WA State: Disposition/Acquisition of Multi-Family operating under Federal Low Income Tax Credit Program - IRC Section 42

3 Replies

Greetings Fellow BP Members:

I've been hired to run some BOV (broker opinion of value) and have come across a really interesting one which is giving me some trouble. It's a building in Washington State, specifically Kitsap County which operates under the Federal Low Income Tax Credit Program, IRC Section 42 of the tax code. Units are restricted to households making less than 30%, 50% and 60% of the median income (AMI) for the Bremerton PMSA. The building was built in mid-2000's and appears it may have a very difficult marketability as it falls between 30-60 units and generally speaking individual investors/developers aren't able to capture these tax credits (from what I understand), thus they would need to partner with a corporation who does need these. 

As being part of this program, on a state level, the owners are not required to pay taxes (assuming the are in compliance, which they must reapply annually - this is indeed transferable to a new owner). 

I have calls into the IRS and the OCC but I imagine it will take time before they reply to me and time is of the essence as the project was just assigned yesterday and must be completed by Monday. 

There is nothing within the zoning/permitting with the City (it is within City limits) that make it so this building is unable to be operated as market-rate multi-family housing; however, I imagine getting out of this tax program is difficult and a management nightmare. I am having trouble confirming this and can't find ANY sales comparable of the sort. 

1. Has anyone ever dealt with a transaction like this? I need to come up with a value and I am thinking it's a very difficult asset to market, especially since I haven't been able to determine how to get out of the Federal Low Income Tax Credit Program - IRC Section 42.

2. Does anyone have any good market data on Kipsap County and/or an appraisal from 2013-2014 they would share? I would not share with anyone at all, but rather would just use it for personal information which may help me on this project. 

Any information and idea's would be greatly appreciated.

Thank You,

Low income housing tax credits are a federal program that restricts the rents for 15 years. Sometimes, the property can be converted to market rate at that time, other times there is a LURA (land use restriction agreement) that calls for additional years of restricted rents. There are additional restrictions on how much the rents can rise each year and it is based on the county's median income.

When valuing a property in the program, it cannot be compared to market rate deals, it's income stream has to be valued assuming the restricted rental rates.

Tax credit deals usually cost more to build than they are worth because of the rents. But the developers get the credits, which they then sell to large corporations who need the write offs, in exchange for equity dollars for their project.

Hi Zach,

Some things I think about when I underwrote LIHTC properties when I was still in the business: 

What are the max rents for the 30s, 50s and 60s and are we hitting these rents? If you aren't, great, means you got some room for value-add. If you're up against max, you're limited to whatever next year's increase(or decrease, which is terrible) in max rents. 

Taxes. Usually properties require a 501c3 NP as a GP for it to qualify for tax exemption. Just need to clarify if a 501c3 is required for transferability.

LIHTC restrictions: Check the LURA!! (Land use reg agmt). It will state what the restrictions are and for how long. Some restrictions last 15, 20, 30+ years. Some even 99 (perpetuity) in the northeast. Check what happens after the restrictions are up. Can units go mkt rate? If so, there's a 3-year phase out process.

Many basic LIHTC properties are subject to 15 year restrictions so your building's restrictions might be coming up soon?

For more resources, check out Novogradic. It's what I used for calculating max rents and finding other LIHTC apts nearby. Great for learning more about LIHTC as well.

Msg me if you have any more questions.

-Ed

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