LIHTC SELF STUDY QUESTIONS AND ANSWERS
(GRADED A+)
LIHTCYOverviewY-
YCORRECTYANSWERS1)YCreatedYasYpartYofY1986YTaxYReform
2)YFed'sYprimaryYvehicleYforYdevelopingYandYpreservingYaffordableYmultifamilyYre
ntalYhousing
3)YLIHTCsYgenerateYprivateYinvestorYequityYinYexchangeYforYoffsetYtoYinvestor's
YfutureYtaxYliability
4)YInvestor'sYequityYmakesYitYpossibleYforYprojectYtoYworkYandYtoYchargeYtheYl
owerYrestrictedYrentsYrequiredYbyYLIHTCYprogram
5)YCreditsYareYcategorizedYasYeitherY4%YorY9%
LISCY-YCORRECTYANSWERSLocalYInitiativesYSupportYCorporationY-
YaYCDFIY(communityYDevelopmentYFinanceYInstitution)YthatYworksYtoYfinanceYde
velopmentYofYaffordableYhousing.YCDFIsYborrowYmoneyYfromYtheYBankYatYfavor
ableYratesYandYreinvestYthoseYmoniesYintoYcommunityYdevelopment.
QualifyingYLIHTCYProjectsY-
YCORRECTYANSWERSReserveYminimumYsetYasideYofYunitsYtargetedYwithinY60
%YAMIY&YmaintainYrentYlevelYrestrictionsYforYaYminimumYofY15YyearsY(YTaxYCr
editYComplianceYPeriod)
InYreturn,YinvestorsYgetYaY10yrYstreamYofYtaxYcreditsY&Y15yrsYofYpartnershipYta
xYlosses
PartnershipYTaxYLossesY-
YCORRECTYANSWERSCombinationYofYProjectYNOI,YinterestYexpenseYofYperman
entYloan,YinterestYexpenseYonYsubordinatedYloans,YbuildingYdepreciation,YandYot
herYexpenses
DepreciationY-
YCORRECTYANSWERSTheYprocessYofYallocatingYtheYcostYofYanYassetYtoYexpe
nseYoverYitsYusefulYlife,YtherebyYloweringYtaxYliability
HowYLIHTCsYWorkY-
YCORRECTYANSWERS1)YStructuredYasYrealYestateYpartnershipsYorYLLCsY(Proj
ectYOwnershipYEntity)
2)YInvestorsYpurchaseYinterestsYinYOwnershipYEntityYinYreturnYforYstreamYofYtax
YcreditsYandYlossesYgeneratedYbyYunderlyingYaffordableYpropertyYheldYbyYOwner
shipYEntity
3)YInvestorsYcanYeitherYactYdirectlyYorYthroughYaYsyndicatorY(investorYtakesYinte
restYinYanYinvestmentYfund,YformedYbyYsyndicator,YwhichYisYultimatelyYcomprise
dYofYnumerousYotherYinvestorsY(ProjectYOwnershipYEntities)
CommunityYReinvestmentYActY-
YCORRECTYANSWERS(1977)YFederalYlawYthatYrequiresYbanksYtoYmeetYtheYcre
ditYneedsYofYallYcommunitiesYtheyYserve,YincludingYlow-YandYmoderate-
incomeYneighborhoods
HistoricYTaxYCreditsY-YCORRECTYANSWERS1)YAYfederalYincome-
taxYincentivesYforYtheYrehabilitationYofYhistoricYincome-producingYproperty
2)YCreditsYdeliverableYoverYoneYyearYwithYaYfiveYyearYcomplianceYperiod
, 3)YGovernedYbyYNationalYParkYServicesYandYeligibleYonlyYtoYpropertiesYwithYNP
SYdesignation
NewYMarketsYTaxYCreditsY-
YCORRECTYANSWERSAttractsYprivateYcapitalYintoYlow-
incomeYcommunitiesYbyYpermittingYindividualYandYcorporateYinvestorsYtoYreceive
YaYtaxYcreditYagainstYtheirYfederalYincomeYtaxYinYexchangeYforYmakingYequityYi
nvestmentsYinYspecializedYfinancialYintermediariesYcalledYCommunityYDevelopmen
tYEntitiesY(CDEs).
MinimumYGainY-
YCORRECTYANSWERSNegativeYoperatingYaccountYduringYtaxYcreditYperiodYcau
singYaYreallocationYofYlossesYawayYfromYinvestorYandYtherebyYtaxYcreditsYsince
YtheyYfollowYlosses/depreciation
SubstancialYUserY-YCORRECTYANSWERS
MinimumYSet-AsideYTestY-
YCORRECTYANSWERS20/50Y&Y40/60;YincomeYaveraging.YGenerallyYservesYasY
theYdeterminantYofYaYbuilding'sYqualificationYforYtaxYcredits
NegativeYArbitrageY-YCORRECTYANSWERSArbitrageYoccursYwhenYtax-
exemptYbondYproceedsYareYinvestedYinYsecuritiesYthatYyieldYaYgreaterYreturnYth
anYtheYinterestYchargedYonYtheYbonds.YRestrictionsYexistYonYtheYamountYofYarb
itrageYbondsYcanYearnYwithoutYputtingYtheYtax-
exemptYstatusYofYtheYbondsYinYperil.YInYinstancesYwhereYtheYrestrictionYisYviola
ted,YexceptionsYexistYthatYallowYforYtheYtax-
exemptYstatusYofYtheYbondsYtoYremainYintact.
NegativeYarbitrageYoccursYwhenYundisbursedYbondYproceedsYearnYaYlowerYinter
estYrateYthanYtheYbondYinterestYrate.
TEFRAYHearingY-
YCORRECTYANSWERSTheYTaxYEquityYandYFiscalYResponsibilityYActY(TEFRA)Y
HearingYisYtheYbondYissuer'sYpublicYnotice,YpublicYhearingYandYapprovalYbyYele
ctedYofficialsYofYaYbondYissuance
VolumeYCapY-
YCORRECTYANSWERSTheYvolumeYcapYisYtheYmaximumYamountYofYLIHCsYand
Ytax-
exemptYbondsYeachYstateYisYallowedYtoYallocateYannually.YTheYtaxYcreditYvolum
eYcapYisY$1.75YperYstateYresident.YTheYbondYvolumeYcapYisY$75YperYpersonY
perYstate,YwithYaY$225YmillionYminimumYperYstate.YBeginningYinY2003,YtheYvolu
meYcapYwillYbeYindexedYtoYinflation
QualifiedYCensusYTractY-
YCORRECTYANSWERSAnyYcensusYtractYinYwhichY50YpercentYorYmoreYofYtheY
householdsYhaveYanYincomeYwhichYisYlessYthanY60YpercentYofYareaYmedianYgr
ossYincome
Placed-In-ServiceYDateY-YCORRECTYANSWERSTheYplaced-in-
serviceYdateYgenerallyYmarksYtheYbeginningYofYtheYcreditYperiod.YItYisYdefinedY
asYtheYdateYtheYpropertyYisYreadyYforYoccupancy
ChapterY40BY-
YCORRECTYANSWERS(1969)YMAYstatuteYlawYwhichYallowsYdevelopersYwithYpr
(GRADED A+)
LIHTCYOverviewY-
YCORRECTYANSWERS1)YCreatedYasYpartYofY1986YTaxYReform
2)YFed'sYprimaryYvehicleYforYdevelopingYandYpreservingYaffordableYmultifamilyYre
ntalYhousing
3)YLIHTCsYgenerateYprivateYinvestorYequityYinYexchangeYforYoffsetYtoYinvestor's
YfutureYtaxYliability
4)YInvestor'sYequityYmakesYitYpossibleYforYprojectYtoYworkYandYtoYchargeYtheYl
owerYrestrictedYrentsYrequiredYbyYLIHTCYprogram
5)YCreditsYareYcategorizedYasYeitherY4%YorY9%
LISCY-YCORRECTYANSWERSLocalYInitiativesYSupportYCorporationY-
YaYCDFIY(communityYDevelopmentYFinanceYInstitution)YthatYworksYtoYfinanceYde
velopmentYofYaffordableYhousing.YCDFIsYborrowYmoneyYfromYtheYBankYatYfavor
ableYratesYandYreinvestYthoseYmoniesYintoYcommunityYdevelopment.
QualifyingYLIHTCYProjectsY-
YCORRECTYANSWERSReserveYminimumYsetYasideYofYunitsYtargetedYwithinY60
%YAMIY&YmaintainYrentYlevelYrestrictionsYforYaYminimumYofY15YyearsY(YTaxYCr
editYComplianceYPeriod)
InYreturn,YinvestorsYgetYaY10yrYstreamYofYtaxYcreditsY&Y15yrsYofYpartnershipYta
xYlosses
PartnershipYTaxYLossesY-
YCORRECTYANSWERSCombinationYofYProjectYNOI,YinterestYexpenseYofYperman
entYloan,YinterestYexpenseYonYsubordinatedYloans,YbuildingYdepreciation,YandYot
herYexpenses
DepreciationY-
YCORRECTYANSWERSTheYprocessYofYallocatingYtheYcostYofYanYassetYtoYexpe
nseYoverYitsYusefulYlife,YtherebyYloweringYtaxYliability
HowYLIHTCsYWorkY-
YCORRECTYANSWERS1)YStructuredYasYrealYestateYpartnershipsYorYLLCsY(Proj
ectYOwnershipYEntity)
2)YInvestorsYpurchaseYinterestsYinYOwnershipYEntityYinYreturnYforYstreamYofYtax
YcreditsYandYlossesYgeneratedYbyYunderlyingYaffordableYpropertyYheldYbyYOwner
shipYEntity
3)YInvestorsYcanYeitherYactYdirectlyYorYthroughYaYsyndicatorY(investorYtakesYinte
restYinYanYinvestmentYfund,YformedYbyYsyndicator,YwhichYisYultimatelyYcomprise
dYofYnumerousYotherYinvestorsY(ProjectYOwnershipYEntities)
CommunityYReinvestmentYActY-
YCORRECTYANSWERS(1977)YFederalYlawYthatYrequiresYbanksYtoYmeetYtheYcre
ditYneedsYofYallYcommunitiesYtheyYserve,YincludingYlow-YandYmoderate-
incomeYneighborhoods
HistoricYTaxYCreditsY-YCORRECTYANSWERS1)YAYfederalYincome-
taxYincentivesYforYtheYrehabilitationYofYhistoricYincome-producingYproperty
2)YCreditsYdeliverableYoverYoneYyearYwithYaYfiveYyearYcomplianceYperiod
, 3)YGovernedYbyYNationalYParkYServicesYandYeligibleYonlyYtoYpropertiesYwithYNP
SYdesignation
NewYMarketsYTaxYCreditsY-
YCORRECTYANSWERSAttractsYprivateYcapitalYintoYlow-
incomeYcommunitiesYbyYpermittingYindividualYandYcorporateYinvestorsYtoYreceive
YaYtaxYcreditYagainstYtheirYfederalYincomeYtaxYinYexchangeYforYmakingYequityYi
nvestmentsYinYspecializedYfinancialYintermediariesYcalledYCommunityYDevelopmen
tYEntitiesY(CDEs).
MinimumYGainY-
YCORRECTYANSWERSNegativeYoperatingYaccountYduringYtaxYcreditYperiodYcau
singYaYreallocationYofYlossesYawayYfromYinvestorYandYtherebyYtaxYcreditsYsince
YtheyYfollowYlosses/depreciation
SubstancialYUserY-YCORRECTYANSWERS
MinimumYSet-AsideYTestY-
YCORRECTYANSWERS20/50Y&Y40/60;YincomeYaveraging.YGenerallyYservesYasY
theYdeterminantYofYaYbuilding'sYqualificationYforYtaxYcredits
NegativeYArbitrageY-YCORRECTYANSWERSArbitrageYoccursYwhenYtax-
exemptYbondYproceedsYareYinvestedYinYsecuritiesYthatYyieldYaYgreaterYreturnYth
anYtheYinterestYchargedYonYtheYbonds.YRestrictionsYexistYonYtheYamountYofYarb
itrageYbondsYcanYearnYwithoutYputtingYtheYtax-
exemptYstatusYofYtheYbondsYinYperil.YInYinstancesYwhereYtheYrestrictionYisYviola
ted,YexceptionsYexistYthatYallowYforYtheYtax-
exemptYstatusYofYtheYbondsYtoYremainYintact.
NegativeYarbitrageYoccursYwhenYundisbursedYbondYproceedsYearnYaYlowerYinter
estYrateYthanYtheYbondYinterestYrate.
TEFRAYHearingY-
YCORRECTYANSWERSTheYTaxYEquityYandYFiscalYResponsibilityYActY(TEFRA)Y
HearingYisYtheYbondYissuer'sYpublicYnotice,YpublicYhearingYandYapprovalYbyYele
ctedYofficialsYofYaYbondYissuance
VolumeYCapY-
YCORRECTYANSWERSTheYvolumeYcapYisYtheYmaximumYamountYofYLIHCsYand
Ytax-
exemptYbondsYeachYstateYisYallowedYtoYallocateYannually.YTheYtaxYcreditYvolum
eYcapYisY$1.75YperYstateYresident.YTheYbondYvolumeYcapYisY$75YperYpersonY
perYstate,YwithYaY$225YmillionYminimumYperYstate.YBeginningYinY2003,YtheYvolu
meYcapYwillYbeYindexedYtoYinflation
QualifiedYCensusYTractY-
YCORRECTYANSWERSAnyYcensusYtractYinYwhichY50YpercentYorYmoreYofYtheY
householdsYhaveYanYincomeYwhichYisYlessYthanY60YpercentYofYareaYmedianYgr
ossYincome
Placed-In-ServiceYDateY-YCORRECTYANSWERSTheYplaced-in-
serviceYdateYgenerallyYmarksYtheYbeginningYofYtheYcreditYperiod.YItYisYdefinedY
asYtheYdateYtheYpropertyYisYreadyYforYoccupancy
ChapterY40BY-
YCORRECTYANSWERS(1969)YMAYstatuteYlawYwhichYallowsYdevelopersYwithYpr