Financing Apartments

Low-Income Housing Tax Credits
Financing Multifamily Housing Projects Using Low-Income Housing Tax Credits

Overview

  • A Credit is a dollar for dollar reduction in tax liability.
    • A credit is subtracted after the tax liability is determined
    • It is not a tax deduction or adjustment to income to arrive at taxable income
  • Typical project structure – 1% general partner (developer), 99% limited partner (investor).
  • Alternative Minimum Tax (“AMT”) applies.

9% (70% Present Value) Credit

  • New Construction (present value of 70% of “qualified basis” over 10 years or approximately 9% per year).
  • Rehabilitation expenditures treated as a separate project eligible for 9% credit provided that within 24 months of acquisition rehabilitation expenditures are equal to the greater of $3,000 per unit or 10% of the project’s adjusted basis.
  • The acquisition of an existing building does NOT qualify for the 9% credit. However, it may qualify for the 4% credit.
  • Cannot use with tax-exempt private activity bonds.

4% (30% Present Value) Credit

  • Acquisition of an existing building (present value of 30% of “qualified basis” over 10 years or approximately 4% per year).
  • 9% credit reduced to 4% credit when “federal assistance” is used for new construction or rehabilitation.
    • Tax–exempt private activity bonds are federal assistance
    • Community Development Block Grants (“CDBG”) below market loans are NOT federal assistance
    • HOME funds are NOT federal assistance if 40% of the units are occupied by families at 50% of median income

Income and Rent Restrictions

2 Alternative Tests:

  • 20-50 Test – Requires that 20% of the units must be set aside for persons and families at or below 50% of area median gross income. This test must be satisfied for the 15 year compliance period to continue to earn the full credit.
  • 40-60 Test – Requires that 40% of the units must be set aside for persons and families at or below 60% of area median gross income. This test must be satisfied for the 15 year compliance period to continue to earn the full credit.
    • The area median gross income test is based on a family size of 4 with adjustments for family size.
    • Persons or families meeting the gross income tests will be deemed to continue to meet such tests until gross income exceeds 140% of the applicable income limitation. For current income limitations, please see http://huduser.org/datasets/il.html
  • Rents for the units meeting the 20-50 test (or 40-60 test) must be equal to or less than 30% of either 50% or 60% of area median gross income.
  • Gross rent typically includes utility allowances.
  • For HUD regulated buildings use HUD determined utility allowance.
  • For non-regulated buildings use the utility allowance prescribed by the local public housing authority or utility company

Eligible Basis

New Construction – all depreciable costs of constructing the building and improving the property, including personal property such as appliances and other amenities attached to the unit. Land acquisition and related costs are not depreciable so they are not includable.

Existing Building – owner’s depreciable basis in the property as defined by the tax code but only if:

  • the building is acquired by purchase
  • the building was not previously placed in service by taxpayer or a related party
  • a period of at least 10 years has passed between the seller’s date of purchase and the later of (i) the date the building was last placed in service, or (ii) the date of the most recent nonqualified substantial improvement (i.e., 25% of the adjusted basis over a 24 month period).
  • Other exceptions may apply (i.e., foreclosure, condemnation, etc.)

Tax Credit Administration

  • States receive tax credits based on population.
  • States designate an agency to administer the tax credit program.
  • 10% of annual credit must be set aside for nonprofit organizations.
  • Designated state agency designs an allocation plan that is approved by the state.

Arizona Administration

  • The Arizona Department of Commerce (the “Department”) is responsible for allocation of tax credits to specific projects.
  • The Department carries out its responsibility through the creation and administration of a qualified allocation plan (the “QAP” or the “Plan”).
  • Copies of the QAP and accompanying application can be obtained from the Department’s website.
  • The Department has a separate application for the tax credit process.
  • Provisions of the QAP (other than matters related to scoring, credit ceilings and carryover allocations) shall apply to projects financed with tax-exempt bonds. Further, the project must pass all of the QAP’s Threshold Criteria.
  • Historically, the Authority has exercised the provisions of the Internal Revenue Code Section 42(m)(2)(A) and (B) to allow the Department to make the determination that the project does not exceed the amount necessary for the financial feasibility of the project and its viability as a qualified low income housing project throughout the credit period.