Financing Green Affordable Housing Herbert F. Stevens Nixon Peabody LLP.
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Transcript of Financing Green Affordable Housing Herbert F. Stevens Nixon Peabody LLP.
Financing GreenAffordable Housing
Herbert F. StevensNixon Peabody LLP
Better Equity Through Tax Credits
• Normal Equity is the most expensive money you can use
• Tax Credit Equity is, like grants, the cheapest money you can use
– Tax Credit Equity is based on a federal or state government giving you free money if investors put equity in your project
Four Types of Federal Tax Credits
• Low Income Housing Tax Credits
• Historic Rehabilitation Tax Credits
• New Markets Tax Credits
• Renewable Energy Tax Credits
Free Money with Strings
• Low Income Housing Tax Credits
– Rental housing for persons and families who earn less than 60% of median income for your area
– Rent charged must be no more than 30% of the 60% median income each year, including utilities
– Must keep housing rental for 15 years and as affordable rental or ownership for 15 years after that (Minimum – some states longer)
Free Money with Strings
• Historic Rehabilitation Tax Credits
– Substantial rehabilitation for historic building consistent with federal standards
– Any type of building
• Housing
• Retail
• Theater
• Community Center
Free Money with Strings
• New Markets Tax Credits
– building or business must be in low-income census tracts – below 80% of median income
– Area must usually have some other higher distress criteria – for example, high poverty rates, high unemployment, housing hot zone, brownfield, lower median income
– Generally investments are for 7 years
Free Money with Strings
• Renewable Energy Tax Credits
– Investment Tax Credit – Solar
• New facility includes Photovoltaic and fuel cells
• Must generate electricity, heating, cooling, hot water or fiber-optic lighting
– Production Tax Credits
• New facilities used to generate energy through wind, biomass, geothermal, certain irrigation, solid waste and others
How Much Free Money?
Time Periods Value as a Credit Type for Equity Percentage of Cost
Housing 15 years 73%
Historic 5 years 20%
New Markets 7 years 25%
Solar 5 years 30%
•Values are approximate and vary with timing of equity, losses and other tax benefits, current market pricing and credit of sponsor
•New Markets sunsets in 2009, unless Congress renews the credit
•Solar drops to 10% in 2009, unless Congress renews the credit
Qualifying for Tax Credits
• Housing Credits – Statewide competitions each year run by State housing finance agency
• New Markets – National competitions each year run by Treasury Department – Community Development Financial Institutions Fund
• Historic – Available by right if building rehabilitation approved by federal government
• Solar – Available by right for qualifying property
New Markets Tax Credit
• Most flexible of all credits – can be used for real estate or business
• Can be combined with historic credits, energy credits and, with creativity, housing credits
• Purpose is to give investors an extra incentive to invest in low income areas, and businesses an extra incentive to locate in these areas and produce jobs and services for such low-income communities
New Markets Tax CreditsIneligible Business Activities
• Operation of residential rental property– Buildings which derive 80% or more of gross rental income from residential
dwelling units
• Properties where no substantial improvements are made
• Development or holding of intangibles for sale or license
• Operation of certain ineligible businesses– Golf courses
– Race tracks
– Gambling facilities
– Certain farming businesses
– Stores where the principal business is the sale of alcoholic beverages for consumption off premises
New Market Tax Credits• Made available to newly created lending conduits with a mission to bring
capital to low income area
• Conduits with credits have been set-up by:
– Banks / Financial Institutions
– Cities
– States
– Nonprofits
– Syndicators (nonprofit and for profit)
– Developers
New Markets Tax Credit Structure
Lender Investor
Debt ($70)
Principal and Interest ($110)
Equity ($30)
Tax Credits ($39)
Community DevelopmentEntity (CDE)
(Conduit Lender)
Equity ($100) Tax Credits ($39), Interest and Repayment ($110)
Project or Business
Equity ($100)
Interest Each Year, Principal in Year 7A Loan($70) B Loan or Equity ($25)
Investment Fund
New Markets Tax CreditsApplication cycle for current competition
December 1, 2006
January, 2007
March 5, 2007
(Probably) October 30, 2007
December 2007/January 2008
Competition announced
Deadline for certification of applicants
Deadline for applications
Announcement of Awards
First investments close
New Markets Tax Credits
• Competition is stiff:
– About 25% of applicants each year get an allocation of credits
– About 10% of requested money is allocated
• In a recent year – $3.5 billion was allocated, but $30 billion was requested
– Application stresses track record in raising and deploying capital, a business plan with a projected pipeline, and concrete measures of community impact
Require Additional Information?
Herbert F. StevensNixon Peabody LLP
202-585-8811
To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Require Additional Information?
Herbert F. StevensNixon Peabody LLP
202-585-8811
To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
