Detroit Housing Commission

Replacement Housing Factor Program

Low Income Housing Tax Credit Program

Governing Law – Section 42 of the IRS Tax Code

Low Income Housing Tax Credits Allocated to States Based on Population ($1.25/person)

Project Eligibility

1.      Residential Rental Property

a.        Requires Rehabilitation Or New Construction

b.        Tax Credits May Be Earned On Acquisition If Property Has Not Changed Ownership & Placed In Service During Past 10 Years

c.        A Building Not Used In Past 10 Years Can Claim Tax Credits Even If Ownership Has Changed, If Not Placed In Service During That Period

2.      Occupancy Threshold Requirements

a.        Credits Available Only For Affordable Units

b.        20-50 Rule – At Least 20% Of Units

                                                         i.            Rent Restricted

                                                       ii.            Occupied By Households With Incomes =< 50% Of HUD Determined Area Median Income (Adjusted For Household Size)

c.        40-60 Rule – At Least 40%

                                                         i.            Rent Restricted

                                                       ii.            Occupied By Households With Incomes =< 60% Of HUD Determined Area Median Income (Adjusted For Household Size)

3.      Rent Limits

a.         Monthly Housing Cost Including Utility Allowance =< LIHTC Rent Limit

b.        Rent Limit = 30.0% Of Area Median Gross Income, Adjusted By Unit Size. 

c.        Rents Cannot Exceed Local Market Limits

d.        Project Based Section 8 May Exceed LIHTC Limits, Tenant Based Section 8 Cannot

4.      Affordability Requirements

a.        Minimum Compliance Period = 15 Years

b.        MSHDA Awards Points To Projects Extending Period To 30 Years

Two Types Of Tax Credits

9% Tax Credit

1.       A Little Less Than 9%

2.       Per Year For 10 Years

3.       New Construction Or Substantial Rehabilitation Not Subsidized By Federal Government

4.       Definition Of Substantial Rehabilitation > 10% Of Basis Minus Land Value

5.       Very Competitive

4% Tax Credit

1.       A Little Less Than 4%

2.       Per Year For 10 Years

3.       Acquisition Of Existing Buildings

4.       Federally Subsidized New Construction Or Rehabilitation

a.        Where Interest Rate =< Federal Applicable Rate

b.        Financed By Volume-Cap Multifamily Tax Exempt Bonds

c.        Can Be Automatically Attached To Volume-Cap Bonds
       i.            Credits Not Part Of Per Capita Cap

                                                       ii.            Bonds Are Part of per capita Bond Cap

Exact Tax Credit Amount Published Monthly By US Treasury

1.       Reflects Changes In Their Market Interest Rate

2.       Locked In At Time MSHDA Makes Binding Commitment, Or

3.       When Project Is Put In Service

Determining Eligible Basis

Eligible Basis = All Depreciable Development Costs

................1.  Amount Eligible For Tax Credits
................2.    All “Hard” Costs (i.e., Construction)

3.    A&E

4.    Soil Testing

5.    Utility Connections, Etc.

Excluded From Basis

1.    Acquisition Costs Of Land

2.    Permanent Financing Costs

3.    Initial Deposits Into Reserves

4.    Federal Grant Reduces Basis

See sample MSHDA Sources & Uses Form for calculating tax credit impact
 

Determining Eligible Fraction

1.       Percent Of Qualified Low Income Units

2.       Established By Building, Upon Occupancy (Must Be Maintained)

Adjustments To Calculation

1.       Located In HUD Designated High Cost Area

a.        Qualified Census Tract

b.        Difficult Development Areas

c.        Increase By 30%

2.       Go To MSHDA Site for Census Tract

Eligible Basis = Sum Of A Project's Total Development Costs That May Be Included In The Calculation Of Tax Credits.

Qualified Basis = Portion Of Eligible Basis Attributable To The Rent Restricted Units.

How To Use RHF &/Or Home Funds

1.       If Provided As Grant, Basis Is Reduced By Equal Amount

2.       Deferred Payment Loans Permitted

3.       Interest May Accrue

4.       Must Be Reasonable Expectation Of Repayment

Below Market Loans Permitted With 4% Tax Credit

Below Market Interest Loan Permitted With 9% Tax Credit, If

1.       At Least 40% Of Units Occupied By Households Making 50% Of Area Median Income Or Less

2.       However, Cannot Use 30% Basis Boost

Typical Structure (if in Qualified Census Tract)

1.       Federal Funds Loaned Based On Applicable Federal Rate

2.       Accrued Interest

3.       No Payments Until Private Mortgage Loan Paid Off

4.       30% Boost Permitted

5.       Must show that Property Has Value to repay Loan

Typical Structure (If not in a Qualified Census Tract)

1.       Federal Funds Loaned @ zero or low interest

2.       Payments Made As Cash Flow Available

How Income Limits Calculated (Example Only)

1.     Household Income Limitations Based On The Area's Median Gross Income (AMGI)

a.        As Determined By HUD

b.        Each Year, HUD Adjusts The Area's Median Household Income Based On A Variety Of Factors:

                                                         i.            Area Economy And

                                                       ii.            Household Growth

c.        Determined On Metropolitan Statistical Area (MSA) Or County Level , And

d.        Determined For A Household Of 4 People.

2.       Example: To Get To The 60% Level, Use HUD-Determined Very Low Income (50%) Number For The Area Since HUD Sometimes Adjusts Eligible Incomes Based On Area Incomes And Their Relation To Area Housing Costs, It Is Not Accurate To Work Backwards From The Annual Median Gross Income (AMGI).

3.       Example:

This Figure Is Adjusted For Household Size As Follows:

Maximum Rents = Tenants At Maximum Income Paying =< 30% Of Their Income For Housing.
Maximum Rents For Unit Type Are Set By The Expected Occupancy - Not By The Number Of People Who Actually Live In The Unit. 

The Following Table Illustrates:

A Household May Live In An LIHTC Unit If The Household Income Is No Greater Than The Maximum Allowed For That Size Household. 

If A Two-Person Household Making The Maximum ($24,288) Wished To Live In A Three-Bedroom Unit Set At The Maximum Allowable Rent ($789), It Is Allowable Under Program Guidelines.  Property's Management Determines Whether They Wish To Accept A Household Paying 39.0% Of Their Income For Rent.

All Households Making Less Than The Maximum For Their Household Size Will Pay Greater Than 30% Of Their Income For Rent If Rent Is Set At The Maximum Allowable.

A survey several communities in the Midwest in 1993 Indicated the percentage of rent paid by LIHTC renters:

10.9% of all renters were paying over 50% of income toward rent, and
40.3% were paying over 40% of income toward rent.

Converting Tax Credits into Cash

When the Tax Credits are allocated to a Project, The Developer Must Form A For-Profit Limited Dividend Entity Where The 99.99% Owner Is The Investor That Receives The Tax Credit In Exchange For An Investment through a syndication process.  The Low Income Housing Tax Credit Has Become A Commodity And Presently Has A Sales Value Of $0.90 To $0.95 Per $1.00 Of Tax Credit. 

MSHDA Tax Credit Score Summary
MSHDA has Established Several Categories And Point Scoring For Their Competitive Scoring.  A Developer Needs 185 Points For The General Round.  For The Small Project Category, The Developer Only Needs 100 Points To Make The Cut:

Some of the categories are:

ü      General

ü      Small Project (24 or less)

ü      Rural

ü      Detroit /non Detroit

ü      Special Needs

ü      Preservation

The Full Application for LIHTC can be found at the MSHDA web page.