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(c) Housing Assistance Council, 1997
Permission is granted ONLY to nonprofit community-based organizations to reproduce and/or adapt this document, and only for their own use.
20/50
RULE -- see Minimum Set Aside.
40/60
RULE -- see Minimum Set Aside.
APPLICABLE
FEDERAL RATE (AFR) -- monthly interest rate statistic published by the
Treasury Department. Used to determine the tax credit rate as well as what loans
constitute federally subsidized and non-federally subsidized.
AREA
MEDIAN INCOME(S) -- HUD determines annually the area median incomes for each
county (and for the entire statewide nonmetropolitan area).
For purposes of the tax credit program, only households with incomes at
or below either 50 percent of median income or 60 percent of area median
income are eligible for housing in a tax credit project.
See Minimum Set-Aside.
BRIDGE
LOAN -- a short-term loan intended to cover the difference between
construction-era financing and a permanent mortgage during the period of
capital contributions to the project. As
capital contributions arrive, they are used to “take out” the bridge loan.
CAPITAL
CONTRIBUTION(S) -- infusions of capital invested in a tax credit project in
return for receipt of tax credits. The
amount of capital contributions relates to the total amount of tax credits
which may be claimed; the schedule of capital contributions is agreed upon and
described within the Partnership
Agreement.
CARRYOVER
ALLOCATION -- commitment by a tax credit allocating agency to allow a project
to keep its reservation of tax credits for an extra year after the end of the
year in which the reservation was made. Used
when a project has not been completed, but at least 10 percent of the
project’s depreciable costs have already been incurred in the name of the
partnership which owns the project.
CREDIT
ENHANCEMENT -- used when obtaining a bond issuance to finance affordable
housing; security for repayment; typically provided by federal, state, or
private mortgage insurance, bond insurance, bank letters of credit, or
insurance company guarantees.
DESIGNATED
LOW INCOME CENSUS TRACTS – census tracts which have been designated by HUD
as particularly low-income areas based on 1994 income estimates.
Tax credit projects located in a low-income census tract may be
allocated tax credits based on 130 percent of qualified
basis. The current list of
designated low income census tracts will remain effective until the year 2000
census data becomes available.
DIFFICULT
DEVELOPMENT AREAS – metropolitan areas and rural counties with high
construction, land, and utility costs relative to area median income.
HUD establishes annually which places qualify as difficult development
areas by comparing Fair Market Rents to Area
Median Incomes. In 1996, 247
rural counties were designated as difficult development areas.
Tax credit projects in difficult development areas may be allocated tax
credits based on 130 percent of qualified
basis.
DISCOUNTED
CASH FLOW -- calculation used to determine the future value of a cash stream
received over time, or the present value of a cash stream received over time.
DUE
DILIGENCE -- process of assembling and reviewing project and partnership
documents to insure that all statements made by the developer/sponsor are
true, that the land, property, and partnership documents are all in order.
See Appendix D.
ELIGIBLE
BASIS -- the portion of development costs that are eligible for consideration
in the tax credit allocation process. Only
depreciable development costs count
towards the project’s eligible basis. Land
acquisition costs, for example, may not be included in the basis.
EQUITY
FUND -- a pool of capital managed by a syndicator, sometimes involving more
than one investor’s money, which is used to invest in a number of tax credit
projects.
FUTURE
VALUE -- see Discounted Cash Flow.
GOVERNMENT-SPONSORED
ENTITY -- a semi-private entity that was chartered by the federal government,
but which has private shareholders. Fannie
Mae and Freddie Mac are two examples.
LIMITED
PARTNERSHIP -- an ownership entity consisting of at least one general partner
and at least one limited partner. Though
both partners share in the ownership, the general partner takes on management
and liability responsibilities, while the limited partner invests capital into
the partnership’s purpose (in this case a tax credit project) and receives
the majority of the profits from the project.
MINIMUM
SET-ASIDE -- the minimum percentage of units in a project which must be
occupied by low- or very low-income households in order for the project to
qualify for the tax credit. The sponsor/owner elects whether the project will qualify for
tax credit by setting aside at least 20 percent of the units for households
with income at or below 50 percent of Area
Median Income, or at least 40 percent of the units for households with
incomes at or below 60 percent of Area
Median Income. Also know as
the 20/50 test (or rule) and the 40/60 test (or rule).
NEXT
AVAILABLE UNIT RULE -- Rule established in Section 42 which mandates that,
should a low-income occupant’s income rise to 140 percent or more of the
maximum eligible income, then the next available unit of comparable or smaller
size must be rented to an income-eligible household in order to retain the
building’s qualified basis and remain in compliance with the tax credit
code.
NONPROFIT
SET-ASIDE -- 10 percent of each state’s allocable tax credits must be set
aside for nonprofit use annually.
PARTNERSHIP
AGREEMENT -- the document governing all interaction between and
responsibilities among partners in a limited partnership.
PLACED-IN-SERVICE
DATE -- the date in which a tax credit building is certified as ready for
occupancy.
PRESENT
VALUE -- See Discounted Cash Flow.
PRO
FORMA -- statement of sources and uses of funds on a project.
QUALIFIED
BASIS -- the amount of eligible
development costs (or Eligible Basis)
multiplied by the percentage of units which will be reserved for low-income
households
QUALIFYING
RATIO -- the percentage of units that are occupied by low-income households
(households with monthly income equal to or less than either 50 or 60 percent
of Area Median Income, as elected by
the project developer. See Minimum
Set-Aside.)
STATE
ALLOCATING CAP -- each state is entitled to award annually tax credits in an
amount equal to $1.25 per capita. Most
projects seeking tax credits must compete for tax credits from this pool of
funds. (Projects which have been
awarded tax-exempt bond financing are automatically eligible to receive 4
percent tax credits without competing against other projects, and the amount
of tax credits reserved for these projects does not count against the
state’s annual allocation cap.) In
recent years, however, the demand for tax credits has rapidly increased, while
the number of tax credits available has not.
Many tax credit advocates seek an increase in the state allocating cap.
SYNDICATION
-- the process of “selling” tax credits to an investor in return for
capital or equity.
SYNDICATOR
-- an intermediary between an investor(s) and a developer(s) which packages
the syndication deal for each, passing through capital from investors to a
project and tax credits from a project to the investors.
TAX
CREDIT "PRICE" -- the amount of money per tax credit dollar which a
syndicator or investor agrees to pay into a project in return for the right to
claim the tax credits.
TAX CREDIT RATE -- the rate used to calculate tax credits on a project, approximately 4 percent for acquisition and federally subsidized new construction and rehabilitation and approximately 9 percent for non-federally subsidized new construction and rehabilitation; the rate is designed to produce a present value of either 70 percent of the eligible development costs over time or 30 percent of the eligible development costs over time (the ten years of the credit period).