Low Income Housing Tax Credits

[Bryan Hancock]

Do any board members have experience with low income housing tax credits? I would love to get a run-down on them as well as some pointers to helpful resources to learn more about them.

[Bill Gulley]

While I was a commissioner of a public housing authority I worked with LITHCs.

The first thing to clearly understand about LITCH projects is that is highly political. The application process begins with allocations at your state economic development authority or housing bond issuer that trickle through HUD.

You will need approval for the application beginning at the local level usually the Mayor and will go through County officials to the State and ultimately to HUD. A needs analysis must be submitted and signed off by local hosuing officials, such as the public housing authority. Letters from your congressional representatives are often required in support of the proposed project. You will have legal fees and accounting fees as well as underwriting and syndication fees. Not to mention the political donations along the way.

After these issues have been accomplished your application request will be viewed with those of competitors. At this stage the developer will be viewed as to their ability to perform. Their track record in completing projects on time and on budget and ability to manage the project are paramont. Now, proof of your ability to manage the LITCs will be required by the syndicator and you will need a syndicator in place for approval. Syndicators are responsible to sell the tax credits that raise the capital for the project.

To give you an idea how political these projects are, there are only about 5 Developers for LITCs in the State of Missouri. A good friend of mine is a developer. He has a staff of 8 just for the processing aspects and compliance.

Committments will be necessary whereby tax payors (say a large corporation) agree to buy the credits. A company may have a tax liability, say 100,000 grand, they will purchase the credits at say 60 cents or 60K and use them as coupons paying their tax liability. So instead of paying 100K, they in effect pay only 60K.

The process is very competitive (cut throat comes to mind) so developers throw in amenities in the project to make them stand out from other applications. Water features, walking trails, playgrounds, commercial aspects so that residents may walk to jobs created, I have even seen contributions to a municipality for a fire station to serve the are where the project was located.

No one starts out as a developer in this area anymore, won't happen! This is an area in real estate that if you have desires to become a developer or property manager, you will need to work for an established firm and learn the ropes. The other way to get involved is to be wealthy, politically connected and hire people with expertise.

LITC projects can be very lucrative, I have seen a developers fee running at 600K for 12 units, that goes to the developer above the hard costs of the project. But many soft costs come out of that fee.

The rules under Sec. 42 of the Code will provide requirements for LITCs. The tricky part and what Charles was talking about, is that projects are audited for complaince. If a manager falls out of compliance, say too many tenants lie about their income and it is discovered, a project can become disqualified which means the tax credits sold could not be used. Liabilty is huge. That is why syndicators require extensive experience in doing these projects.

Financing for the projects come from the sale of the tax credits and conventional financing as well as other financing relationships. Developers must act at arms length in these projects and many restrictions apply. The goal is that the equity established from the tax credits will go to owners. While a certain amount of the units can be leased at market rates, the purpose is to provide very low, low and moderate income housing. When these leasing requirements expire the owners have units that can be leased at full market rates. But often they are sold off and management is retained as management fees are subsidized during the LITC period. Some public housing authorities have spun off "subsidiary non-profits" to manage these projects. These can be the sponsor (each project must have a sponsor) of the project and a non-profit sponsor goes to the head of the line in the application process. Like I said, very competitive!

This should give you a fuzzy overview of LITCs and many of the requirements can be found in Section 42 of the Code for tax issues.

This is not something that small investors would probably want to to specialize in, IMO. While a good Sec. 42 TC adminstrator can earn a very good living in the management area, you don't start off doing so, you end up doing so. Good luck!

Knowing Bryan as I do, lol, and others, you might think that a group of investors could swing a project. It takes more than money, more than experience and more than connections, you need to be at the top of the game in all three areas, IMO.