The Low-Income Housing Tax Credit program, or LIHTC program, is an integral component behind the supply of affordable housing in the U.S. Designed to help bolster capital to build this type of housing, without it industry participants would have a much more difficult time supplementing rents and revenues.
As a developer of affordable housing units, you understand the value of creating this type of rental property – both for the economy and your business. However, you also know that one oversight or minor mistake can throw the entire process off course, and avoiding these issues should be one of your highest priorities.
To that end, you can’t afford to overlook the Qualified Allocation Plan (QAP). Early in the process you need to dissect the QAP, run forecasts to determine which of your projects will score high, and evaluate what it is going to cost to receive an allocation of tax credits.
Likewise, you will need to develop forecasts in order to predict the impact of a deal on your return on investment. You want to evaluate the deal structure, the sources and uses of funds, the amount and timing of development fee payments, and the ultimate exit costs.
Position yourself for success
Your success depends on a number of factors, specifically planning, awareness, timing and proper utilization of resources. You have to understand what your equity partners are looking for from the development, such as size of units, and positioning yourself for maximum tax credits and the highest chance of winning an award will increase the likelihood of generating a profit.
The affordable housing industry is unlike any other. When working with partners, it is vital that you team with a firm that understands the nuances of this segment. At Clark Schaefer Hackett, we have extensive affordable housing experience, and we’re able to effectively assist you to find ways to structure affordable housing developments so navigating the regulations is a breeze.
And, it all comes back to this main element: Without a sound structure in place, you’ll be fighting against tax rules and other elements that would otherwise be working in your favor. To avoid that problem, here is what you need to know about structuring each of your affordable housing developments.
Understand the details to increase profits
The details involved in an affordable housing development can add up quickly, and without a clear understanding of the ins and outs of the industry, tax regulations and requirements, you might encounter difficulties. With that said, structuring your affordable housing development to achieve the best tax benefits is a vital step that cannot be missed.
Pivotal to your success will be your ability to navigate U.S. Department of Housing and Urban Development (HUD) regulations. The affordable housing industry is one with minimal cash flow. Using government rental assistance programs to supplement rents and revenues is the best way to assure a steady stream of rental revenue, and the main benefit of proper structuring is to avoid compliance problems and ensure the correct allocation of tax credits.
Focus on the Qualified Allocation Plan
As previously stated, your project cannot get underway without an allocation of tax credits. This brings into play your state’s Qualified Allocation Plan (QAP).
This document will outline what you need to do in order to receive tax credits for each project. Your state will determine a list of types of housing. For example, Ohio’s QAP includes apartments for families and units for seniors, as well as single family lease-purchase projects and single-family homes. The QAP will also detail what characteristics your project needs, such as the ability to be sustainable in the current market. You may also need to meet certain regulations and other criteria, like energy-efficiency.
Plan ahead to ensure financial success
You won’t be able to create an effective affordable housing project alone, and going over all your options ahead of time will help you find the best financial opportunities, from syndicators to governmental programs
For example, HUD’s HOME Investment Partnerships Program can help you find additional grants for affordable housing developments. But, it is important to keep in mind that each of these programs has its own share of federal regulations, and navigating these can be one of the most complicated parts of the process.
According to the media outlet Professional Builder, partnerships and financing opportunities are the lifeblood of the affordable housing industry. Thanks to programs and tax credits, cities can be valuable allies during this process – not enemies. Even so, the regulations, permits, materials and labor all come into play, and planning ahead can ensure that these expenses are calculated, so the final product will be profitable for those involved.
Connecting with experts will keep you on track
Finding financing sources for low-income housing units can be challenging. With the assistance of advisors, you will be able to take advantage of all available government incentive programs, community initiatives and other regulations that will allow for the best possibility of putting a deal together that works. You need to know what’s coming in the industry, and connecting with experts will provide an avenue of comprehension into future trends and changes in affordable housing. As we mentioned before, a misunderstanding or minor mistake can drastically alter the course of your project, and consulting knowledgeable tax professionals will keep you on track.
When you are looking for a professional team to help you structure your affordable housing development, make sure you work with a firm that balances experience, youth and industry knowledge. Clark Schaefer Hackett is that organization. Here at CSH, we stay up-to-date with industry trends, IRS regulations and other affordable housing shifts. We are focused and dedicated to responsiveness, and we provide effective methods of accounting for tax credit investments.
CSH’s Morgan Mahaffey, Senior Accountant, contributed to this article.