Federal tax credit programs are powerful and prudent tools used by the government to stimulate economic growth, create jobs and provide affordable housing in communities across the country. Such efforts improve state infrastructure, while simultaneously fostering community pride and good will. Tax credits revitalize run-down inner cities and under-utilized downtown areas, while providing needed housing in rural counties where affordable housing is scarce.

Tax credits are proven economy boosters. Even during downturns, tax credit incentives effectively “prime the economic pump” of every state, creating jobs for contractors, tradesmen, insurance companies and all businesses serving or supplying the construction industry.

Development Incentive

The basic premise of all LIHTC programs, whether they arise from state or federal legislation, is to use tax credits as an enticement to encourage private developers to build high-quality multi-family and senior communities.

High-quality developments are expensive to build and maintain, while charging rents at affordable levels. With tax credits, the high costs are not passed on to the resident. Instead, developers are awarded tax credits, which are purchased by equity investors. These tax credits help to reduce the investors' tax liabilities, offset the construction and maintenance costs, and enable the developer to offer affordable rental rates to qualifying households. It's a win-win situation for everyone involved.

AEP can assist you in Evaluating federal low income housing tax credits

AEP can guide you through the regulatory requirements of the federal LIHTC programs.

Investor Incentive

When you rely on AEP's knowledgeable team, you can rest assured that we will make sure your project meets all requirements. Here are some considerations:

• Credit Period: The credits are taken each year for ten years, with an additional five-year compliance period. The first year's credit is based on the number of months that the development is in service during that year, with the remainder of the first year's credits taken in year 11. The program now requires that buildings remain in low-income use for at least 30 years, although it is still possible to convert to market rents after 15 years. At the end of this period, which may be extended if mutually agreed to at the time the credits are awarded, the property remains under the control of the owners who may manage them in any way they choose.
• Reporting: Accurate annual reporting is a requirement for tax credit investors. AEP's Asset Management Team automatically notifies the investor of the amount of tax credits that can be taken against tax liabilities each year. AEP asset management also allows investors to monitor their investments on a continuous basis. An investor will receive a K-1 each year indicating the amount of credits that can be taken against his tax liability that year ($1.00 reduction of tax for each $1.00 of tax credit)
• Transferability: The credits may be transferred from one taxpayer to another.
• Pricing: The credits are priced on an internal rate of return based on a return of and return on capital.
• Generating Credits: An apartment complex that has been allocated credits begins generating credits once construction is complete and the units are leased to qualified residents.
• Income and Rent Restrictions: The apartment units must be rented to residents whose incomes are within certain guidelines. These guidelines are based on the median income of the area in which the development is located. The rents charged must also be below certain levels established by Missouri Housing Development Commission (MHDC) and/or Georgia’s Department of Community Affairs (DCA).

What are the potential risks?

AEP has been involved in tax credits for more than a decade, with over 400 tax credit developments, and zero tax credits lost. We seek, in all ways, to continue our success and work with the best developers with the best properties. We will work tirelessly to ensure that your applications, financing, construction and management meet the highest standards.

There are, however, three primary ways an affordable housing complex may not generate as many tax credits as initially projected.

1. The complex leases up more slowly than anticipated.
2. The units, although leased, are not leased to tax credit-qualified residents.
3. The complex is not able to meet its debt payments and the mortgage holder forecloses on the property.

AEP takes substantial steps to minimize these risks and to protect the investor's investment.

Lease-Up
Tax credits become available as the units are leased to tax credit-qualified residents. AEP provides projections to the investor setting forth the estimated timing of construction completion and lease-up (and thus the estimated timing of the credits). If the development leases up slower than anticipated (for example, due to a delay in construction from weather or slow market conditions), the timing of the first year's tax credits to the investor could be delayed, thus reducing the investor's rate of return.

To reduce this possibility, AEP closely monitors the construction and lease-up of its developments to make sure that they meet the projected construction and lease-up schedules. Our lease-up team acts as an auxiliary partner to the developer and management company. Prior to construction, AEP requires a third party market study to confirm that an adequate market exists for the development. AEP is in continual contact with the builder and developer of the project. AEP's affiliate company, Fairway Construction Co., Inc.,has constructed over 150 affordable housing developments in seven states and can assist with or take over a development's completion if problems should occur.

Leasing Team:
JES Holdings and AEP’s commitment to best serve its clients and communities in the affordable housing industry has led to the formation of the Leasing Team. The role of the Leasing Team is to wrap around the management company and assist with the marketing and advertising of new properties within both the Fairway Management portfolio and the portfolios of third party clients. Beginning with initial construction, members of the Leasing Team plan and implement marketing and advertising campaigns to help generate future resident interest within a particular community. Leasing agents will formulate and execute a comprehensive marketing plan. In addition, they assist property managers covering leasing center office hours, and provide prospective residents tours, paying particular attention to lead follow-up. The end goal of the Leasing Team is to have the community completely leased with residents ready for immediate occupancy at the time the building is turned over to the management company by construction. AEP plans to extend its training program to include a specialized manual for future members of the Leasing Team. This latest addition to Pathways to Success will include information on marketing in the affordable housing industry, direction for advertising campaigns, guidelines for developing a marketing plan, suggestions for new marketing strategies, and timelines to ensure successful planning and organization.

Compliance
Tax credits are available only for those apartment units that are leased to tax credit-qualified residents. Each apartment complex owner involved with the tax credit program is required to record a deed with the property forbidding the property owner or future owners from leasing an apartment unit to an unqualified resident. In addition, both the Missouri Housing Development Commission (MHDC) and/or the Georgia Department of Community Affairs (DCA) and AEP approve the management agent for each complex. The IRS also allows for mistakes to be corrected within a reasonable time period.

AEP takes considerable steps to make sure that the management agents stay well trained in the tax credit program and collect necessary information from residents to ensure that the apartment units are being leased to tax credit-qualified residents.

To ensure tax credit compliance, AEP employs consultants who perform routine field audits of the developments. AEP also co-sponsors annual compliance training for all of its developers, management agents, and officials of the Missouri Housing Development Commission (MHDC) and/or Georgia Department of Community Affairs (DCA), respectively. At this annual week long seminar, intense training and testing is conducted to ensure that the management agents comply with the tax credit rules and regulations.

AEP also has an affiliate management company, Fairway Management, Inc., which has extensive low income housing tax credit management experience. Fairway Management’s Compliance Department can assist a management agent with compliance issues and, if necessary, take over management of the apartment community to prevent any potential loss of tax credits.

Foreclosure
AEP's developments have very low foreclosure risks. The equity provided to the developer through the sale of the state and federal tax credits allows for an extremely low debt/equity ratio (approximately 30 to 70 percent).

For more information regarding the federal tax credit program, please refer to the Internal Revenue Code (I.R.C.) Section 42, (http://www.irs.gov/pub/irs-drop/rr-04-82.pdf) or visit RESOURCES for the Section 42 report.

If you are an investor and wish to learn more, please contact:
Dan Torgerson
Director of Investor Relations
Email: dtorgerson@aepartners.com
or
Tom Jensen
Director of Transactions
Email: tjensen@aepartners.com
or
by phone at 573.443.2021.

This explanation of tax credits is adapted from "Building Affordable Rental Housing: An Analysis of The Low-Income Housing Tax Credit", written by Jean L. Cummings and Denise DiPasquale