Bringing money to your Low-Income Housing Credit Project in a timely manner can be a challenge. Well-timed equity installments are beneficial to investors, syndicators, developers, and property managers, allowing the project to pay off any construction loans and deferred developer fees, among other items. Credit delivery may trigger equity installments and a successful lease-up is critical to the property’s cash flow. Here are five items that may help facilitate successful tax credit delivery and the related equity installment(s).
Placed in Service Date
The first-year credit delivery is contingent upon the unit being placed in service and occupied by a qualified tenant. Careful tracking may be needed for each unit in service and tenant occupancy. In general, placed in service means the unit is ready and available for occupancy. Placed in service is typically evidenced by a certificate of occupancy or a temporary certificate of occupancy issued by a local inspector. Acquisition rehab properties may have different start dates for calculating the first-year credit period.
First Year Credit Calculations
A monthly weighted average is used to calculate the first-year credits based on the lesser of the unit fraction or the square footage fraction. The building must be in service a full month to count in the weighted average. Each month’s qualified units are counted and divided by 12 months. For example, if a building was placed in service September 1, and assuming occupancy rates of 25%, 50%, and then 100%, the weighted average would be calculated as follows: (25% + 50% + 100% + 100%) / 12 = 22.917%. Therefore, 22.917% of the project’s credit reservation would be claimed in year 1 with the remaining claimed in year 11.
Tax Credit Adjusters
The amount of the first-year tax credit equity installment is based upon, in part, the amount of credits delivered. If the actual credits differ from projected, upward or downward adjusters will be calculated. The result may be more or less cash than expected based on the calculations as outlined in the operating agreement and the time value of money.
Conditions of the Equity Installment
Aside from placed in service and tax credit delivery, several other conditions must be satisfied to receive the equity installment. The conditions will be outlined in the operating agreement and are oftentimes extensive. Examples of conditions may be: executed Form 8609s, a set number of days after the prior installment was received, proof of insurance, audited or unaudited financial statements, cost certification reporting, and tax return filings.
Breakeven or Rental Achievement Reporting
The operating agreement may require a breakeven or rental achievement report in connection with the lease-up equity installment. Properties may be required to maintain debt service coverage ratios or expense coverage ratios for a certain period. The ratios are as defined in the operating agreement and the installment may require an informal certificate or formal reporting completed by a CPA. Additionally, certain occupancy milestones may need to be achieved and maintained.
Successful tax credit and installment delivery is important, especially if timing adjusters are present. MarksNelson has the experience and knowledge to help you through this process. Give us a call if we can help you move forward.