Glossary

Abusive shelter. An IRS term for sham transactions with no economic substance other than tax avoidance. This is the only form of shelter that can trigger a visit from the IRS Criminal Division. In addition to interest at prime, subject to severe penalties. Affordable housing syndications should never fall into this category.

Accredited investor. An investor deemed to be sufficiently syndicated -- by virtue of income, wealth, or experience, all according to specified safe harbors -- so as not to count against limitations in private placements.

Accrual basis. An accounting method whereby income and expenses are generally recognized when incurred, rather than when paid. Most subsidized housing syndications operate on the accrual basis. See cash basis.

ACRS or Accelerated Cost Recovery System. The term for ERTA-class depreciation. Later amended to Modified ACRS, or MACRS.

Accrue. An accounting term meaning to take an item into income or expense at some time other than when cash is actually paid. Thus, if you incur a bill but do not pay it, the amount of the bill is said to be accrued.

Active losses. Losses incurred in an active activity. No, this is not a tautology. See portfolio income.

Affiliate. Someone who is controlled by or economically connected with another entity.

Affordability. A condition where the housing is affordable to its target resident population. The objective of most production programs.

Affordability provisions. Agreements, usually captured in a use agreement or regulatory agreement, by which the government assures that housing is indeed affordable. Typically include some or all of the following elements:


Affordable. An apartment is considered affordable to its resident when the resident is paying no more than a designated percentage of income for rent. Under most housing programs, affordable means 30%.

Affordable housing. Housing that is pledged to provide affordability to low income (or poorer) residents via a contractual obligation (regulatory agreement, use agreement, or other documentary requirement).

AFR. See Applicable Federal Rate.

Allocation regulations. See Section 704(b) allocation regulations.

Alternative minimum tax. Created under the Revenue Act of 1978, the alternative minimum tax is a method of making sure that every taxpayer pays some tax. After determining his normal tax liability for a year (including any additional tax generated by tax preference), the taxpayer must also compute alternative minimum tax (AMT). In general, the AMT adds back items deductible from ordinary income, and taxes the resulting (higher) income at a lower rate. As a practical matter, the Alternative Minimum Tax makes sheltering long-term capital gains uneconomical.

Amortization. The staged annual reduction of an item over an expected life. But since the same term is used in two different but related contexts, it is often a source of confusion.

  • Amortization of intangible assets. Used in a tax context. Refers to the annual depletion of an intangible asset that had to be capitalized rather than being expensed (example: organization fees, financing fees). A deductible item that is a non-cash expenditure.
  • Amortization of principal. Used in a mortgage or debt service context. Refers to the annual (usually scheduled) reduction in mortgage balance due, normally through the application of a (slowly but steadily increasing) portion of the monthly debt service payment. A non-deductible item that is a cash expenditure.


Annual Adjustment Factor (AAF). A mechanism for setting Section 8 annual rent increases. HUD surveys a market and determines the average rent increase for a given apartment type, then converts this into a percentage (the AAF) which is applied to all properties, based on their last year's rents. This methodology has largely been replaced by an Operating Cost Adjustment Factor (OCAF).

Anti-churning. Provisions in the 1981 Tax Act designed to prevent resyndications among affiliated entities. See resyndication.

Applicable Federal Rate. The minimum rate of interest the IRS will consider as market-based. Tied to the corresponding long-term federal cost of funds, on the reason that any other instrument, being by definition riskier than government borrowings (since it has industry-specific risk plus government risk), must command a rate higher than AFR.

Appreciation. Growth in value above original purchase price. See equity buildup.

Appropriations. Legislation whereby the federal government spends money, predominantly on authorized programs.

Area Median Income (AMI). An estimate of the median income in a Metropolitan Statistical Area, calculated by HUD. Most affordability requirements are set relative to AMI, for example, at 30% of 80% of AMI. See moderate income, low income, very low income, and extremely low income.

Asset Management. The transformation of a property's operations through a structured and managed series of concrete actions that reposition it in the marketplace.


Assignment. The process whereby an FHA mortgagee sells (assigns) its mortgage back to HUD (usually at a price of 99% of face amount). Assignment is an election made by the mortgagee but only when the property is in default. (Mortgagees who would rather foreclose directly can do so, but few bother.) When a mortgagee holds a mortgage with an interest rate below current market yields, it gains a significant financial benefit if it can assign the loan, even if the loan could otherwise be restored to current status, because it can redeploy the paid-off principal at the higher current market rates.

Assumed equity. The base figure against which HUD computes maximum permissible limited dividend cash distributions. Normally equals 10% of the total property cost. Since the mortgage equals the remaining 90%, the assumed equity will usually equal one-ninth of the mortgage. See limited dividend.

At-risk property. A property is considered at-risk if its current affordability is threatened by one of several causes:

  • Use agreement expiring. A use restriction or covenant has reached its term.
  • Subsidy terminating. Subsidy essential to ongoing affordability or property viability is ceasing and not certain to be renewed.
  • Financing ballooning. Underlying debt must be paid in full in a way that makes continued affordability unlikely.
  • Deterioration. The property is physically or operationally unsound.
Many resources are potentially available to preserve at-risk properties.

At-risk rules. Provisions in the 1976 and 1978 tax reform acts that limit the amount of deductions investors may take to the amount of capital for which they are actually "at risk." The "at risk" provisions apply to all investments except real estate. A real estate investor receives "at risk" credit for his pro-rata share of any non-recourse mortgage debt.

Audit. An inspection of an entity's books and records by an outside source. Has two common meanings: see audited financial statements and IRS audit.

Audited Financial Statements. A report (usually issued annually) of the partnership's operations, including (a) income and expense statement; (b) balance sheets; (c) statement of changes in financial position; (d) supplementary information. Almost all regulatory agencies annually require independently audited financial statements. A valuable investor protection if prepared consistently by a reputable, knowledgeable outside accounting firm.

Authorization. The enactment of a statute that authorizes the federal government to create a new program. Most housing legislation is authorized via amendments to the National Housing Act. Once a program is authorized, funding for it must still be appropriated annually. See budget authority.

Available Unit Day. A useful measurement of the rate of completion of a project, the Available Unit Day is much like the work-hour. Useful because it allows for reasonably accurate indirect calculation of the tax benefits generated from a year's operations. Calculated as follows: take the number of apartments available for occupancy times the number of days they were available. For instance, a 200-apartment property which had 50 apartments available for 125 days (resulting from certificates of occupancy issued on August 18) and the remaining 150 apartments available for ten days (certificates of occupancy issued on December 21) would have 7,750 available unit days. In a full year that same property would have 365 x 200 = 73,000 available unit days.

BAN or Bond Anticipation Note. The state housing finance agency equivalent of construction loan financing.

Bargain sale. A transaction whereby a property is sold to a qualified non-profit for a price that is demonstrably less than its fair market value. The 'bargain element' -- the difference between actual price and fair market value -- can be taken as a charitable contribution. Bargain sales thus can alleviate adverse tax consequences, but they only help shelter lock-in gain; they do not eliminate it.

Basis. A number that generally measures an investor's stake in a venture. The investor may take deductions only to the extent of his basis. Gain upon sale will equal proceeds received in excess of adjusted basis. Basis is affected as follows:

Item How to Increase Basis How to Decrease Basis
Cash Put in Take out
Partnership shares Income Losses
Debts Assume Forgive

In other words, contributing $1 of cash increases basis by $1. Having the partnership generate $1 of taxable income and distribute $1 of cash leaves basis unchanged (the dollar of income increases basis by a dollar, but distributing that dollar reduces basis). Incurring $1 of debt increases basis by a dollar. To be includable in "at risk" basis, debt incurred in any investment except real estate must be recourse (see at-risk property).

Basis points. One one-hundredth of a percentage (thus one percent is 100 basis points). The normal means whereby loan practitioners describe rate costs because basis points are additive and less likely to be confused when used in conversation to compare two possible interest rates.

Blind. An investment in unidentified properties. Typically, a large public offering will simply state that it intends to raise funds to purchase as-yet unidentified properties of a given type (shopping centers, second-user conventional apartments). When the properties are known prior to investor commitment, the offering is said to be disclosed. See public fund.

Blue sky. Industry slang for securities law aspects. State securities laws are called blue sky laws. It comes from the idea that an investor buying into a venture should not have a clouded picture of its future, but should instead be able to see the blue skies ahead clearly.

Bonds. Can be used in two different ways. Both of them mean a formal guarantee of payment.

  • In financing, evidence of a long-term debt obligation. Bonds are characterized by fixed interest payments during their term and a lump sum retirement at the end. The mechanism by which state agencies raise credit for permanent mortgages.
  • In construction, evidence that someone else has guaranteed to complete construction. Obtaining a payment and performance bond is an important protection for a construction lender.

Bottom line. Slang which means the net return. A real estate project's annual bottom line is its net cash surplus or deficit from operations.

Brochure. Another term for offering memorandum or prospectus.

Broker/dealer. Someone who sells securities. A broker buys or sells exclusively for others; a dealer may buy and sell for its own account as well. Broker/dealers may be affiliated with the syndicator or the developer, but usually are not.

Budget authority. Authority granted by the Congress to the executive branch to obligate the federal government up to a specific dollar figure for a specific legislative program. The main currency used in appropriations legislation.

Budget-based rents. A rent-setting mechanism applicable to the older assisted properties (Section 221(d)(3) and Section 236). Each year HUD approves the minimum rent increase necessary to pay budgeted expenses, debt service, and a limited dividend. Budget-based rents tend to keep rents low, and often have the unintended effect of depriving properties of capital to reinvest, especially when replacement reserve deposits are low.

Call protection. Provisions written into new bond issues generally precluding the issuer from requiring redemption of the bonds (at par) for a specified period of years (typically ten). Intended as an investor protection so that even if interest rates fall after bonds have been sold, the investors are able to enjoy the benefits of their bargain for some interval of time. A feature of most bond issues.

Cancellation of Debt Income (CODI). Income, taxed at ordinary rates, arising when a previously incurred debt is cancelled (that is, forgiven as opposed to being foreclosed). When a taxpayer is relieved of an obligation to pay a loan, the taxpayer is considered to have made money (because the old debt was canceled), and hence to have income equal to the debt forgiven. Relevant to Mark to Market because some forms of debt restructuring can be deemed to have created CODI, and hence to trigger tax, even if the old debt remains nominally in place; however, IRS ruling 98-34 provided generally that M2M debt restructuring would not trigger CODI.

Capital account. Equity contributions minus deductions taken (or plus income reported) minus cash distribution minus sale/refinancing proceeds. If the capital account is a negative, an investor has gain in that amount upon termination, because deductions exceed net cash investment. Sometimes inaccurately called basis.

Capital gain. Gain resulting generally from the difference between adjusted tax basis and sales proceeds. Divided into two kinds depending upon how long the asset is held: short-term capital gain, which is taxed at ordinary income rates, and long-term capital gain. Normally taxed at rates lower than ordinary income.


Capital investment backlog. The total amount of renovations needed to bring a property into its ideal state. Includes a series of concepts, including (i) deferred maintenance, which is work that should have been done before but was deferred because money was lacking, (ii) unfunded improvements, which would make the property better but are not strictly necessary, (iii) energy conservation, which would pay for itself in reduced operating costs, and (iv) deliberate extended-life use, such as keeping an old refrigerator.

Capitalize. To reflect on the balance sheet any expenditure not immediately deducted. Once an asset has been capitalized, it may generally be depreciated or amortized. Some items (land, goodwill) may neither be expensed nor depreciated and remain on the books forever.

Capital needs assessment (CNA). A calculation, usually made by an independent inspector (architect, engineer, or specialized assessor) of a property's future capital improvement needs and the total dollar cost which must be set aside, either today or over the upcoming years, to fund the capital investment backlog.

Cash basis. A method of accounting in which income and expenses are recognized only when cash changes hands. Depreciation, however, is allowed as a deduction in a cash-basis entity. Most real estate partnerships are accrual-basis; virtually all individual tax returns, however, are filed on the cash basis. See accrual basis.

Cash flow. The net cash produced by the venture. Cash flow from real estate projects can be a tax-free return of capital, because depreciation creates non-cash (or paper) deductions.

Certificate of occupancy. Local government approval stating than an apartment has been completed, has passed all housing code requirements, and is now ready to rent. The usual benchmark for commencement of depreciation.

Certificates. A portable Section 8 assistance with a variable subsidy payment to the resident. The monthly subsidy equals the difference between the actual resident's rent (up to a maximum, usually the FMR) and the family's affordable rent (30% of income). If the resident finds a less expensive apartment, the subsidy is adjusted so the resident's share is roughly the same. See voucher.

Chapter 7. A bankruptcy where the bankrupt entity will not be reconstituted but instead will be liquidated. The termination of a bankrupt entity. See Chapter 11.

Chapter 11. A bankruptcy where the bankrupt entity intends not to go out of business (via Chapter 7) but instead to be reorganized. To emerge from bankruptcy -- that is, to exit from Chapter 11 -- a company must obtain court (and creditor) approval for a plan of reorganization; if it cannot be confirmed, eventually the bankruptcy will be converted to a Chapter 7 liquidation.

Charitable contribution. Donation to a recognized public charity (typically a Section 501(c)(3) non-profit institution). In general, and subject to limits, individuals and corporations may take deductions against ordinary income for the amount of their charitable contributions.

Claim. A mortgagee's assertion that it is entitled to an assignment. "Paying the claim" usually means honoring the assignment and redeeming the loan.

CMBS or Collateralized mortgage-backed securities. Instruments issued by an originator or a credit enhancer and secured (backed) by a pool of mortgages or similar debt instruments. By pooling multiple mortgages into a CMBS, the issuer creates diversification and size, factors that tend to reduce volatility and risk and hence allow the CMBS's to be sold with a lower interest rate (higher price) than the matching mortgages, thus creating spread.

CODI. See cancellation of debt income.

Comparability. A clause in Section 8 contracts provided generally that Section 8 rents (adjusted for the initial difference) can be no greater than 'comparable unassisted rents in the area'. Later referred to a test HUD began applying in the early 1990's in an attempt to abate the growth of AAF Section 8.

Compliance period. In tax credit parlance, the period of time (typically 15 years) in which the owner has undertaken to provide affordability or be subject to credit recapture.

Constant. Shorthand for debt service constant.

Contract authority. The total dollar payments that may be made by the federal government to a program participant (such as a property owner) under a particular contract (e.g. a Section 8 contract). Contract authority is the means by which departments obligate their budget authority. Occasionally (but very rarely) Section 8 contracts can run out of contract authority even before their term has expired.

Conventional. Financing with a non-government third-party lender. Usually implies market-rate rents, no restrictions on sale or refinancing, and no limitations on cash flow or appreciation. All apartments not built via subsidized housing mechanisms are conventional.

Conversion. The process of deducting losses against ordinary income but repaying them at capital gains rates upon sale. Deductions resulting from straight-line depreciation, for instance, act in this way, since they are ordinary losses when taken but are taxed as capital gains upon sale. Compare with deferral.

Coverage. Shorthand for debt service coverage.

Cramdown. A process, in a Chapter 11 bankruptcy reorganization, whereby secured creditors are forced to accept a payment or settlement not for the face amount of their security but rather for a reduced amount that represents, in the court's judgment, the 'indubitable equivalent' -- at least in value -- of what they had before the cramdown. The only means whereby overhanging debt (that is, debt with a face amount greater than can be paid) can be discharged without the affected creditor's consent. Increasingly difficult to achieve in single-asset bankruptcies.

Credit-eligible. Eligible for LIHTCs; typically used as an adjective to describe a resident (as being below 60% of AMI, adjusted for family size) or an apartment (having rent and affordability caps consistent with the LIHTC).

Credit enhancement. The process whereby a creditworthy third party not directly involved with a transaction provides a guarantee that increases the likelihood of receipt of future flows (usually of debt). Valuable because it enables the debt (or equity) security to be sold to an investor who need not do a thorough due diligence evaluation of the property, only of the credit of the credit enhancer. FHA insurance was the earliest, and is still the most powerful, form of credit enhancement.

Credit subsidy. An accounting estimate, critical in scoring, applicable to a loan or other program whereby the federal government makes contingent promises (e.g. FHA insurance, which involves no immediate outlays but a pledge of the FHA insurance fund). Credit subsidy represents the net present value of the expected loss from making the pledge. As such, scoring credit subsidy in loan or guarantee programs involves developing a future projection of what may happen, when, and how much it will cost net of potential recoveries. When a program is expected to generate more revenue than it costs (e.g. the FHA insurance premiums are greater than the losses), it has negative credit subsidy. (Only the federal government could find a way to describe making money that both is obscure and sounds bad.)

Crossover. Used two different ways, but both mean the point at which good things stop and bad things begin. (A) The point at which a property stops generating tax deductions and begins generating taxable income. Usually occurs halfway through the mortgage life, when principal payments (which continually increase) finally exceed depreciation deductions (which continually decrease). The more common usage. (B) The point at which the hypothetical limited partner begins having paper income whose tax liability is greater than the cash flow thrown off from the property. Note that whenever cash flow is greater than zero, crossover B will occur a few years later than crossover A. When cash flow is zero, the two occur simultaneously.

D-4. Industry shorthand for a Section 221(d)(4) market-rate property.

DCR or debt coverage ratio. Debt service coverage expressed as a percentage (hopefully, above 100%).

Debt service. Payments on a loan, encompassing both interest and principal. For subsidized properties, may also include the one-half percent (0.5%, or fifty basis points) annual mortgage insurance premium.

Debt service constant or constant. Short for 'constant payment,' it is the fixed monthly payment (including principal, interest, and in a HUD property, MIP) made by the mortgagor. Constants are also sometimes expressed as percentages of the original mortgage amount. The higher the constant, the less of a mortgage can be supported by a given amount of debt service. Constants become higher with higher interest rates or shorter mortgage terms.

Debt service coverage. Usually expressed as a percentage (e.g. 120%), it is the ratio between projected Net Operating Income and the maximum debt service that a lender will underwrite. Lenders demand coverage because apartment operations have an element of risk. Coverage (technically, the portion remaining above 100%) is the lender's margin of safety. Lenders nervous about a property want higher coverage, so a given level of NOI will result in a lower new debt service, and in turn a lower mortgage recovery. Thus the marketplace's perception of a property's risk ties directly into FHA's potential recovery on its new mortgage.

Deductibility. The ratio between deductions expected and equity contributed. A property with 175% expected deductibility will produce $1.75 of losses for every dollar of equity. Because of the "at risk" rules, only real estate allows deductibility higher than 100%.

Deep subsidy. Any subsidy mechanism that delivers resident-calibrated affordability by limiting the amount of rent tenants must pay to a fixed portion of their income (usually 30%). HUD approves apartment rents for such projects based on the operating expenses and debt service requirements. The deep subsidy pays the difference between the tenant's payment and the apartment rent. Examples are rent supplement, Section 8 or local leased housing programs. Called deep subsidy because it is better for the owner than a shallow subsidy like Section 236. Deep subsidy can be available to a property already receiving some other form of subsidy.

Deferral. The act of moving tax deductions from a current year into a future year. A dollar of accelerated depreciation is considered deferral, because when the property is sold recapture will cause that dollar to be taxed as ordinary income, instead of capital gains. Compare this term with conversion.

Density. Number of apartments per acre. A convenient measure of the probable rent appeal of low-rises; lower density is desirable for several reasons.

Department of Housing and Urban Development (HUD). The federal agency that regulates all federally subsidized apartments. Successor to the Federal Housing Administration (FHA), it also incorporates GNMA. Central office is located in Washington. Ten regional offices (hubs), and underneath them local offices. For all HUD properties, HUD must approve every rent increase, either affirmatively or via contract provisions in the regulatory agreement.

Depreciation. An arbitrary annual deduction of the cost basis of an asset based upon its decline due to age. Since it is only an estimate, can bear little relation to the property's true changing value: depreciation can be taken on a property whose market value is rising. Affordable housing generates paper tax deductions and thus makes investments attractive to high-bracket investors. Depreciation deductions provide perhaps 85% of the benefits of a subsidized housing syndication.

Discontinuity. Any event in a property's future where the current equilibrium will be punctured by a sudden change that may necessitate a operational or financial restructuring. Examples of discontinuity include:


Discounting. The process of equating future sums to current dollars. Used to calculate the present value of amounts due in the future. See future value and present value.

Dividend limitation. A limit on cash flow that can be distributed from a regulated property to its owners. Profits above the dividend limitation are held in a Residual receipts account controlled by the regulator (typically HUD or a Housing Finance Agency).

Double declining balance. A method of accelerated appreciation often abbreviated as DDB, a 200% Declining Balance, or 200% DB. Declining balance depreciation is calculated as follows:

Declining Balance Depreciation Formula
(1) Take the remaining asset at the beginning of the year, minus an assumed salvage value (use zero).
(2) Divide by the original useful life.
(3) Multiply the result by the declining balance factor (for DDB, use 200%). This produces the current year's depreciation.
(4) Subtract current year depreciation from the asset balance at the beginning of the year to produce the new asset balance for the beginning of the subsequent year.

Variations are possible (e.g. 175% DB, 150% DB); just substitute the appropriate declining balance factor. Also note that pure declining balance depreciation will never exhaust the asset. Thus, declining balance depreciation allows a switch to straight-line depreciation when the straight-line (remaining asset over remaining life) proves greater than the formula depreciation computed above. This allows an asset to be completely depreciated exactly over its useful life.

DSC. See debt service coverage.

Due diligence. The process of investigating, after having made a commitment but before its contingencies are removed, of verifying whether the assumptions on which an investment decision is to be made are in fact borne out by reality. Applies in several contexts, such as a buyer investigating a property or a broker/dealer investigating an issuer. Under the Securities Act of 1933, a broker who does not exercise due diligence before selling securities is subject to investor, civil and criminal remedies for misbehavior. Due diligence is thus a defense against two distinct but related things: (1) making a stupid decision, and (2) being sued for negligence.

Duplex. An apartment with internal stairs, usually a two-bedroom or three-bedroom, usually a townhouse.

Economic Recovery Tax Act of 1981. Enacted in 1981, one of three tax acts with most impact on affordable housing (the Tax Reform Acts of 1969 and 1986 being the other two). The 1981 Tax Act:

  • cut the maximum ordinary income bracket from 70% to 50%
  • cut the maximum capital gains bracket from 49½% to 20%
  • eliminated the distinction between earned and unearned income
  • eliminated any distinction between first and second-user real estate
  • provided substantially improved depreciation through a 15-year useful life for most real estate (later changed to 18 years, 15 for affordable housing)
  • revamped the rules regarding historic rehabs.

It triggered a massive inflow of capital into all forms of real estate, including affordable housing, a trend that was reversed only five years later with the even more sweeping Tax Reform Act of 1986.

Eligible Low-Income Housing. (From Section 229 of LIHPRHA) Any housing financed by a loan or mortgage that is:

A:

  • a. insured or held by the Secretary under section 221(d)(3) of the National Housing Act and receiving loan management assistance under section 8 of the United States Housing Act of 1937 due to the conversion from section 101 of the Housing and Urban Development Act of 1965:
  • b. insured or held by the Secretary and bears interest at a rate determined under the proviso of section 221(d)()5) of the National Housing Act:
  • c. insured, assisted, or held by the Secretary or a State or State Agency under section 236 of the National Housing Act; or
  • d. held by the Secretary and formerly insured under a program referred to in clause a, b, or c; and

B:

that, under regulation or contract in effect before February 5, 1988, is or will within 24 months become eligible for prepayment without prior approval of the Secretary.

ELIHPA. Emergency Low-Income Housing Preservation Act of 1987, also known colloquially as Title II. An early form of preservation replaced by LIHPRHA. ELIHPA intended to measure the benefits an owner would receive by prepaying an older assisted property and converting it to market rate use, then compensate the owner with equivalent benefits if the owner agreed to continue affordability through the expiration date of the original first mortgage. Compensation could be in the form of an equity take-out loan (second mortgage) insured under Section 241(f) or through a sale to a non-profit purchaser. Owner participation was effectively mandatory, in that the statute effectively blocked owners from actually prepaying their original financing and converting to market use.

Enhanced voucher. A form of portable Section 8 resident-based assistance created for use in existing property conversions. Unlike a regular voucher, whose payment standard is generally capped at FMR, the enhance voucher's payment standard is typically set at the actual post-conversion rent charged at the subject property. Enhanced vouchers thus enable current residents to remain in place when rents increase, due either to an opt-out of a Section 8 project-based contract or a prepayment on an older assisted first mortgage.

Equity buildup. Another term for the cumulative principal payments by which a mortgage has been amortized. It is based on the idea that a property will at least hold its value. Thus, even if the property is sold for the original purchase price, the seller would receive net cash equal to the equity buildup. See appreciation.

Equity syndication. The process of selling off shares in a venture to raise needed cash. Carries the implication of a partnership vehicle, as distinct from a stock offering. Generally refers to a venture-by-venture process, rather than shares in the operating company.

ERTA. The Economic Recovery Tax Act of 1981.

Exit tax. The seller tax due upon sale of a property. In many cases, because of tax benefits received by the owners, the exit tax is greater than the cash proceeds of the sale. This often discourages owners from selling to preserving entities.

Expenditure. An outlay of cash. Expense refers to a possible tax treatment of a real or projected outlay of cash or to non-cash charges such as depreciation.

Expenses. In accounting and real estate, primarily a tax term meaning to take the full cost of an item as a deduction in the year the item was incurred. Salaries, utilities, and operating costs are all expenses. Note that something can be expensed before it is paid. See capitalize.

Extremely low income (ELI). Families with incomes below 30% of area median. The most challenging constituency to house, not only because the rent they can afford is typically barely enough to pay direct costs of operations, leaving nothing for renovation or return on capital (debt or equity), but also because, being below the jobs line, these residents often need additional social services.

FAF. Financing Adjustment Factor, a supplement to original Section 8 rent levels designed to cover the increase in debt service costs resulting from the spike in interest rates that prevailed between 1980 and 1982.

FAF refunder. A refunding of the underlying bonds financing a FAF property. Under provisions in the McKinney Act, savings from a FAF refunder are split 50% to the issuing agency and 50% to HUD.

Fair Market Rents (FMRs). HUD's estimate of the actual market rent for a comparable apartment in the conventional marketplace. Every year, HUD develops and publishes FMRs for every MSA and every apartment type.

Fannie Mae. The new friendly name for the Federal National Mortgage Association, one of the two GSEs and generally regarded as the more innovative of the two. Fannie Mae issues huge CMBS pools and similar instruments; because Fannie Mae is a GSE with a congressional charter, these are perceived as carrying some unstated level of federal government moral credit enhancement. As such, they carry lower interest rates than similar pools issued by entities that are not GSEs. For more see www.fanniemae.com.

Farmer's Home Administration. The nation's oldest federal multifamily issuer, started in the Depression to provide homestead loans to farmers. A branch of the U. S. Department of Agriculture, it recently changed its name to Rural Housing Services.

FHA. Federal Housing Administration, the predecessor of HUD. The debt-originating or guaranteeing arm of HUD (as opposed to the poverty-alleviation departments). If HUD is a shotgun marriage of a bank and a charity, FHA is the bank.

FHA Insurance. The predominant vehicle by which the federal government stimulated new housing production from 1962 through 1986. When a mortgage is FHA-insured, the federal government promises to buy it from the lender at full value (technically, 99% of face) if there is any default. FHA insurance does not prevent properties from going into default, nor does it protect their owners once they are in default; rather, as a powerful form of credit enhancement, FHA insurance protects the lender.

FHA Insurance Fund. The fund established by the federal government to pay off assignments. Technically not a real sum of cash -- the government is a net borrower, so it makes no sense to escrow cash that will learn less than the government's cost of funds -- but the aggregate credit line that FHA may draw from the Federal treasury.

FHA-insured. Refers to mortgage with FHA insurance held by a third-party mortgagee.

Fiduciary. One who acts in any fiscal matter on behalf of, and for the benefit of, another.

Fiduciary duty. The obligation by one party in a transaction to be economically fair to the other parties. Can be used in the context of an escrow or financial agent hired to hold and disburse sums according to instructions. More commonly is used to define the relationship among partners in an ownership entity. Partners owe each other a fiduciary duty. Frequently bandied about and occasionally litigated, the boundaries and definition of fiduciary duty are nevertheless seldom fully agreed. As a result, investors and sponsor often disagree on just what constitutes their fiduciary duty. In practice, our standard is, "To hold one's partners' money or interests as dearly as one holds one's own." This does not mean to subordinate one's interest to one's partners, but it certainly means not to subordinate one's partners' interests for self-enrichment.

Final closing. The date on which the construction period ends, the construction loan is retired, and the permanent loan takes effect. Usually involves complying with HUD regulations and doing a complete reckoning of construction, including paying all necessary bills.

Final endorsement. Technically not the same as final closing but often used interchangeably, it is the date on which HUD completes its work and endorses the mortgage for mortgage insurance. Once HUD has done this, final closing happens shortly thereafter, or simultaneously.

Financial Transaction Management. The changing of a property's capital structure -- bringing in new money for rehab, owner or partner buyout, clearance of liabilities, or transitional operating deficits.

FIRREA. The Financial Institutions Reform, Recovery, and Enforcement Act (Public Law 101-73, available from ), the reform legislation enacted in 1989 in the wake of the savings and loan scandals. Among many sweeping changes, FIRREA created the requirements that appraisers of real estate be state certified.

First mortgage. A loan, secured by a piece of property, which comes ahead of any other creditor (except delinquent real estate taxes). See second mortgage, junior and senior.

Flexible subsidy. A grant (or soft loan) program created by HUD and principally active between 1979 and 1984. Designed to stem the flood of assignment, Flexible Subsidy (or Flex as it was often abbreviated) provided a one-time capital injection in exchange for the following owner commitments:

  • Owner's match of $1 for every $3 of Flex.
  • Repayment obligation as a first call on future cash flow and residuals (against a junior mortgage with a 1% interest rate).
  • Extended affordability via a Flexible Subsidy Use Agreement that lasts until the original term of the underlying first mortgage (forty years) even if the Flexible Subsidy loan and the HUD mortgage are both paid off.
  • Prepayment subject to 250(a) affordability. Prepayment of the HUD first mortgage requires HUD approval.

 

FmHA. See Farmers Home Administration.

FMR. See Fair Market Rents.

FNMA. Former name for Fannie Mae. See GNMA.

Foreclosure. Recovering collateral for non-payment of a loan. A mortgagee who has not been paid its full debt service has the right to demand an auction of the property. At that time, the mortgagee usually bids the amount of its indebtedness. If anyone else bids more, the mortgagee will be paid its full loan. If no one bids more, the mortgagee will take title to the property. Either way, the current owners will lose ownership unless they are the high bidder. Since foreclosure results in a change in ownership, it triggers tax consequences and is thus a major risk in subsidized housing transactions.

Freddie Mac. Originally known as Federal Home Mortgage Corporation, the second major GSE (Fannie Mae is the first), with similar activities. Historically has tended to be more conservative than Fannie Mae. For more see www.freddiemac.com.

Future value. The amount that a given sum of money will grow to, when invested at a specified rate for a specified time. See present value and discounting.

GAAP or Generally accepted accounting principles. An agreed-upon set of guidelines determined by the Financial Accounting Standards Board. Partnership financial statements usually tell you the extent to which their accounting methods differ from GAAP.

Garden apartment. An apartment in a low-rise (usually in a two or three-story building) which is laid out on a single floor. If you have to climb stairs once inside an apartment, it is not a garden. Garden apartments generally connote on-site parking. Distinguished from high-rises, duplexes and townhouses.

General partner. Any partner in a partnership who has unlimited liability and whose signature may bind the partnership. In a syndication, the general partner or general partners are almost invariably affiliates of the developer. Occasionally an affiliate of the syndicator will be an administrative or additional general partner. See limited partner.

Ginnie Mae. The Government National Mortgage Association, a HUD subsidiary performing functions analogous to Fannie Mae. For more, see www.ginniemae.gov.

GNMA. The original acronym from which arose the new name, Ginnie Mae. See Fannie Mae.

GSE or Government Sponsored Enterprise. Congress's term giving life to private entities that have a federal charter to carry out public policy goals while also making a profit for their shareholders. Fannie Mae and Freddie Mac are the two principal private GSE's.

HAP contract. A "Housing Assistance Payments" Contract. The technical name for the contract which supplies Section 8 subsidy to a property.

High-rise. A building with an elevator.

Historic tax credit. A one-time tax credit, captured in Section 50 of the Internal Revenue Code, equal to 10% or 20% of all rehabilitation costs of a certified historic structure. A very substantial equity incentive, especially when combined with the Low Income Housing Tax Credit.

HOPE VI. A title of the Housing Opportunities for People Everywhere (HOPE) statute, a source of funding to renovate and privatize existing public housing. HUD makes HOPE VI grants to local housing authorities on behalf of specific properties. Although a very substantial grant, HOPE VI is seldom by itself sufficient to cover the full renovation costs, so in most cases other resources such as volume-cap bonds and allocated LIHTCs are deployed as well.

Housing Finance Agency (HFA). A state agency which issued bonds to finance the construction or development of affordable housing properties (for more, see NCSHA's "What Housing Finance Agencies Do").

HUD. See Department of Housing and Urban Development.

HUD-held. A formerly FHA-insured mortgage that has been assigned to HUD (usually because of a default).

HUD-insured. An FHA-insured mortgage held by a third-party mortgagee.

HUD-owned. A property on which HUD has foreclosed its HUD-held loan.

Income limits. Ceilings on resident income eligibility as established by various programs. One of the several affordability provisions in affordable housing.

Income subsidy. Any of a number of programs that allow tenants to pay a fixed portion of their income for rent. The income subsidy pays the balance (the difference between the tenant's payment and the apartment rent) to the landlord. Section 8 is the most common form of income subsidy.

Inflation hedge. An investment whose value increases if inflation goes up. To be a true inflation hedge, rise in value must match or exceed inflation. Inflation hedges often involve buying a tangible asset (gold, silver, antiques, artwork) whose value does not depend upon a particular currency. Because of its tangible nature and the availability of fixed mortgages, real estate has often been considered a good inflation hedge.

Initial difference. A concept in Section 8 AAF, the difference (in nominal, not-inflation-adjusted dollars) between the initial approved Section 8 rents and the then-prevailing market rents. A factor in Section 8 comparability analyses because to be 'comparable' the Section 8 rents cannot exceed market rents plus the initial difference. (In other words, the initial difference is evergreen for comparability purposes.)

Installment sale. A sale that is taxed over a period of several years rather than all at once (because proceeds are received in more than one year). Under current tax law, almost any sale in which money is paid over a period of years will qualify as an installment sale. Oversimpifying, in an installment sale the lock-in gain is triggered on disposition and the gain associated with cash is paid if-as-and-when received.

Interest reduction payment or IRP. A federal subsidy used with Section 236 loans to bring down their debt service constant. Conceptually defined as the difference between the actual debt service (including MIP) and the debt service that would be paid assuming the loan bore interest at one percent. Section 236 IRP covers MIP, so it declines every year by a small amount. Section 236 IRP is frequently misunderstood. (1) It does not yield the same as a 1.0% constant, because the constant includes principal. The constant on a forty-year loan at 1.0% is 3.03%. (2) It is not (quite) a level payment, because it pays MIP, and MIP declines a little every year. (3) It is not the same as simply a 1.0% loan; the amortization curve is that of the actual underlying loan. (4) As a result, in the later years of a Section 236 mortgage, the portion of the gross debt service attributable to principal can be greater than the net after applying the Section 236 IRP, so that in the later years, a portion of interest reduction payment is going to pay principal.

Internal rate of return (IRR). A financing concept, the IRR represents that discount rate at which an irregular stream of flows has a present flow equal to the up-front investment. Thus, in a normal universe, the IRR should allow normalized comparisons among multiple investment types. But there are three flies in the ointment when IRR's are used in the context of tax-advantaged investments. (1) Applying the IRR to investments with different holding periods. The IRR assumes in effect that investments are infinitely available and that funds retrieved from one successful investment can be redeployed into another investment at the same IRR. (2) Applying the IRR to investments with multiyear payments. In tax-advantaged investments, tax benefits are received almost contemporaneously with equity investments. When the denominator (money out-of-pocket) is small, timing changes can have a disproportionate effect on calculated IRR's. (3) Applying the IRR to investments with costs at the beginning and at the end. Few analytical tools cope fairly with tax investments where there is a substantial exit tax that may create a large outflow. (Theoretically, the investment can have two IRR's and any discount rate between the two endpoints yields a positive present value.)

Interstate offering. A securities offering where the issuer and purchaser are domiciled across state lines. Most private placements are interstate offerings, and as such seek exemption from registration under SEC Rule 146.

Intrastate offering. An offering within the boundaries of a single state. Governed by SEC Rule 147. Only local syndications are offered this way.

Investment tax credit (ITC). A direct reduction of taxes payable, used by the government to encourage very specific kinds of investment. Prior to the 1981 Tax Act (ERTA), the most common forms applied to personal property investment. Energy Tax Credits allowed homeowners tax reductions for putting in insulation and similar energy-conservation measures. Of interest to investors in 1982 and later historic rehabilitation syndication, since the ITC can be as much--or nearly as much--as the full equity contributions.

Investor. A (usually) passive participant who pays money to share in the proceeds of a venture. In real estate, investors almost invariably purchase limited partnership interest, and become limited partners.

Investor representative. Usually affiliated with the syndicator, the investor representative is often known as the "investor services department," " investor relations department," or "customer services department."

IRP. See interest reduction payment.

IRP Decoupling or IRP Strip. A transaction whereby the actual Section 236 loan is repaid, but the stream of IRP funds that would have been used to write down the debt service payments if the loan had remained in place are separated from the original debt and used to support a new loan on the property.

IRS audit. An inspection by the IRS of a partnership's books, for the purpose of determining if the partnership has paid or accounted for its taxes properly. The mechanism by which the IRS challenges or approves partnership accounting or tax decisions. Never a desirable event.

Issuer. One who offers securities for sale. Generally means the originator of the securities (in a stock offering, the owners of the stock of the company going public); in a syndication, the developer/general partner. Can be extended to mean anyone who took money in connection with the offering.

Jobs line. A slang term indicating the level of income achieved by the head of household working full-time. At minimum wage, translates roughly to 25-30% of median income.

Junior. An indebtedness paid only after some other (senior) indebtedness is fully satisfied. See second mortgage.

Leverage. Using borrowed funds to purchase an asset. Spoken of as a percentage of total costs: thus a $10,000 property bought with $7,500 of mortgage money and a $2,500 down payment would be said to be 75% leveraged (or 75% levered). As its name implies, leverage allows an investor's equity dollars to purchase more asset. High leverage implies greater potential return on asset if the venture is successful--but greater risk of foreclosure if it is not. Affordable housing syndications have about the highest leverage of any kind of real estate transactions: between 78% and 90% depending upon the syndication proceeds.

LIHPRHA. The Low-Income Housing Preservation and Resident Homeownership Act of 1990, also known colloquially as Title VI. LIHPRHA was a later form of preservation which replaced ELIHPA. LIHPRHA intended to measure the benefits an owner would receive by prepaying an older assisted property and converting it to market rate use, then compensate the owner with equivalent benefits if the owner agreed to continue affordability for the property's remaining economic life--a minimum of 50 years. Compensation could be in the form of an equity take-out loan (second mortgage) insured under Section 241(f) or through a sale to a non-profit purchaser. In the late stages of the program, incentives were funded through a capital grant rather than 241(f).

LIHTC. See Low Income Housing Tax Credit.

Limited dividend (LD). The maximum annual cash flow which an owner is entitled to distribute; money earned above this ceiling is retained in the property in the residual receipts account. Limited dividends are normally set when the property was originally developed (that is, many years ago) and are generally not adjusted for inflation or appreciation.

Limited liability. The legal term which distinguishes general partners from limited partners. In exchange for agreeing not to take control of the business, the limited partners are shielded from paying any debts of the partnership; their liability is limited to the amount of capital they contribute.

Limited partner. A partner in a limited partnership who has limited liability and whose signature cannot by itself bind the partnership. Investors in a syndication are almost always limited partners, but other parties can be limited partners as well. See special limited partner and general partner.

Liquidity. The ability to convert an asset into cash. An investment which can do it virtually instantaneously (e.g. publicly-traded stock) is said to be very liquid. Tax shelter interests, especially in subsidized housing, are virtually illiquid. Resyndications now offer the promise of some liquidity.

Litmus test. A test that, although not necessarily significant in itself, is a reliable indicator of how a larger, more difficult test will come out.

LLC or Limited liability company. A recent creation that combines passthrough of tax consequences with a corporate shield. As such, the LLC has generally supplanted the limited partnership as the ownership entity of choice for new affordable housing.

Loan Management Set Aside (LMSA). A form of Section 8 used to support properties that need assistance, either to alleviate resident rent hardship or to prevent high vacancy and potential default. It was created in 1976, with contracts typically running for five years (although in recent years HUD has been renewing LMSA contracts for shorter periods).

Lock-in gain. A useful bit of slang for the aggregate negative capital account, because in virtually any sale (as opposed to a contribution or exchange), the seller has gain equal to the negative capital account plus any actual cash proceeds received.

Lock-in tax. The inherent tax (predominantly capital gains) on the lock-in gain. Often the most significant barrier to persuading investors to sell their interest in a very old affordable housing investment.

Low income. In federal statutes, families at 80% of area median income (adjusted for family size). The eligibility definition for Section 236 properties, public housing, and the original Section 8. Gradually it has become recognized that many low income families can pay market rents, so the typical programmatic income limits have drifted downwards. See very low income and extremely low income.

Low-Income Housing Tax Credit (LIHTC). Low Income Housing Tax Credits are available under Section 42 of the Internal Revenue Code. They are the principal equity incentive for new affordable housing production. LIHTC was created in the 1986 Tax Reform Act to stimulate production of affordable housing. States receive a per-capita allocations which they use to leverage private capital. LIHTC properties must meet affordability requirements set by the state allocating agencies. See the Learn section for more LIHTC resources.

LTV or Loan-to-value. The ratio between proposed new financing and the as-is value of the property provided as collateral.

M2M. The universal cognoscenti acronym for Mark to Market, pronounced as it is spelled (em-too-em).

MAHRA. The Multifamily Assisted Housing Reform and Affordability Act, the enabling legislation, enacted in 1997, that created the Mark to Market program.

Maintenance reserve. Another name for replacement reserve. A mandated cash holdback intended to be spent on items which need replacement less frequently than every year. Generally not deductible until spent.

Managing general partner. When more than one general partner is present, one of them is usually designated Managing General Partner. The powers and duties of the general partner group are exercised in the first instance by the Managing General Partner, who is usually the controlling partner.

Marginal bracket. The incremental tax rate on an incremental dollar of income.

Mark to Market. The process of reducing above-market rents to true market levels, and absorbing whatever further financial consequences follow from this: in HUD's case, this means recognizing defaults in FHA-insured mortgages, paying the mortgage claims, and restructuring the remaining available debt service into a new mortgage(s).

Mark Up to Budget (MUB). This program allows non-profit owners of older-assisted properties to raise Section 8 rents to fund necessary capital improvements. See the MUB Summary.

Mark Up to Market (MUM). HUD's reaction in 1999 and beyond to the sudden surge in opt-outs. Under MUM, eligible properties can obtain a Section 8 rent increase to true market levels, if they agree to extend affordability for five years. See the MUM Summary.

Mark Up to Market Non-profit Transfer (MUM-T). An option for Section 8 contract renewal under MAHRA designed to keep properties in the Section 8 inventory by encouraging acquisition by non-profit owners. Non-profits acquiring properties with Section 8 contracts can have rents adjusted upward to market levels and subject to regular adjustments. See the MUM-T Summary.

Member. A participant in an LLC. The controlling party is normally designated the managing member.

Metropolitan Statistical Area (MSA). The basic census unit for defining urban areas and rental markets. Section 8 FMRs are set for each MSA. Unfortunately, most MSAs contain many neighborhoods with considerable variation in their rent levels, so the FMRs may or may not be a good proxy.

Mod funds. Short for modernization funds, the logical supplement to PHA operating subsidy.

Mod rehab. Short for Moderate Rehab, a HUD Section 8 financing program that flourished between 1985 and 1988. As the name implies, it was intended to cover renovation that was less than Substantial Rehab but greater than cosmetic rehab. With funds scarce and an unusual crew of administrators at HUD, the Mod Rehab program rapidly became discredited as patronage-riddled in its award allocations. Most Mod Rehab properties had 15-year Section 8 contracts.

Moderate income. In federal statutes, families at or below 95% of area median income (adjusted for family size). The income ceiling for Section 221(d)(3) BMIR properties. Now widely recognized as too high a ceiling to be meaningful.

Mortgage Insurance Premium (MIP). An annual payment, included in the constant monthly debt service, from the mortgagor to HUD (sometimes via the mortgagee) as a premium paid to HUD for its FHA mortgage insurance. Typically MIP is 50 basis points annually (that is, 0.50% of the outstanding mortgage amount); as such, it declines little by little every year as the mortgage's unpaid principal balance declines.

Mortgagee. The lender who holds a mortgage. The mortgagee is the payee.

Mortgagor. The borrower. (Can be remembered as "you pay your mortgage or the lender takes your property away from you.")

MUB. See Mark Up to Budget.

MUM. See Mark Up to Market.

MUM-T. See Mark Up to Market Nonprofit Transfer.

Negative basis. A misnomer -- there is no such thing, basis is always positive or zero -- often used incorrectly in place of negative capital account.

Negative capital account. An investor's capital account when total withdrawals from an entity (refinancing proceeds, cash flow, and most significantly tax deductions) exceed the investor's aggregate contributed capital.

Net Operating Income (NOI). A property's rents minus all its costs of operations, Net Operating Income represents the maximum amount available for debt service plus the owner's cash flow.

New reg. A subcategory of AAF Section 8 properties, 'new reg' properties were financed after roughly the beginning of 1980 (exact dates vary according to Section 8 AAF type); under these regulatory agreements: (1) the owner agreed to a ceiling on cash distributions, and (2) cash flow above the limited dividend accumulates in a residual receipts account which belongs to HUD but only at the end of the Section 8 contract. Many Section 8 new reg contracts were 30 or 40 years (or a series of five-year contracts renewable at the owner's option), so few of them are likely candidates for Mark to Market. See old reg.

Newer assisted portfolio. Properties developed (generally 1977-1982) with FHA insurance and AAF Section 8: generally speaking, the Section 221(d)(4) Tandem properties. About 450,000 apartments with Section 8 contracts that expire generally from about FY 97 through FY 2001.

Non-recourse debt. A secured loan for which no recourse may be had to any borrower. A personal residential mortgage is usually recourse; they can take your home away and then they can sue you. A subsidized housing syndication mortgage is non-recourse; all they can do is take back the security (the property). See recourse.

Offering memorandum. The basic document describing all aspects of the transaction. Sometimes called the prospectus or the brochure.

Office Of Multifamily Housing Assistance Restructuring (OMHAR)The agency in charge of Mark to Market restructuring for renewal of Section 8 contracts. OMHAR was originally independent, but has been rolled into HUD.

Old reg. Refers to a subcategory of AAF Section 8 properties. Those financed before roughly the beginning of 1980 (exact dates vary according to Section 8 AAF type) had 'old' regulatory agreements under which (1) HUD imposed no limitation on cash distributions, and (2) all cash flow (or residual receipts) belong to the owner. Old reg AAF Section 8 properties tend to be generating a great deal of cash, and distributing it to their partners, so little cash is building up in the property. In general, old reg Section 8 were 20-year contracts. Most AAF Section 8 eligible for Mark to Market, therefore, are old reg. See new reg.

Older assisted portfolio. Properties developed (generally 1968-1975) with FHA insurance and budget-based rents intended to be below market; acquired Section 8 LMSA over time principally to avoid assignment or to abate rent burdens for current residents. About 650,000 apartments, of which about 450,000 have Section 8 LMSA. Only older assisted properties are eligible for LIHPRHA preservation.

One-for-one replacement. A statutory requirement, enacted to prevent HUD from exiting the affordable public housing arena, that requires HUD to provide new funding to construct one new public housing apartment for each one demolished. While well intentioned, the rule outlived its time, and became a substantial inhibition to renovating public housing, since it meant that a largely uninhabitable property on an overly dense site could not be logically rehabbed (by lowering density with fewer apartments on the same ground). Fortunately, one-for-one has been superseded.

OP Units. See Operating Partnership Units.

Operating Cost Adjustment Factor (OCAF). A methodology used to increase the rents for project-based Section 8 contracts. The OCAF attempts to gauge the typical operating costs increases incurred in a given region and applies the factor to the rents to compensate for those increases. The OCAF has largely replaced the AAF as HUD's operative adjustment approach.

Operating expenses. Has both a narrow and a broad meaning. Narrowly, it means the costs of operations (administration, maintenance, janitorial, groundskeeping) excluding financial expenses (real estate taxes, debt service). Broadly, it means any and all required costs of operating a property. Usually a defined term in partnership agreements that is well worth reviewing closely.

Operating Partnership Units (OP units). Units in an operating partnership that is paired with an associated REIT. As part of a sale of a property from a limited partnership to a REIT, limited partners may exchange their ownership interest for OP units. Since OP units are partnership interests, if they are received in exchange for a property or private partnership interests, that event is a tax-deferred exchange (not a sale). The swap allows them to defer the capital gains tax event, and can facilitate completion of transactions. Typically the OP units provide that, either at the holder's option or under defined circumstances, the holder may exchange them one-for-one with shares in the REIT. Their exchange for REIT shares is a gain, but since this comes at the holder's option, the holder gains the benefit of timing in tax planning.

Operating subsidy. Assistance to public housing authorities, provided generally by the federal government, to cover the difference between the residents' contribution and the authority's operating requirements (excluding renovation or replacement reserves, which are funded with mod funds), so in effect it mandates zero NOI. Between the absence of capital planning and the zero-NOI target, operating subsidy/mod funds create perverse incentives favoring a short-term, hand-to-mouth dependency in housing authorities.

Opt out. The owner decision to decline to renew a project-based Section 8 contract and a precursor to converting a property to conventional use. Owners must file a Notice of their intention to opt out and must comply with notification and other requirements imposed by HUD.

Ordinary income. Anything that is not capital gain. After the 1981 Tax Act, subject to a maximum rate of 50%.

Original Issue Discount. A concept enshrined in Section 168 of the Internal Revenue Code. Intended to prevent sponsors from inflating or front-ending artificial tax deductions by issuing deferred-payment non-recourse soft debt with a high face amount and a low interest rate. Requires generally that for non-exempt debt instruments, the loan must bear interest at the AFR or be restated as if it had an AFR accrual. The difference between the resulting restated face amount and the original amount is the "Original Issue Discount" that is excluded from basis but instead taken as an accrual so as to simulate the effect of having had an AFR note from inception. See CODI.

Out of pocket. The difference between the amount an investor has contributed and the net after-tax benefits received as of a particular point in time. The lower the out of pocket investment, the better the overall yield will be. Because payments in a subsidized housing syndication are received over time, substantial tax benefits will flow through to investors. An investor who contributes $1.00 in equity over four or five years, for instance, will probably be only 35 cents or so out of pocket at any given time.

Outlays. Annual expenditures of federal resources. A critical element in budgetary scoring.

Paper. Has two meanings; both imply a substitute for cash. (A) Used as an adjective, refers to non-cash items of income or expense (chiefly depreciation). Paper write-offs form the basis of all multiple-write-off tax shelters. (B) Used as a noun, refers to financing, usually from the seller, which cannot easily be converted to cash. Thus, selling a property and taking back paper means offering the buyer substantial financing, and agreeing to receive sale proceeds over several years.

Participating Administrative Entity (PAE). HUD selects PAEs to administer the Mark to Market program. PAE's coordinate restructuring with FHA underwriting and perform eligibility screening, data collection and due diligence, underwriting, responses to appeals, management of the closing process, and certain post-closing asset management activities. Most PAE's are public entities: either state or local housing finance authorities. Some non-public entities, usually non-profits, handle restructurings that occur outside the jurisdiction of participating public PAEs, for instance, in areas where the HFA declined to participate.

Passive activity. Only the IRS could define this oxymoron in a way to make it meaningful. A passive activity is an investment in -- specifically -- real estate (as opposed to all those other active investments like preferred stock). Relevant because, in defining activities as active, portfolio and passive, Congress and the IRS could then deem that losses from one kind of activity can be sheltered against only income from that kind. A construct that, being purely artificial, was effective; since real estate investments overwhelmingly produce losses rather than income (a consequence chiefly of favorable depreciation), the passive activity rules largely devalued losses in real estate investments.

Passive losses. Losses arising from a passive activity (chiefly, real estate). Can be used to shelter only passive income; if not used when incurred, they become suspended passive losses.

Passthrough. Limited partnerships do not pay taxes; instead, each partner reports his proportionate share of the income or expenses of the partnership. Limited partnerships, therefore, pass through income or deductions to their partners.

Payback. Recovery of the original capital contribution. Any investment may be divided into two periods: the payback period and the yield period. Having a short payback period is considered desirable because it reduces risk and out-of-pocket investment. Since subsidized housing investments involve a substantial termination cost, not completely meaningful when applied to a subsidized housing syndication.

Payment standard. HUD's term for the maximum rent for which a voucher is calibrated. A holdover phrasing from the time when vouchers and certificates were different entities. As a general matter, the payment standard on regular vouchers is 100% of FMR (local authorities can increase it to 110% of FMR and, in exceptional cases, to 120% of FMR); for enhanced vouchers, it is the actual rent at the post-conversion property.

Phantom income. Refers to a partnership that is generating net taxable income to its partners greater than the distributable cash flow they receive. Phantom income arises from two principal sources: (1) as properties age, their mortgage amortization increases and their depreciation decreases, and (2) many new reg (and some budget-based ones) generate cash flow above their limited dividend. Either way, phantom income creates a continuing aggravation to limited partners and motivates them to seek financial transactions to escape their current predicament.

Plan of Action. In Preservation (ELIHPA and LIHPRHA), the underwriting document defining initial new rents, how they will be set and adjusted over time, resident selection policies and ongoing affordability provisions. The governing document in most ELIHPA/LIHPRHA preservation transactions.

Portfolio re-engineering. A HUD term for Mark to Market, intended to recognize that the issues involved are not purely financial but also involve repositioning the properties, rethinking their regulatory structure, and reducing HUD's workload.

Portfolio income/losses. The second of three categories established by TRA 1986. Applies to income or deductions from investments other than real estate, such as stocks and bonds. The same artificial losses-against-like-income requirements apply, but since portfolio income is easy to generate, in practice this is a distinction largely without a difference.

Preference. See tax preference.

Prepayment. Older assisted properties have affordability requirements tied directly to their FHA-insured mortgages. To end the affordability requirement and convert the property to conventional use, owners must prepay the mortgage. More generally, prepayment refers to paying off a mortgage before the end of the amortization period.

Present value. What somebody will pay today for the right to receive some future amount. One dollar, invested at 8% compounded yearly for twenty years, will grow to $4.66. In other words, the present value of $4.66 twenty years from now is $1, by discounting (the reverse process of compounding) at 8%. See future value and discounting.

Preservation entity. An entity with both the capabilities and orientation to be an effective owner of affordable housing over the long term. Preservation entities must combine a mission commitment with business capability. Many but not all are non-profits. With so many resources allocated on an advantaged basis to preservation entities, the market share of this type of owner is increasing. See the Learn section on Owning Affordable Housing to read more.

Preservation programs. A program (enacted in 1987 with the Emergency Low-Income Housing Preservation Act, ELIHPA, and later amended into the Low-Income Housing Preservation and Resident Homeownership Act, LIHPRHA) that (i) prevented owners of older assisted properties from prepaying their mortgages and converting to market-rate use, and (ii) compensated them with financial incentives available either through extension (continuation of ownership) or sale (to a non-profit buyer). Properties that went through preservation generally had their incentives financed with new higher rents supported by new Section 8 LMSA.

Price. Total investor contributions (including interest on investor notes) plus all mortgages assumed. To obtain the proper apples-to-apples yardstick for measuring how much an investor is paying for a given syndication, divide the investor contributions by the total mortgages acquired.

Private placement. An offering exempt from federal securities registration because it is sold only to a limited number of rich and sophisticated investors. For any given offering, federal guidelines for private placements (under Rule 146) limit them to no more than 35 purchasers, who commit less than $150,000 each nationwide. (Accredited investors do not count against the 35-purchaser limitation.) Offerings must still receive either exemptions or clearance from individual state securities bureaus.

Production programs. Programs designed to create new affordable housing through construction, substantial rehab, or acquisition.

Property. In general, a multifamily rental development. Often, a property is the physical asset acquired in a syndication. Sometimes called a development, a complex, a property, or "a job."

Project-based. Income subsidy assistance that is attached to the property; almost always a precondition for a production program. See Section 8 and property-based Section 8 assistance.

Project-based vouchers. Section 8 assistance attached to a property by a Public Housing Authority, which allocates some of its portfolio of tenant-based assistance to create a HAP contract with a property owner.

Project-specific rents (PSRs). In a LIHPRHA property, the market rent that unsubsidized tenants would reasonably expect to pay for their apaprtment based on the actual project conditions after the Title VI repairs are complete. PSRs were established because FMRs reflected the prevailing unsubsidized rents that are comparable to the subject, but not necessarily what someone would pay for the subject property. The rent for the non-Section 8 tenants is be the lowest of 1) 30% of the tenant's income 2) FMR, or 3) PSR. If PSRs affect the total rent cap, the owners must update the PSRs annually durnig the annual rent increase process.

Property-based Section 8 assistance. A form of resident rental assistance attached to specific apartments: if the resident moves, the assistance remains behind so that the next applicant gains the benefit. All properties developed with resident rental assistance used property-basing initially, because lenders strongly prefer it as a more secure form of income.

Prospectus. Another term, borrowed from stock offerings, for the offering memorandum.

Public fund. The opposite of a private placement. Registered with the SEC, it may be sold to any number of purchasers, nationwide. The largest users of public funds are oil and gas drilling partnerships and real estate partnerships formed to purchase conventional apartments, office buildings and shopping centers. The only vehicle to put tax shelter within reach of the middle-class buyer. Public funds usually purchase an unidentified (or blind) pool of properties. Occasionally a public fund will list specific properties it will acquire; in such a case it is said to be 'specified' or 'semi-specified.'

Public housing. Affordable housing directly owned by the government. The earliest form of governmental housing, created by the National Housing Act of 1937, and the virtually exclusive form from 1937 through 1965, when Pruitt-Igoe was demolished. Just about pervasive throughout the United States, in communities small and large. HOPE VI is the principal method of revitalizing distressed public housing.

Put. In syndication parlance, the repurchase obligation whereby, under certain circumstances, the investors can compel the general partner to repurchase their interests at par.

RAP or Rental Assistance Payments. A rent supplement analog that tended to be applied only to uninsured Section 236 properties financed by HFAs.

Real Estate Assessment Center (REAC). HUD's office for evaluating physical condition and financial soundness of assisted properties, as well as tenant income verification and other forms of oversight. Minimum REAC scores can be a requirement for certain types of HUD processing.

Recapitalization. The financial restructuring of a property so as to bring in capital, improve operations, and enhance performance. It may or may not involve new debt or a change in ownership. Mark to Market is a form of recapitalization.

Recapture. The recovery at ordinary income rates of certain deductions previously taken. In subsidized housing, recapture applies only to accelerated depreciation in excess of the straight-line. Any investment held for its full useful life will generate no recapture, only capital gain.

Recourse. An obligation for which some entity is personally liable. See non-recourse debt.

Refinancing. Paying off the current mortgage loan and substituting instead a new mortgage loan, generally for either (a) a higher amount, or (b) a better rate. If the former, the extra proceeds which become available can be distributed to the owners, but because they are matched by a higher mortgage, they are tax free at the time of distribution. Thus, refinancing is often a very useful way of converting equity buildup and appreciation into cash without selling the property or paying tax.

Regulatory agreement. HUD's principal control document -- an accompaniment to most forms of Section 8 and to affordable production programs -- that captures both affordability requirements and HUD's monitoring and enforcement provisions.

REIT or Real estate investment trust. A publicly tradable and liquid ownership vehicle. After falling into disfavor in the late 1970's, REITs re-emerged in the mid-1990's and for a brief interval showed extraordinary asset growth and consolidation. In the long run, the combination of tradability, passthrough, and OP units should give REITs an ongoing advantage in lower cost of capital and lead to greater market share.

Rent Comparability Study (RCS). A study defining comparable market rents for a property. An RCS is an important component of several types of Mark to Market processing.

Rent supplement. A form of property-based assistance, provided under Section 101, that preceded Section 8; it operated under very similar principles (but with greater restrictions). Original rent supplement contracts were for forty years and precluded prepayment or market conversion. When rent supplement contract authority ran out in 1979-1982 (a casualty of inflation driving rents up and federal preferences driving resident shares down), Congress offered owners with rent supplement properties the opportunity to convert to Section 8 LMSA. About 97% did so.

Replacement reserve. A segregated property cash account used to fund costs beyond normal operations (typically, the replacement of items that have useful lives longer than one year). Owners make monthly deposits into the replacement reserve (in amounts agreed by the owner and HUD) and withdraw funds only with HUD permission to pay for specifically enumerated replacements (such as appliances, carpeting, and roofs).

Rescission. The right to rescind a securities transaction and receive money back (possibly net of interim benefits, but usually with interest). An investor is entitled to rescission if he can show that the offering material was incomplete or misleading. This is accomplished via a rescission suit which must be instigated by the investor. Thus, although the right is clear in theory, it is poorly defined in practice. Nevertheless, the threat of a rescission suit can be a significant weapon in an investor's arsenal.

Resident-based Section 8 assistance. Section 8 certificates or vouchers, both of which are portable: if the resident moves, the subsidy travels.

Residual. Generally used to mean the proceeds of a sale or refinancing. In any event, generally not payable from normal operations or cash flow.

Residual receipts. In HUD parlance, a cash account, maintained in the name of the property and under joint control of HUD and the owner, into which is deposited all cash generated over and above all obligations and the limited dividend. Residual receipts are not released until a mortgage is paid off, at which time they belong to the owner (except for new reg properties, whose residual receipts belong to HUD).

Resyndication. The process of selling an existing property to a new group of investors. In subsidized housing, we believe that resyndication will likely become more important than regular syndication.

Revenue agent's report. A report by an IRS auditor indicating the results of his field work and setting forth the proposed IRS disallowances and the authority for these disallowances. The first salvo in a partnership audit.

Rural Housing Services. The new term for the Farmers Home Administration, the affordable housing branch of the U. S. Department of Agriculture.

Schedule K-1. A form sent to each limited partner, each year, listing the partner's:

The annual K-1 provides the limited partner with all tax information needed from the particular investment. You do not need to file the K-1 with your tax return, only the tax information on it, but it does not hurt to do so. And you should definitely keep a copy in your personal tax records.

Score. An estimate of the outlays flow (spendout rate) of budget authority under a new program. A crucial element in fitting proposed legislation within an appropriations bill.

Second mortgage. An additional loan, secured by a property, junior only to its first mortgage. A frequent device employed when real estate projects are sold. See paper, first mortgage, junior, and non-recourse debt.

Secondary financing. A generic term for any subordinate financing -- second mortgages, wraparound mortgages, seller notes, and the like -- that is clearly debt but junior to the primary loan. When described as 'financing' rather than a mortgage, tends to connote both a lower level of security and (probably) that the loan has soft or favorable repayment terms.

Section 8. The predominant form of resident rental assistance, but in reality an umbrella term that covers many distinctly different varieties, as follows:

Type Attached To Budget-based or Adjustment Factor Mortgage programs commonly used Original contract length
LMSA Property Budget-based 221(d)(3), 236 15
Certificates Resident N/A N/A 3-5 years
Vouchers Resident N/A None 3-5 years
New Construction Property Adjustment Factor 221(d)(4) 20, 30 or 40 years
Substantial Rehab Property Adjustment Factor 221(d)(4) 20, 30 or 40 years
Moderate Rehab Property Adjustment Factor 221(d)(4) 20 years

With the impact of budget deficits and scoring considerations, almost all Section 8 renewals have one-year appropriations (even if they are nominally for longer terms).

Section 11(b). A section of the National Housing Act under which local issuers were allowed to issue tax-exempt private-purpose bonds to finance properties. Popular as a financing mechanism for Section 8 properties between 1981 and 1983, when high interest rates made tax-exempt funding a necessity.

Section 42. The Internal Revenue Code location for the LIHTC.

Section 101. The National Housing Act location for the original forty-year rent supplement program.

Section 202. A federal program that makes capital grants to qualified non-profit developers to provide for supportive affordable housing for the elderly. Section 202 properties also receive Section 8 assistance, which covers the difference between the amount paid by residents and the property's operating cost. Because of the initial capital grant, the Section 8 assistance need not cover any debt service. Before 1990, the Section 202 program made direct loans, rather than grants. Older 202 properties therefore have debt service payments and require greater Section 8 assistance.

Section 207. A new construction financing program, precursor to Section 221(d)(4), to provide FHA insurance for new market-rate apartments.

Section 220. Analog to Section 221(d)(4) -- FHA insurance, market rate rents, no income subsidy -- for urban renewal areas.

Section 221(d)(3). The oldest multifamily mortgage insurance program relevant to Mark to Market, active from 1963 through 1970 in either of two forms:

  • In the Below Market Interest Rate (BMIR) version, FHA provided loans at the federal government's direct borrowing cost (ranging from 3% to 3.875%).

  • In the Market Rate/Rent Supplement (MR/RS) version, FHA provided loans at a market rate and provided rent supplement to all residents.

Section 221(d)(4). A mortgage insurance financing program introduced in 1973 and still active. Probably the most active program, it generally financed market-rate properties with no subsidy, but during the late 1970's and early 1980's was often paired (in the Tandem program) with Section 8 New Construction, Substantial Rehab, or Moderate Rehab project-based subsidies.

Section 221(d)(5). The technical section that authorized 221(d)(3) BMIR.

Section 221(g)(4) assignment. An assignment right written into older Section 221(d)(3) mortgages which entitled the mortgagee to assign after twenty years, even if there was no default. These (g)(4) assignments (colloquially called a "(g)(4) put") were a feature added to make buying the loans twenty years ago more attractive.

Section 223(a)(7). A refinancing program authorized specifically to allow new FHA insurance for situations where the current interest rate is higher than market and the refinancing will reduce interest costs and aggregate debt service. As it happened, the lending program used to authorize new restructured first mortgages under Mark to Market.

Section 223(f). A refinancing program functionally analogous to Section 221(d)(4) -- FHA insurance, market-rate housing. Normally capped at 85% loan-to-value, 117% coverage. Required some renovation but limited to amounts much less than substantial rehab.

Section 236. A mortgage insurance premium, active from 1968 through 1975, under which HUD also provides interest reduction subsidy payments (IRP) in a fixed amount equal to the difference between the debt service actually being paid and the debt service that would have been required if the mortgage bore interest at 1%.

Section 241(a). A second mortgage program providing FHA insurance for junior loans (almost always with FHA insurance on the senior loan) to fund operating deficits. Interest rate and repayment terms set by the market.

Section 241(f). A second mortgage for FHA insurance on a junior, equity takeout loan used specifically for preservation (ELIHPA and LIHPRHA). Funded both the equity takeout and any renovations required in the Plan of Action.

Section 250(a). A National Housing Act provision requiring post-prepayment affordability for HUD properties where HUD's consent is required for the mortgage prepayment. Generally requires HUD to find that the residents' situation after the prepayment must be at least as favorable as before the prepayment. Because these terms are undefined, HUD has considerable latitude in deciding what post-prepayment affordability provisions satisfy Section 250(a).

Section 501(c)(3) bonds. Tax-exempt bonds issued by a tax-exempt Section 501(c)(3) charitable institution. Under current law, 501(c)(3) non-profits can issue up to $150 million in such bonds, a huge financial resource for affordable housing transactions.

Section 515. A direct lending program, administered by the Farmers Home Administration (now RHS). A precursor to and near-analog of Section 236, it provides 1.0% loans with fifty-year amortization and budget-based rents. These properties are divided based on whether the owner can prepay and go market: in pre-1979 Section 515's, the owner can; in post-1979 properties the owner requires RHS consent. Pre-1979 515's are currently prevented from prepaying under an FmHA analog to ELIHPA of dubious constitutionality but a decade's operation.

Section 704(b) allocation regulations. Regulations implementing a section of the Internal Revenue Code requiring that allocations of profits and losses among partners must have 'substantial economic effect.' These generally require that partners with a negative capital account must have it restored to zero before residual sharing. In practice this results in several large sections in the partnership agreement defining chargebacks of profits and losses on disposition of the property.

Section 754 election. A request by a new buyer of an interest that the Partnership step up his basis in his interest to the fair market value of that interest. Extremely desirable in subsidized housing investments. Must be made in the year of acquisition.

Section 811. A federal program that makes capital grant to stimulate production of affordable housing with supportive services for persons with disabilities. Section 811 properties receive Section 8 assistance, which covers the difference between the amount paid by residents and the property's operating cost. Because of the initial capital grant, the Section 8 assistance need not cover any debt service.

Secured creditor. In general, a creditor who holds a mortgage, lien, or similar instrument against a piece of (presumably valuable) collateral. In a bankruptcy, a secured creditor is one who not only has collateral but the collateral is sufficient to cover the debt due that creditor.

Security. Used as a noun, means a written evidence of an obligation to pay, either as a debt security (mortgage, loan, or some such) or an equity security (share of stock, partnership interest).

Senior. An obligation which must be completely paid before any junior obligations are paid. See first mortgage.

Service. Industry jargon for the IRS.

Single-asset bankruptcy. A bankruptcy where the debtor holds one principal asset (such as a property) rather than being an operating business of having multiple different assets. Recent reforms in bankruptcy laws have been designed to give creditors greater rights in single-asset bankruptcies, to prevent them from being used simply as an obstruction or stalling defense against foreclosure.

Soft cost. Money spent for non-capitalized items. For instance, legal and accounting fees are soft costs. Soft costs are either expensed or amortized. See paper.

Special increases. Under Section 8 AAF, owners are entitled to 'special' rent increases when they can demonstrate increases in the rate at which they are charged utilities, hazard insurance, or real estate taxes.

Special limited partner. A limited partner who is not an investor. Special limited partner interests usually have different shares than investors. Affiliates of the developer or the syndicator are often special limited partners. See investor representative.

Sponsor. Usually used as another term for issuer.

Spread. Colloquial jargon for the difference between two rates (typically, the rate at which capital is lent and the rate the lender pays to obtain it). When the two instruments are unrelated (e.g. a securitizer who accumulates existing loans, bundles them into a pool, and then sells them), spread means that entity's source of revenue. When they are related (e.g. an HFA issues bonds to fund new mortgages, or an originator accesses the capital markets in FHA loans), the proposed borrowing rate is often quoted in terms of its spread (e.g. T + 175 means the then-prevailing rate of like-term Treasuries, plus 175 basis points).

Step-up in basis. An increase in asset value resulting from a revaluation normally associated with a transfer or other event marking a market observation of the asset's true worth (as opposed to its depreciated book value). Available under Section 754, which allows a new buyer of a partnership interest to redepreciate, as a second user, the difference between the fair market value of the property and the shelter's adjusted tax basis. The step-up in basis of the buyer is equal to the gain recognized by the seller upon transfer. Section 754 is especially favorable for estates since they receive a step-up in basis without having to pay tax on the gain realized.

Straight-line. A method of depreciation that produces the same amount of depreciation every year. Calculated by dividing the useful life into the asset amount.

Subordinated loan. Usually means an amount advanced to the property by the developer after completion or final endorsement. Subordinated loans generally are non-interest-bearing and payable from the first available surplus cash of the property, after all the other bills are paid (hence the name "subordinated loans").

Substantial completion. A technical HUD term meaning the point at which accrual of construction costs shuts off and upon which the construction contract obligations are considered fulfilled. Substantial completion must be certified by the project's architect. Final endorsement and final closing usually happen about two months after substantial completion. Often incorporated into the definition of completion date. A key equity precondition.

Suspended passive losses. Passive losses that a taxpayer cannot use because he has no passive income. Passive losses are carried forward indefinitely until the taxpayer does have passive income. Although suspended losses from an investment can be used against the gain on sale of that investment, if that occurs they will in practice have had no value.

Sustainability. A principle that emerged as a logical companion to preservation entities, sustainability refers to a property's ability to succeed over time from internal resources -- principally, its rent-collecting ability -- to pay its debt service and obligations. Many previous affordable housing programs paid inadequate attention to sustainability, with the result that they faced challenges long before anyone expected.

Syndicator. The middleman between the developer and the broker/dealer, the syndicator is responsible for structuring the initial investment and usually responsible for the ongoing investor representative function.

Tax credits. A direct reduction of taxes payable, hence the most direct, comprehensible, and broadly useful form of tax incentive. In affordable housing, has become synonymous with LIHTCs.

Tax-exempt bonds. Bonds whose interest is exempt from taxes because its issuer is allowed to treat them so under a relevant section of the Internal Revenue Code. Volume-cap bonds and 501(c)(3) bonds are the common forms in affordable housing.

Tax incremental financing (TIF). A method of local redevelopment financing used for affordable housing (also for urban redevelopment, environmental remediation, public education capital improvements, and similar community investments). TIF districts finance community redevelopment using future tax revenues. Municipalities establish TIF districts under authority granted by state government. Tax revenues in the district are frozen at the current base level, and future tax revenues above the base go into a fund. The municipality raises capital, usually through a bond issue, and begins community redevelopment that should lead to increased property values, and thereby increased future tax revenue to pay off the bond issue.

Tax preference. Generally, items receiving favorable tax treatment have the amount by which they have been stimulated considered a tax preference that is then added back for the Alternative Minimum Tax computation. In affordable housing, tax preference typically refers only to accelerated depreciation in excess of the appropriate straight-line allowance. In older forms (pre-1986), the accelerated depreciation was also subject to 'recapture' (that is, taxed at ordinary income rates rather than capital) if the property were sold before a statutorily defined phaseout period. (Recapture was 100% for the first 100 months and declined 1% per month so that it was 0% by 200 months, or 16-2/3 years.)

Tax Reform Act of 1969. One of the three most important tax acts in the history of affordable housing, TRA 1969 inaugurated the modern era. See Economic Recovery Tax Act and Tax Reform Act of 1986.

Tax Reform Act of 1986. The critical watershed tax legislation that wiped out almost all forms of tax shelter through, among other things, introducing the passive loss rules.

Tax shelter. Commonly used to designate any tax-advantaged investment. More correctly used to indicate investments in which tax deductions exceed cash investment. Sometimes used to imply investments which create conversion, but should more properly include those which have very substantial deferral as well.

TEFRA. The Tax Equity and Fiscal Responsibility Act of 1982.

Tenant-based. Assistance that is attached to a resident, not a property, so that when the resident moves, the assistance travels with her. Section 8 vouchers are the principal form. Since the assistance is portable, most underwriters will not rely on it when sizing debt. Contrasted with property-based.

Thirty-day letter. A deficiency notice issued by the IRS stating its belief that a taxpayer owes additional taxes. The taxpayer must file a formal response or protest within thirty days, or he loses all rights to contest the IRS's assessment.

Townhouse. An apartment with its own entrance and roof. Usually a duplex, in a row with a series of other townhouses. Most frequently two-bedroom or larger. See garden apartment and duplex.

Track record. A summary of all previous results of a syndicator or developer. Extremely useful as an indication of past competence, although by itself no guarantee of future performance.

Two-tier. A method of structuring investments where investors subscribe for interests in an upper-tier (or "investing") partnership, which would then buy interests in many lower-tier (or "local") partnerships. Sometimes called a "pool" or a "fund," upper-tier partnerships are usually publicly-syndicated. Click for a diagram.

Underwriter. One who guarantees to buy an unsold interest in a security. Usually the major broker/dealer in a stock offering will be the underwriter. Affordable housing syndications are seldom underwritten--instead they are done on a "best efforts" basis.

Underwriting. The process of analyzing an income-producing asset to assess how much capital a lender or equity provider is willing to advance. Normally involves a financial analysis, a sensitivity analysis or stress test on key variables, and fact-checking or due diligence.

Uniform Limited Partnership Act (ULPA). The standard federal law from which most state limited partnership laws have been copied. Sets out the parameters of a limited partnership and provides guidelines which limit the various partners' roles.

Uninsured Section 236. A property that (1) received its mortgage financing from a state HFA, without FHA insurance, but (2) received Section 236 IRP subsidy from HUD. A useful hybrid applicable to only a handful of state HFAs (Massachusetts, Michigan, New Jersey, and New York).

Units. Shares in a limited partnership. One Unit in a private placement usually has a face value between $50,000 and $150,000, with payments stretched over several years. Units in a public offering usually cost $1,000 (often with a minimum purchase of five Units), and all the money is collected up front. (In a property description, units may also be a synonym for apartments.)

Unsecured creditor. A creditor owed money by a debtor who has no claim to any specific assets of the debtor. In a bankruptcy context, a creditor whose debt cannot be paid in full.

UPB or Unpaid principal balance. The outstanding amount remaining on a loan.

Use agreement. A documentary commitment limiting how a property may be used. Can be general (housing) or very specific (with income limits, rent caps, and so on). Normally recorded as an encumbrance against title. Normally lasts for a specified number of years. Many use agreements have undefined material terms that, since the agreement lasts a long time, can make for lengthy arguments and frequent litigation to adjudicate their meaning.

Very low income. Income below 50% of area median, adjusted for family size. The current ceiling on Section 8 eligibility.

Volume-cap bonds. Also called private activity bonds. These tax-exempt securities are issued by state allocating agencies to raise capital for affordable housing, among other purposes. Each state has an annual limit to the bonds it may issue, called a volume cap, which is calculated on a per capita formula.

Voucher. Portable (or resident-based) Section 8 assistance with a fixed rent: the monthly resident subsidy equals the difference between HUD's estimated market rent and the family's affordable rent (30% of income). If the resident finds a less expensive apartment, he or she pockets the savings.

Writeoff. A deduction. A loose term that encompasses expensing, amortizing and depreciating.