 year credit, but with tax reform, changed to a 5 year credit. Typical for the LIHTC investor to buy these credits too.

50 State Historic Credits To qualify for Oklahoma State Historic Tax Credits, requirements of both the IRS and the Department of Interior must be met. A 20% tax credit is available Mirrors the federal credit

51 State Historic Credits State Historic Tax Credits are freely transferrable unlike the Federal HTCs This means that these credits can be sold to anyone who wants to purchase them they don t have to go to an owner in the property like with the federal historic tax credits. These credits have no impact on your eligible basis calculations for the LIHTCs.

52 State Low Income Housing Tax Credits The Oklahoma Affordable Housing Act of 2014 granted OHFA the authority to allocate Oklahoma State Low Income Housing Tax Credits to Qualified Projects. OHFA began making allocations in 2015 the Act stipulated that no credits could be used before January 1, Total State LIHTCs allocated in any given year cannot exceed $4,000,000.

53 State Low Income Housing Tax Credits The amount of your State LIHTC request must equal your Federal LIHTC request. This credit is exactly like the Federal LIHTC a 10 year credit period. Requirements for compliance also mirror the Federal LIHTC. Currently no separate application is required.

54 Contact Information

55 Contact Information

56 QUESTIONS?