The information presented here is intended solely for informational purposes and should not be construed as accounting advice from the author or Reznick Group. Reznick Responds is published four times a year, so be sure to send accounting questions that you would like to have addressed in this column to [email protected]

Reznick Group has more than 25 years of experience providing accounting, tax, and business advisory services to clients nationwide. The expertise of the firm is broad, ranging from real estate and management advisory services to auditing and tax preparation. Ranked among the top 20 public accounting firms in the nation, Reznick Group is on the move—continuing to grow nationally, expanding its services, and building upon its leadership as industry experts.

Terence Kimm, CPA, is a principal with Reznick Group and co-head of the Real Estate Consulting Group in the Bethesda, Md., office, where he works with developers and syndicators in structuring low-income housing, historic, and New Markets tax credit transactions.

Q: I’ve heard low-income housing tax credit (LIHTC) developments referred to as “mixeduse” or as “mixedincome.” Are the two terms synonymous?

A: Although the two terms are similar, in the LIHTC world, they have very different meanings. A mixedincome building refers to combining market-rate and LIHTC units. A mixeduse building refers to combining commercial space and LIHTC units. It is possible for a building to be both mixedincome and mixed-use.

Q: How are LIHTCs calculated when a building is either mixedincome or mixed-use?

A: Take a look at the table below to get a sense of how the numbers work. As you can see from the example, costs associated with commercial space are excluded from eligible basis. This would include the direct costs attributable to the commercial space as well as an allocable portion of the indirect or soft costs. Only costs associated with the residential portion of a building may be included in eligible basis.

Accounting for Commercial Space
Item Mixed-use Building Mixed-income Building
LIHTC portion of project 100% 80%
Depreciable basis of project $11 million $10 million
Less cost associated with commercial space $1 million N/A
Eligible basis $10 million $10 million
Applicable fraction 100% 80%
Qualified basis $10 million $8 million
Tax credit rate 9% 9%
Annual LIHTCs $900,000 $720,000

Q: Are there any special rules for determining eligible basis in a mixed-income building?

A: As long as the low-income and market-rate units are of comparable quality, their entire cost may be included in eligible basis. If the marketrate units are above the average quality standard of the low-income units, some calculations need to be done. Generally speaking, average quality standard is measured by comparing the cost of a market-rate unit to what the cost for that unit would have been using the average cost per square foot of the lowincome units in that building. If the cost differential is more then 15 percent, the entire cost of the market-rate unit must be excluded from eligible basis. If the cost differential is 15 percent or less, the owner may elect to exclude just the cost differential from eligible basis. In either case, the applicable fraction remains the same.

Q: How is the applicable fraction calculated in a mixed-income building?

A: The applicable fraction is the percentage of the residential portion of the building occupied by low-income tenants. It is calculated using the lesser of the unit or floor-space fraction. The unit fraction is calculated by dividing the total number of low-income units in a building by the total number of residential units in the building. The floor-space fraction is calculated by dividing the total floor space included in the low-income units in a building by the total floor space of all residential units in the building. The lesser of the two calculations is used in determining qualified basis.

Q: Assume that a building has 10 units, two of which are market-rate units. All the units are the same size. Assume that the two market-rate units are above the average quality standard of the low-income units by more than 15 percent. Are you saying that I have to exclude the entire cost of the two marketrate units from eligible basis, and my applicable fraction will still be 80 percent?

A: Yes, the rules are very punitive. In effect, you get double- penalized if the market-rate units in a mixed-income building are above the average quality standard of the low-income units. If this is the case in your development, you need to be very careful in running your numbers. Ignoring these rules will result in a pro forma significantly overstating eligible basis.