2 Hour CPE course regarding Low Income Housing Tax Credits.

1. THE Affordable Housing Tax credit PROGRAM Presented by Midwest Housing Equity Group

2. Panelists Jim Rieker President /CEO Andrea Frymire Executive Vice President

4. Curbed tax shelters and introduced Section 42

5. Pre-1986 multifamily housing developments sold primarily to individual investors

6. Post-1986 Section 42 multifamily housing developments sold to corporate investors

7. The Omnibus Budget Reconciliation Act of 1993 signed by President Clinton – made the LIHTC permanent

8. From 1987 through August 1993, the LIHTC program was subject to various sunsets1

9. Tax Credit Calculation $1,000,000 Total Project Cost $ 200,000 Project Cost Not Eligible for Credits $ 800,000 Eligible Basis for Credits* x 9% Tax Credit Percentage $ 72,000 Credits Received/year x 10 Years credits are received $ 720,000 Credits received x .70 Price paid for credits $ 504,000 Equity into project from MHEG Allows for low debt on project enabling developers to keep rents affordable * States may allow 130% basis boost (not shown here). 2

11. HOME

12. TCAP

13. Exchange

14. Developer Fee

15. Various Contributions

16. Certain Grants3

17. Typical Deal Structure – 70% Soft Debt / GP Equity 25%* Tax Credit Equity 70% Hard Debt < 5% 4

18. K-1 Example 5

19. 6

20. Form 1120 7

21. Form 3800 8

23. Many corporate controllers/ treasurers were skeptical of an unproven product LIHTC

24. Result – pricing was in the mid .40 range in 1987-1988 producing 20%+ IRR

25. Early in mid-1990s – Financial institutions embrace LIHTC

26. Banks, GSE’s – fair return plus Community Reinvestment Act (CRA) credit9

28. 2008 – Sub-Prime mortgage crisis followed by full scale financial meltdown – Investors retreat

29. Housing and Economic Recovery Act of 2008 intended to boost returns bringing non-financial investors to the LIHTC market

30. 2009 – Many 2007 and 2008 deals unfunded and little prospect for 2009

31. American Recovery & Reinvestment Act intended to jumpstart the LIHTC industry10

33. Limited only by tax liability

34. Sub-S flows through to owners

35. Requires passive income

36. Rental real estate can materially participate

37. Business activities that one doesn’t materially participate

38. Individuals – same as S-Corps

39. Makes less than $100,000

40. 25,000 passive offset

41. Can offset credits up to 8,25011

43. Accredited as per Regulation D of the Securities and Exchange Act

44. $5,000,000 or more in assets (varies by syndication firm, many much higher)

45. Can withstand losses due to depreciation or even loss of investment

46. Usually a C Corporation

47. Has to forecast a taxable need for credits

48. Must utilize the credits themselves

49. SEC issues when buy credits to resell

50. Many Banks for CRA purposes

51. Insurance Companies for both economic and social responsibility

52. No set standard for an exact profile other than paying taxes 12

54. The Housing and Economic Recovery Act of 2008 signed by President Bush on July 30, 2008

55. ARRA of 2009

56. The American Recovery & Reinvestment Act of 2009 signed by President Obama on February 17, 200913

58. Increase in-state LIHTC allocation authority by 10% = .20 (per capita) for 2008 and 2009

59. Additional $11 billion nationally of Tax-Exempt Housing Bonds in 2008 (additional 38.6% for each state)

60. Temporarily fix at 9% the credit rate for new construction and substantial rehabilitation costs14

61. 2009 OHFA Allocation 3,642,361 Population of Oklahoma per IRS for 2009 LIHTC x 2.30Times two dollars and thirty cents per capita $8,377,430 Total 2009 Credits available per capita +$305,2312008 unused credit ceiling from 8610 carryovers to 2009 $8,682,661 Tax Credits available to award in 2009 -$4,206,112 Amount of 1st cycle 2009 awards +1,678,057 Amount of 2009 Credits returned by TCAP Applicants -$4,000Amount of tax credits awarded for ARRA applicants $6,150,606 Amount of Tax Credits Available to award 2nd cycle 2009 15

63. Alternative Minimum Tax (AMT) Relief

64. HUD Moderate Rehabilitation projects are no longer prohibited from participation in the LIHTC program. Effective for buildings placed into service after July 30, 2008.

65. The 10-year hold provision for acquisition credits is no longer applicable to federally or state assisted buildings. HUD Section 8, 221(d)3, 221(d)4, 236 and RD section 515 properties and similarly assisted properties under various state programs.

66. Allowable Related Party interest in subsequent ownership is increased to 50% from 10%.16

68. 30% basis boost previously allowed for properties located in qualified census tracts or difficult to develop areas is allowed for any project that needs additional credits to be financially feasible as determined by the state housing finance agencies. Apples to projects placed in service after July 30, 2008. Does not apply to Tax Exempt bond financed properties.

69. The definition of federal subsidy no longer includes “or any below market federal loan” allowing HOME, RD and section 515 projects to utilize the 9% credit for new construction or substantial rehabilitation costs. Tax Exempt bond financed projects are still limited to the 4% tax credit.

70. Federal Grants received after construction no longer reduce tax credit basis – relief for IRP financed deals and other properties receiving federal operating subsidies.

71. Allowable eligible basis for community service facilities increased to 25% of total cost up to $15M; plus 10% of total cost in excess of $15M.17

73. Minimum threshold to qualify for substantial rehabilitation is increased to $6,000 per unit or 20% of acquisition basis from $3,000 or 10%. Indexed for inflation going forward.

74. LIHTC bond posting requirement is eliminated provided investor agrees to extend statute of limitations to three years after IRS notification.

75. Extends the time period to satisfy the 10% cost incurred test necessary for carryover to 1 year from 6 months.

76. Tenant re-certifications no longer required for 100% LIHTC properties.18

79. Section 1602: Grants to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits

80. aka the “Credit Exchange Program”

81. State HFA’s have the ability to exchange eligible LIHTC allocations with Treasury for $0.85 per dollar of credit allocation exchanged. The proceeds from the exchange are to be used by the HFA to provide funds to projects with or without an allocation of LIHTC in the form of grants or forgivable loans.20

83. 100% of the state housing credit ceiling for 2009 attributable to unused and returned credits from the 2008 housing credit ceiling plus any amount of state housing credit ceiling returned in 2009. (This provisions applies to 2007 and 2008 allocations).

84. 40% of the state housing credit ceiling for 2009 attributable to the 2009 ceiling including any amounts reallocated from other states with unallocated credits. Amounts exchanged under this provision serve to reduce the state’s 2009 credit ceiling.21

86. Treatment at the state level may vary

87. Funds received cannot exceed 85% of the amount Recipients of exchange funds must demonstrate a good faith effort to obtain private equity commitments. Good faith effort is determined by each state HFA.

88. of buildings eligible basis including any increase for buildings located in high cost areas. Direct tracing is not required.

89. Funds received under this program must be expended by December 31, 2011 – originally this date was December 31, 201022

91. Can be carried forward 20 years

92. Legislation introduced to go back 5 and forward 15

93. Help some companies free up unclaimed credits

94. Gives them the sense of security if they can’t use the credits23

95. Fund Investment Structure MHEG Tax Credit Syndicator Investors OF III, L.P. Owned 99.99% by Investors Owned 00.01% by MHEG Project A Lower Tier Partnership LP/LLC Owned .01% by Developer/GP Owned 99.99% by Fund OHFA Tax Credits 24

97. 10 full years of federal tax credits

98. 15 full years of depreciation and other passive deductions

99. Periodic Write-down of Paid in Capital

100. CRA Investment Credit, if applicable

101. Marketing and PR opportunities

102. Stabilizing and Investing in your local communities

103. Stable proven track record of a performing asset class

104. Accurately forecasted tax benefits

105. Quarterly Reporting and Asset Management update25

107. Keep your tax dollars in Oklahoma instead of Washington

108. You know where they are going and how being used

109. You have a say in those dollars usage

110. You generate a decent return versus a 0% (or cost) with sending to Washington

111. Spread the credits over 10 years

112. The Warren Buffet Rule

113. What other program can you do something for society and have society give you something in return26

115. Regulators do vary on the scope of inclusion. Please check with your Regulator for their interpretation.

116. See OCC report dated 2/08– further adopted by FDIC and Federal Reserves

117. By purchasing tax credits in a MHEG fund banks can potentially fulfill the Investment portion of the CRA exam, typically the most difficult portion for most banks to meet, as well as opportunities to meet the lending and service tests.

118. All documentation that the Examiners require is provided by MHEG.27

120. Offer Diversity

121. Multiple investors

122. Multiple projects

123. Fund General Partner has financial risk

124. Fund level of reserves

125. Less concerns over FIN 46, consolidation issues

126. Less need for tax credit expertise by the investor

127. Direct

128. No diversity-all eggs in one basket

129. Do get specific project in investors area

130. More of a say in investment terms

131. Direct (cont.)

132. Less reserves and no financial backing from Fund General Partner

133. Sole investor-FIN 46 comes into play

134. May need staff expertise

135. Proprietary

136. Some diversity, usually fewer projects

137. Usually specifies where projects must be located

138. Usually dictates deal terms

139. Less chance of Fund General Partner taking financial risk

140. Most likely FIN 46 comes into play

141. Usually has tax credit staff expertise28

143. Mitigated by MHEG’s investment policies, ongoing management and financial oversight, as well as MHEG’s financial strength

144. Compliance risk

145. Mitigated by MHEG’s continuing compliance practices and oversight

146. Changes in current law

147. Highly improbable any law change would affect any current investments

148. Reputation Risk

149. We take “the high road”, we know that we represent our fund participants who are financial pillars of their communities29

151. Size of investment (% of total of Fund)

152. Guarantees

153. Reserve accounts

154. Structure of debt to property

155. Experience and strength of development team, general partner and property manager

156. Project site-zoning, stability, accessibility

157. Market Study/Analysis

158. Title and Survey

159. Insurance: property, contractor (insurance and bonds)

160. Quarterly risk rating for life of investment

161. Environmental studies: Phase I mandatory, Phase II if needed

162. Reasonable and substantiated operating assumptions: rent levels, vacancy factors, expense estimates, level of must pay debt, and lease-up period

163. Construction parameters and oversight

164. Rent Level Analysis

165. Operating Expense Comparison and Analysis to MHEG’s extensive database 30

167. You receive no monetary return with your payment to the IRS.

168. You will receive an above market return and a CRA Investment Credit, if applicable, when you purchase tax credits with MHEG.

169. Your participation benefits the community and you receive a monetary return without jeopardizing your normal business capital.31

171. The general partner or managing member in most cases has a right of first refusal to purchase our interest for an amount stipulated in the IRS code.

172. Since the project still has restricted rents, it will not be able to refinance much additional debt. Our exit usually does not generate significant cash or create a tax event. Therefore, we do not include any residual value in our analysis of return to investors.(note: this narrative is greatly oversimplified, but does represent the results of a typical exit) 32

174. Mission: Change lives for a better tomorrow by promoting the development and sustainability of quality affordable housing

175. Service area today includes Nebraska, Kansas, Iowa and Oklahoma33

177. single family homes

178. multi-unit and multi-building complexes

179. duplexes

180. historical renovations

181. specialty needs developments: elderly, assisted living, transitional homeless facilities, and developmentally disabled residents Number of Developments: 245 Number of Counties Represented: 105 Number of Housing Units: 6,708 Number of Cities Represented: 128 Equity raised: $570 million Current as of 12/15/09 34

183. $25.81 million raised*

184. 13 projects closed

185. 564 units created

186. OEF II, L.P.

187. $40 million raised

188. 7 projects closed

189. 300 units created

190. OF III, L.P.

191. currently open35 * Equity raised total also includes side-by-side investments or direct investments

192. Oklahoma Map Multifamily Senior Single Family Special Needs Transitional Type of Units Total Housing Units in OK 864 36

193. Oklahoma Developments CHARMED-Perkins Perkins, OK Quail Ridge Homes Broken Bow, OK Cottage Park Midwest City, OK Broadway Pointe Seminole, OK Woodson Park Apts. El Reno, OK Parkland Town Homes Prague, OK 37

194. Questions ???