THE ABC S OF AFFORDABLE HOUSING DEVELOPMENT

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2 Presentation Overview Page Tax Credit Program Fundamentals 3 Qualified Allocation Plan Review 22 What Makes a Successful Application 32 2

3 Tax Credit Program Fundamentals 3

4 Housing Priorities Increase the supply of decent, affordable rental housing; Expand housing opportunities and access for individuals with special needs; Expand the supply of housing and services to assist the homeless; and Preserve the State s existing affordable housing stock. 4

5 Tax Credit Program Fundamentals LIHTC created by Tax Reform Act of 1986 as an incentive for individuals/corporations to invest in the construction or rehabilitation of low income housing. The Tax Credit provides a dollar-for-dollar reduction in personal or corporate federal income tax liability for a 10 year period. 5

6 Internal Revenue Code 42 IRC 42 sets for the requirements and process for the LIHTC program. 42(m) states the housing credit agency must make tax credit allocations pursuant to a Qualified Allocation Plan, which: Sets forth project selection criteria; Gives preference to those serving lowest income tenants for the longest period of time; Provides a procedure for monitoring compliance. 6

7 Fundamentals, continued 9% Credit Ceiling: $2.35 per capita allocation + any returned or unused credits + any National Pool credits forward allocations MFA allocated $4.74mm of 9% tax credits in 2016 MFA will allocate approx $5mm in % Tax Credits are the deepest federal subsidy that funds up to 70% of total development cost. 7

8 Affordable Use: Fundamentals, continued Use restriction for 30 years required (income and rent limits) Minimum set asides: 20% of units for tenants earning no more than 50% of median income (20/50 election), or 40% of units for tenants earning no more than 60% of median income (20/50 election), but This election is irrevocable. 8

9 Applicable Fraction: Fundamentals, continued The percentage of the Project that is dedicated to low income use Employee units excluded from calculation Applicable Fraction Calculation: Smaller of Percentage of Low-Income Floor Space and Percentage of Low-Income Units Floor Space Fraction Unit Fraction Total Residential Rental Floor Space 79,200 Total Units 72 Low-Income Units Floor Space 66,000 Low-Income Units 58 Percent Low-Income 83.33% Percent Low- Income 80.56% Applicable Fraction: 80.56% 9

10 Fundamentals, continued Eligible Basis: The sum of the eligible cost elements that are subject to depreciation. 70% Eligible Basis (9% tax credits) for new construction or rehabilitation costs. 30% Eligible Basis (4% tax credits) for acquisition costs and projects w/ federal subsidy (bonds). Exclusions- federal grants, land acquisition cost, commercial structures, off site improvements, perm financing costs, tax credit fees, syndication fees. 10

11 Fundamentals, continued Basis Boost : Up to a 30% increase in Eligible Basis for new construction and rehabilitation costs (acquisition costs not eligible) Tax Exempt Bond projects must be located in a HUD designated QCT or DDA; MFA designation of need for financial feasibility (up to 30%) and: Not financed with Tax Exempt Bonds; and Serves a target population 11

12 Fundamentals, continued Maintaining the Tax Credit Reservation: Projects that do not Place in Service in the same year of the credit reservation must receive a Carryover Allocation before year end; Projects must Place in Service by the end of the second year after Carryover Allocation 12

13 Fundamentals, continued Recapture of Tax Credits (IRS): Vacant or uninhabitable low income units; Failure to maintain applicable fraction; Failure to maintain minimum set aside election; Other- any non-compliance resulting in the filing of a Form 8823 with IRS 13

14 Fundamentals, continued 14

15 Fundamentals, continued General partner has 0.01% ownership and operates the project, provides guarantees Passive limited partner invests equity in return for 99.99% ownership Limited partner receives return almost exclusively from tax credits and losses Investor equity reduces other financing needs, helps project development, and enable rents to be affordable. 15

16 Fundamentals, continued Estimate Eligible Basis and total development cost Estimate tax credits generated (9% or 4%) Estimate investor equity and timing Estimate all hard cost debt (first mortgage)- both construction and permanent financing Estimate funding gap Seek other sources to fill the gap 16

17 Fundamentals, continued Tax Credit Calculation (example): Eligible Basis $2,250,000 x Basis Boost (if applicable) 130% $2,925,000 x Applicable Fraction 80.56% = Qualified Basis $2,356,380 x Applicable (Tax Credit) % 9% = Annual Tax Credit $176,

18 Fundamentals, continued Equity Calculation (example): Annual Tax Credit $176, x Years of Credit x 10 = Total Credit Amount $1,762,572 x Price per Credit Dollar x.95 = Equity to Project $1,674,443 18

19 Fundamentals, continued Other Basis Considerations: Costs in Excess of Limits will be Excluded from Basis when Calculating Credits Developer Fee Limits Contractor Fee Limits Architect & Engineering Fee Limits (new) Legal Fees (new) 19

20 Fundamentals, continued Variables: 9% Tax Credits for new construction or rehab costshighly competitive 4% Tax Credits with federal subsidy (or for building acquisition costs)- private activity bond volume cap needed; other incentives such as possible property tax abatement; bond counsel and bond purchaser needed 4% applicable rate is tied to market and varies Equity pricing negotiable- varies for each project Basis boost 20

21 Fundamentals, continued Apply for credits Receive a tax credit reservation Receive carryover allocation, indicate lock-in election Incur 10% of estimated project basis and start construction by August 31 of the following year Complete project and place in service within two years of carryover allocation Apply for 8609 s Record extended use agreement Project Lease-up: Qualify Tenants Begin claiming credits: PIS year or following year Keep tax credit units in compliance ** See LIHTC Calendar on website 21

22 2016 Qualified Allocation Plan Review 22

23 Qualified Allocation Plan: What is it? The QAP is the State of NM s plan for allocating its tax credits It is prepared annually, consistent with IRC 42(m). Approval Process- Where is it? 23

24 QAP: Threshold Review All Applications must meet each of the following and include all required materials: Site Control Zoning Minimum Project Score Applicant Eligibility Financial Feasibility Fees 24

25 QAP: Site Control Written governmental commitment to transfer land, recorded deed or long term lease, or fully executed purchase contract or purchase option. Initial terms lasting until at least July 31 st. Must be unconditional Names, legal description and acquisition cost to match application 25

26 QAP: Zoning Evidence that multifamily housing is not prohibited by the existing zoning and dated 6 months before application deadline Only exemption, a site that is not zoned or which is zoned agricultural No pending litigation or unexpired appeal process relating to zoning for project 26

27 QAP: Fees All fees owed to MFA for all Tax Credit Projects in which principal(s) participate must be current. See QAP for list of fees, including (i) application fee, (ii) deposit for market study and architectural reviews, (iii) processing fee. 27

28 QAP: Applicant Eligibility All members of the development team for the proposed project must be in good standing with MFA and all other state and federal affordable housing agencies. This includes the Developer, General Partner, Contractor, Management Company, Consultant, Architect, Attorney, Accountant. 28

29 QAP: Minimum Project Score 130 points for competitive round; 80 points for bond projects (4% s); Partial points not awarded; Applicant self-scores application; MFA scores application; Scoring criteria and information needed to obtain points in QAP and checklist Proposed scoring changes in 2017 QAP 29

30 QAP: Financial Feasibility Applications must demonstrate, in MFA s reasonable judgment, the Project s financial feasibility. QAP Sections IV.C.2, Section IV.D, and Section IV.E summarize MFA s financial feasibility considerations. Additional underwriting details in the Initial Application Underwriting Supplement (available one month before application deadline). 30

31 QAP: Dates to Remember ALL DATES TENTATIVE! 2017 QAP & 2017 Design Standards Public Comment Period: September 16 th through October 7 th ; MFA Board Approval of 2017 QAP: November, 2016; 2017 QAP Training: December 8, Applications Due: February 15, 2017 MFA Board Approval of 2017 LIHTC Awards: June,

32 What Makes a Successful Application? 32

33 2016 Tax Credit Round: THE ABC S OF AFFORDABLE HOUSING DEVELOPMENT Of the 17 Applications submitted: $14,320,678 in credits were requested (ratio of requests to credit ceiling was 2.92:1); Average TDC per unit for new construction was $186,332; Range of $170,106 to $246,623/unit cost; Average project size of 63 units (range of 20 to 121); Applications included: 5 new construction, 9 acquisition/rehab projects and 3 new construction/acq/rehab. 33

34 2016 Tax Credit Round, continued Five awards in 2016; seven awards in 2015; Of the 2016 awards: Total of 367 units to be newly constructed or rehabilitated; Five awards consisting of 1 new construction project, 3 acq/rehab projects, and 1 new/acq/rehab project; Award amounts range from $767,638 to $1,150,

35 The most successful Application is the project that you can deliver and successfully operate for the entire extended use period! 35

36 For more information: Visit MFA s website at: Contact: Susan Biernacki, Tax Credit Program Manager (505) sbiernacki@housingnm.org 36

37 Notes: THE ABC S OF AFFORDABLE HOUSING DEVELOPMENT 37