LIHTC EXAM QUESTIONS AND
ANSWERS 100% CORRECT
LIHTC Overview - ANSWER-1) Created as part of 1986 Tax Reform
2) Fed's primary vehicle for developing and preserving affordable multifamily rental
housing
3) LIHTCs generate private investor equity in exchange for offset to investor's future tax
liability
4) Investor's equity makes it possible for project to work and to charge the lower
restricted rents required by LIHTC program
5) Credits are categorized as either 4% or 9%
LISC - ANSWER-Local Initiatives Support Corporation - a CDFI (community
Development Finance Institution) that works to finance development of affordable
housing. CDFIs borrow money from the Bank at favorable rates and reinvest those
monies into community development.
Qualifying LIHTC Projects - ANSWER-Reserve minimum set aside of units targeted
within 60% AMI & maintain rent level restrictions for a minimum of 15 years ( Tax Credit
Compliance Period)
In return, investors get a 10yr stream of tax credits & 15yrs of partnership tax losses
Partnership Tax Losses - ANSWER-Combination of Project NOI, interest expense of
permanent loan, interest expense on subordinated loans, building depreciation, and
other expenses
Depreciation - ANSWER-The process of allocating the cost of an asset to expense over
its useful life, thereby lowering tax liability
How LIHTCs Work - ANSWER-1) Structured as real estate partnerships or LLCs
(Project Ownership Entity)
2) Investors purchase interests in Ownership Entity in return for stream of tax credits
and losses generated by underlying affordable property held by Ownership Entity
3) Investors can either act directly or through a syndicator (investor takes interest in an
investment fund, formed by syndicator, which is ultimately comprised of numerous other
investors (Project Ownership Entities)
Community Reinvestment Act - ANSWER-(1977) Federal law that requires banks to
meet the credit needs of all communities they serve, including low- and moderate-
income neighborhoods
, Chapter 40B - ANSWER-(1969) MA statute law which allows developers with projects
containing at least 20 - 25% of units restricted at 80% AMI to override zoning densities
in towns where at least 10% of units are not defined as affordable (80% AMI). There are
no state subsidies that accompany 40B
Defeasance - ANSWER-The retirement of bonds through the issuance of new bonds.
A clause that may be contained in commercial mortgages to protect lenders from
prepayments in a declining interest rate environment
Completion Development Deficit Guaranty - ANSWER-GP & Guarantor guarantee
investor the project will complete on a certain date (payment guarantees include all
investment costs, soft costs, and construction period interest, including lien-free
completion). Also guarantees payments of operating deficits during leasing period and
up to conversion
Operating Deficit Guaranty - ANSWER-GP & Guarantor guarantee investor payment of
all operating deficits arising after the Completion and Development Deficit Guaranty,
generally equal to 6 months op/ex, RR, plus debt service (coverage and occupancy
hurdles are set in order to terminate/release)
Historic Tax Credits - ANSWER-1) A federal income-tax incentives for the rehabilitation
of historic income-producing property
2) Credits deliverable over one year with a five year compliance period
3) Governed by National Park Services and eligible only to properties with NPS
designation
New Markets Tax Credits - ANSWER-Attracts private capital into low-income
communities by permitting individual and corporate investors to receive a tax credit
against their federal income tax in exchange for making equity investments in
specialized financial intermediaries called Community Development Entities (CDEs).
Minimum Gain - ANSWER-Negative operating account during tax credit period causing
a reallocation of losses away from investor and thereby tax credits since they follow
losses/depreciation
Substancial User - ANSWER-
Minimum Set-Aside Test - ANSWER-20/50 & 40/60; income averaging. Generally
serves as the determinant of a building's qualification for tax credits
Negative Arbitrage - ANSWER-Arbitrage occurs when tax-exempt bond proceeds are
invested in securities that yield a greater return than the interest charged on the bonds.
Restrictions exist on the amount of arbitrage bonds can earn without putting the tax-
exempt status of the bonds in peril. In instances where the restriction is violated,
exceptions exist that allow for the tax-exempt status of the bonds to remain intact.
ANSWERS 100% CORRECT
LIHTC Overview - ANSWER-1) Created as part of 1986 Tax Reform
2) Fed's primary vehicle for developing and preserving affordable multifamily rental
housing
3) LIHTCs generate private investor equity in exchange for offset to investor's future tax
liability
4) Investor's equity makes it possible for project to work and to charge the lower
restricted rents required by LIHTC program
5) Credits are categorized as either 4% or 9%
LISC - ANSWER-Local Initiatives Support Corporation - a CDFI (community
Development Finance Institution) that works to finance development of affordable
housing. CDFIs borrow money from the Bank at favorable rates and reinvest those
monies into community development.
Qualifying LIHTC Projects - ANSWER-Reserve minimum set aside of units targeted
within 60% AMI & maintain rent level restrictions for a minimum of 15 years ( Tax Credit
Compliance Period)
In return, investors get a 10yr stream of tax credits & 15yrs of partnership tax losses
Partnership Tax Losses - ANSWER-Combination of Project NOI, interest expense of
permanent loan, interest expense on subordinated loans, building depreciation, and
other expenses
Depreciation - ANSWER-The process of allocating the cost of an asset to expense over
its useful life, thereby lowering tax liability
How LIHTCs Work - ANSWER-1) Structured as real estate partnerships or LLCs
(Project Ownership Entity)
2) Investors purchase interests in Ownership Entity in return for stream of tax credits
and losses generated by underlying affordable property held by Ownership Entity
3) Investors can either act directly or through a syndicator (investor takes interest in an
investment fund, formed by syndicator, which is ultimately comprised of numerous other
investors (Project Ownership Entities)
Community Reinvestment Act - ANSWER-(1977) Federal law that requires banks to
meet the credit needs of all communities they serve, including low- and moderate-
income neighborhoods
, Chapter 40B - ANSWER-(1969) MA statute law which allows developers with projects
containing at least 20 - 25% of units restricted at 80% AMI to override zoning densities
in towns where at least 10% of units are not defined as affordable (80% AMI). There are
no state subsidies that accompany 40B
Defeasance - ANSWER-The retirement of bonds through the issuance of new bonds.
A clause that may be contained in commercial mortgages to protect lenders from
prepayments in a declining interest rate environment
Completion Development Deficit Guaranty - ANSWER-GP & Guarantor guarantee
investor the project will complete on a certain date (payment guarantees include all
investment costs, soft costs, and construction period interest, including lien-free
completion). Also guarantees payments of operating deficits during leasing period and
up to conversion
Operating Deficit Guaranty - ANSWER-GP & Guarantor guarantee investor payment of
all operating deficits arising after the Completion and Development Deficit Guaranty,
generally equal to 6 months op/ex, RR, plus debt service (coverage and occupancy
hurdles are set in order to terminate/release)
Historic Tax Credits - ANSWER-1) A federal income-tax incentives for the rehabilitation
of historic income-producing property
2) Credits deliverable over one year with a five year compliance period
3) Governed by National Park Services and eligible only to properties with NPS
designation
New Markets Tax Credits - ANSWER-Attracts private capital into low-income
communities by permitting individual and corporate investors to receive a tax credit
against their federal income tax in exchange for making equity investments in
specialized financial intermediaries called Community Development Entities (CDEs).
Minimum Gain - ANSWER-Negative operating account during tax credit period causing
a reallocation of losses away from investor and thereby tax credits since they follow
losses/depreciation
Substancial User - ANSWER-
Minimum Set-Aside Test - ANSWER-20/50 & 40/60; income averaging. Generally
serves as the determinant of a building's qualification for tax credits
Negative Arbitrage - ANSWER-Arbitrage occurs when tax-exempt bond proceeds are
invested in securities that yield a greater return than the interest charged on the bonds.
Restrictions exist on the amount of arbitrage bonds can earn without putting the tax-
exempt status of the bonds in peril. In instances where the restriction is violated,
exceptions exist that allow for the tax-exempt status of the bonds to remain intact.
