LIHTC Financial Management & Tax Credit Allocation 4 — Questions and Answers
Question 1: California's TCAC scoring system awards points for projects serving populations with special needs. Which of the following is a recognized special needs population under TCAC regulations?
- Chronically homeless individuals (Correct answer)
- First-time homebuyers
- Market-rate renters displaced by gentrification
- Commercial tenants in mixed-use buildings
Correct answer: Chronically homeless individuals
TCAC awards scoring points for serving special needs populations including the chronically homeless, veterans, persons with disabilities, and farmworkers.
Question 2: What financial ratio does TCAC require projects to maintain during the compliance period to demonstrate adequate cash flow to cover debt obligations?
- Debt Service Coverage Ratio (DSCR) of at least 1.15 (Correct answer)
- Loan-to-Value Ratio of no more than 80%
- Operating Expense Ratio of no more than 50%
- Vacancy Rate of no more than 5%
Correct answer: Debt Service Coverage Ratio (DSCR) of at least 1.15
TCAC requires a minimum DSCR of 1.15, meaning net operating income must be at least 115% of annual debt service.
Question 3: In a LIHTC partnership structure, what is the typical ownership percentage held by the limited partner (tax credit investor)?
- 99.99% (Correct answer)
- 50%
- 1%
- 75%
Correct answer: 99.99%
Tax credit investors typically hold 99.99% limited partnership interest to receive virtually all tax benefits, while the general partner holds 0.01%.
Question 4: A LIHTC project in California is financed with 4% tax credits and tax-exempt bonds. Which entity typically issues the tax-exempt bonds for these projects?
- California Debt Limit Allocation Committee (CDLAC) (Correct answer)
- California Department of Tax and Fee Administration
- TCAC directly
- The Federal Home Loan Bank
Correct answer: California Debt Limit Allocation Committee (CDLAC)
CDLAC allocates California's private activity bond cap, which is used to issue tax-exempt bonds that trigger 4% credits without a separate TCAC application.
Question 5: What happens to previously claimed LIHTC credits if a project fails to maintain compliance during the initial 15-year period?
- The investor must recapture the credits with interest on their federal tax return (Correct answer)
- Only the current year's credits are lost
- The state agency reimburses investors for lost credits
- Credits are suspended until compliance is restored
Correct answer: The investor must recapture the credits with interest on their federal tax return
Noncompliance triggers IRS recapture of previously claimed credits plus interest, creating significant financial risk for investors.
Question 6: Under TCAC underwriting standards, what is the maximum developer fee allowed for a new construction affordable housing project with a total development cost under $20 million?
- $2.5 million or 15% of TDC, whichever is less, subject to TCAC limits (Correct answer)
- $5 million flat fee regardless of project size
- 10% of eligible basis only
- No cap; negotiated between developer and investor
Correct answer: $2.5 million or 15% of TDC, whichever is less, subject to TCAC limits
TCAC caps developer fees on a sliding scale based on total development cost, with specific maximums to ensure credits fund housing rather than excessive fees.
Question 7: What is the function of a 'catch-up' provision in a LIHTC limited partnership agreement?
- It allows the general partner to receive a portion of profits once investor returns reach a target yield (Correct answer)
- It accelerates credit delivery to the investor if the project is completed early
- It permits late equity contributions without penalty
- It requires tenants to pay deferred rent if income increases
Correct answer: It allows the general partner to receive a portion of profits once investor returns reach a target yield
A catch-up provision lets the general partner receive a disproportionate share of cash flow or sale proceeds once the investor achieves their preferred return threshold.
LIHTC Financial Management & Tax Credit Allocation 4
California's TCAC scoring system awards points for projects serving populations with special needs.
Which of the following is a recognized special needs population under TCAC regulations?