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LOW INCOME HOUSING TAX CREDIT PROGRAM

By Theresa Jackson,2014-03-02 11:43
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LOW INCOME HOUSING TAX CREDIT PROGRAM

    Section 10

    LIHTC

    PROGRAM DESCRIPTION

    AND REQUIREMENTS

4% LIHTC Initial Application 10 - 1 Rev. 07-07

    LOW INCOME HOUSING TAX CREDIT PROGRAM

    (LIHTC)

Amendments to LIHTC Program

    Each state is allocated annual tax credits in an amount equal to $1.90 per state resident for 2006 with an increase indexed to inflation thereafter. Recent congressional action and Internal Revenue Service rulings have brought about the following changes to the LIHTC Program:

    ; OHCS must provide a preference for projects located in Qualified Census Tracts, the development of

    which contributes to a concerted community development plan.

    ; "Community Services Facilities" can be used to generate credit if the facility is designed to serve

    primarily low income individuals whose income is 60% or less of area median income and the facility

    does not generate in excess of 10% of the total eligible basis.

    ; Allows OHCS, at its discretion, to award credits in a manner not in accordance with the requirements

    of the Qualified Allocation Plan. Should an award be made that is not in accordance with the

    requirements of the Qualified Allocation Plan, OHCS must document this allocation in writing to the

    general public.

    ; All projects that receive a reservation of Low Income Housing Tax Credits will have six months from

    the date of their carryover allocation to meet the 10% of Costs Incurred Test (10% test). The 10%

    test requires third party certification of incurred project costs to date be presented to OHCS for

    approval. Projects using 4% tax credits with tax exempt bond financing do not have the

    carryover requirement.

    ; IRC Section 42 requires a comprehensive market analysis of the housing needs of the low-income

    individuals in the area served by each housing credit project. The analysis must be conducted at the

    developer's expense before the credit allocation is approved. A disinterested party approved by the

    allocating agency must conduct the analysis. (See the market assessment and LIHTC sections of the

    application for more information.)

    ; If HOME funds are granted to the general partner in a limited partnership and in turn loaned to the

    limited partnership, in order for the HOME funds to be included in basis one of the following must

    occur: 1. HOME funds must be loaned to the limited partnership at an interest rate that equals or

    exceeds the federal applicable rate or 2. HOME funds can be loaned at a rate less than the federal

    applicable rate if at least 40% of the total units in each building are occupied by persons whose

    income is 50% or less of median income and rented at rates affordable to persons whose income is

    50% or less of median income.

    ; A 130% bonus is available to projects located in HUD-determined Qualified Census Tracts (QCT’s)

    and Difficult to Develop Areas (DDA’s). The Qualified Census Tracts are defined as census tracts in

    which 50% or more of the households are at or below 60% of area median income, as well as census

    tracts with a poverty rate of 25% or higher.

Introduction

    The Low Income Housing Tax Credit (LIHTC) was enacted by Congress to encourage new construction and rehabilitation of rental housing for low-income households. In establishing the tax credit incentive, Congress recognized developers may not receive enough rental income from a low-income housing development to: 1) cover the costs of developing and operating the project, and 2) provide a return to investors sufficient to attract the equity investment needed for development. To spur investment, Congress authorized the states, within specified limits, to allocate tax credits to qualifying housing projects. The credits may be shared among owners (equity investors), much as income and losses are shared among business partners for tax purposes. Generally, the investors are recruited by syndicators, and ownership rights are controlled by limited partnership agreements.

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    The amount of LIHTC that may be awarded to a building is based upon the cost of the building and the portion of the project that low-income households will occupy. The cost of acquiring, rehabilitating, and constructing a building constitutes the building’s eligible basis. The portion of the eligible basis attributable to low income units is the building’s qualified basis. In general, the qualified basis excludes

    the cost of land, obtaining permanent financing, rent reserves, syndication and marketing. The applicable percentage of the qualified basis may be claimed annually for 10 years as the low income housing tax credit.

    The LIHTC program is jointly administered by the Internal Revenue Service (IRS) and state tax credit allocation agencies, such as Oregon Housing and Community Services (the “Department”). Credits are provided to states to allocate to eligible affordable housing projects. These credits are considered to be under the State’s per capita credit authority and are a limited and scarce resource.

Overview of the Credit Allocation and Review Process

    Under Section 42 of the Internal Revenue Code, OHCS is responsible for determining which applicants should receive the tax credit and the dollar amount of credits each should receive. In making these determinations, OHCS must comply with federal requirements and meet the following program goals: ; Give preference to projects that provide housing to households with the lowest incomes for the

    longest period of time,

    ; Assist in affordable housing development in areas with the greatest low income housing needs, ; Provide housing for special needs populations,

    ; Encourage equitable allocation of credits across the state,

    ; Support housing for families with children,

    ; Support housing in Qualified Census Tracts and/or areas where community revitalization is a local

    priority,

    ; Encourage resident services and community involvement,

    ; Provide an allocation of tax credits in an amount sufficient to make the project financially feasible

    and viable as a low-income housing project throughout the compliance period.

In addition, OHCS may supplement these general goals with more specific local goals in order to meet

    local low-income housing needs. This may include but not be limited to:

    ; Mixed income projects where appropriate,

    ; Mixed use projects where appropriate,

    ; Acquisition and rehabilitation of expiring use projects,

    ; Housing near employment centers,

    ; Approaches in design, planning, building and financing of low income housing that maintain quality

    and long term sustainability, durability and ease of maintenance of affordable units, ; Other goals as determined locally or by OHCS.

    Tax credits are awarded on a per building basis. For a particular building to qualify for tax credits, it must be a part of a low income housing "project". To qualify for consideration for credits a project must: ; be residential rental property

    ; make an election to restrict both rent and income as follows:

     Rent: restrict rents (including utility charges) for tenants in low income units to 30 percent of either

    the 50 percent area median income as adjusted for family size or the 60 of area median income as

    adjusted for family size. Rents may be further limited based upon the limitation selected and other

    representations made in the application to OHCS.

     Income: maintain at least 20 percent of the available units for households earning up to 50 percent

    of area median income as adjusted for family size, or maintain at least 40 percent of the available

    units for households earning up to 60 percent of area median income as adjusted for family size.

    maintain habitability standards: if the project involves rehabilitation, there must be expenditures of

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    at least $3,000 per unit or 10 percent of the unadjusted basis of the building, whichever is greater ; operate under the program’s rent and income restrictions for a minimum 30 year extended use time

    period.

    The OHCS application process was created in accordance with the requirements of Section 42 of the Internal Revenue Code to select proposals for tax credit awards. The application process is more fully described later in this document. OHCS may not award more credits to a project than are required to make the project financially feasible. In evaluating projects, OHCS must consider any proceeds or receipts expected to be generated through tax benefits, as well as the reasonableness of development hard and soft costs. In general, the IRS expects OHCS to compare the proposed project’s development costs

    with the non-tax credit financing, both private and public. The difference between the costs and the sources to finance the costs is the financing gap. Tax credits may be used, up to a ceiling, to attract the equity investment to fill this gap.

    Once credits have been awarded to a developer, the developer typically sells the credit to private investors. The private investors use the credits to offset taxes otherwise owed to the federal government. The money private investors pay for the credits is paid into the project as equity financing. This equity financing is generally used to fill the gap between the development cost of a project and the non-tax credit financing sources available, such as mortgages, that could be expected to be repaid from rental income.

    Owners must place the project in service no later than December 31 of the allocation year (for competitive projects), unless a Carryover allocation is obtained. If a Carryover allocation is obtained, the project must be placed in service no later than December 31 of the second year following the original allocation. Investors can claim the credits for each year of a ten year period (called the “credit period”) as long as the project is operating in accordance with the representations made to OHCS in its

    application for credits and in accordance with IRS regulations. Individual and corporate investors

    attach an IRS Form 8609 (initially obtained from OHCS in the first year of placed in service), “Low

    Income Housing Credit Allocation Certification” to their income tax returns when they claim the credits.

    Once a project has been placed in service, OHCS is responsible for monitoring the project for compliance with state and federal requirements concerning household income, rents, project habitability, resident services and other requirements as represented in the application, Declaration of Land Use Restrictive Covenants and other agreements. If noncompliance is discovered, OHCS must report the event of noncompliance to the IRS and if the non-compliance is not corrected, the IRS may recapture or deny credit for previously used or issued tax credits. The IRS issues regulations on monitoring requirements that OHCS follows. These regulations are described in the Tax Credit Compliance Guidebook (available from OHCS upon request).

    To apply for tax credits, a developer must submit a detailed proposal to OHCS in the format prescribed which incorporates the specific requirements listed below:

Threshold Criteria

    All projects must achieve a minimum standard, as established by OHCS in this application packet and described in each of the following threshold categories. Failure to achieve the minimum standard may result in ineligibility for credits.

    Site Control All applicants must demonstrate site control. Evidence of site control can include: fee

    simple title, evidence from the local government demonstrating their intent to transfer property, or a

    contract or agreement demonstrating site control, including an option on the property.

    Zoning Applicants must attach a letter from the local planning department indicating that the

    property is properly zoned for the use intended, or the intended use is allowed with conditions and

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    application has been made for a conditional use permit. Under no circumstances will anything other

    than a letter from the local planning department be accepted as evidence of proper zoning. Projects

    requiring zone changes or annexations do not meet the threshold.

    Site Review and Environmental Review All applicants must complete the Environmental Review

    Checklist. OHCS's Regional Advisor (RAD) will review the information on the form during the site

    review. The Environmental Review Checklist is included in the application materials.

Sponsor Characteristics

    Sponsors must be able to demonstrate an understanding of the Low-Income Housing Tax Credit Program, and proficiency with housing-related development. Sponsors receiving a 2006 tax credit allocation may be required to have a independent third party capacity analysis ordered by OHCS prior to release of department funds. No sponsors with limited multi-family experience will be excluded from the application process as long as they engage the services of qualified development team members. Additional consideration may be given to program sponsors who have consistently completed their projects in accordance with representations made in their applications, and who are maintaining their project in compliance with tax credit program policies and procedures and federal regulations.

    OHCS may reject applications from previous program participants who have failed to demonstrate proficiency with the LIHTC Program or other government-funded housing programs. OHCS may also reject or discount an application from previous program participants who have failed to complete their projects in accordance with their applications and/or certified plans presented to OHCS or other public or private allocating agencies, or who have failed to effectively utilize previously allocated tax credits, or who have been found to be in chronic non-compliance with program rules as evidenced by Department or other public or private allocating agencies’ project monitoring.

Financial Feasibility

    Tax credits for a project may not exceed the amount necessary for the financial feasibility of the project. Financial feasibility analysis will include a comparison with current market costs and an assessment of the reasonableness of projected cost components and operating expenses. OHCS's project evaluation will utilize common lending standards and underwriting criteria for evaluating multi-family projects. Basic criteria includes, but is not limited to:

    ; Primary Debt Service Ratio no lower than 1.15 and no higher than 1.20 (unless accompanied by an

    explanation from the lender)

    ; Maximization of Loan to Value ratios and documentation thereof from the project lender

    ; Construction hard costs per square foot between $75.00 to $95.00 unless adequately justified by

    community constraints or building type

    ; Developer fees in accordance with Department policy (as stated herein)

    ; Reasonable operating expenses, as determined by OHCS for the project size, type and population to

    be housed, including:

    ; Operating reserves of 4 to 6 months operating expenses (minimum). Reserves less than or in

    extreme excess to this will be approved on a case-by-case basis with justification. ; Replacement reserves of no less than $250 per unit per year for new construction

    development for seniors and $300 per unit per year for new construction development for

    families and rehabilitation developments. These figures are guidelines. A more precise

    measure of reserves needed will come from a carefully prepared Reserve for Replacement

    schedule.

    ; Acquisition price for acquisition of buildings or land shall be limited to the appraised value as

    determined by an independent third party certified appraiser

    ; Ability of the project to demonstrate long term financial viability via a 15 year projection ; Tax Credit pricing at or above current market rates.

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    Note: Tax exempt bond projects with funding gaps requesting Consolidated Funding Cycle funds to fill the gaps may be required to apply for these funds during the normal CFC application round.

    OHCS reserves the right to determine, in its sole discretion, whether the Letters of Interest or Intent, Award Letters, or Commitment Letters are satisfactory, and whether a lender or investor possesses the financial or other capacity to make a specific loan or investment. A change in the financing source or financing terms after reservation of credits may, in the sole discretion of OHCS, result in all or a part of the credits being recaptured or reduced by, or returned to, OHCS. Architectural/Site Review

    In response to a legislative mandate for promoting good quality in the development, design and construction of publicly funded housing, OHCS has adopted Architectural Requirements for all LIHTC

    projects. These requirements are minimum standards that apply to new construction and to the renovation of existing structures. They promote long-term livability and the wise use of public investment by addressing Site Design, Building Design and Unit Design issues. The standards are listed in “Section 15, Architectural Standards and Product Replacement,” along with specific architectural submittal

    requirements.

    Once the formal application is received, the OHCS architect reviews projects twice before construction can begins. Preliminary Architectural Review is made during the Schematic and Design Development phases of a project. Final Architectural Review is then made when Drawings and Specifications are nearly complete and before the project is submitted for building permit.

    Sometimes, after studying the requirements and preparing a rough feasibility analysis, the sponsor and architect may have remaining questions about the Architectural Requirements and the Architectural Review Process. In that case a pre-application conference with OHCS may be useful before submitting all the documents necessary for the formal application.

    Changes made to architectural designs after the award or reservation of credits must be documented and are also subject to OHCS architectural approval.

Rehabilitation Assessment Requirements

See “Architectural Supplemental Application Forms" Section.

Long-Term Affordability

    All tax credit developments are subject to an extended use affordability period of a minimum of 30 years. This Extended Use commitment is defined under IRC Section 42 regulations as 15 years beyond the initial 15-year compliance period for a total of 30 years.

Resident Services

    Sponsors who receive OHCS resources, including but not limited to LIHTC, must include in their affordable housing development a provision for residents to access services appropriate to the identified needs of the target population. The anticipated outcomes of the resident service plans are: ; Through coordination, collaboration, and community linkages, provide residents the opportunity to

    access appropriate services which promote self-sufficiency, maintain independent living, and

    encourage positive life choices; and

    ; To effectively maintain the fiscal and physical viability of the development by incorporating into the

    ongoing management appropriate services that address resident issues as they may arise.

    Project evaluation will reward projects offering appropriate resident services. Applicants are encouraged to build services provisions into their operating expense budgets.

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    Resident services are not intended to be limited to services provided on site, residents at risk or with special needs, nor is participation in services mandatory for residents. It is intended to be a support system integrated into the housing and available to all residents. Resident services can be incorporated into the operation and management in a variety of ways. Common to many models, however, are the goals of helping residents achieve greater social and economic self-sufficiency and an enhanced quality of life. While service-enriched housing offers assistance to residents facing a crisis, it should also focus on addressing problems and linking residents to community resources. The most effective service-enriched housing encourages and supports resident participation in the decision making process.

Housing Need and Demand

    The project sponsor must be able to demonstrate evidence that the project is meeting a clear need in the community in which it is sited. This must include a discussion substantiating community need as well as market information as per the application materials. Please see the market assessment section and the LIHTC supplemental pages (at the beginning of this section) for additional information.

Policy on Material Participation By Nonprofit Organizations

    It is preferred that Material Participation of the nonprofit be demonstrated as if the applicant is applying under the 10% nonprofit set aside. For partnerships, turnkey or joint ventures that have as a general partner or co-general partner a local tax-exempt nonprofit organization, OHCS expects material participation by the said local tax-exempt nonprofit organization to include, but not be limited to:

; Participation in developer fees and excess cash flows.

    ; Participation in project oversight and decision making, such as direct involvement in application

    preparation, direct involvement in discussions for construction, bridge and debt financing, a close

    working relationship with the property management firm, and tenant selection. The project must

    demonstrate an ability to further the nonprofit’s charitable mission and there should be an ability on

    the part of the nonprofit to override any fiduciary duty to the owners when that duty conflicts with the

    charitable mission of the nonprofit.

    ; Provision of assistance that empowers the nonprofit and enables it to gain expertise. ; It is further required that the said nonprofit NOT be affiliated with or controlled by a for profit

    organization.

Eligible Applicants

    There are no restrictions on who may apply to OHCS for an allocation of LIHTC.

Basic Eligibility and Considerations for all Applicants

    In order to be eligible to receive an allocation of LIHTC, a project must be considered a “qualified low income housing project”. To meet this test, a project must be a residential rental property. For the

    purposes of Section 42, the definition attributed to “residential rental property” is generally the same as applied to tax-exempt rental housing bonds. This definition focuses on the following issues: ; Residential rental properties must include separate and complete facilities for living, sleeping, eating,

    cooking and sanitation.

    ; In addition to actual residential units, functionally related and subordinate facilities may be included

    in eligible basis if they are available to all tenants with no additional fees attached to them. ; A scattered site project may be treated as a single project if all units in the building are rent-restricted.

    A scattered site is a project where multiple buildings with similar units are located on separate sites,

    within management proximity to one another, owned by the same party, managed by the same party,

    and financed under the same agreement. All Scattered Site Projects must be 100% affordable. ; If a building consists of both residential and nonresidential areas, the nonresidential portion will not

    preclude the residential portion from qualifying for credit. Determinations will be made on a

    reasonable basis to ensure that the costs for the commercial use portion of such a mixed-use building

    are not in the credit computation.

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    ; Residential rental units must be available for use by the general public in a nondiscriminatory manner.

    Definitions and authority regarding public use and discrimination are provided by Housing and Urban

    Development (HUD).

    ; For a project to qualify for a credit award, it must meet a minimum low income set aside requirement.

    A building owner must elect and fulfill one of the following low-income set asides:

     the 20/50 test: at least 20% of the units must be both rent restricted and occupied by tenants with

    incomes at or below 50% of area median income as adjusted for family size (as determined by

    HUD)

     the 40/60 test: at least 40% of the units must be both rent restricted and occupied by tenants with

    incomes at or below 60% of area median income as adjusted for family size (as determined by

    HUD)

    The minimum set aside is the election that commits the building owner to a specific income level which will serve to define low income for that building. Under a 20/50 election, an owner that claims 100% of units as eligible for LIHTC must rent all units to households at or below 50% of area median income as adjusted for family size in order to claim 100% of the credit.

Other Key Application Requirements

    ; The owners are required to sign all of OHCS’s legal documents relating to the LIHTC

    program, including the Reservation Agreement, Declaration of Land Use Restrictive

    Covenants and other documents as deemed necessary by OHCS.

    ; Applicants will be evaluated based upon information submitted in the application.

    ; The application charge is $25.00 per unit to be included under the LIHTC program. The

    charge is non-refundable and must be submitted with the application. Please see the

    application materials for proper charge transmittal format.

    ; If awarded a reservation of credits, a charge equal to 5.5% for project with 30 units or less

    and 6.4% for projects with more than 30 units; of the total annual tax credit amount will be

    required at the time of signing the reservation agreement.

    ; Recipients of awards must sign the Hold Harmless, Acceptance of Credit Offer and the

    Reservation and Extended Use Agreement in a timely manner. The reservation of credits will

    not be made and secured without these documents being fully executed.

    ; Compliance monitoring fee of $35 per unit per year must be included in the operating

    expense budget.

Allocation Limitations

    During the application process, the following limitations shall apply:

    ; The per capita tax credit cap for projects will be $700,000 in annual credits. Project sponsors,

    developers, or any "related entity" (An entity is a "related entity" if a relationship exists between the

    sponsor or developer and such entity which would result in the disallowance of losses between related

    persons under Sections 267 or 707(b) of the Internal Revenue Code of 1986 as amended) utilizing

    Oregon's Low-Income Housing Tax Credit Program must comply with this ceiling. Applications for

    4% credits with tax exempt bond financing are only limited by the amount of eligible basis.

    ; Tax Credit Offers to Reserve and/or Carryover Allocations may not be transferred without

    Department approval. For projects with a nonprofit sponsor applying for the 10% nonprofit set-aside,

    it is required that the nonprofit applicant(s) materially participate in the development of the project;

    any changes in General Partner status without the consent of OHCS may result in forfeiture of the

    Offer to Reserve or Carryover Allocation.

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    OHCS will diligently enforce all agreements, warranties and representations of the sponsor regarding the project, especially those made in the Initial Application as well as those made in the Reservation and Extended Use Agreement. Failure to perform or demonstrate progress may jeopardize the reservation for Carryover Allocation, tax credits previously awarded, and potential future allocations. Tax Credit Reservations are made based upon representations in sponsor applications. Once a Reservation and Extended Use Agreement has been offered or executed, written approval for any changes to the project must be obtained from OHCS. This approval shall be made in a timely manner and will not be unreasonably withheld. Changes requiring such approval include but are not limited to: ; Changes in the project's composition may be approved provided the project continues to maintain an

    evaluation ranking equal to or greater than those awarded to the original project. A re-evaluation of

    the project is necessary if there are material changes to the project scope. Applicants will be required

    to submit an amended application, and an additional application fee may be required. ; Composition of the partnership.

    ; Lender/Equity investor changes.

    ; Changes in the unit mix or number of units.

    ; Changes in cost.

    ; Changes in management agent.

    ; Any others OHCS in its discretion deem to be substantive changes.

    No executive, employee or agent of Oregon Housing and Community Services or any other official of the State of Oregon, including the Governor thereof, shall be personally liable concerning any matters arising out of, or in relation to, the allocation of Low-Income Housing Tax Credits, or the approval or administration of this plan.

Qualified Census Tracts or Difficult Development Area

NOTE:

    The LIHTC Program Description and Requirements Section of this Application lists Difficult to Develop

    Areas (DDAs). The eligible basis of a project located within a DDA may be increased up to 30 percent. Only the eligible basis attributable to new construction or rehabilitation qualifies for the basis boost. Acquisition expenses do not qualify for the basis boost.

    The listing of DDAs is prepared annually by the United States Department of Housing and Urban Development (HUD) and is subject to change without prior notice. A revised list is typically published in the Federal Register in the middle of December each year.

    Projects receiving a forward allocation of Low Income Housing Tax Credits are always at risk of losing their DDA status prior to receiving an allocation of tax credits. On November 2, 2004, HUD issued a new rule on the effective dates for DDAs. This was published in Federal Register / Vol. 69, No. 211. This notice changes the definition of effective date to correspond to the filing date of an application for low-

    income housing tax credits or tax-exempt bond financing. The notice extends the effective date for areas

    designated as DDAs in effect in the year the application is received and the allocation of credits to an applicant is made no later than the end of the 365-day period after the submission of a complete

    application by the applicant to the credit allocating agency. Remember, a project receives the official allocation of tax credits at the time of carryover, not at the time of funding reservation.

    Projects located in Difficult to Develop areas and Qualified Census Tracts may be eligible for additional credits. The maximum credit to such projects is calculated by increasing the eligible basis by 130 percent. Effective for tax credit allocations made after August 22, 2005, the following counties are designated as Difficult to Develop (DDA) and thereby ELIGIBLE for the 130% increase:

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