What is a Tax Credit Property?

Question

What is a Tax Credit Property?  What major institutions invest in them?  Are they low income housing?

Anyone know?

Bill Gulley · Answer

Hi, this usually refers to Section 42 of the Tax Code. Federal tax credits are issued through HUD to states under their economic development/finance departments, or the state housing and development authority. These credits are issued based on a very competitive process to developers who have shown experience and expertise in developing and managing low/moderate income properties. The credits are syndicated to sell the credits to usually large corporations, say Ford Motors. Ford may buy the credits at 70 cents on the dollar. When Ford a one dollar of tax liability, they send in that amount or credits, so to speak, so they reduce their tax liability by 30%. The sydicator keeps 10 or 20%, what ever they get to grab and the developer receives 50 to 60%. Funds are designated for certian costs of the project, excluding land costs.and certian soft costs. To obtain the funds and get the project approved, states really squeeze the developers to put in amenities generally found at higher end apartment complexes, walking trails and ponds/lakes are a dead give away to identify one of these projects. Projects are set up to be a mixed income development, for example 20% at a very low income, 30% low income and maybe 25% moderate income, the remaining units can be rented to anyone, from very low to "over" income tenants. Big risk...if the distribution of the tenants is not met, say after an audit it is discovered that there were too few low income persons and too many moderate or over income tenants, the project will be out of compliance. If that happens, the credits can become disqualified and Ford Motors is not happy! That's why it is so critical that the management of the project must be very familiar with tax credit requirements and have sufficient experience to be selected to administrate programs.
          At the very best chance of an "outsider" getting involved in this busienss would be to work for a developer. You'd have to work your way up, you can't walk in and do a deal! It's for big boys only.  These are very political.
          To get a deal, the developer needs to hook up with a non-profit hosuing agency, PHAs are prime targets to partner with, the proposal goes to the state level and comes back to go for approaval by the loacal PHAs,  to show that a need exists and the city council, county commission must sign off as well. Then back to the state. If everyone along the way approves your proposal, then the state selects the projects. Those selections  might have something to do with contributions to the governor! It helps! And is done.
          
           A good friend of mine is a developer. I began a deal about 10 years ago, and we were not selected for that project. There was roughly two million dollars for the development of 24 units, small in scope, and about $800K for developer fees. So, you can see that on a sq ft basis, units are sky high, which is the basis for the developer fees or profits. Those ponds and walking trails, laundry facilities, club houses, pools, and recreation areas, some with day cares, are offered by the developers to get the deals. Now, you probably know more than you wanted to about Sec. 42 !
          
          Don't confuse state tax credits for rehabs of blighted areas, winterization and energy updates. States offer tax credits for economic development zones to build new construction of commercial projects and developments, mixed use (commercial and residential) and residential units as well. These are not as profitable as Sec. 42, but can be a very nice niche where small developers and rehabbers can do very well. These kinds of tax credits are political as well, but are doable for many investors.
          Good Luck, Bill

Bill Gulley · Answer

Hi, Jeffrey, seems you have some pretty set attitudes about people in low and moderate income brackets. I always get a kick out of hearing the guy who makes 45K a year and has 2 small kids and a wife talk about how all those "losers" drain our social system with entitlements and then point out that he qualifies as well! I'm really entertained by those starting out themselves, who believe themselves to be from affluent backgrounds (new money families) when they find out they qualify for benefits or can't qualify on their own steam for a median priced home. In other words, snobs who lack means themselves. I have seen many astonished faces.
          
          You'll find that successful real estate investors do not make much money off of their socioeconomic peers, other successful people, higher profits will generally come from those who have lesser knowledge and resources than the investor! If you only want to deal with people like yourself (or rather those who you may aspire to be and immulate) your success will be limited.
                               I have never had a unit that smelled like grease or for that matter had any odors that were significantly different from any luxury home.

I only smell the money!  Good luck, Bill

Bill Gulley · Answer

Jeff, I was hoping that you didn't take that personally and good to see you took it in the spirit as noted. I understand the poor very well, since I was charged with oversight of over 1200 public housing units as a commissioner, a very active commissioner at that! I'm not real familiar with your area, but I do recall talking to your PHA several years ago and addressing problems that faced many larger cities. I really am anti-slumlord! The problem is that there is no incentive to make repairs and improvements to many units since such cash outlays will never justify higher rents, but it would improve equities and future market values.

I really like seeing existing buildings being renovated and updated for affordable housing, especially for mixed use. What goes hand in hand with the mixed use approach (commercial and residential or low and moderate income) is that ther is alot of hand holding and education involved in many social aspects that flow through to housing issues. Literacy, diet, job training, personal financial counselling and addressing medial issues is all an aspect of responsible housing management. This is beyound the scope of individual landlords/investors and gets into another aspect of hosuing altogether. Unless you have a desire to assist in community affairs, this really isn't an area for investors who are profit driven. It's a long term committment and it can be very profitable, but maybe not like the market you specialize in. There are many markets like that. In every city, there is a transistional area, where ill kept properties start flowing into better neighborhoods. Those are the areas to begin with in my opinion. Begin where properties are OK, improve those and work toward the worse areas. Eventually blighted areas will be removed and development will upgrade areas little by little. There is money to be made in re-development, especially with government assistance. Good luck, Bill

Jeffrey K. · Answer

Thanks for the info.  Thats the idea I got from my friend.  I guess I will get back to the rental grind.  So if you retain ownership of the property after the tax credits are sold you have to deal with low income tenants in your fancy building?  Dont people usually take every fancy thing away from low income tenants so they dont break it?

Mark Davis · Answer

Can individuals get these credits to fix up or build with?  Seems like a great little secret.

Jeffrey K. · Answer

The areas I buy in down have that program.  There is a map and all of the higher-end stuff does not make it in. The reason I was asking about this is that Zilber is redeveloping the Pabst Brewery using one of these tax credit programs to be sold to a third party.

Bill,
Milwaukee is a very nasty place.  There is either good or bad.  There are not to many places that are okay.  Some of my friends do low income stuff and I have a tenant that I inherited with the building that does not have much money.  Poor people tend to cook with a lot more grease (hense the higher rate of obesety, heart disease, stroke, and diabetes) and tend to reused that grease coating the whole house.  When I get a check from this tenant the paper is brown (he does not smoke).  I dont know what kind of poor people you deal with, but poor people I know eat what they can get (low end food) and cook it in grease to make it taste better.

I've been working with mid to upper-end stuff for four years now and it has treated me pretty well.  I do not make as much money as the guys in the hood, but I have a lot less stress per unit and the checks come to my office on time for the most part on the first of the month.  I also hope that my building will go up in value.  My friends who are making more money every month will retire in 20 years with a building worth close to what it is worth today.

Everyone has their own way to make a living.  I love going to work every day in the word of nicer rentals.  I have enough money to live the life I want to and hope some day down the road to grow rich from my hard work.

Good luck to you sir.

Bill Gulley · Answer

Hey Ralph, I didn't notice that, I just saw Jeff's post from the 25th, good eye! Every large city has an economic development program, investors should be familiar with what's available...agreed! Bill

Ralph S. · Answer

Wow.  A thread from 2005!

Jeffrey, have you looked into the HUD Neighborhood Stabilization Program as Milwaukee is spending the money?  I'd be curious to hear your thoughts.

http://www.mkedcd.org/MilwaukeeStrong/Programs/NSPRentRehabInformation.pdf

It assists purchase and rehab, up to $7,500 per unit (forgivable loan in 5 years) and $17,500 per unit (forgivable in 10 years).

A couple snippets from the pdf:
The Housing and Economic Recovery Act of 2008 provided the City of Milwaukee with $9.2 million in federal
funding for the Neighborhood Stabilization Program (NSP) to address foreclosed properties in Milwaukee
neighborhoods impacted by the foreclosure crisis.
The NSP Rental Rehabilitation Program provides funding to help responsible landlords purchase and rehabilitate
foreclosed homes for affordable rental opportunities.

I asked once before:

http://www.biggerpockets.com/forums/16/topics/40214-hud-s-neighborhood-stabilization-program-nsp-

and you can see what responses I didn't get! :wink:

Jeffrey K. · Answer

I would just hate to build a brand new place, rent it to poor people, and have it have that grease smell that you smell in every house in the hood and no matter what you do the the flooring and paint it will always be there.

Bill Gulley · Answer

Hi, LOL, I don't know if there is any fancy thing they could carry off! I guess this kinda made a bad day for you, sorry about that. I'd urge you to look into rehabs in the ecoconomic development programs. Citys have sold properties for a dollar and arranged financing for rehabs. Any time there is government funds involved in anything, it will have strings attached, like agreeing to rent to low/mod income tenants. Good luck, Bill

What is a Tax Credit Property?

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