6A — August 25 - September 14, 2017 — Tax Issues & Accounting — M id A tlantic
Real Estate Journal
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T ax I ssues & A ccounting By Michael Benguigui, CPA, Sax LLP Low Income Housing – Why Invest?
T
he Low-Income Hous- ing Tax Credit (LIHTC) program has created
eral income tax. This program makes up approximately 90% of all affordable rental hous- ing in the country, and it is estimated that the cost to the Federal government to fund this program is around $9 bil- lion annually. The allocation process starts at the federal level and states are allotted income tax cred- its based on their population sizes. For the 2017 calendar year for example, New Jer- sey was provided $21 million of LIHTCs. However, even though the LIHTC program was created and is funded
by the Federal government, it is up to each state’s Hous- ing Finance Agency (HFA) to administer the application process and establish a Quali- fied Allocation Plan (QAP) to provide guidelines and procedures for awarding the credits to developers. Federal law requires that the QAP prioritize credit allocation to projects that serve the lowest income households and those that remain affordable for the longest period of time. Obtaining the credits is a competitive and cumbersome process. Developers propose
plans to state agencies, and if allocation is granted, tax credits are set aside for the project but cannot be claimed until the project is completed and the units are occupied. Also, properties must meet certain standards in regards to rent costs and the income of tenants, and must fall under a certain type of qualifying project to be eligible. There is an initial 15-year compliance period for a project to operate under the guidelines of the low income housing rent limits, whereas credits are also sub- ject to recapture. However,
most states have an “extended use period” (EUP) of 30 years or greater, such as California for example, which has a 55- year EUP. For real estate developers looking for a long term hold- ing period, these credits are a means to raise funds as part of the “capital stack” (i.e. debt, hybrid debt, or equity). Once a specific development project has been allocated LIHTCs, developers can retain tax credits or enter into a limited partnership with investors to then sell the tax credits for cash equity in which case, the investors are entitled to 99% of the profits, losses, depreciation, and tax credits being allocated from the part- nership. The developer serves as the general partner and is compensated through the payment of development and management fees paid to the partnership. Here are multi-unit rental development projects that are awarded credits as part of the LIHTC program, although in an overall general sense since guidelines vary by state: • Low income multi-family housing, which can be com- prised of 100% low-income housing units or mixed-in- come housing units • Supportive Housing (i.e. housing for people with dis- abilities and special needs) • Senior Citizen Housing There are two levels of LI- HTCs available: • New Construction – eli- gible for 9% credit for build- ings which are not federally subsidized; Claimed annually over a 10-year period • Subsidized or Acquired Buildings – eligible for 4% credit for new buildings which are federally subsidized (i.e. tax exempt bonds) or for con- struction to be done on exist- ing buildings; Claimed annu- ally over a 10-year period In order to calculate how much a specific project can generate in terms of LIHTCs, the following must first be determined: • Eligible Basis - Costs incurred by a developer as part of the low income housing project. For new construction, it’s all the costs associated with building the property. For renovation, it’s all the costs associated with the re- hab of the building. Ineligible costs include the cost of the continued on page 12A
momentum in the pri- vate sector, incent i v i z - ing syndica- tors, passive i n v e s t o r s , banks and real estate developers to
Michael Benguigui
invest in the new construction and rehabilitation of lower income housing by providing credits for qualified projects which can offset their fed-
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