Basic Debt Calculation - Kingdom Development



OverviewIn an effort to incentivize the private sector to rent apartments to households earning at or below 60% of median income for affordable rents (Affordable Housing), the federal government enacted the Low-Income Housing Tax Credit (LIHTC or the Credit) via §42 of the Internal Revenue Code (the Code). The Code allows owners of Affordable Housing to reduce their tax liability by a certain amount, each year for 10 years. Developers of Affordable Housing typically admit an investor to a partnership who will enjoy the Credit and contribute capital used to construct the apartments. This whitepaper explains how to calculate (given various assumptions) the amount an investor will contribute to the partnership for the ability to receive the Credits (Tax Credit Proceeds).Terms9% Program – the competitive program administered by the California Tax Credit Allocation Committee (TCAC), wherein an owner can receive Credits that cover approximately 70% of the building costs4% Program – the currently noncompetitive program administered by TCAC, wherein an owner receiving an allocation of tax exempt bonds from the California Debt Limit Allocation Committee (CDLAC) will also receive Credits that cover approximately 30% of the building costsEligible Basis – the depreciable costs to develop buildings containing Affordable Housing unitsHigh Cost Area – the Code authorizes a 30% increase when calculating the credit for projects in a Qualified Census Tract (QCT) or Difficult Development Area (DDA) according to: Applicable Fraction – the percentage of the building that is operated as Affordable Housing, which if less than 100% is used to reduce the amount of Credits awardedApplicable Percentage – a number published monthly by the IRS used to calculate the amount of Credits awarded in relation to Eligible BasisLP Ownership Percentage – the percentage of the Credits (usually 99.99%) that the investor will receive based on their ownership percentage in the partnershipCredit Price – the amount of money per tax credit an investor plans to contribute to the partnership as a condition of their admittanceThreshold Basis Limit – a maximum imposed by TCAC on the Eligible Basis that can be claimed for a project given location, unit sizes, unit quantities, and adjustmentsVoluntarily Excluded Basis – an arbitrary reduction in Eligible Basis agreed to by developers to adhere to the CA Threshold Basis Limit or improve their competitive score in the 9% ProgramHigh Cost Project – a project with Eligible Basis (ignoring Voluntarily Excluded Basis) in excess of the Threshold Basis Limit * 130%, which is automatically disqualified from the CA 9% ProgramFunding Gap – the difference between total project costs and all permanent financing, besides Tax Credit Proceeds, which constrains the amount of credits TCAC will award to a projectWarning: Some of the concept described herein only apply to projects in California. We made a basic attempt to highlight CA specific topics but did not do so thoroughly.Calculating Federal Credits – New ConstructionLet’s assume we have an 80 unit mixed income (8 market rate units) new construction project in a QCT with 20,000,000 of Eligible Basis (EB) and a Threshold Basis Limit of 23,000,000, applying for the 4% Program when the published Applicable Percentage is 3.25% and investors are paying Credit Prices of 95?. -That’s a mouthful.Starting with 20M in Eligible Basis, we will chose not to Voluntarily Exclude any because we are not competing for Credits and we are under the Threshold Basis Limit, resulting in 20M Requested Unadjusted EB. “Requested” meaning not excluded and “Unadjusted” meaning not yet boosted.With 20M Requested Unadjusted EB in a High Cost Area (in a QCT), we multiply 20M * 130%, resulting in 26M Requested Adjusted EB.With 26M Requested Adjusted EB and only 90% of our units being Affordable Housing, we multiply 26M * 90%, resulting in 23.4M Qualified Basis.With 23.4M Qualified Basis and a 3.25% current Applicable Percentage, we multiply 23.4M * 3.25%, resulting in 760,500 Annual Federal Credits.Assuming our Funding Gap justifies us needing these Credits, the partnership will receive 760,500 Credits each year for 10 years. Assuming the investor will receive 99.99% of the Credits and contribute 95? per credit received, we multiply 760,500 * 10 * 99.99% * 0.95, resulting in $7,224,028 of Tax Credit Proceeds. Calculating Federal Credits – AcquisitionLet’s assume we acquire a 100 unit project in a QCT with improvements worth 10,000,000 planning to rehabilitate the project with 8,000,000 of Eligible Basis, applying for the 4% Program when the published Applicable Percentage is 3.20% and investors are paying Credit Prices of 97?. Further assume there is no reason to Voluntarily Exclude Basis and no Funding Gap constraints.The Credits derived from the Acquisition Basis must be calculated separate from the Credits derived for the rehabilitation because the former doesn’t enjoy the High Cost Area boost.Annual Acquisition Credits will be Eligible Basis * Applicable Fraction * Applicable Percentage, resulting in 320,000.=10000000 * 100% * 3.20%Annual Rehabilitation Credits will be Eligible Basis * High Cost Area Boost * Applicable Fraction * Applicable Percentage, resulting in 332,800.=8000000 * 130% * 100% * 3.20%Together the Annual Rehabilitation and Acquisitions Credits are 652,800 Annual Federal Credits.The Tax Credit Proceeds will be Annual Federal Credits * 10 * Ownership Percentage * Credit Price, resulting in 6,331,527.=(320000 + 332800) * 10 * 99.99% * 0.97Coding: Be sure to use cell references in your formulas and not raw assumptions.CA State Credit EligibilityTo incentivize the development of Affordable Housing in areas not eligible for the High Cost Area boost, the state of CA authorized a credit against an Affordable Housing owner’s state tax liability. Unlike the LIHTC, the CA state credit is utilized by the investor in the first 3-4 years and so state credits are not spoken of in annual terms. The following are scenarios that qualify for the CA state tax credit on New Construction Basis:9% project not located in a High Cost Area (HCA)9% project in an HCA, having >= 50% of the units reserved for Special Needs households4% project not located in a High Cost Area, desiring to compete against similar projectsOnly 9% At-Risk projects not located in a High Cost Area are eligible for CA state tax credits on Acquisition Basis, but using the 13% rate instead of the 30% rate used for new construction basis.Calculating State CreditsLet’s assume we have an 50 unit new construction project not in a HCA with 10,000,000 of Eligible Basis, applying for the 9% Program when investors are paying State Credit Prices of 81?. Further assume we are Voluntarily Excluding 2,000,000 of Eligible Basis.The state credit calculation starts with the Requested Unadjusted EB figure from the federal credit calculation, which would be Eligible Basis – Voluntarily Excluded Basis, resulting in 8M. Next we account for the Applicable Fraction, which in this case is 100%. Lastly, we multiply the the project’s Qualified Basis by 30% (13% if it was a 4% deal), resulting in 2,400,000 state credits.=(10000000 -2000000) * 100% * 30%Assuming we are certificating the 2,400,000 state credits and investors can utilize 100% of them, paying 81? each, we calculate the state credit proceeds as Credits * Ownership Percentage * Credit Price or $1,944,000. Note: not “certificating” the credits will require the Ownership Percentage to be 99.99% and the Credit Price to be roughly 65?.=2400000 * 100% * 0.81Special Needs 9% Double BoostTo provide additional financing to special needs 9% projects, CA allows such projects to receive the High Cost Area boost and CA state credits regardless of their location. However, TCAC desires such applicants maximize their federal credit request before requesting state credits. Error HandlingAs with all financial modeling you should build in warnings that notify the user of errors, regulatory thresholds not being met, and benchmarks that seem out of line. Important errors to watch for when calculating Tax Credit Proceeds include:If Eligible Basis is greater than the 130% Threshold Basis Limit, making it a High Cost ProjectIf Requested Unadjusted Eligible Basis is greater than the Threshold Basis LimitIf Voluntarily Excluded Basis on a Special Needs deal exceeds the difference between the Threshold Basis Limit and Requested Unadjusted Eligible BasisIf annual federal credits exceed the limit imposed by the state (TCAC is currently considering changing its 2,500,000 limit)If the Applicable Percentage assumption is out of dateIf there are sufficient credits available in the competition that your applying forWarning: Errors like these are notorious for getting applications disqualified, even though they are simple to calculate. Build warnings into your model!ConclusionThe Low-Income Housing Tax Credit is an excellent resource for raising capital from private investors to finance the development of affordable housing. However, since Tax Credit Proceeds are such a large component of the budget, small mistakes in its calculation can cripple a project’s feasibility. Furthermore, in CA the competition for 9% credits is so fierce that errors in the calculation of Tax Credit Proceeds could result in your project’s demise.Practice Calculate the Tax Credit Proceeds for a 120 unit mixed income (96 market rate units) new construction project in a QCT with 30,000,000 of Eligible Basis and a Threshold Basis Limit of 40,000,000, applying for the 4% Program when the published Applicable Percentage is 3.25% and investors are paying Credit Prices of 92?.Calculate the Tax Credit Proceeds for a 40 unit special needs new construction project not in a QCT or DDA with 30,000,000 of Eligible Basis and a Threshold Basis Limit of 25,000,000, applying for the 9% Program when the published Applicable Percentage is 9.00% and investors are paying Credit Prices of 98? and 80? for federal and state credits respectively.Calculate the Tax Credit Proceeds for a 50 unit new construction project in a DDA with 26,500,000 of Eligible Basis and a Threshold Basis Limit of 20,000,000, applying for the 9% Program when the published Applicable Percentage is 9.00% and investors are paying Credit Prices of $1.01 and 80? for federal and state credits respectively.Questions?If you have questions, call your helpful housing analysts at Kingdom Development, Inc., a California nonprofit public benefit corporation.william@951.538.6244rusty@714.357.1637Answers 2,331,967 30,497,550 0 ................
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