LIHTC Financial Management & Tax Credit Allocation 5 — Questions and Answers
Question 1: California's TCAC regulations allow projects to use 'income averaging' with unit designations ranging from 20% to 80% AMI. What is the key averaging requirement?
- The average AMI of all income-restricted units must not exceed 60% AMI (Correct answer)
- At least half the units must be at 60% AMI
- The median AMI of restricted units must be 50% or below
- No unit may exceed 70% AMI under income averaging
Correct answer: The average AMI of all income-restricted units must not exceed 60% AMI
Under income averaging, the average of all designated unit AMI levels across the project must be 60% AMI or below.
Question 2: What is the primary risk to LIHTC investors associated with 'burn-off' of tax benefits in later years of the compliance period?
- Declining tax losses reduce investor yield if alternative income is insufficient (Correct answer)
- Increased recapture liability after year 10
- Rising AMI limits force rents above market
- State compliance monitoring fees increase after year 15
Correct answer: Declining tax losses reduce investor yield if alternative income is insufficient
As depreciation and credits wind down after the 10-year credit period, passive loss benefits diminish, reducing overall investor returns if not anticipated.
Question 3: Under California law, what is the maximum rent a LIHTC owner can charge a tenant occupying a unit restricted to 50% AMI (assuming a 2-person household)?
- 1/12 of 30% of 50% AMI for the applicable household size (Correct answer)
- 30% of the actual household's gross monthly income
- 50% of the fair market rent for the area
- The lesser of market rent or 30% of 60% AMI
Correct answer: 1/12 of 30% of 50% AMI for the applicable household size
Maximum rent is calculated as 1/12 of 30% of 50% AMI for the applicable unit size, not based on actual tenant income.
Question 4: A syndicator in a LIHTC transaction primarily performs which function?
- Pools equity from multiple corporate investors and places it into affordable housing partnerships (Correct answer)
- Originates and services the permanent mortgage loan
- Issues tax-exempt bonds on behalf of the developer
- Monitors tenant compliance on behalf of TCAC
Correct answer: Pools equity from multiple corporate investors and places it into affordable housing partnerships
Syndicators aggregate equity from multiple corporate tax credit investors and structure the limited partnership to invest in LIHTC projects.
Question 5: Which of the following would INCREASE a LIHTC project's eligible basis, thereby generating more tax credits?
- Including historic tax credit-qualifying rehabilitation costs (Correct answer)
- Purchasing more expensive land in a prime location
- Increasing the number of market-rate units
- Extending the loan term on the construction financing
Correct answer: Including historic tax credit-qualifying rehabilitation costs
Qualifying rehabilitation costs for historic tax credit purposes are includable in eligible basis, increasing the credits available on the project.
Question 6: TCAC's annual competitive funding rounds allocate credits on a per-county or regional set-aside basis. What is the purpose of these geographic set-asides?
- To ensure affordable housing development occurs throughout California and not only in high-demand urban areas (Correct answer)
- To prioritize the counties with the highest median incomes
- To limit applications from rural counties with low housing demand
- To concentrate credits in Difficult Development Areas only
Correct answer: To ensure affordable housing development occurs throughout California and not only in high-demand urban areas
Geographic set-asides ensure that rural and smaller counties receive funding, preventing all credits from flowing to competitive coastal markets.
Question 7: When a LIHTC project is permanently financed with both a first mortgage and a deferred developer fee, how is the deferred fee treated in the project's pro forma?
- As a soft loan from the developer that is repaid from available cash flow over time (Correct answer)
- As non-repayable grant income reducing development costs
- As a liability requiring immediate repayment at construction completion
- As additional equity contribution from the general partner
Correct answer: As a soft loan from the developer that is repaid from available cash flow over time
Deferred developer fees are structured as soft loans repaid from project cash flow, subordinate to all other debt obligations.
LIHTC Financial Management & Tax Credit Allocation 5
California's TCAC regulations allow projects to use 'income averaging' with unit designations ranging from 20% to 80% AMI.
What is the key averaging requirement?