Page 20
— Multifamily Properties Quarterly — August 2016
A
s the economy continues to
recover nearly 10 years after
the mortgage meltdown, the
costs of land, building mate-
rials and construction con-
tinue to rise. As Americans, many
of us take for granted clean running
water or a warm, dry place to sleep.
There are segments of our popula-
tion that are economically disad-
vantaged. The double-edged sword
of a free market society is that some
are unable to attain the American
dream without assistance. As the
greatest country in the world, all
Americans deserve opportunities for
safe, clean and affordable housing
and this can be accomplished with
economic development incentives.
Mayors in many cities across
America, including Denver, Houston,
San Francisco, Chicago, New Orleans
and others, have affordable housing
initiatives, which act as a wake-up
call for municipalities, developers
and housing authorities to work
together to deliver quality housing
stock to our fellow Americans in
need.
Affordable housing often is
financed through tax credits – low-
income housing tax credits, or
LIHTC – and associated financing
sources. These financial mecha-
nisms are a tool that private devel-
opers, as well as public housing
authorities, can use to create afford-
able housing options. Often, these
two groups form joint ventures to
execute projects and, other times,
they work independently.
The need for affordable housing is
greater than we realize. Here is an
abbreviated list of the diverse popu-
lations that are
underserved with
affordable housing:
• Divorced single-
parent households
• Millennials with
mounting student
debt
• Lower-income
workforce
• Seniors
• Veterans
• Medically dis-
abled
• Families with a
single income
• Civil servants
• Schoolteachers
Types of low-income housing tax
credits include 9 percent and 4 per-
cent. The 9 percent LIHTC typically
provides approximately 70 percent
of a project funds with the remain-
ing 30 percent made of debt or
other sources. The 4 percent LIHTC
provides 30 percent of a project’s
funding and the balance of funds
is made up of other sources includ-
ing debt. The 9 percent applications
are very competitive and only the
best projects are awarded funding
annually. While the 4 percent appli-
cations are noncompetitive, they do
require other sources of capital to
finance the project.
The challenge developers face
with any LIHTC project is the
rents charged to tenants are at a
maximum of 60 percent of the area
median income, or AMI, and go
down from there. Hence, the reason
the tax credits were invented was to
provide the available funding neces-
sary that otherwise would require
developer’s equity. Clearly the finan-
cial returns on owners’ equity for
a tax-credit deal is not enough to
incentivize the private sector like a
market-rate deal. The credits come
from large corporations that have
a tax obligation and, instead of the
tax, they invest in affordable hous-
ing tax credits, which is how fund-
ing becomes available and helps
monetize these much-needed proj-
ects.
What do tax credits finance?
Tax
credits can finance new construc-
tion and rehab projects; acquisition,
in some cases; housing for families,
special-needs tenants, single-room
occupancy and the elderly; urban,
rural and suburban locations; and
additional projects in high-cost or
difficult-to-develop areas.
There are many reasons to use
tax credits as a financing tool. The
credits can be monetized and used
as a source of capital for a project,
or as an instrument that can be sold
to a syndicate or bank at 80 to 100
percent on the dollar. The credits
create opportunity for other fund-
ing sources to round out the capital
stack, such as grants, low-interest
government loans, community
development block grants and other
contributions from municipalities
and nonprofits. As previously noted,
typical debt and equity financing
does not work economically for
rents that are controlled based on
a percentage of AMI, and thus part
of the incentive to use a tax-credit
form of finance is that there is less
financial risk to the sponsor due to
nonrecourse debt funding. When
using tax credits as a financing tool,
occupancy rates typically are high
due to demand. Lastly, a benefit to
the sponsor is that developer fees
range from 8 to 15 percent.
How do tax credits work?
Rental
units are leased to tenants earning
no more than 60 percent of AMI,
while investors earn dollar-for-dol-
lar credits against their federal tax
liability and can received tax ben-
efits from losses generated by the
property.
Generally, tax credits are received
up front for the first 10 years of
operation, and these credits essen-
tially cover the equity capital
needed to fund the project. The
tricky part of the structure is that
some tax credits may be recaptured
by the IRS if the project does not
comply for 10 years of the life of
the tax credits; however, the other
part of the structure is that the
affordable housing land-use restric-
tion remains in effect for 15 years.
This obligation essentially requires
periodic audits of tenant income
to ensure no tenant is understat-
ing income levels and they remain
in compliance of 60 percent AMI or
less. Failure to comply has serious
tax recapture penalties to the devel-
oper sponsor and partners, which
is why compliance with IRS regula-
tions is critical.
As mentioned, a 9 percent LIHTC
deal provides approximately 70
percent of a project’s funding with
the balance picked up by debt, soft
funds (nonrecourse) and/or owners’
equity. A 4 percent LIHTC deal pro-
vides approximately 30 percent of
a project’s equity with the balance
picked up by other soft funds and/or
Kenneth J.
Puncerelli
CEO, LAI Design
Group, Englewood
Affordable Housing
