Low-Income Housing Tax Credits & Preservation in Michigan, 2017

Set Asides

Michigan State Housing Development Authority sets aside 25% of the state’s total credit ceiling for projects within the Preservation category. This represents $5,750,000 in preservation-designated annual funding across all funding rounds.

For a preservation project to be eligible to apply for 9% LIHTC, it must first be submitted to MSHDA in order to evaluate whether the project is likely to be competitive under the MSHDA Gap Financing Program. Please note that existing United States Department of Agriculture Rural Development (“USDA RD”) financed preservation projects that are composed of 49 units or less will not be required to submit to MSHDA under the process outlined below before applying under the 9% Preservation Category. The Gap Financing Program makes available a certain amount of gap financing to be used in combination with MSHDA tax-exempt bond financing. To perform its evaluation, MSHDA will consider the following:

1. The financial viability of a project based on the pro-forma analysis, site, and preliminary market analysis 
2. The overall capacity and experience of the development team; and 
3. The likelihood that the project will be competitive and be able to proceed with the funds available in the Gap Financing Program. 

To determine how competitive a project is likely to be, MSHDA will primarily evaluate a project’s soft to hard debt ratio, which is used to rank the proposals in the Gap Financing Program, to determine if the project appears to be competitive as compared to the current or most recent Gap Financing Program funding round. As a general guideline, historically projects have had a soft to hard debt ratio of 65% or less to be competitive in the Gap Financing Program, although actual ratios that are utilized by MSHDA may be greater or less than 65%. However, applicants are encouraged to view rankings of recent Gap Financing rounds on MSHDA’s website to determine with more certainty whether or not their project has a competitive soft to hard debt ratio. All Preservation projects (with the exception of existing Rural Development financed preservation projects that are composed of 49 units less) will be required to submit under the MSHDA Gap Financing Program regardless of their soft to hard debt ratio.

Following the analysis above, if, based on MSHDA’s determination, a project appears to be a strong candidate for the Gap Financing Program, the project will need to be completed using the Gap Financing Program and will be ineligible for 9% LIHTC. However, if, based on MSHDA’s determination, a preservation project is unlikely to be competitive in the Gap Financing Program; the project will be eligible to submit for consideration as part of a 9% funding round under the Preservation Category. Additionally, following an evaluation based on the process outlined above, preservation projects that do compete under the Gap Financing Program, but that cannot move forward using gap financing with a MSHDA tax-exempt loan (as determined by MSHDA as part of the Gap Financing Program) will be able to submit an application for credit as part of Preservation Category for 9% LIHTC in a future round. An applicant will not be able to submit a preservation project for 9% credit unless the project has been submitted to MSHDA, reviewed based on the criteria above, and MSHDA has determined that the project is unlikely to be competitive using the available gap funding paired with a tax-exempt bond loan.

The Preservation Category will be made available in both the October and April 9% LIHTC funding rounds of each year. Because of this timeline, an applicant may be evaluated by MSHDA at any time as long as the submission of the required documentation takes place at least 45 days in advance of the 9% funding round in which the applicant intends to apply. In order to complete the review outlined above, the sponsor must submit the LIHTC Application and the documents listed under the Preliminary Project Assessment portion of MSHDA’s Addendum IV Exhibit Checklist. MSHDA’s determination of the project as it relates to this assessment and the project’s eligibility for 9% LIHTC will be good for a period of one year provided that there are no changes made to the project that would cause it to be materially different from what was originally reviewed under the determination. After one year or in the case where there are material differences in the application, another assessment would need to be made by MSHDA to determine a project’s eligibility for future 9% LIHTC funding rounds. For further clarity, “material differences” generally includes, but is not limited to, any differences in land and building costs, site work and hard construction costs, soft costs, income projections, operating expense projections, replacement reserve projections, equity pricing, soft sources, seller financing, and any other funding sources from interim operations or transfers of existing escrows. MSHDA is aware that there are programmatic differences between the 9% LIHTC Program and MSHDA Gap Financing Program regarding developer fee calculations, financing fees, and capitalized reserve requirements and will generally not consider differences in these areas to be material differences if they are solely a result of the project taking advantage of differing program requirements.

Projects that are ultimately eligible to be submitted in the 9% Preservation Category portion of the funding round will be evaluated and awarded based on the scoring criteria, requirements, and process outlined in this Qualified Allocation Plan.

Point Incentives

The general areas where projects can receive points in the Scoring Criteria include, but are not limited to: project location, project financing, project characteristics, and development team characteristics. Under no circumstances will any application subject to a competitive scoring process give rise to an entitlement or legal right to an allocation of LIHTCs. The allocation of LIHTCs shall be entirely at the discretion of MSHDA.

Historic Rehabilitation Projects will earn 5 possible points, according to the Scoring Criteria. Preservation developments that are able to be completed without the use of acquisition credit or eligible basis that is attributable to acquisition costs are considered Rehab-Only Preservation and are eligible for 5 possible points. Project involves the replacement or redevelopment of public housing units are eligible for 5 possible points, as are projects that involve the rehabilitation of an existing RHS Section 515 property. There are a total of 222 possible points designated in the Scoring Criteria.

Thresholds

'Preservation' applies to the acquisition and renovation of existing affordable properties, which are currently subject to a low income use restriction. For purposes of determining which category to apply under, adaptive reuse projects, entirely vacant residential buildings, and projects requiring demolition will be ineligible to apply under the Preservation category, regardless of whether or not project-based rental subsidies are being preserved.

Basis-Boost

The “basis boost” has historically been applied to projects in two ways:

1. Buildings located in a difficult to develop area (DDA) or in a qualified census tract (QCT) 
2. Section 42(d)((5) provides that state housing credit agencies may award up to a 30 percent “basis boost” to buildings that States determine need the boost to be economically feasible, effective for buildings placed in service after July 30, 2008. This additional increase is not available to buildings located in a Qualified Census Tract, HUD-designated Difficult Development Areas, or tax-exempt bond financed projects; and it must be awarded prior to the issuance of 8609s, subject to tax credit ceiling being available. 

The Protecting Americans from Tax Hikes (PATH) Act of 2015 made permanent the fixed 9% credit rate. As a result of that change, in an effort to ensure the efficient allocation of the LIHTC resource, the QAP is limiting the maximum allowable basis boost that any project can receive to either 10% or 20% based on the criteria outlined below.

For projects financed with tax-exempt bonds eligible for 4% credit, the following basis boost will be available:

• Projects located in a QCT or DDA will be eligible for up to a 30% basis boost 

For projects eligible for 9% LIHTC, the following basis boost will be available: (projects are only eligible for a basis boost under one of the criteria below. If a project qualifies for both a 10% boost and a 20% boost, up to a 20% boost will be applied)

Up to 10% Basis Boost:

• Projects located in a QCT or DDA 
• Permanent Supportive Housing projects 
• Deep income targeting – Projects restricting 10% of the total units to 30% AMI or less 
• Central Cities projects 
• Rural set-aside projects 

Up to 20% Basis Boost:

• Historic Projects – Projects that are completing a certified rehabilitation of an existing certified historic property listed, either individually or as part of a district, on the National or State Historic Register; or that the State Historic Preservation Office expects to be listed on the National or State Historic Register. Project must also incorporate the use of the Historic Credit. 
• Projects with a Walk Score of greater than 90 
• Deep income targeting – Projects restricting 20% of the total units to 30% AMI or less 
• Mixed income housing – Projects with no more than 60% of the overall units being LIHTC units 

Y15, Qualified Contract

By submitting an application for LIHTCs, all Applicants waive the right to request a qualified contract under Section 42(h)(6)(E)(i) of the Internal Revenue Code. Thus, MSHDA's required extended use commitment shall not terminate at the end of the compliance period, but is instead a minimum of 30 years.

The Scoring Criteria specifies projects that agree to commit to an extended use period longer than 15 years (i.e., beyond the minimum total commitment of 15 years compliance plus 15 years extended use = 30 years) will receive 0.34 points for each additional year, up to a maximum of 5 points. Fractional points will be rounded down. Thus, a project committing to a total affordability period of 45 years would earn the maximum 5 points.

Distressed Communities

Eligible Distressed Areas, 30% - Housing projects in eligible distressed areas, which include proposed or existing housing projects in distressed areas pursuant to MCL 125.1411(u). A list of Eligible Distressed Areas can be found on MSHDA’s website at Eligible Distressed Areas List. With the exception of the nonprofit set-aside, if the LIHTC allocated falls below the set-aside threshold by October 1 of the year in which that credit amount is authorized, MSHDA may reapportion unallocated LIHTC amounts thereafter.

Community Revitalization Plans

Projects applying for funding under the Strategic Investment Category will receive consideration, in part, based upon the proposed project’s coordination with an overall community revitalization effort.