Hypothetical Case Study: 9 Percent LIHTC Project With Basis Boost

Total project development cost is $15,220,000.

Project overview: This sample transaction illustrates a direct investment by a bank in a 9 percent LIHTC-financed project located in a DDA. Because the project is in a DDA, the eligible basis is boosted by 30 percent. The project involves the new construction of 100 units of affordable rental housing. The units are allocated to renters according to their household income relative to the area median income (AMI), as shown in table 2.

Table 2: Affordable Unit Allocations

Tax credit project financing: Table 4 illustrates how the number of tax credits available to the project is calculated. The eligible basis was “boosted” because of the project’s location in a DDA. Because all of the units are affordable, 100 percent of the adjusted eligible basis becomes the qualified basis. Multiplying the qualified basis by the applicable percentage gives us the number of tax credits available annually.

In this example, a bank became a direct investor with 99.99 percent ownership interest in the partnership developing the properties. As shown in table 3 that investment created $13,162,500 in equity financing (the bank paid $0.90 for every $1 of credit). The remainder of the financing came from a first lien note from a state housing trust fund program of $1,056,200. The balance of financing needed to complete the project was made by other state housing programs providing “soft” financing to close the gap. In this case, the second and third mortgages are to be repaid upon transfer of the properties or after 30 years, whichever comes first.

Table 3: Sources and Uses of Funds