Eminem’s former Detroit home up for auction via USA Today
20 Friday Sep 2013
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Commercial Development, Horizon Companies, Housing Recovery, Preston Byrd, Preston Byrd Memphis, Real Estate Development, Residential Development
US Commercial Real Estate Development May Rebound Only In 2014: Report
“An anticipated rebound in nonresidential construction across the United States has fallen somewhat flat in 2013, so it may be 2014 before commercial developers benefit from a budding national housing recovery, according to a Citigroup Inc. (NYSE:C) research note from Tuesday.”-IBT
02 Monday Sep 2013
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in01 Sunday Sep 2013
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in02 Friday Dec 2011
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4% tax credits, 9% tax credits, affordable housing, affordable housing market, affordable rental housing, Business, Collierville TN, Horizon Companies, Horizon Holding Company, how tax credit syndication is structured, Internal Revenue Service, IRS, Memphis TN, multi-family housing, multi-family tax credit housing, Preston Byrd, Preston E Byrd, Tax, Tax credit, tax credit allocation, tax credit calculation, Taxation, TurboTax, United States
Development Budget
The first step in determining the amount of tax credits a project is eligible to receive and how much equity can be raised from the tax credits is to put together a development budget – a budget of all of the project’s costs.
Eligible Basis
Once the development budget has been prepared, it is important to determine which line items in the development budget are depreciable costs – this is known as the “Eligible Basis”.
Eligible Basis includes:
• A project’s depreciable costs related to the construction of new residential rental housing, or
• Its depreciable costs related to the substantial rehabilitation of existing residential rental housing.
Another way to calculate the Eligible Basis is to take the total development costs and subtract out those items not eligible. Among those costs not eligible are:
• land and land-related costs
• building acquisition and related costs
• fees and costs related to any permanent loan financing
• fees and costs related to post-construction period operations
• syndication-related costs
• project reserves
• post-construction period working capital (e.g., marketing expenses included in the development budget)
• federal grants
• the residential housing portion of any historic tax credits taken
• the non-residential portion of project costs (e.g., any commercial space and any community space if its use is not restricted to project tenants)
Commercial space is not eligible for low-income housing tax credits because it is not residential in nature. Actual costs for commercial space should be used if available. Often, commercial construction is less costly than residential work. This helps to preserve tax credit basis. Certain soft costs may also need to be adjusted, and normally the developer fee is pro-rated, as well.
Calculation of Applicable Fraction
Eligible Basis must be adjusted so that it includes only the depreciable costs related to qualifying residential rental units. Costs related to residential units that are rented to tenants with incomes above 60% of area median income levels are not eligible for tax credits. Costs for non-residential housing purposes, such as commercial space in a project, must also be excluded.
The adjustment of Eligible Basis to eliminate these costs is done by applying what is known as the project’s “Applicable Fraction”. This is a 2-step process. The Applicable Fraction is defined as the lesser of:
• the number of qualifying rent-paying residential units as a fraction of all rent-paying residential units (the “Unit Percentage”), and
• the square footage fraction of qualifying rent-paying residential units as a fraction of all units (the “Square Footage Percentage”). It is developed for each building or group of buildings for which you receive a “Building Identification Number (“BIN”).
Do not include the rent-free super’s unit in either Applicable Fraction calculation. However, the cost of the super’s unit is, in fact, pro-rated when the Applicable Fraction is applied, because the cost of the super’s unit is included in Eligible Basis.
Applying the 30% Basis Boost
Eligible Basis (as adjusted by the Applicable Fraction) may be increased by up to 30% if the project’s buildings are located in Qualified Census Tracts (i.e., tracts with relatively low incomes) or if they are in a Difficult Development Area (i.e., a county or metropolitan area with a high cost/ income ratio). QCT’s and DDA’s are designated by HUD & the IRS, and the list may change from year to year. The list of QCT’s and DDA’s is published in the federal register. ESIC’s website http://www.esic.org/ has a link to these lists.
This results in a higher basis for calculating tax credits and provides an economic incentive to invest in such projects. The Basis Boost applies to the 9% rehab/construction tax credits and the 4% rehab/construction credits but does not apply to the 4% acquisition tax credit.
• Special HOME Rules for the Basis Boost. There are special rules that apply to using the basis boost if a project also uses HOME financing.
The resulting adjusted depreciable basis is known as the project’s Qualified Basis. Tax credits are calculated on the project’s Qualified Basis.
Annual Tax Credit
The total amount of tax credits a project is eligible to receive is determined by multiplying the Qualified Basis times the tax credit rate (4% or 9% – remember the actual tax credit rate is published monthly and has been slightly less than 4% and 9%). The result is the amount of tax credits the project is eligible to receive. For a project to receive tax credits, groups must apply to their state housing agency and receive a reservation. Since the number of applicants is high and the supply limited, it is not uncommon for a project to receive less in tax credits from the state than the project is eligible to receive.
Total Tax Credits
Since the project receives tax credits for 10 years, the annual tax credits is multiplied by 10 to get the total tax credits the investor will receive.
Tax Credit Equity
The tax credit investor will look at all of the tax credits the project can receive over 10 years and pay a price for the tax credits. Often, a project with 4% credits will have a higher raise (price) per tax credit dollar than a comparable deal with 9% tax credits. The higher raise is because the non-tax credit benefits such as depreciation are a greater percentage of total tax benefits, and investors value them, as well.
09 Wednesday Nov 2011
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Collierville TN, executive order, Head Start Program, Horizon Companies, Horizon Holding Company, Memphis TN, president executive orders, President Obama, Preston Byrd, Preston E Byrd, social media, We Can't Wait Campaign, YPolitic
Yesterday, President Obama signed yet another executive order, this time for the Head Start Program, as apart of what he’s calling the “We Can’t Wait” campaign. This move once again by-passing what has been described as a do nothing Congress. The President visited a Head Start program in a suburb of Philadelphia on yesterday in an effort to show his support towards education and reforming the school systems across America. In his efforts to retool the Head Start Program, Obama announced new benchmarks that will evaluate and challenge the effectiveness of the Head Start program that also includes a new plan to force all low-performing Head Start programs to re-compete for federal dollars that they receive each year.
The Heard Start Programs federal contribution in its 2010 fiscal years budget was $7.2 billion. It also received an additional $2.1 billion as part of the Recovery Act. President Obama said “We know that three and four-year olds who go to high-quality preschools, including our best Head Start programs, are less likely to repeat a grade; they’re less likely to need special education; they’re more likely to graduate from high school than the peers who did not get these services,”. “And so this makes early education one of our best investments in America’s future.”
From 2009 to 2010, the Heard Start Program and its subsidiary program Early Head Start served more than 1 million children and pregnant women. The program focuses on providing assistance in the areas of education, nutrition, health, parent involvement and family support to low-income and at risk communities. 80% of the program’s funding comes from the federal government with the remaining 20% coming from a combination of in-kind and local match funds from the communities at large.
President Obama said that “Under the old rules governing Head Start, there just wasn’t enough accountability,”. “If a program wasn’t providing kids with quality services, there was no incentive to improve. Under the new rule, programs are going to be regularly evaluated against a set of clear, high standards. If a program meets these standards, and we believe the majority of Head Start programs will, then their grants will be renewed.” “But if a program isn’t giving children the support they need to be ready for school, if classrooms are unsafe, if finances aren’t in order, if kids aren’t learning what they need to learn, then other organizations will be able compete for that grant. We’re not just going to put money into programs that don’t work. We will take money and put them into programs that do,”.
Although President Obama believes that Congress still needs to fix the No Child Left Behind initiative, he’s wasting no time push his agenda for change. President Obama says, “Congress still needs to put teachers back in the classroom where they belong. So Congress still needs to act. But if Congress continues to stand only for dysfunction and delay, then I’m going to move ahead without them.”
08 Tuesday Nov 2011
Posted Real Estate
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Bank, Business, Collierville TN, Federal Home Loan Bank, filling financial gaps in tax credit development, Finance, Financial services, Horizon Companies, Horizon Holding Company, Loan, Memphis TN, Mortgages, multi-family housing, multi-family tax credit housing, Preston Byrd, Preston E Byrd, Real Estate, tax credit financing, tax credit housing market
Based on the developer’s cash flow projection, it is possible to estimate the size of a first mortgage for the project. An estimate of how much investor equity can also be made. In some cases, certain soft financing can be identified from state and local financing agencies.
There are many reasons why a financial gap would come up to include cost over-runs, inflated material cost or just plane over cites. These gaps must be filled in order to fund all of the development costs that have been identified. Closing this gap requires obtaining funds that do not require current payments from the project, referred to as “soft” financing.
Among the traditional sources of soft financing are:
• Community Development Block Grant (“CDBG”) loans and grants
• Federal HOME loans
• Other federal, state and local financing sources
• The Affordable Housing Program of the FHLB
• Soft loans from public utilities and banks
• Better first mortgage terms
• Reduced acquisition costs
• Deferred developer fees
• General partner loans and equity
Private funds are sometimes a source, including the Affordable Housing Program (“AHP”) of the Federal Home Loan Bank. Some utility companies and banks make soft loans to local projects to cover specific kinds of costs. For instance, some utility companies make loans at beneficial terms in order to cover weatherization costs, such as the conversion of an existing heating system to a more efficient system.
Deferring a portion of the developer fee may be a way to limit capital outlays. Or a developer fee may be paid but lent back to the project with interest to fund project construction costs. In those cases, they may be paid or repaid from the project’s cash flow. Or a developer may be willing to contribute a portion of its development fee back to the project, as general partner capital, as a way of filling the gap. It is important however, to always check and recheck the underwriting of the project prior to closing on the loan to ensure that financial gaps are non-existent or at least minimized.
In some situations, a part of the acquisition price may be deferred and paid from cash flow. Reductions in development costs can also help fill the gap, but that should occur only if it does not impair the quality or economics of the project. Caution should be taken when using federal funds to fill the gap, as there are special rules that apply when using these funds. In addition, gap funding normally should be structured as loans to the partnership, meaning that the terms require repayment. A nonprofit sponsor may make a loan to the partnership using the proceeds of a grant that it has received.
07 Monday Nov 2011
Posted Real Estate
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Business, Collierville TN, Debt, Finance, Grants, Horizon Companies, Horizon Holding Company, Loan, Memphis TN, Preston Byrd, Preston E Byrd, Tax, Tax credit, United States
Before examining the tax credit program itself, it is important to understand what sources of financing there are for the project. The developer prepares an estimate of a project’s development costs. This estimate needs to cover the cost of acquiring the property. The sources of financing must cover these acquisition and development costs. In addition, potential lenders and investors will want additional funds to be set-aside as reserves against specific operating risks. They also may require the developer to provide financial guarantees to protect them further.
There often is substantial tension among the parties as project cost, project performance, and construction and operating risks are identified, and as risk mitigation is negotiated to conclusion and incorporated into the final closing documents.
There are only three general kinds of financing for a project
o Project debt
o Grants to the project, and
o Equity
Project debt often comes from several different sources. The project may utilize a combination of:
o Conventional debt that may come from an insurance company, bank, institutional source or other lender. Debt service is payable currently and the loan carries a market rate of interest.
o So-called “soft” debt from state or local government lenders. Interest rates often are lower on these projects, and may be accrued if project cash flow is not adequate to cover debt service. Also, Federal HOME and CDBG loans are often used in these projects.
All of these sources of debt can be used with the tax credit program, if properly structured. Careful structuring will provide funds to the project in a way that does not jeopardize the availability of tax credits to the project or the amount of the tax credits allocated.
02 Wednesday Nov 2011
Posted Real Estate
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Accounting, Collierville TN, Horizon Companies, Horizon Holding Company, Memphis TN, Preston Byrd, Preston E Byrd, Tax credit
This is the first crucial hurdle the project faces once construction begins. The so-called “10% test” to carry over the tax credits is an all-or-nothing test. If a project has not incurred 10% of its “reasonably expected basis” before December 31 of the year in which tax credits are allocated AND/OR if the incurred costs and the tax credit allocation do not run to the same legal entity, the tax credits cannot be carried at the end of the year. The project will have lost its tax credit allocation irretrievably, and has no credits.
The only way to salvage tax credits for the project is to apply for, and receive, a new tax credit allocation in the new year. This is possible only if the project is still in construction. Syndicators tend to be VERY conservative regarding the 10% test. The importance of meeting this test cannot be overemphasize!
Here is the tax credit process that is involved:
• The sponsor has applied for, and received, tax credits according to the allocating agency’s schedule, pursuant to its QAP.
• The project has received a reservation of tax credits. This may be for the project or for individual buildings in the project.
• Within 5 days of receiving the allocation, a decision was made to either lock in the tax credit rate for the allocation month, or by default to allow the tax credit rate to float until project completion. Many states require a lock-in at the time the credits are allocated. Most investors tend to prefer lock-ins, too, to reduce financing risk.
• The partnership has incurred costs greater than 10% of the project’s “reasonably expected basis” (the “10% test”) by December 31 of the reservation year in which the Carryover Allocation was received. The Carryover Allocation provides time to get the project into service – two years from the end of the allocation year.
• The costs that go into a project’s “reasonably expected basis” and the incurred costs by the partnership to meet the 10% test have been reviewed carefully, to confirm that incurred costs satisfy IRS requirements. Many states and local tax allocating authorities require the partnership’s CPA firm to certify the 10% figure prior to the IRS’s date of December 31.
• Ways to meet the 10% test:
Purchase land and/or building. These costs count toward the 10%.
Incur pre-development costs – appraisal, environmental study, legal fees, etc.
Earn a small portion (usually no more than 20%) of the developer’s fee.
Fund or pre-fund construction costs prior to year-end. The contractors’ costs may be included. But the contractor’s pre-purchased construction inventory does not. There may be ways to structure around this. Specific IRS rules apply.
Note: meeting the 10% test can involve very technical interpretations. Get assistance from an attorney and an accountant who are experienced in tax credit transactions.