The Low Income Housing Tax Credit

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1 The Low Income Housing Tax Credit Paul Buckland Community Lending and Investments Senior Vice President Regional Equity Manager States Covered: Utah / New Mexico / Nevada / Arizona / Hawaii 2016 Wells Fargo Bank, N.A. All rights reserved. For Discussion & General Information Purposes Only

2 Agenda What is the Low Income Housing Tax Credit ( LIHTC ) LIHTC s in Utah How Does the LIHTC Work Income Limits for LIHTC Projects in Utah (Wage / Rents in Wasatch County Heber City) Who can use the LIHTC Benefits of Investing in LIHTC s Types of Investments in LIHTC s Wells Fargo Investments 1

3 Low Income Housing Tax Credit The Low Income Housing Tax Credit (LIHTC) is widely hailed as one of the most successful federal programs in history for enabling the development of affordable housing in the US. The LIHTC was first offered by the IRS in 1986 The Internal Revenue Service and Utah Housing Corporation ( UHC ) jointly administer the LIHTC program in Utah. Tax credits are not an operating subsidy, but provide a subsidy for the construction of affordable rental units serving tenants at or below 60% of area median income. LIHTC tax credit equity volume of approximately $11.5B per year. Since 1986 LIHTC has developed 60,000-80,000 new affordable apartments across the US each year. The program is administered by the state housing agencies who allocate tax credits to owners of housing developments on a competitive basis. 2 2

4 Low Income Housing Tax Credit (LIHTC) Equity The Treasury Department gives states the authority to allocate tax credits to developers of rental housing that is dedicated to low-income families for a minimum of 30 years. In 2016, each state will receive an allocation of either $2,690,000 or a maximum of $2.35 per capita whichever amount is greater. Since 2003, this amount has been adjusted annually for inflation, but not meaningfully increased since For an additional period of up to 84 years Utah Housing Corporation ( UHC ) maintains a deed restriction on the property requiring its use for affordable rental housing. Throughout the entire period of affordability, UHC monitors, audits, and inspects the property to ensure compliance. The Low Income Housing Tax Credits have been part of the tax and investment strategies of many Fortune 1000 corporations, in addition to their social missions. These investments also provide benefits to financial institutions under the Community Reinvestment Act of

5 Low Income Housing Tax Credit (LIHTC) UTAH 4 4

6 How Does the LIHTC Work Source: Wells Fargo Bank. 5 5

7 UTAH Wage and Rental Statistics Source: National Low Income Housing Coalition 6

8 CLI LIHTC Equity Production Elmbridge Apartments Mountianland Community Housing Trust

9 LIHTC Median Income and Allowable Rents MSA: Wasatch County, UT City: Heber 1 Person Annual Area Median Income (30% to 60%): $15,180 to $30,360 Monthly Rent for 1 Bedroom (30% to 60%): $406 to $813 per month 2 Peron Household Annual Area Median Income (30% to 60%): $17,340 to $34,680 2 Person Monthly Rent for 2 Bedroom (30% to 60%): $487 to $975 per month 8 8

10 WHO CAN USE THE LOW INCOME HOUSING TAX CREDIT Individual investors in a tax credit project are subject to the passive loss, passive credit, and at-risk rules in the federal tax law. For example, under the passive loss and credit rules, certain individual investors may use the LIHTC up to an amount equal to the deduction equivalent of $25,000 per year at the individual s marginal tax rate (e.g., $9,900 per year at a 39.6% marginal tax rate [$25,000 x 39.6% = $9,900]). C Corporations Widely held C corporations are ideal investors in LIHTC projects because they are exempt from passive loss restrictions which serve to limit the use of tax credits and depreciation deductions. Why Corporations invest in tax credits: 1) use excess cash to produce investment returns in excess of their internal rates; 2) reduce the corporation s effective tax rate and in turn increase after-tax earnings. 9 9

11 BENEFITS OF INVESTING IN LIHTC Increases after tax earnings Provides financial return on investment (credits and operating losses) Provides financial performance similar to bond instruments Receives consideration under the Investment Test of the CRA Provides safe and affordable housing to residents Provides community banks with an additional vehicle for their investment strategy 10 10

12 Low Income Housing Tax Credit (LIHTC) Equity $1million investment earns an investor $1.45 million to benefits and yields a 7% IRR

13 After-Tax Yields Alternative Investments 18% 16% 14% After Tax Projected Yield - LIHTC Funds After Tax Yield 10-Year Treasury Municipal Bonds - Blended 12% 10% 8% 6% 4% 2% 0%

14 Low Income Housing Tax Credit (LIHTC) Equity WF s Objective: Offsetting the Bank s federal tax liability Satisfying CRA investment volume goals Generating profitable earnings and cash flow Cross-selling Bank s financial products (i.e. Construction Loans) Duration of Investment: Typically 15 years Three distribution channels: Direct Investment investor directly purchases credits from developer Indirect Investment investor purchases credits from syndicator syndicator purchases credits from the developer) (and Proprietary fund Multi-investor fund 13 13

15 Low Income Housing Tax Credit (LIHTC) Equity Direct Investment Typical Direct Investment Structure: General Partner (GP) (typically 0.01%) Investor Limited Partner (ILP) (typically 99.99%) Property A Ownership Entity (LP or LLC) Developer Property A 14

16 Low Income Housing Tax Credit (LIHTC) Equity Indirect Investment Typical Indirect Investment Structure: Investor A Investor B Investor C Investment Fund (aka Upper Tier Partnership ) Fund GP (aka Syndicator ) Property A Ownership Entity (aka Lower Tier Partnership ) Property B Ownership Entity (aka Lower Tier Partnership ) Property C Ownership Entity (aka Lower Tier Partnership ) Project A - GP Project B - GP Project C - GP 15

LOW-INCOME HOUSING TAX CREDIT PROGRAM OVERVIEW

LOW-INCOME HOUSING TAX CREDIT PROGRAM OVERVIEW September 2015 TAX CREDIT OVERVIEW The credit is a 10-year tax incentive to encourage the development of residential rental housing at or below 60% of area