Friday, October 22, 2010
Thursday, October 21, 2010
Wednesday, October 20, 2010
Tuesday, March 9, 2010
Tuesday, March 2, 2010
The National Flood Insurance Program expired
The National Flood Insurance Program expired Sunday night after Congress failed to pass a temporary extension of the program that is vital to protecting homes in the New Orleans area.
The lapse puts home sales at risk and could leave homeowners whose policies were scheduled to renew March 1 in jeopardy in the unlikely event that Monday's rains turned out to be heavy enough to cause flooding.
Other homeowners with existing flood coverage should face no repercussions.
While the federal flood insurance program is expected to be re-authorized, frustrated insurance agents and Realtors are asking why Congress is treating the program so carelessly by keeping it alive with temporary extensions rather than finish the sweeping overhaul that was launched after Hurricane Katrina.
"They keep doing temporary extensions rather than just passing it. It's almost like they don't understand the ramifications of their actions," said Chris Paulin, an executive at Insurance Underwriters Ltd. in Metairie who is also president of the Independent Insurance Agents and Brokers of Greater New Orleans. "To me, it's just irresponsible."
For the past few years, Congress has been extending the National Flood Insurance Program's authorization for a few months at a time while overhaul bills have been pending. Hurricane Katrina exposed shortcomings in the program, such as coverage limits that are out-of-step with today's home values, and reinvigorated a debate about how much the program should charge for policies and how to get more homeowners to buy policies.
The extension periods have been getting shorter, making the program more subject to Congressional whims. Last Thursday, the Senate failed to act on a bill previously passed by the House of Representatives that extended the program for 30 days, causing the program to lapse for the first time in recent memory.
The Senate reconvenes today , re-opening the possibility for action.
Most ho
mes in New Orleans are in flood zones, so lenders require federal flood insurance coverage as a term of the mortgage because standard homeowners insurance policies don't cover damage from rising water.Without the program in force, home buyers can't close on loans where flood insurance is required. Realtors say closings will be rescheduled, but if buyers and sellers are near the end of their contract periods, sales could be scuttled.
"They're obligated to delay the closings," said Glenn Gardner, director of operations at Prudential-Gardner Realtors. "but if somebody, for example, is at the last day of their contract, and someone changes their mind, it could put the sale in jeopardy."
On Monday afternoon, local insurance agents were bracing for the possibility of closing delays. "As of today, we are not able to bind any or endorse new coverage, so potentially it could affect real estate closings," said Robby Moss, president of the Hartwig Moss Insurance Agency and vice president of Latter & Blum Insurance Services.
Al Pappalardo, a local insurance agent with Pappalardo Insurance who is a past president of the Independent Insurance Agents of Greater New Orleans, urged people with upcoming closings to check in with their insurance agents to make sure that all of their paperwork is in order. Fortunately, since real estate closings often occur at the end of the month, few closings might be affected, Pappalardo said.
In addition to not being able to write new policies, insurance agents also can't increase coverage on existing policies or renew policies until the program is re-activated.
But Paulin said that the program lapse could affect policyholders whose coverage was scheduled to renew March 1 if there was a flood.
According to rules spelled out in a FEMA bulletin, for the policy to remain in force, renewal payments must have been received before the program lapsed. Since the program expired Sunday night, a homeowner's escrow account must have sent the payment to FEMA in time for it to have been received by Friday for the policy to remain in force.
If the renewal isn't received in time, any homeowner experiencing a flood will have to rely on Congress to re-authorize the program retroactively. According to a Feb. 25 FEMA bulletin, FEMA believes that would happen. "If a lapse does occur, an extension will probably be done retroactively."
For all other homeowners with flood policies, FEMA says that claims should be made and processed as normal if anyone were to experience flooding while the program was on hold. "Claims for covered losses occurring during a hiatus on existing policies...are to be processed an paid as usual," the memo says.
Gardner said he's grateful that Congress picked a good time of year for the lapse. "Fortunately, they didn't pick the middle of hurricane season," he said.
By Rebecca Mowbray, The Times-Picayune
Friday, February 19, 2010
Thursday, February 18, 2010
Low Income Housing Tax Credit
The Low Income Housing Tax Credit (LIHTC; pronounced “ly-tech”) is a tax credit created under the Tax Reform Act of 1986 (TRA86) that gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer’s federal income tax, whereas a tax deduction only provides a reduction in taxable income.
As of 2006, 40% of all new multifamily construction projects received section 42 credits.
How it Works
The LIHTC provides funding for the development costs of low-income housing by allowing a taxpayer (usually the partners of a partnership that owns the housing) to take a federal tax credit equal to a large percentage of the cost incurred for development of the low-income units in a rental housing project. Development capital is raised by “syndicating” the credit to an investor or, more commonly, a group of investors.
To take advantage of the LIHTC, a developer will typically propose a project to a state agency, seek and win a competitive allocation of tax credits, complete the project, certify its cost, and rent-up the project to low income tenants. Simultaneously, an investor will be found that will make a “capital contribution” to the partnership or limited liability company that owns the project in exchange for being “allocated” the entity’s LIHTCs over a ten year period.
The amount of the credit will be based on (i) the amount of credits awarded to the project in the competition, (ii) the actual cost of the project, (iii) the tax credit rate announced by the IRS, and (iv) the percentage of the project’s units that are rented to low income tenants. Failure to comply with the applicable rules, or a sale of the project or an ownership interest before the end of at least a 15-year period, can lead to recapture of credits previously taken, as well as the inability to take future credits.
Application Process
The first step in the process is for a project owner to submit an application to a state authority. The application will include estimates of the expected cost of the project and a commitment to comply with either of the following conditions, known as “set-asides”:
* At least 20% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 50% or less of the area median gross income.
* At least 40% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 60% or less of the area median gross income.
Typically, the project owner will agree to a higher percentage of low income usage than these minimums, up to 100%. Low income tenants can be charged a maximum rent of 30% of the maximum eligible income, which is 60% of the area’s median income adjusted for household size as determined by HUD. There are no limits on the rents that can be charged to tenants who are not low income but live in the same project.
Here Are Some More Frequently Asked Questions
When and why was the Low-Income Housing Tax Credit Program created?
In the early 1980s, the federal government eliminated many publicly funded housing-development programs. To help offset the resulting loss in the production of affordable housing, Congress passed the Low-Income Housing Tax Credit (LIHTC) program. Part of the Tax Reform Act of 1986, the LIHTC program provides an incentive to the private sector to invest in low-income multifamily housing. The program gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing.
Today the Low-Income Housing Tax Credit program is the only federal affordable rental housing production program available to developers. Currently it provides more than $400 million in annual subsidies for developing low-income rental housing. Since the national program went into effect, a number of states have established their own LIHTC programs.
Who administers the LIHTC program?
The Internal Revenue Service (IRS) oversees the LIHTC program, but most administrative and monitoring responsibilities have been delegated to the states. Each state receives an annual allotment of tax credits based on the size of its population. For 2008 and 2009 the state volume cap is $2.20 per resident or $2,557,500, whichever is greater.
State agencies review and rank tax credit applications submitted by developers and allocate credits to the highest-scoring affordable housing projects. Each state sets its own criteria for awarding credits to proposed projects and lists the criteria in a document called the “Qualified Allocation Plan” (QAP). The IRS requires that QAPs prioritize projects that serve the lowest-income tenants and ensure affordable housing for the longest period. The law also requires that states set aside a minimum of 10 percent of their allotted credits for nonprofit developers/owners.
The allocation process is highly competitive. Some states can receive applications requesting as many as three times or more credits than they have authority to allocate.
How does the low-income housing tax credit program work?
Most developers who receive an allocation from their states sell their tax credits to corporate investors (and in some cases individuals) for cash. By investing in LIHTC developments, corporations (or individuals) can then claim the tax credit on their income tax returns over a 10-year period and thereby reduce their tax liability. Federally regulated financial institutions (e.g., banks and savings institutions) not only reduce their tax liability when they invest in LIHTC projects; they also receive, as an additional incentive, Community Reinvestment Act (CRA) credit.
The money developers receive from the sale of tax credits is in the form of an equity contribution that is used to pay costs related to the project. By receiving equity capital, developers can reduce the sum they need to borrow and, consequently, their debt service costs. Typically, the amount of equity raised from the sale of tax credits ranges from 50% to 55% of the total development costs. These savings allow the developer to charge below-market-rate rents.
Are there any limitations placed on the rent that owners of LIHTC properties may charge?
Yes. First of all, to be eligible to participate in the LIHTC program, projects must meet either of the following requirements: at least 20 percent of the units must be rented to households whose incomes do not exceed 50 percent of the area median income (AMI) or at least 40 percent of the units must be set aside for households whose incomes do not exceed 60 percent of the AMI. In practice, usually 100 percent of the units in a development qualify for LIHTCs.
The Department of Housing and Urban Development (HUD) calculates the area median income for each county in each state. Low-income rents, including utilities, are restricted based on family size, the number of bedrooms in the apartment, and the AMI. In all cases, the project owner cannot charge a rent that is greater than 30 percent of a qualified tenant’s income (i.e., 30 percent of 50 or 60 percent of AMI).
By statute LIHTC projects must adhere to the rent restrictions for a minimum of 15 years (also known as the “compliance period”). Most states include an additional 15 years through an extended use agreement. The long-term structure of tax credits helps ensure that the units remain available for low-income occupancy for at least fifteen years. Should the number of low-income units drop below the required percentages within the first fifteen years, the number of tax credits available to the investor is reduced.
Are there any limitations on the types of projects tax credits can be used for?
Tax credits can be used to finance family projects and developments serving elderly residents, the homeless, or disabled individuals as well as other special needs groups. It is important for developers to be familiar with their states’ QAPs, for when reviewing and ranking applications, some states award points to projects that give priority to meeting the needs of specific population groups.
If a developer wants to build a rental project using Low-Income Housing Tax Credits, what steps should be followed?
First, the developer should obtain a copy of the QAP from the state allocating agency where the project will be built and become thoroughly familiar with its contents. Second, the developer should get a copy of the tax credit application and find out the date(s) for submittal. Third, if the developer, even an experienced developer, has never built a tax credit project, it is strongly recommended that an experienced consultant be retained to assist with the preparation of the application, project structuring, financing, and other matters unique to the tax credit program.
Tax credits are big business and for a lucky few, can mean big cash. Something to think about if you are exploring multifamily rehab or development.