Housing 101 Developing Affordable Rental Housing Vermonts Housing

Housing 101 Developing Affordable Rental Housing

Vermont's Housing Stock Number of Non-Seasonal Housing Units 180 000 160 000 140 000 120 000 100 000 80 000 60 000 40 000 20 000 Owner Occupied Renter Occupied

Vermont's Rental Units 35 000 30 000 25 000 20 000 15 000 10 000 5 000 In builings with 1 In buildings with 2 In buildings with 3 units or more units Mobile homes

Housing Wage The housing wage is the income necessary to pay the Fair Market Rent (40 th percentile rent plus utilities).

Vermont Incomes Fall Short

Shifts in Federal Rental Affordability Delivery Mechanisms • Public Housing • Section 8 • Tax Credits

Developing Affordable Rental Housing • Local groups identify need or opportunity. • Connect with experienced community or regional housing nonprofit. • Conduct feasibility analysis. • Secure property. • Design and permit development. • Secure financing. • Begin construction. • Occupy.

Federal Low Income Housing Tax Credit • Created by the Tax Reform Act of 1986. • Intended to offer investors incentive to invest in affordable rental housing. • Provides a 10 -year stream of federal tax credits in exchange for equity investment. • Promotes affordability by minimizing debt service. • Projects must meet occupancy and affordability criteria. • IRS sets rules. Administered by VHFA.

LIHTC Project Eligibility Requirements • Occupancy – At least 20% of the units occupied by families with incomes ≤ 50% of HUD AMI; or – At least 40% of the units occupied by families with incomes ≤ 60% of the HUD AMI. • Affordability – Gross rent cannot exceed 30% of the applicable qualifying income. – Rent does not fluctuate based on size of family in unit.

Maximum LIHTC Gross Rents Location Burlington 1 Bedroom 2 Bedrooms 3 Bedrooms $794 952 1, 101 Barre 737 885 1, 021 Rutland 662 795 918 Brattleboro 677 813 939

Other Features • Federally required 30 -year use restriction. • VHFA requires restrictive covenant requiring that low income occupancy in assisted units continues in perpetuity. • Nonprofits arrange in advance through right of first refusal to purchase property after initial 15 -year compliance period for pre-determined price (outstanding debt + any tax liability).

Generic LIHTC Process

The Investors' Perspective • Why do investors participate? – Community Reinvestment Act (banks). – Return on investment. – Local Involvement. • What are the investors risks? – Loss of credits. – Reduction in return due to late credit delivery. – Poor financial performance which results in need for additional capital investment.

Calculating LIHTC Equity Available • Determine eligible basis. • Compute percentage of total units which are tax credit units. • Determine qualified basis by multiplying eligible basis by percentage of LIHTC units. • If applicable, multiply qualified basis by QCT/DDA adjustment of 130%. • Multiply qualified basis by 9% (allocated) or 4% (bond). • Result is tax credit which can be taken annually for 10 years. • Multiply LIHTC available by credit pricing.

• Assumptions: Example – Conventional financing. – 50 units, 45 of which are LIHTC units. – Property is not eligible for 130% boost. – Total development cost = $6 million. – Land other non-depreciable costs = $1. 2 million. • Calculations: – Eligible basis = $6 m less $1. 2 m = $4. 8 million. – Percentage of LIHTC units = 45 ÷ 50 = 90%. – Qualified basis = $4. 8 m X 90% = $4, 320, 000. – Maximum annual LIHTC = $4, 320, 000 X 9% = $388, 800.

Amount of Equity Created • Assume that investors are paying 83 cents per LIHTC dollar. • In our simplified example: – $388, 800 X 10 years = $3, 888, 000. – $3, 888, 000 X 83¢ = $3, 227, 040. • We these assumptions, the use of LIHTC would produce $3, 227, 040 in equity.

Other Tax Credits • Federal Historic Rehabilitation Credit – One time tax credit equal to 20% of the qualified rehabilitation costs in a certified historic building. – Rehab must be approved by US Department of Interior. – Credit is available when project is placed in service. • State Tax Credits – Affordable Housing Credit. – Downtown Credits.

Sample Development Budget • Assumptions: – 30 -unit, new construction project. – 25 LIHTC units (applicable fraction = 83. 33%). – LIHTC qualified basis + $6, 606, 637 (includes 130% adjuster). – Tax credit percentage = 8. 15%. – Maximum LIHTC available = $539, 015 – LIHTC used = $531, 700. – LIHTC available over 10 years = $5, 317, 000. – LIHTC price = 83 cents. – Tax credit equity raised = $4, 413, 110.

Uses

Uses (continued)

Sources

First Year Operating Expenses