Preserving Multi-family Housing with a Smart Rehab Loan
Existing multi-family housing properties in Pennsylvania that rent at least one half of their units to households earning less than 60% of median income are eligible for a combination of grants and loans to complete rehabilitation that will reduce the energy consumption. The property must remain affordable for five years after completion of the improvements. Guidelines and application are available on the Pennsylvania Housing Finance Agency website.
Low Income Housing Tax Credit Overview
The Low-Income Housing Tax Credit Program ("Tax Credit Program") is a federal program created by the 1986 Tax Reform Act and amended pursuant to several subsequent Budget Reconciliation Acts. The Pennsylvania Housing Finance Agency ("Agency") is the Commonwealth agency responsible for the administration of the Tax Credit Program. The purpose of the Tax Credit Program is to assist in the creation and preservation of affordable housing for low-income households. The Allocation Plan containing the criteria to be used in distributing the Tax Credits based upon the housing needs of the Commonwealth is located in the Multifamily Housing Program Guidelines.
The Tax Credit Program makes available to owners of and investors in low-income rental housing developments a Tax Credit which is a dollar-for-dollar reduction of their federal tax liability. The Tax Credit may be taken for a 10 year period provided that the development remains in compliance with the Tax Credit Program. All information and summaries are provided as a general overview only. Applicants must consult their own tax advisors and may be required to provide opinions from qualified professionals regarding any aspect of their development.
Rehabilitation – 9% Credits
This year, approximately 15% of Pennsylvania’s Rehabilitation (9%) Tax Credit allocation will be reserved for preservation of existing affordable rental communities (approximately $3.6 Million in tax credits). Essentially, the equity raised by these 9% credits pay for up to 70% of the eligible construction basis and reduces the amount of debt otherwise required to finance the rehabilitation. Preservation applications are ranked in a competitive process with awards announced annually. In recent years, less than half of the preservation applicants received an award of credits. The complete guidelines for tax credits and the Preservation Set-Aside are available in the 2011 Qualified Allocation Plan on the PHFA website.
Acquisition – 4% Credits
The Tax Credit for acquisition expenditures is based on a present value of 30 percent of the qualified basis of the building over the 10 year period. This applicable percentage, determined monthly by the IRS, is approximately four percent. The amount of Tax Credits is determined by applying the applicable percentage to the qualified basis of the building. The qualified basis of the building is determined after a value attributable to the land has been deducted.
Tax Credits for the acquisition of an existing building are not permitted unless rehabilitation costs equal to the greater of $6,000 per unit or 20% of adjusted basis will be or have been incurred on the building. In general, an acquired building is eligible for Tax Credits if it meets the following requirements:
The Agency provides financing to developers building or rehabilitating rental units designed for lower income occupancy. Competitive financing rates are made possible through the sale of Agency tax exempt and taxable bonds. Mortgages provided through Agency bond proceeds must be secured by a priority lien position. Bond financing may be coupled with PennHOMES funds to help make the development financially feasible.
Tax Exempt Bonds with 4% Credits
Each year the Agency publishes a Request for Proposals (“RFP”) to invite, evaluate, and select qualified tax exempt residential rental facilities for annual allocations of state ‘volume cap’ financing. The Agency encourages applications from multifamily developments and will provide volume cap to as many qualified properties as are reasonably feasible. Applications may be accepted up to August of each year but are allocated on a ‘first come, first served’ basis until the annual allocation is expended.
For projects using tax exempt bond proceeds for more than 50% of eligible basis, 4% credits may be awarded on a non-competitive basis. Eligibility for tax exempt bond financing does not ensure qualification or eligibility under the Allocation Plan (“Plan”) for applicants seeking federal Low-Income Housing Tax Credits (“ 4% Tax Credits”) for a portion of the development financing. Applications must meet the requirements of the Plan in order to qualify for the Tax Credits associated with the tax-exempt bond financing.
For projects utilizing bond proceeds for less than 50% of eligible basis, they may compete for 9% rehabilitation credits by submitting a LIHTC application in the normal process.
To qualify for private activity volume cap, residential rental facilities must meet all qualifications of the IRS Tax Code. Such facilities may involve the rehabilitation of existing rental facilities, new construction of facilities, modernization of public housing facilities, and construction of qualified ‘assisted living’ housing. Details for the required applications are detailed in the 2011 Multifamily Housing Application Package and Guidelines (“Guidelines”).