REST Easy with Mahoney December 2023

9% Credits vs. 4% credits:
The LIHTC is designed to subsidize the development of low-income unit costs in a project. The 4% tax credit is used for new construction or rehab projects and/or the acquisition cost of existing buildings. The 9% tax credit is used in new construction or rehab projects.

The annual pool of 9% tax credits is available federally per state by population. The approximate state allocation of credits per year can be calculated by taking: State Population x $2.75 (2023 amount, increasing annually)

The amount of 4% tax credits available varies from state to state as well, but there is not a defined pool of credits (as there is with 9% credits). In order to qualify for 4% tax credits, at least 50% of the aggregate basis of the project must be funded with tax-exempt private activity bonds subject to volume cap. The number of projects that are awarded a bond allocation are determined by the amount of bonds issued by the state.

Calculation of Annual Tax Credits
The example calculation below will use the following information: new construction project, $28,000,000 of eligible basis, located in a qualified census tract (QCT), 100% applicable fraction.

*smaller of unit fraction or floor-space fraction

Eligible Basis may include costs such as:
• Construction costs
• Construction loan interest
• Developer fee
• Architect and engineering
• FF&E
• Amortization of financing fees during construction period
• Other hard and soft costs

Non-Eligible Basis:
• Land
• Marketing
• Partnership organization costs
• Commercial property
• Amenities tenants pay a separate fee for or not offered to all tenants
• Syndication
• Finance Fees
• Other

Projects are often eligible for a 30% basis boost when located in the following areas:
• Qualified Census Tracts (QCTs) – 50% or more of households have income less than 60% of area median income (HUD provides income amounts)
• Difficult Development Area (DDAs) – high construction, land, and utility costs relative to area median income (HUD provides income amounts)
• States can award up to 30% basis boost to make the project “financially feasible” for 9% projects that are not eligible for QCT or DDA
• If in QCT and DDA, property can only qualify for up to 30% (cannot combine and use 60%)

Minimum Set-Aside, Income Limits, Rent Limits
Applicable fraction is the percentage of low-income households in the building(s).
Minimum set-aside
• Set aside at least 20% of units for households with incomes at or below 50% of area median income OR
• Set aside at least 40% of units for households with incomes at or below 60% of area median income OR
• Average income test (AIT) – must designate an income limitation for each low-income unit (between 20% and 80% of area median income, in 10% increments), and the average of those units must be at or below 60% of area median income.

How Credits are Earned, Claimed and Recaptured
Credits are received/claimed over a 10-year tax credit period but earned over the 15-year compliance period. Accelerated credits are the credits received early in the first 10-year period for the last 5 years of the compliance period. If each low-income unit is not occupied by a qualified tenant by January 31st of the first year of the credit period, a portion of the first-year credits may be delayed. The delayed portion of the first-year credits is allowed in the 11th year.

Credits that are eligible to be recaptured are the accelerated credits, not the credits that have already been earned. After the 15-year compliance period when the credits have already been fully earned and utilized, credits are safe and can no longer be lost.