CRHA Financial Training   12/10/2020

Yes, it looks good.

Thank you so much.

Great.

I will.

Thank you.

Whoops, I got rid of myself.

Hi.

Hi.

I'm just waiting to let a couple more people look like they're connecting.

Okay, and Miss Carnes, are you set up?

I'm sure they already spoke with you about your PowerPoint and being able to share it.

Yes, Joe has that under control, I believe.

Okay, wonderful, thank you.

Okay, oh, there he is.

OK, thanks so much.

So I welcome everyone.

This is a work session, a virtual work session for the Charlottesville Redevelopment and Housing Authority Board.

It is Thursday, December 10, 2002.

And our agenda tonight is mainly to hear from Miss Carnes about, she's doing a, we'll call it financial training.

I think mostly focused on how we're going to be having LIHTC units in order for us to receive the LIHTC credits for our new redevelopment.

So she's gonna talk a lot about how all of that works.

So I'll call this meeting to order and read our...

Our statement from the governor allowing us to meet virtually.

Governor Northam issued an executive order EO 553, restricting public gatherings of greater than 10 persons.

Accordingly, code 2.2-3708.2A3 permits public bodies to meet electronically to discuss business required or necessary to operation of the public body

and discharge of its lawful purposes, duties and responsibilities in times of emergencies and to address COVID-19.

Therefore, this meeting is being held electronically pursuant to Virginia law because the COVID-19 pandemic makes it impractical and unsafe to assemble a quorum physically in a single location.

and let's see.

So I guess we'll go ahead and do the role of commissioners.

Mr.

Sales, do you want to do that?

I don't know.

I can do it.

Commissioner Slaughter.

Commissioner Green.

Can you just raise your hand and I'll mark you as present?

Gotcha.

Commissioner Dr. Henry?

Present.

Present.

Okay well thank you for being with us.

I think as this pandemic moves on we're all just so I feel like we're just on the screen all day.

Anyway, so we'll have a quick moment of silence and then have a moment if anyone has any announcements, dates that they want to bring up while we're all together.

Okay.

Does anyone have any, I know we have some meeting dates that we can announce, but any other announcements or just reminders that they want to share with everyone?

Let me move my, so at the bottom of, I'm just gonna read what's on the bottom of our agenda.

There might be other upcoming meetings and dates that we should pay attention to, but these ones, the safety meetings are continuing.

We think that December 22nd, yes.

Okay, December 22nd is.

It's every other Tuesday at 6pm and you can get the link on our website and it's the same link and password for all those meetings.

The redevelopment meetings continue every Thursday at 2.30 PM.

This board will have another work session next Thursday at 5 PM.

It's a public hearing for our annual plan.

And then we're not going to have a December monthly regular board meeting due to the holidays.

So we will actually have our next board meeting in January, January 25th.

We are also starting to resurrect some of our committees to have stable meeting times.

And we've set our first new resident service committee, new after a hiatus or break, January 12th, Tuesday at 1 p.m. And it's our first meeting, so we can then discuss whether this will be a good time to continue those meetings.

and I know this I'll share it with anyone that's watching I know that the city schools are doing another I have to remember what it was called but they're doing another

sort of giveaway at the high school for essential needs.

I believe they're doing kind of health essentials, some food.

So that's Saturday morning at the high school.

And I could give you more information, but I'll try to find it and I'll add it into, if we have the chat.

Yep, I'll add it into the chat.

Okay, so let's go ahead and introduce our,

Lawyer, down from, well, zooming in from Norfolk.

Miss Carnes has prepared a training for us and I see some staff on here so we can all learn about the very complicated funding process and mechanisms to make affordable housing work these days.

So I guess I'll turn it over to you and let us, are there any other questions, comments?

Okay, well, we'll go ahead and here we go.

Thank you so much.

And thank you for having me.

So we've zoomed in before for another meeting.

Tonight, we thought we would talk about one of the financing tools that CRHA is actually using for some of its initiatives.

So we're going to talk about low income housing tax credits,

and we're also going to touch on how to combine low income housing tax credits with tax exempt bonds.

The training tonight is meant to be, I guess, an overview with a little more detail.

It's not necessarily going to make you an expert in low income housing tax credits, but it's going to give you more information than what you would find in a 101.

So it's going to be fairly detailed.

Perhaps some of it is overkill or maybe too much detail for some of you, but I thought it was

Better to provide you a little more information and you can feel free to disregard what's not as relevant.

And then at the end of the training, if we have a few minutes left, I'll give you an update on where we stand for two of your transactions, Crescent Halls and South First Street.

So we can do that at the end, because once you've heard, I think the presentation on LIHTC, you'll get a better sense for what it takes to get a project from

start to finish.

So I don't know if you can see the PowerPoint on your screen or if Joe could put it on the screen.

There you go.

I know I see it on my end.

Can everybody see it?

Okay.

And hopefully you received an advanced copy from I think Divinia had circulated it.

So today we're gonna talk about how to use low-income housing tax credits.

And we're also going to talk a little bit about tax exempt bonds.

Next slide, please.

So this slide tells you about the Low Income Housing Tax Credit or LIHTC program and how it came to be.

So some of you may know that it was established in 1986 and was codified in the Internal Revenue Code.

It's at Section 42.

And the goal of the program is to provide financing for the construction

and Rehabilitation of Affordable Housing.

So you can do both renovation as well as new construction with low income housing tax credits.

And today it's really the main financing tool for the production and renovation of affordable rental housing.

As a matter of fact, with the dwindling federal funding on the public housing side, you really see that LIHTC is the main

financing source for anything that you do in affordable housing because you really do not get enough subsidies for the government to address all of the capital needs of an overall very much aging affordable housing stock in the Commonwealth of Virginia.

So without LIHTC, there's not that much that we could do these days.

Even as the financing tools like RAD were developed,

We realized that even with RAD, we also needed LIHTC on top of RAD, which is the rental assistance demonstration in order to make the financing work.

So really one of the main financing tools to develop affordable housing, which is why it is widely used by housing authorities.

Next slide, please.

So this is a very simplified snapshot of how the LIHTC programs work.

Developers can receive LIHTC and they can use the credits themselves, meaning keep the credits and claim them against their own taxable income, or they can sell the credits to investors.

And I put sell in quotation marks because you cannot sell tax credits, you syndicate them.

Tax credits follow profits and losses.

So you have to be a member of an entity in order to claim tax credits.

You don't sell tax credits.

The investors make an equity contribution in exchange for the right to claim the tax credits.

And the more equity contributions you get, the less you have to borrow money to fund your development costs.

That's really how it works in a nutshell.

And if you don't have to pay as much debt service to a bank on a loan, then you can have a successful affordable housing project because you can have lower rent.

You don't need to have rents that are as high in order to service your debt.

So the more equity you get, the less you have to borrow pretty much dollar for dollar.

and again, it makes your projects successful.

Always keep in mind that the investors are not looking for their equity contributions back.

They're in essence, buying the credits and again, in quotation marks, because they're making an equity contribution in exchange for the right to receive the tax credits.

Most of their return comes from the tax credits.

So it is not like they're making a loan.

They're not looking to be reimbursed for their equity contribution.

Of course, some things can go wrong, in which case they do want their money back, which is called recapture.

And we'll talk about that in the presentation.

But otherwise, in principle, once they have invested their equity, it is the developers to keep.

Next slide, please.

So as I briefly mentioned, the LIHTC is a dollar for dollar reduction of federal tax liability for the owner of the qualified project.

So if you are a developer of a qualified LIHTC project,

and your project receives tax credits that you syndicate to an investor.

If the investor receives $2 million in tax credits, for example, then those $2 million in tax credit reduce dollar for dollar their amount of tax liability.

So it's an actual credit as compared for instance, to a deduction where if you take a deduction,

As part of preparing your tax return, it is not dollar for dollar.

It reduces your taxable income, but not your tax liability.

A tax credit is a dollar for dollar reduction.

So if you if you owed $2 million in taxes, but you have $2 million in tax credits, your federal tax liability becomes zero.

It's a federal program.

So we're talking about federal taxes.

The LIHTC does not offset your Virginia tax liability if you're in Virginia.

But because it's a federal program, it means that even for a project located in Virginia, you could attract an investor that is based elsewhere because they're interested in offsetting their federal tax liability, not their Virginia liability.

So that's actually a very attractive thing because it allows you to work with

A variety of investors.

They could be based in California.

They could be based in New York.

It really doesn't matter.

As long as they have a federal tax liability, they are potentially interested in offsetting that tax liability with some tax credits that they could get on the project based in Virginia.

But because the LIHTC is a federal credit, it would work fine for them.

The amount of the credit is based on the cost of building new affordable units or renovating existing affordable units.

So this is important.

It's a credit that is based on how much you spend.

And not everything you spend will qualify, but we'll get into that.

but fundamentally the amount of the credit is based on your project and how much you spend in hard costs and some qualifying soft costs.

That's very important because that means the credit is extremely project specific and it requires a lot of underwriting and due diligence in terms of verifying those costs and having accountants certify as to those costs and how much was spent

on the various line items in the budget.

And we do that with accountants at the beginning of the project for underwriting purposes.

Then we do that again at closing.

And then we do it post-closing to verify that the assumptions that were made before closing ended up being true once the project was built.

That's important because obviously it takes a while to build units or to renovate units and the cost can change along the way.

or you can have change orders with your construction contractor.

So there is always a verification upon delivery of the units when the construction is done.

The low income housing tax credit is claimed over a 10 year period.

So that means if we close today in 2020,

Then the credits would start being claimed when the project is placed in service.

So let's say maybe next year in 2021, and then for an additional nine years before that.

But what's really specific and interesting with regard to this credit is the next bullet.

The tax credit compliance period is 15 years.

So contrast that to the prior bullet.

I just said the credits are claimed over a 10 year period.

So after 10 years, the investor is done claiming the tax credits on their tax return, yet the compliance period continues for an additional five years after that.

That discrepancy between the compliance period and the credit

being claimed over tenure, that's what makes this credit called an accelerated credit.

You basically claim it faster than you have earned it.

You haven't really fully earned it until the compliance period of 15 years is over, but yet you've already claimed all of it in the first 10 years.

That's really important because even if an investor has derived all of the financial benefits from the credits that they could get

in 10 years, there are still some significant compliance and oversight requirements for an additional five years beyond that, which could cause a recapture and we'll talk about recapture in this presentation.

So that's very important to keep in mind as we move forward with this presentation and as you get involved with low income housing tax credit transactions for the housing authority.

The last bullet states that the restrictions extend for at least 30 years.

That's what we call in Virginia the extended use agreement.

So it's not so much an internal revenue code statute that regulates how the tax credit works.

This is due to affordable housing restrictions.

that the Commonwealth of Virginia puts on tax credit projects.

And actually the Commonwealth of Virginia is not alone in implementing those restrictions.

A lot of states do the same thing.

And those restrictions basically state that the project has to remain an affordable housing project for at least 30 years.

That's the extended use agreement.

It's a document that VHDA, the Virginia Housing Authority for the Commonwealth monitors and implements the tax credit program.

And they mandate that the extended use agreement be signed at closing on the low income housing tax credit transaction if the transaction is based in Virginia.

and that document is recorded in the land records and it becomes a lien against the property to make sure that the units remain affordable housing units for at least 30 years.

So that's an important point to keep in mind because you have on the one side the Internal Revenue Code rules

the tenure claiming the credits period and the 15 year compliance period.

But then you have affordability restrictions that govern the use of the property for at least 30 years.

So really in terms of what you can use those units for, you're looking at 30 years of affordable housing, which is why we always tell our clients that you only consider

using low income housing tax credits if you are prepared to restrict the use of the property for affordable housing purposes for 30 years.

If you're not on board with that, LIHTC is not the right program.

Next slide, please.

This just gives you an overview of who are the parties to the transaction.

So you have the developer, which could be

The Housing Authority, or it could be an affiliate of The Housing Authority, or it could be a complete third party who is in the business of developing private housing developments.

Then you have the State Housing Finance Agency, that's VHDA, the Virginia Housing Development Authority, although they recently changed their name and they are now just called Virginia Housing, but everybody knows them as VHDA.

Then you're gonna have a lender who's going to provide some debt for the property because the tax credit equity by itself is never sufficient.

You're gonna have the low income housing tax credit investor who is quote, purchasing and quote the credits, providing equity in exchange for the right to claim the credits.

Then you have your residents who are going to occupy the units.

And then you have all kinds of consultants

Of course your attorneys, your accountants, and then your third party providers of services, your general contractor and all the subcontractors working for your general contractor.

an architect, an engineer.

Sometimes you have a civil engineer, you have a surveyor, you'll have the title company providing title insurance for the project.

The locality has to provide support letters when it's a tax credit project.

So you really have a lot of professionals basically who help implement the tax credit project.

Next slide, please.

So this talks about how you obtain tax credits.

So you may have a qualifying project and qualifying expenditures at the project level that does not allow you to claim tax credits automatically.

First, you have to receive tax credits and in order to receive them, you have to apply.

I mentioned that it's a federal credit, but in each state, the program is administered by state housing finance agencies.

And for us in the Commonwealth, it is VHDA, now known as Virginia Housing.

Each state receives an overall allocation of tax credits based on their population.

And we have two types of low income housing tax credits, 9% credits and 4% credits.

and we'll talk about the distinction.

The 9% credits are the ones that bring you the most money and they are the ones that are limited.

So there's a calculation that is made based on the population of the state and that gives you the total pool of tax credits that is available to be divvied up amongst qualifying projects who submit an application.

I have to tell you it's an extremely competitive process.

Every year, it is oversubscribed at the 9% level and certainly not everyone who submits an application receives funding, far from it.

And then we've got to 4% credits, those are not limited, so you do not have to worry about a cap.

Each year, Virginia Housing, formerly known as VHDA issues

A QAP, which is the qualified allocation plan and it is in that document that they outline what the rules will be for that particular year.

And I'm saying that because the rules do change every year.

They make adjustments to the application just to keep us on our toes, I suppose.

But they adjust the program a little bit every year.

So even though developers, for the most part who are in this field, pretty much apply every year or every other year and are very used to the project, to the program, they have to make adjustments for their projects every year because the QAP will be slightly different.

Next slide, please.

The QAP is the document that will govern the point allocation.

So for 9% low income housing tax credits, because it's a competitive process, developers submit an application to VHDA and they are scored.

And so the scoring is what really changes in the QAP every year.

and some years Virginia Housing may decide to put an emphasis on certain developments.

For instance, several years ago, they created bonus points for developments that include units that are accessible to persons who are disabled.

So you get extra points if you have a certain number of units or percentage of your units accessible to persons with disabilities.

And so you really have to review the QAP every year to figure out where your priorities are going to be.

It's really a balancing act because as you try to score some points in certain categories, you are also potentially increasing your development costs.

And there comes a point where maybe it's not worth it, right?

Because if your development costs become this high, but the tax credit equity that you get just takes you here, well, you haven't really made much progress.

You've committed to do a number of additional improvements to score higher, but then you don't have the money to make those improvements.

and that happens for instance with LEED certification and green buildings.

A lot of developers try to get extra points by committing to obtaining a LEED certification or building to Earthcraft standards and yes you do get the points to do that but how much is it going to cost you in construction costs to meet that standard and so it really becomes a balancing act and

And developers, I guess, have to be careful in terms of how they craft that application to score the maximum amount of points available pursuant to the QAP, yet still have a project that they make financially feasible.

And then even if you're using tax exempt bonds, which puts you in the realm of 4% instead of 9% credits, you must still follow the rules in the QAP.

Next slide, please.

So this slide talks about how you evaluate a project and whether a project would be a good candidate

for low income housing tax credits.

And so in the first bullet, you can see the types of units that can work for low income housing tax credits.

And it's pretty much any type of housing dwelling.

But always keep in mind as you consider a tax credit application that the state agency, so in our case, VHDA will only give you

the bare minimum amount of credits that are absolutely necessary for your project to be feasible.

Meaning VHDA is not going to just give you additional funds to pay for soft costs or developer fees.

They are not in the business of throwing money at you just to make you happy.

They're going to give you the bare minimum that makes the project feasible.

Which is why you have to always be very careful what you put in your application because VHDA will hold you to it.

So you cannot just engage in puffery to score well in the application and then not deliver.

Not only will they give you only the minimum of credits necessary to make your project work, but they will also hold you to the commitments you made in your application.

And so in the third bullet, you see some of the items that are important to keep in mind, including of course your sources and uses of funds or your budget, as well as the equity to be generated by the tax credits.

I'll pause on that point for a second.

The equity generated by the tax credits is basically the price that an investor is willing to pay in exchange for the right to claim the tax credits.

And so in the industry, there is a price per credit, right?

For each dollar of tax credits, how much is an investor willing to pay?

That varies greatly according to a lot of factors.

But to give you an example, for your two pending transactions, which are Crescent Halls and South First Street, your price per credit is 88 cents.

So for every dollar of tax credits that VCDC claims, they pay you or your developing entity 88 cents.

For each of those two deals, by the way, that adds up to about $6.6 million in equity.

But keep in mind also that not only does the price per credit change, meaning the fact that it's 88 cents for these two deals doesn't mean it's gonna be 88 cents later, let's say next year for a different transaction.

It could also be different, not just based on timing, but based on the investor you're talking to.

Some investors are motivated by the Community Reinvestment Act, and I don't know how many of you are familiar with that statute, but it's a statute that applies to banks and basically banks have an obligation to reinvest in the communities where they are present.

And where they're present means do they have a branch office?

Do they have an ATM?

If they have a presence in an area, they will collect CRA credits, meaning they will do well under their own regulations if they reinvest in those communities.

That's why, for instance, in Virginia, particularly in the Charlottesville area, and I know it's true in Hampton Roads as well,

You do not see JPMorgan Chase making a lot of investments.

That's because they don't have a lot of ATMs and branch offices in our areas.

But you can see more investments from other entities who do have a larger presence in the Commonwealth in those areas.

If they have a larger presence, not only will they be willing to make an investment in exchange for tax credits, but they may also be willing to pay a higher price per credit.

So that's important because it goes into the negotiations.

And of course it goes into your analysis as you're evaluating a project for LIHTC purposes, you have to make certain assumptions as to how much equity you could raise for your project.

Are you gonna raise 88 cents per credit?

Are you gonna raise 92 cents per credit?

Even though it's only a four cents difference on the $25 million project, that's a huge amount of money.

And so it's important to be realistic, but at the same time, somewhat conservative when you're making your estimates for tax credit application purposes so that if you get less money, you don't have maybe a big gap to fill because you were already conservative in your analysis.

And if you get too much money, then that's okay because chances are your construction costs are going to increase anyway by the time you finish the transaction.

I've rarely seen a LIHTC project get finished without change orders or going into the construction contingency line item.

So it's important to keep that in mind.

And again, we don't have to do that tonight.

I just wanted you to be aware that that's one of the factors to take into account when evaluating a project and more importantly, evaluating the feasibility of a project using tax credit equity.

You have to also look at your development and operating costs.

So as part of the submission, when you make an application for tax credits that you submit to VHDA, you have to not only have your development budget, but also an operating pro forma.

So you have to demonstrate that your project will be able to operate.

You need to know your rent levels and your operating costs on an ongoing basis.

and you always have to have a market study.

Once you submit your application, VHDA goes through it and decides whether you can actually score the points that you thought you could score.

There is a self scoring sheet as part of the VHDA application for tax credits.

So you can sort of self score and see how well you think you're going to do on the scoring.

But generally that's not 100% accurate.

And when VHDA reviews your tax credit application, they most likely make adjustments.

And so you don't get your final score until much later.

Next slide, please.

So now we get into the ownership structure and this slide will take us then to a transaction chart and then we'll talk about various parties to that transaction structure and how there can be a role for the housing authority.

So in a low income housing tax credit transaction, the owner of the housing units, which is not necessarily the same as the owner of the land itself, the owner of the units has to be a for profit entity.

and it has to be a partnership for tax purposes.

So it can be a limited liability company or a limited partnership.

It doesn't matter to me, but at the end of the day it needs to be a partnership for tax purposes.

For-profit entity and partnership are the two key things here.

It needs to be for-profit because it has to have a tax liability.

You cannot have tax credits and claim tax credits if you don't have a tax liability.

Partnership because you want to be able to pass those tax credits on to your investor in exchange for their equity contribution.

And the only way to do that is to not be taxed at the partnership level, but to pass the credits to your members or partners, which is why the entity has to be qualified as a partnership.

So the partnership itself is not the entity that pays taxes.

It issues a K1 to its members and the tax credits follow the profits and losses.

So they will be transferred, if you will, just like a distribution would be to the members of the entity.

In our case, in a tax credit transaction, the investor who makes a capital contribution in exchange for the right to take the tax credits, to claim the tax credits on their federal return.

So the next two bullets talk to you about who those two entities are, the two entities that become the member of the for-profit owner of the units.

You will have the tax credit investor and the general partner or managing partner.

The tax credit investor is going to be the entity that owns 99.99% of the owner entity.

and in that manner, because they own 99.99% of the membership interest, they also get 99.99% of the tax credits as well as of the profits and losses.

The general partner owns the 0.01% and keeps control over the operations.

So this split shows you that we want the majority of the ownership interest to go to the investor because with the amount of ownership come the tax credits, but we do not want the investor to make the decisions.

Those are made by the general partner or managing member who only has a 0.01% interest.

And I hope that makes sense.

Right.

So in those structures, the CCDC tax credit structure is actually way more complicated than what I'm showing you tonight.

So I'll be happy after this call to send you the ownership charts for Crescent Halls and South First Street.

They are more complex than what we're going to go through tonight.

That's because you have different levels of funding and CCDC

is actually acting in a couple of different capacities.

And so is the housing authority.

So in those two transactions, so again, just briefly to bring everyone up to speed.

So you have Crescent Halls, which is a renovation of 105 units.

And then you have South First Street, which is new construction, brand new units, 62 units in the first phase.

For both of those, the structure of the transaction involves a ground lease as opposed to an outright conveyance of the property.

So that's one distinguishing item from the get-go, which I thought I should mention.

And then CCDC serves in a couple of capacities.

One, it's a co-developer.

Two, it's involved in the ownership structure.

And three, it's involved also as a vehicle to flow different sources of funds.

And you have many sources of funds in each of these transactions.

And I'm happy to go through them briefly.

The two transactions are basically sister transactions, so to speak.

We're working on both of them together.

They involve a lot of the same parties and a lot of the same funding partners.

Your equity investor is gonna be VCDC for both.

You're getting funding from the Department of Housing and Community Development for both.

Not in the exact same amount, but you're getting that funding for both.

You're also getting funding from the Federal Home Loan Bank of Atlanta Affordable Housing Program, AHP.

You're getting that for both.

And that's half a million dollars for each of those two transactions.

You're getting of course your equity from your equity investor, which is VCDC.

Your construction lender is Atlantic Union Bank for both, but then your permanent lender is VHDA itself.

So VHDA is your state funding agency that administers the LIHTC program, but VHDA also has a different arm of the house that provides debt.

And so for those two transactions, VHDA will provide debt to you

for the permanent financing of the project.

And they are also in a different capacity giving you a grant for each of those two projects.

And so the funding structure for these two transactions is way more complex than the introductory overview I'm giving you tonight.

I'll be happy to send that to you separately.

I mean, it could be the,

The topic of a whole meeting of its own, because of the complexity of the financing structure and the various entities involved, Riverband is your contractor in those transactions.

So as you know, because of the grants and the various types of funding that we're trying to flow into the structure, we had to make some

some accommodations for the funds to flow properly and not jeopardize the tax credits.

So those two transactions are quite complex in and of themselves.

And then as far as the housing authority is concerned, you will be the property managers once the units are built in the case of South First Street and renovated in the case of Crescent Halls.

So you will continue to have an involvement.

You also have an involvement in the ownership structure, and then you have an involvement because the housing authority is providing some guarantees for the financing.

You will provide a guarantee of the delivery of the tax credits.

So basically a recapture guarantee so that the investor gets comfort that they will receive their credits.

And you're also guaranteeing the construction loan, which I mentioned,

is provided by Atlantic Union Bank.

And that's pretty much $12 million per transaction.

I'm sure I'm off slightly.

I think for one of the two transactions, it's 12.5 million.

And for the other, it's 11.5 million.

That's the construction loan.

So there will be nuances for those transactions because they're very complex.

I mean, if you're gonna do LIHTC, why not go for the full brain damage?

Okay, so one additional item, unless there are other questions, I'll talk about the second bullet a little more.

Okay, so in the second bullet, you see there's a little sub bullet.

And it says that the investor will invest its equity in the form of multiple capital contributions made according to negotiated benchmarks.

So that's really important.

So remember how we talked about the price per credit.

And I told you that for your two transactions that we're about to close in December and January, your price per credit is 88 cents.

And so for these two transactions, it equates to a total amount of equity of approximately $6.6 million for each of Crescent Halls and South First Street.

$6.6 million that you can use towards development costs and that you do not have to pay back unless something goes really wrong.

$6.6 million.

Well, that sum does not come to the project all at once in one lump sum.

It comes to the project according to negotiated benchmarks.

And that's what that bullet on this slide is about.

So you'll get a little bit of money at closing, not much.

a fraction of the 6.6 million.

And then you get more as you reach milestones for construction completion.

And then you get even more when you reach stabilization.

And so in most transactions, the equity is contributed according to a schedule and agreed upon benchmarks.

in three or most of the time, four installments.

And I hope that makes sense.

And that's because the investor doesn't wanna put in all their money without knowing that you're actually going to deliver.

They don't get to claim the credits unless and until you place the units in service and you put in those units, illegible tenants.

Now for a housing authority, it's always helpful because you most likely have a pool of residents who are ready and willing to move into these units and who you know you can pre-qualify in terms of their eligibility.

They have the right income level.

and the rent levels are calculated so that those rents are affordable.

So for a housing authority, it's a little bit easier because you are familiar with the residence you work with and you do already have most likely a wait list for your housing properties.

It's different for private

developments that do not involve a housing authority because they need to know that these units will be occupied by eligible residents.

Until that happens, the investor cannot claim their credits.

And so the investor will want to wait

until certain benchmarks have been reached before they invest all of their money.

So it makes a lot of sense when you think about it.

It's just again something that you have to take into account when you're the developer of a LIHTC property because what that means in practice is that you're going to have to bridge that equity.

meaning you have to find another source of financing to pay the construction costs while you're building the project and while you're waiting to receive the majority of the money from your equity investor.

That's why you have a construction loan.

And so most of the time, as you're getting ready to finish construction and as you're getting ready to convert your construction loan to a permanent loan,

One of the sources that you use to pay off your construction loan is the installment of equity from your investor.

Because at that point you finished construction, the investor is confident that your project is going to be placed in service and that you're going to have residents moving in.

And they can give you a bigger installment of their equity contribution, which you then use immediately to pay off a portion of your construction loan.

Does that make sense?

Again, we're looking at this at a high level but I do want to give you some of these notions so that as we move forward with Crescent Hall and South First Street, at least you get a high level view of how this works in practice.

Next slide, please.

So this next slide shows you a typical vanilla structure for a LIHTC transaction, which is not what Charlottesville is doing.

You can take this structure and put it on steroids and we're closer to crescent halls.

But this still holds true in the sense that this is what a tax credit structure boils down to.

It boils down to a limited partnership, which is the box at the top.

That's the entity that owns the units.

And it's a special purpose entity.

It never existed before.

It's created just for the transaction.

So we can call it Crescent Hall's limited partnership.

Or we can call it anything we want, depending on the name of the project.

But it's an entity that did not exist before.

It's created to use LIHTC and it has two members most of the time or two partners if you will.

The investor who is the limited partner and the developer or developer affiliate who is the general partner.

The general partner makes the decisions, the investor puts in money in exchange for the right to claim the tax credits.

And the split is always 99.99 to 0.01%.

That's because we want the investor to be able to claim the majority of the credits.

And for LIHTC, under tax rules, the tax credits follow the distributions of profits and losses.

So you cannot give the investor a 10% ownership interest and have them claim 100% of the credits.

It's not how it works for LIHTC.

Now put a pin on that because that's exactly how it works for historic tax credits, but that's not the point of this presentation.

But that's why I'm mentioning this.

With some tax credit programs, you can have a very

nominal amount of ownership and yet get to claim all of the tax credits.

That is not the case for LIHTC.

I repeat, that is not the case for LIHTC.

So here we showed 99.99% membership interest.

That's because we want 99.99% of the tax credits to go to the investor and then 0.01% to the general partner or developer.

Next slide, please.

This slide tells you who the investors are.

And I talked about this before at various points.

The last bullet talks about the Community Reinvestment Act or CRA that I talked about earlier which drives some of the investors in certain markets so that they can meet their CRA obligations.

The rest of it we talked about as well.

So the investors are in the deal to claim tax credits.

An additional benefit that they get from their participation is that they get to claim losses.

And typically the project is going to generate losses, including debt service payments and mostly depreciation deductions.

And so they're interested in claiming those losses.

Again, because they're the 99.99% owner of the entity that owns the units, they will claim 99.99% of profits and losses.

The deals are structured so that there's very little profit while the investor is still a member.

Because we want them to just get the bare minimum to make them happy.

We don't distribute profit.

We use fees for the developer, the housing authority, CCDC and others to receive compensation.

We want it in the form of fees.

We don't want it in the form of profit that becomes distributable because the moment you have distributable profit, you have to give 99.99% of it to the investor.

So you do have to keep that in mind.

The investors have a primarily passive role in the partnership.

It is the developer or general partner who makes the day to day decisions on the operations of the project.

The investor will get involved only for major decisions that would involve the future

The future of the project or of the partnership and whether or not the project is successful to the point that perhaps the credits could be jeopardized.

So the investor has a primarily passive role, but they will step in if they sense that perhaps the tax credits are in jeopardy.

Next slide, please.

This talks about the two types of tax credits that we've touched on before.

So we have a 4% credit and a 9% credit.

So the 9% credit yields a present value of 70% of your eligible costs.

Whereas the 4% credit yields a 30% value of your eligible costs.

So if you're thinking about building a project

Obviously you would want to use the 9% credit because it'll fund 70% of your eligible costs.

So it brings more money to the table.

But as we discussed, it's a very competitive process.

Whereas the 4% credits yield more money, but they are not competitive.

So the second bullet on the slide and the sub bullets below this show you the 9% credit and some of the rules that attach to those credits.

Particularly, I would look at the last bullet on slide 12, which tells you that if you're using the 9% credit to do rehab, you have to spend

at least $15,000 per unit currently in Virginia as your minimum amount of rehab.

Next slide, please.

So this slide talks to you about the 4% credits, which are the credits that you can combine with tax exempt bonds.

And so those credits, although they're not bringing as much money to the table as the 9% credit, they still have a lot of advantages.

One of them is that although it's less equity, they're easier to obtain because they're not competitive.

And if you combine them with tax exempt bonds, it's even better because

You can obtain tax exempt bonds and combine those with your tax exempt, with your low income housing tax credits and finance the vast majority, if not all of your project.

Because you're introducing bonds in addition to LIHTC, you now fall under two regulatory regimes and you have to comply with two different sets of rules, the tax exempt bond rules and the 4% LIHTC rules.

So the financing structure is way more complex and costly.

And again, you have the minimum amount of rehab expenditures to qualify.

Unless there are questions on this slide, we can move on to the next slide, please.

This slide shows you the bond caps for next year.

So there is a state ceiling for low income housing tax credits.

And that state ceiling is used to calculate the ceiling for the issuance of bonds, meaning that every year,

The volume caps are published by the IRS and that tells you the maximum amount of tax exam bonds that can be issued in the Commonwealth of Virginia for projects located in the Commonwealth of Virginia.

Next slide, please.

This slide number 15 and then the next few slides after that are pretty technical and we don't have to go into the details of all of them unless you have some questions but I would say they're pretty self-explanatory but fairly technical in that they explain to you how the credit is calculated for each project.

A couple of things that I will highlight that are important

One is the credit is not calculated for the entire project.

It is calculated building by building.

So if you have multiple buildings in your project, which is most often the case, then you will have an identifying number assigned to each building.

And the credit that you can obtain is calculated based on the cost and based on the units in that building and then based on how many of those units are occupied by qualifying tenants.

So it's really building by building that we have to look at it.

It's a little bit tedious but it's an important exercise because in some projects certain buildings will be a hundred percent affordable and some buildings may not be.

You may have a distinction within a project because not all of the units are always tax credit units.

In many projects you have a mix of tax credit units and market rate units for example and so in order to calculate the credit

that is allowed to be claimed for each building, you have to look at how much of the building represents affordable housing.

In the fourth bullet, you see that the credit is calculated so that it provides a yield over a 10 year period equal to 70% or 30% of the building's qualified basis.

So that's what we talked about earlier in terms of the 9% tax credit financing, 70% of your eligible costs and the 4% tax credit

financing 30% of your eligible costs.

So that's what this is about.

Next slide, please.

So this slide again, goes into the calculation of the credit at a more detailed level.

And so will the next slide after that.

So this talks about eligible basis.

As you're getting ready to calculate the tax credit you're entitled to,

You look at what is called the eligible basis.

That's slightly different from total development costs because eligible basis is not all of the development costs.

Some development costs do not qualify for tax credits.

And you see here in the two smaller bullets,

that eligible basis includes your rehab costs and a reasonable developer fee, but it does not include the land, the syndication costs, the financing costs or the legal fees related to the land.

Anything related to the land is not part of your eligible basis.

So the first step is to look at the total development costs

that are part of your budget for the construction or renovation project.

And then look at how many of those costs need to be excluded for purposes of calculating your eligible basis.

Next slide, please.

The next step is looking at what is your qualified basis.

So now that we have the eligible basis, you look at how much of the building

is attributable to affordable housing, meaning in the building, how many of the housing units will be low income units or units occupied by low income tenants as defined in the tax credit program.

So you look at your eligible basis, which are the total development costs minus the costs that are excluded from the tax credit program.

And you multiply that by the fraction of the building that comprises affordable housing units.

And that gives you the qualified basis.

Again, a term of art in the tax credit program.

Next slide, please.

This is the applicable rate.

So again, we're still in the mechanics of calculating the applicable credit.

And you look at your rate.

And this is where I guess we dispel some myths.

In the first bullet,

We've talked about the 9% credit and the 4% credit and that's really what they're still called and what people still refer to when they talk to the two types of tax credits that are available.

But actually, those are not the current rates for the 9% and 4% credits.

Those rates are floating.

And as a matter of fact, for the month of December 2020, the 9% credit rate is actually 7.2%.

So it's a little bit of a misnomer.

We just call it the 9% credit because that was the applicable rate when the program was created.

But since then, the rates have declined.

And so that reduces the amount of tax credit equity that's available.

But the rate is not 9%.

It's right now 7.2%.

It'll change next month.

It's a floating rate.

I hope that makes sense.

I know it's a little confusing.

Since July of 2008, we have seen several statutes that have fixed the 9% tax credit rate at 9%.

And so there have been different statutes enacted, including the one that's listed in the fourth bullet point.

And so in December of 2015, Congress passed the PATH Act

and it permanently sets the minimum 9% tax credit rate at 9%.

So hopefully that eliminates the floating rate issues.

But again, I wanted to mention that because that's actually true as well for the 4% credit, which is listed on the last bullet of slide 18, if I'm reading that correctly.

And so

That rate is also adjusted monthly and has not been the subject of a statute to permanently set a minimum tax credit rate.

And so currently the 4% LIHTC rate is 3.09%.

That's for December of 2020.

And there has not been a statute to set the minimum tax credit rate.

So in the absence of a statute, we have to look at the floating rate.

Next slide, please.

So hopefully this puts it all together.

These are the components of the calculation that we've talked about.

So remember, we start from the eligible basis, which is the total development costs minus those costs that are not eligible for tax credits, like the costs associated with the land.

So it's the eligible basis multiplied by your percentage of qualified affordable housing units in the building multiplied by the applicable percentage, which is either 9%, if you're in the 9% credit or the floating 4% rate, which is currently 3.09%.

And you multiply that by 10 years, which is the amount of time over which the credit is calculated.

and the result of that math problem is your total tax credits that can be claimed over 10 years.

You take that total and you multiply it by your credit price in our transactions for Crescent Halls and South First Street, that's 88 cents.

So you multiply your total credits by the credit price and that gives you the total amount of equity that your investor will give you

for your transaction in exchange for the right to claim the tax credits.

And as we mentioned earlier, keep in mind that the investor's equity doesn't all come in a lump sum and most of it will not be contributed to you until the project construction is completed.

Any questions on that?

Okay.

Next slide.

This gives you an example of credit calculation to basically recap what we talked about.

In this example, which you can look at at your leisure, we took the example of a project that would have 300 units in it, only 240 of which are low income housing units.

So in our example, there would be 60 market rate units.

and we give you the total development costs including the land.

Then separately, we give you the land cost so that you know to deduct that from your TDC to obtain your eligible basis.

Again, we simplified it for the example.

So here you would have an eligible basis of $36 million.

From there, you calculate your qualified basis, which is your eligible basis multiplied by the percentage of your building that is dedicated to affordable housing that follows the requirements of the tax credit program.

In our example, 80%.

And then you multiply that by your 9% credit rate, now 9% because it's been fixed by statute.

That gives you your annual credits, which you multiply then by 10 to have 10 years worth of credits.

So in our example of a $40 million project, you could get equity of almost 26 million, which is a significant amount.

It shows you that it funds a significant portion of your project.

And I hope this makes sense.

Obviously it's a simplified calculation.

A lot more goes into it, but hopefully that's helpful to understand how the credit calculation would work in a typical transaction.

Again, simplified, but still valid to give you the overall concepts of how this works.

Next slide, please.

This gives you a sample of the equity contribution installments because I mentioned earlier that the equity investor will not contribute all of their money at once.

They will make their equity contributions in several installments based on certain benchmarks being reached.

And so this gives you a sample of what could be the benchmarks that an investor would take into account before they invest their equity.

So they would put typically a small portion of their equity at closing, then a big chunk of their equity at completion of construction, and then some at the breakeven or stabilization, and then the last piece at the final cost certification.

The form 8609 is the official Internal Revenue Service form that certifies building by building the costs for the tax credit verification purposes.

And again, those aren't just samples of equity installments.

It could be that an investor puts 10% at closing and then 60% at completion and 25% at breakeven.

It varies.

and sometimes it's negotiable.

Next slide, please.

So we're done with the credit calculation and hopefully that's relief for everybody.

I realized it's pretty technical.

So yeah, now we get into LIHTC program requirements, how refreshing.

And so we're on slide 22, and this talks about the rules that apply to the low-income housing tax credit program.

We have occupancy or income requirements with regard to the units.

And then separately we have rent requirements.

So this slide deals with occupancy and income requirements.

The first two bullets are the two options that a developer has when applying for LIHTC.

You can pick either the 2050 test or the 4060 tests and they're described in bullets one and two.

So under bullet one, you can commit that 20% of the units will be occupied by households with income at or below 50% of area medium income.

or you could commit that 40% of the units will be occupied by households with income at or below 60% of area median income.

And you have to make that election once you're done with construction and you're ready to place the units in service.

So you indicate that choice when you apply for the tax credits and submit your application to VHDA

and then you do it again at completion when you submit IRS form 8609.

You have to meet those requirements no later than December 31st of the first year of your tax credit period and then you have to continue meeting that test for 15 years.

And this is where property management comes into play.

It's very important that the managers of the property have LIHTC training because they have to review, document and verify at least once a year that the tenants in the building still meet those requirements.

And they have to do that for the duration of the compliance period.

Otherwise the credits are in jeopardy.

So these are the occupancy and income requirements, which is one half of the LIHTC requirements.

Next slide, please.

Here comes the other half.

Those are the rent requirements.

So not only do you have to dedicate a certain percentage of your units to tenants with a certain income level, you also have to restrict your rent.

The gross rent for a LIHTC unit cannot exceed

30% of the imputed income limit applicable for a unit of that size.

And when we talk about unit size, we talk about a two bedroom, one bedroom, three bedroom.

That's what we're referring to.

The rent limits change every year because they change when the new area median incomes are calculated but they never go below the original floor which is set when you start your project.

It's a complex calculation and requirement to meet.

And again, the rent limits change annually.

So emphasizing again, the importance of LIHTC certification and training for your property managers so that they know what to look for and they know what to charge and they know how to document it every year.

It's a compliance issue, which could cause you a recapture.

And of course, in addition to income and rent, you have to maintain habitability standards that should go without saying, but we say it anyway.

Next slide, please.

We've talked about this already at the very beginning of the presentation, but this again sets forth the fact that the occupancy or income restrictions and the rent restrictions.

So the two components of the LIHTC program are in place for 15 years, which is the tax credit compliance period.

In addition, as I mentioned at the beginning,

In Virginia and in most states, you have a recorded extended use agreement, which is not a document we negotiate.

It's a form that VHDA mandates, and it adds another 15 years of extended affordability use to the first 15 years, in effect, making the compliance period 30 years.

Next slide, please.

This is about carryover allocations.

We don't need to talk about it a tremendous amount.

I just wanted to mention that because this is the mechanism that is in place to take into account the fact that a lot can change between the time you submit a tax credit application, the time you receive word from VHDA as to whether or not you were successful, and the time you actually close on your financing.

It takes years.

And the issue is that without carryover allocations, a lot of deadlines would keep on running while you're working on your closing.

And then after that, while you're working on your renovation or construction.

So it's a very lengthy way of saying that in recognition of that, VHDA has in place a carryover allocation application, which basically

lets you apply for tax credits in a given tax credit application year and carry that allocation over to the next year if you don't have enough time to receive the results of the application round, go to closing, get started with your construction and actually place your units in service.

I will tell you nowadays it's most people.

It's actually rare to not have a carryover allocation because everybody needs more time.

The program is so competitive on the 9% credits that you cannot really bank on receiving the award.

Therefore, you're not working towards closing with your financing partners because you don't know if you're going to get the credits.

Chances are you're not.

So you can't really work in earnest towards a financial closing with unknown

awards on the tax credit side and so very often you have to wait until you've heard from VHDA that you're receiving an allocation and then you finalize your negotiations with your funding partners and then you move towards closing which takes at least six months most of the time way more than that and then you start your construction and hopefully you place your units in service but very likely

you're into the next fiscal year by the time that occurs.

So the carry over allocations basically give you that flexibility.

Next slide, please.

This is the unpleasant slide.

And to the extent you found the presentation unpleasant up to now, I apologize.

This is the one that's supposed to break your spirit for the evening.

So this is the recapture slide, but actually I put it in there so that people are prepared.

It's not a bad thing if you're ready for it and you can anticipate it and you prepare for those risks.

So recapture is the term that we use to say that someone did something wrong and as a result of that, the investor is no longer entitled to claim tax credits.

It is the worst thing that can happen in a tax credit project.

Remember how I mentioned to you earlier that in Crescent Halls and South First Street, the equity investor is providing to you $6.6 million in equity for each transaction.

A recapture would mean that you have to pay that back plus interest plus penalties.

It's unpleasant.

This slide, which is slide 26, shows you what recapture means and how it can occur.

And the basic thing that creates a recapture is if you have in your building

tenants that don't qualify as tenants because they make too much money or you're charging rent in excess of the amount of rent that you're allowed to charge.

Remember those earlier slides when we talked about the two facets of the requirements, one was called occupancy slash income and the other was rent.

And remember you pick 2050 or 4060.

for the occupancy and income, and then you have to verify the rents.

If you violate one of those two, meaning you have a market rate tenant, someone who makes too much money, or you have a person who makes the right amount of money, they qualify on an income basis, but you're making them pay too much rent, you potentially have a decrease in your qualified basis.

Now it should all come into play and the light bulb should shine.

You should say, aha, now I know why she walked us through that painful credit calculation.

Well, that's because during that credit calculation, we talked about eligible basis and qualified basis.

And you will remember for sure that the eligible basis is the total development cost minus the costs that are not part of tax credits.

And then you multiply that by the applicable fraction of the building that represents your low income housing units.

You get the qualified basis as the result.

If you have a non-qualifying tenant or a non-qualifying rent, your applicable fraction is no longer the same.

Therefore your qualified basis is off, which means some of your credits are no longer valid credits and you have a recapture.

I know everybody's with me.

I can sense it.

If you're not, raise your hand.

Anywho,

I'm telling you this to tell you that if you have that and it happens to your project, it's a really bad thing, obviously, and you have a chance to fix it, but if you don't fix it, you owe a lot of money to the investor because the investor is no longer entitled to claim the tax credits that they thought they could claim.

So this- I have a question, I have a question.

Now the investor is no longer required to pay that, but can the investor take the property for a different reason?

No.

No.

So what would happen if you have an event that triggers a recapture of credit?

You would have to make the investor whole.

They don't get the property, they get their money back.

So they make you pay for what they thought they could get out of this transaction.

So it's a monetary remedy.

It's not the investor taking the property and changing it for another purpose.

That would only happen in cases where the investor decides to

remove the managing member from its position as managing member and take over the ownership of the property and then give up on the right to receive tax credits on the property altogether.

And then they would have to have a discussion with VHDA because remember that those affordable housing covenants are recorded as a lien on the property for 30 years.

And then only could the property be used for another purpose.

Does that make sense?

Did I answer your question?

Okay.

So on slide 27, we talk about the types

of events that can create a recapture and how we can avoid a recapture related to those events.

So the most common event is bullet number two, but let's talk about all of them anyway.

So the first one is a sale of the property.

If you sell the property to a new entity, you potentially have a recapture

You avoid that by making sure that the building continues to be used for affordable housing.

Second bullet is what we talked about.

If you have non-qualified units, which is a fancy way of saying you have a tenant that doesn't meet the eligibility from an income standpoint, or you have rent that is above limit.

And so those are the three bullets that are on this slide in the category of non-qualified units.

Okay.

And then next slide, please.

The third recapture event is a casualty loss.

So basically if you have a fire that destroys your units, technically you no longer have the same applicable fraction of affordable housing units.

You can avoid recapture if you repair before your end.

Does that make sense?

So for each of these potential recapture events, the great news is there are ways to fix it.

So recapture is not automatic.

You do have cure periods.

Next slide, please.

I promise we're almost done.

Only 150 slides left.

I'm just kidding.

I'm just kidding.

It's only five or six.

Just trying to see if you guys are paying attention.

Okay.

All right.

For those of you still with me,

including the chairperson of your board.

Thank you.

Okay, so this is actually very important for CRHA.

These are the potential roles for a housing authority in a LIHTC transaction.

So you can have a role in the partnership structure.

You can be the general partner.

or you can be a member of the general partner.

And we didn't dig into that level of detail on the structured chart that was on slide 10, but the general partner is usually an entity that itself has members.

So you could be a member of the general partner or the housing authority itself can be the general partner.

In either scenario, you just have to decide how much control you want to have over the transaction.

The more control you have, the more risk you will have.

Meaning the more you control the development, the more you're going to be asked to provide guarantees in case things go wrong.

Guarantees to the investor and guarantees to the lender.

Another role for the housing authority is as developer.

So in the case of Crescent Halls and South First Street, you're participating as a developer through CCDC.

So it's not CRHA itself, that's a developer.

CCDC is a developer and it's actually a co-developer.

So here on this slide, you can see the different bullets.

So the housing authority can be the developer, can be the co-developer, or you can be

a third party developer and not an owner in the general partner.

And then regardless of those two other roles, you can always serve as property manager.

And as I think I mentioned earlier for Crescent Hall and for South First Street, CRHA will in fact be the property manager of the units.

Next slide, please.

So this talks about the guarantees that housing authorities often have to provide in a LIHTC transaction.

So construction completion guarantee that

basically speaks for itself, but both the lender and the tax credit investor want the units to be completed.

The lender wants the units completed because if they're not completed, you're not gonna move in tenants who are gonna pay rent and it's with the rent that you can pay their debt service.

So that's why the lender wants the project completed.

The investor wants the project completed because until the units are placed in service, they cannot claim tax credits.

Operating deficit guarantees, those are very much standard in tax credit transactions because basically the lender and the tax credit investor want to make sure that your project remains financially feasible for the duration of the compliance period.

They want you to be able to operate.

So if some expenses get out of control, they expect you to control those expenses or pay for them.

Payment guarantee, that's a repayment of the debt.

In the case of Crescent Halls and South First Street, CRHA is guaranteeing the repayment of the construction loan, which is made by Atlantic Union Bank.

And then tax credit recapture or repurchase guarantee.

So this is the scenario we talked about earlier.

If something goes wrong with the tax credits, you have to make the tax credit investor whole.

That means you have to give them their money back that they paid for the credits and make them whole for what they thought they could obtain as tax benefits.

So even if they paid 88 cents on the credit, that's not the only amount you're gonna give them back.

You're gonna give them back that amount plus what they were hoping to obtain as a tax benefit from that transaction plus interest plus any penalties assessed to them by the IRS.

basically a boatload of money.

It's very significant.

You do not wanna recapture event.

Next slide, please.

These are some of the requirements for you to consider.

And we actually mentioned some of that earlier but you only want to embark upon a LIHTC project.

If you have experience

or you acquire experience or you contract with people to help you have that experience because all about avoiding recapture is really having good files to document the eligibility of your tenants and the rent levels, making sure that you have appropriate insurance in place because you don't want a casualty.

If you have a fire, we saw that that's a recapture event.

So you have to have good insurance in place

so that you could count on the proceeds of that insurance to rebuild and maintain your affordable housing fraction so that you don't jeopardize the tax credits.

And you really want to be on top of your accounting and reporting responsibilities.

With those tax credit deals come a tremendous amount of reports that you have to provide to the investor every year.

And so that's something that's important for you to know because

If you don't know how to provide those reports or if you've never done it before, it can be a daunting task.

They do want a tremendous amount of information every year.

It can be standardized and those reports are often comprised of Excel spreadsheets and things that

With some familiarity with the LIHTC program, you can streamline a lot of those reports, but it's still something that needs to be addressed.

And so that's why it's noted on slide 31.

Next slide, please.

So we talked about your reports to the investor, but you also have to keep in mind that VHDA

now called Virginia Housing also monitors projects for compliance with their requirements.

So you have to keep in mind that basically it's about good record keeping, good verification of the income of the tenants, good verification of your units and how many of your units are affordable housing units.

In your case as a housing authority, in your projects, 100% of your units are affordable housing units, but that's not always the case, even for housing authorities.

Some housing authorities do a mix of market rate and LIHTC units, which is something that you yourself may consider at some point.

And so the importance of that is that if you have a mix of affordable housing and market rate units, then that changes your applicable fraction

Remember for the brain damage of the calculation of LIHTC.

And so you have to keep that in mind because your market rate units ratio to affordable housing units cannot change over time.

If it changes, then yet again, you're jeopardizing your calculation of tax credits basically because you're changing your qualified basis.

And you always have to monitor your rent amounts.

And as I mentioned earlier, that's something that you need to keep track of every year.

And then you have to fill out your annual compliance certifications to the investor, which is why you have to verify the income of your tenants every year as well, so that you can basically feed one report into the other.

Hope that makes sense.

We're reaching the end.

Thank you for sticking around.

So next slide, please.

We're at slide 33, which is the conclusion.

Thank goodness.

So in sum, LIHTC is complex, no question, but it's a critical tool, right?

As you can see from Crescent Halls and South First Street, for each of those two projects, you're getting $6.6 million in equity from an investor, and you don't have to give that money back.

unless something terrible happens and you have a recapture, but knock on wood, you're not gonna have that.

So you get free money basically, right?

Not completely free because with it comes a lot of compliance and with it come a lot of costs to get to that point.

So you'd have to figure out once you have all the transaction costs and all the things that go into the compliance, perhaps it's not 6.6 million, but whatever that amount is, it's a tremendous amount of money.

And it's critical to making this renovation feasible for Crescent Halls or the new construction feasible for South First Street.

As we mentioned, you can add tax exempt bonds.

That's only if you're really in shape and you want a lot more complication in your structure.

But again, that could add value.

And I would say for transactions that cannot obtain 9% tax credits,

Falling back on a different structure that instead of using 9% credits uses 4% credits but combined with tax exempt bonds can make some projects feasible that otherwise would not be feasible.

Always keep an eye out for tax reform.

Unfortunately or fortunately, depending on how you look at it, things change quite drastically.

And when we have tax reform, we have to keep that in mind in terms of how it's going to impact tax credits, how it's going to impact bonds, how the markets impact the rate that we're looking at when you borrow money.

So all of that really comes into the equation when you're evaluating a project at the very beginning of a project

and trying to determine the feasibility of a project.

Always evaluate carefully, always consider additional subsidies.

And you have, I mean, for those two transactions that I've mentioned, Crescent Halls and South First Street, you have at least seven different sources of funds for each transaction.

So you are knocking on every door and getting all the grants that you can get and obtaining the Federal Home Loan Bank of Atlanta money under the AHP program.

the VHDA grant, the VHDA permanent financing.

You have funding from DHCD.

You have your seller financing from the housing authority.

So you do have a combination of lots of different sources of funds, which is why I was mentioning earlier that the structure is way more complex for those two deals than what I described tonight.

And that's because every time you superimpose sources of funds, they come with their own set of documentation and their own requirements.

And so we can't just add funds willy-nilly into the project partnership.

Sometimes we have to make the funds go through various entities before they get to the project entity, which is why the transaction ends up being a lot more complex than what I tried to describe to you tonight.

Always select good partners because you're with them for 15 years.

Now the use restrictions carry for 30 years but your partners you're with them for 15 years.

The investor will exit and we could do a whole separate presentation on how an investor exits from a structure.

And actually, if you're curious that presentation is probably available on my firm's website

But basically you have to select good partners because you're going to, it's like a marriage a little bit.

You're going to be with those partners for at least 15 years, your co-developer, but more importantly, your investor.

And you're going to have to report to that investor every year at a minimum.

Some of them semi-annually, they're going to do site visits.

They're gonna approve your budget, the operating budget of the project every year.

If something goes wrong, you want to have a good partnership so you can work things out as opposed to having to indemnify them or make good on your guarantees that you sign at closing.

So it's really important to pick people with whom you know you can work for the next 15 years.

Oh, here we go.

Ah, here we go.

So this is in case, I know, hold your breath.

This is in case you didn't have enough tonight.

I've listed some additional resources so that you can go look at additional explanations of how the LIHTC program works.

I know, don't mention it.

It was just my little parting gift.

So in case you wanna know even more about LIHTC, these are great resources.

Of course VHDA and then resources from Novogradak and Kohn Resnick.

Those two are accounting firms and they're recognized nationally as the two experts in tax credit finance.

So Novogradak and Kohn Resnick.

They have offices around the country, but Novogradak is originally based in San Francisco, whereas Kohn Resnick is based in Baltimore.

and then so of course the VHDA handbook and then the IRS handbook and the National Low Income Housing Coalition also has a very rich website with a lot of additional resources if you're interested.

And I think that's it.

I think the last slide is just my contact information.

Yep, so I think that's it.

I'm happy to take questions.

if you have any.

I wanted to give you an introduction and I do apologize if it was at times a bit too technical.

I'm hoping it was helpful, particularly as the Charlottesville Housing Authority embarks upon the Crescent Halls and South First Street projects.

Thank you.

Any questions?

There's so much.

And I'm really happy we have the copy of the PowerPoint so that we can go back.

I was taking some notes.

But does anyone have questions now while something is fresh on your mind?

No.

If anything, I would anticipate a more favorable treatment of funding for affordable housing.

Let me ask one more question real quick.

Yes, so I think the defunding of section nine, which is the low income public housing program will continue to the benefit of section eight, the housing choice voucher program.

So I do think we're gonna see more of that model where you see LIPH units being converted to PBV units, project based voucher units.

I think that's a more stable funding stream.

I'm hoping we see more programs like CNI, the Choice Neighborhood Initiative, which in a lot of ways is similar to HOPE 6.

So you may remember hope six from 20 years ago that disappeared and then CNI happened and CNI is extremely similar to hope six.

So I'm hoping for more funding under CNI or another program like that whether it's hope six CNI is something else.

I think HUD has realized that RAD doesn't work great.

We all tried RAD, I mean, we didn't necessarily

close on a lot of red transactions.

I did early on, but that's because people were desperate, right?

There was no tool in the toolbox and then they gave us RAD.

And RAD was horrible, but it was better than nothing.

So we did RAD, everybody did RAD.

And then people said, well, RAD doesn't really work.

It's not enough money.

And so the feasibility of RAD is really under question.

So I think hopefully we see less RAD-like programs and more CNI, HOPE-6 type.

transformation programs.

I wish I could say that the operating subsidy and capital funds model is gonna come back for the funding of public housing, but I just don't know that that's in the cards.

And that's not really due to the latest administration.

It was well underway before that.

It's been years in the making, the real transformation of affordable housing to a more private model.

It started with asset management right when HUD started telling housing authorities that they had to convert to an asset management system that was the beginning of the conversion to a more private like system.

So I don't think that's gonna change.

I don't know if it's good or bad.

I mean, as long as they're funding under one platform or another, what we want is for the affordable stock to be sufficient to accommodate all the people who need affordable housing.

The main issue is that most people can't afford affordable housing.

That's a problem.

Affordable housing is no longer affordable in a lot of ways.

And so not only do we need more inventory in terms of more affordable housing units, but we need them to be actually affordable.

And then we also need to bring up to speed the aged

or aging affordable housing stock, mostly older public housing communities that are in desperate need of capital improvements, but there's no money to do those capital improvements.

Nationwide it's in the billions of dollars in terms of the backlog in capital improvements for old public housing units.

So a lot is needed and I'm just not sure what the new administration will do for that, but if anything,

I, for one, I'm hopeful that with the new administration comes at least a halt on the defunding of affordable housing.

Perhaps more funding, but I hate to be that hopeful.

Can I ask you a question?

I recently served on the Planning Commission.

And so there's a lot of folks that talk about

Well, let's just build more housing stock.

And then by default, no matter what the price point of that would be, we'll get more affordable housing.

I call it trickle down housing.

We all know trickle down economics didn't work, but what are your thoughts on that?

No, never.

And nobody's going to convince me other ways.

I mean, that simply doesn't work.

More housing stock that has no restrictions with regard to rent or affordability just means you're growing towards gentrification in the worst meaning of the term.

And I know some people say some gentrification is good, right?

And I don't even want to get into that debate because we're going to be here all night and

It's something that I get pretty passionate about and so I'm just going to tell you the short answer is no.

Just because you build additional housing doesn't mean it's going to become affordable.

That's baloney.

It doesn't happen in practice.

I haven't seen it anywhere.

There may be pretty studies out there.

That's great.

But in my experience, if you don't put any kind of affordability restrictions, then that's market rate housing.

And we know it's not affordable to most people who really need affordable housing.

We actually already know that affordable housing is not affordable enough.

So market rate housing is not going to be affordable.

I don't even have time for all the reasons why that's ridiculous.

So let me just say, I hope the planning commission, I hope the city council, I hope all these folks are listening to that because I've been beating my head against the wall for the 10 years that I started on the planning commission saying that does not work because people keep bringing that to a planning commission and saying, well, let's just build this because it'll trickle down.

If we build this, that's why we got the mess on West Main Street.

Well, let's build this and then that'll provide more affordable housing.

And so I'm so happy to hear somebody else say that because I've been just like, nothing has been able to click in my brain to say, oh yeah, I could see how that works.

It doesn't work.

I mean, if someone tried to argue that with me, I would probably have to be escorted out of the room at some point.

That just simply doesn't work.

Actually a good reason why it doesn't work, we know it.

We don't even have to argue over it.

You could just give them your wait list for the public housing program.

I've asked all of them to put 20% affordable and low-income housing in every unit that they build.

That's what zoning ordinance that has either a density bonus or requirement for new developments to include a portion as affordable housing.

But again, I digress.

That's a decision for politicians to make.

I'm not elected on city council, obviously, and perhaps thank goodness, but

That's more of a policy decision.

I can only say what I know works because of my experience representing housing authorities and because of the dire need for affordable housing across the Commonwealth of Virginia.

Now what the city of Charlottesville deems appropriate for the city of Charlottesville is up to elected officials who

I assume are catering to their constituency and doing what they believe is best for the city of Charlottesville so I'm hardly qualified to talk about that.

I've always been a big believer of density bonuses and requirements as to an applicable fraction of the building being affordable housing because that's the only way you're going to get affordable housing.

Developers don't build affordable housing because they like it.

So let me ask you this question.

Do you believe, so what we have in the city of Charlottesville right now is that the developer can build it on site or provide money contribution to the housing fund?

So I'm really sad, I'm happy to hear you say that.

I'm really sad that this comes at the tail end of a presentation and no disrespect to you, but we've lost a lot of people at this presentation.

And unfortunately, this hasn't been interesting enough for the media folks to have sat in on this, to report on this, but this is something I have literally beat my head against the wall for years on the Planning Commission saying, no, this doesn't work, this doesn't work, this doesn't work.

I understand.

I mean, at the same time, it's difficult, right?

Because there is a line between what I can tell you as legal counsel and the technical training that I can provide us to the applicable rules and regulations, right?

So that's kind of my job.

And then there's my opinion and what I observe.

I'm a big affordable housing advocate.

So I'm never going to say, oh, we need more market rate units.

Let's gentrify old Charlottesville.

That's a good idea.

But I'm also not a politician.

I don't have to worry about NIMBY.

I don't have to worry about being reelected.

So it's just my opinion.

And I realized, you know, an elected official could say, we don't care, Miss Carnes, thank you so much, but your job is to be paid to give legal advice.

And I think you've given it, so have a great evening.

No, I mean, I really just wanted to, I wanted to pick your brain about that since, since Dr. Henry asked that question, because I wanted to know.

Let's see, I think we have the same dog.

Now, if that has any validity, I will tell you that I represent a lot of housing authorities in Virginia.

I'm going to try to name them, but I could miss some in the process.

So bear with me.

I'm general counsel to the Norfolk Redevelopment and Housing Authority, which is the largest in the Commonwealth.

the Charlottesville Authority, as you know, Hopewell Housing Authority, Petersburg Housing Authority, Chesapeake Housing Authority, and then I do all the financing, LIHTC work for Suffolk Housing Authority, I've done some for the Franklin Housing Authority, and I'm doing some for the Portsmouth Housing Authority.

I'm not their general counsel, I just do their financing.

and I recently did some training for the little 10 who are in Southwest Virginia.

So I do a lot of work for housing authorities in the Commonwealth and I can tell you the lack of affordable housing is consistent with every housing authority I just mentioned.

And the concept of building more market rate housing because somehow it's gonna magically turn into affordable housing is nonsensical.

I've never seen it.

I mean, if someone wants to show it to me, that's wonderful.

Well, again, again, as I look at it to me, it's a trickle down housing, trickle down economics, trickle down economics didn't work.

So I don't know how this works.

So I've, and that's why I was wanting to ask your opinion based off of the experience you have throughout the state.

So thank you.

Kathleen just noted that this is being recorded and we know we can link it.

Welcome to my TED Talk.

Oh come on, the qualified basis discussion was gripping.

This part is off the chart, okay?

Kudos.

Well, thanks for having me.

I truly appreciate every time it's a treat.

I love what I do.

And I do realize that sometimes the details and the mechanics of it can be a little dull.

The only thing that I hope is that at least some of the concepts will stick with you as you move forward in your role as commissioners, particularly as you embark upon those LIHTC projects, you'll have a better appreciation for the work that your staff is doing.

This is complex stuff.

It's not easy.

Your staff is wonderful.

You have a team that's doing a tremendous amount of work and you have picked good partners to work with.

So I do think it's important for you as commissioners to have some level of understanding of those financing tools because they're complex and they're risky.

So you should know because you're the fiduciaries of public funds.

So I hope that you retain some of the items we discussed, at least some of the concepts like recaptures, what to do, what not to do, the different types of credits and all the things you can do and adding bonds to it and all that.

And then I hope that you can keep the presentation as a reference material down the road if you need to get back to it.

It's probably on my website already.

If it's not, I'll add it there.

But on my website, you will find also additional presentations on LIHTC, on the exit from a LIHTC transaction, all different topics regarding housing authorities and the financing

tools that you can use.

So I hope this has been helpful.

I know I loved it, but obviously it's my presentation, so I should love it.

But I remain available even after tonight.

Wonderful.

Thank you.

Thank you.

Thank you.

And I suppose at this point, unless anyone else has a thought or I mean, I have a lot of thoughts, but questions at this moment at 7 p.m., we'll go ahead and wrap it up.

Second, someone?

Second.

and then a roll call vote to adjourn.

Mr.

Sales, are you still with us?

Yes, I am.

Wow.

What's going on over there too.

Commissioner Goldblatt, Commissioner Slaughter, Commissioner Green, Commissioner Dr. Henry, Commissioner Osteen,

Commissioner Mayor Walker, Chair Rucker.

See y'all next week.

Bye-bye.

Bye.

Thank you so much.