General Rules for Qualified Multifamily Housing Bonds
- Renter Obligations. Must elect to rent to 20% of residence who make less than 50% Area Medium Gross Income or 40% of residence who make less than 60% Area Medium Gross Income for 15 years, length of bond or longer if using tax credits or is a Section 8 property.
- Volume Cap Limits apply – Volume cap an issuing authority to a maximum amount of tax-exempt bonds that can be issued to finance a particular qualified purpose during a calendar year.
- 2% Limit on Issuance Costs – Issuance costs are limited to 2% of the Sales Proceeds (amount of bonds issued)
- 95% Use Test Rule – 95% or more of the “net proceeds” (sales proceeds minus reserve fund) of the bond issue must be used to finance the qualified purpose for which the bonds were issued.
- Qualified Use Allocation – allocation of proceeds among the various project expenditures in a manner demonstrating compliance with the qualified use.
- Subject to Arbitrage and Rebate Rules
- Must have a TEFRA hearing.
- Substantial User Prohibition – no person who is a substantial user of a facility financed with qualified private activity bonds, or any person related to such a user, can receive tax-exempt interest income as a holder of those bonds.
- No direct or indirect federal guarantees except governmental entities administering federal insurance programs for home mortgages and student loans and the investment of bond proceeds in U.S. Treasury securities.
- No prohibited facilities (skybox, gambling, liquor, etc.)
- Weight average maturity of Bonds may not exceed 120% of useful life of asset financed. (ignore land; life of working capital equals zero.)
- Advanced refunding prohibited.
- Proceeds toward Land. No more than 25% of net proceeds may go toward land.
- Rehabilitation Requirement. Restrictions on acquisition of used property. (minimum of 15% rehabilitation required.)
- Alternative Minimum Tax
- No utility allowance requirements.
- No utility rent restriction requirements.
Financing Multifamily Housing Projects Using Low-Income Tax Credits
- A tax credit is a dollar for dollar reduction in tax liability.
- Typical project structure – 1% general partner (developer), 99% limited partner (investor)
- Alternative Minimum Tax applies.
9% (70% Present Value) Credit
- New construction (present value of 70% of “qualified basis” over 10 years or approximately 9% a year).
- Rehabilitation expenditures treated as separate project eligible for 9% tax credit provided that within 24 months of acquisition rehabilitation expenditures are equal to the greater of $3,000 per unit or 10% of the projects adjusted basis.
- The acquisition of an existing building does NOT qualify for the 9% tax credit.
- Cannot use 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% a year).
- 9% reduced to 4% credit when “federal assistance” is used for new construction or rehabilitation.
- Tax-exempt private activity bonds are considered federal assistance.
- Community Development Block Grants (CDGB) 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 be set aside for persons and families at or below 50% of area median gross income for a minimum of 15 years or length of bonds.
- 40-60 Test – Requires that 40% of the units be set aside for persons and families at or below 60% of area median gross income for a minimum of 15 years or length of bonds.
- 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 test will be deemed to continue to meet the test until gross income exceeds 140% of the application income limitation. For current income limitations see http:huduser.org/datasets/il.html
- Rents for the units meeting the tests must be equal to or less than 30% of 50% or 60% of area 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.
Eligible Cost Basis for Bond Financing
New Construction – All appreciation 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 in the tax code but only if
- The building is acquired by purchase
- The building was not previously placed in service by taxpayer or 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 (Foreclosures, condemnation, etc)
- If 50 percent or more of the aggregate basis in land and building is financed with tax-exempt bonds, then the entire project is eligible for 4% tax credits without reducing the state’s LIHTC volume cap.
- If an investor is considering purchasing an existing building using the LIHTC and bond program, the previous owner generally must have held the property for a minimum of 10 years in order for the purchaser to claim credits on the acquisition costs.
Tax Credit Administration
- States receive tax credits based on population.
- States designate an agency to administer the tax credit program.
- Designated state agency designs an allocation plan that is approved by the State.
- The Arizona Department of Housing (the “Department) is responsible for allocation of tax credits to specific projects.
- The Department carries out its responsibilities through the creation and administration of a qualified allocation plan (QAP or 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.