Congress passed and sent on July 26, 2008 to the President for his signature the Housing and Economic Recovery Act of 2008 (the Act), which will become effective on the date the President signs the bill (Effective Date).
The changes address (i) the availability and allocation of tax credits, (ii) project level structural, finance and cost issues and (iii) occupancy guidelines and modifications. Unless otherwise noted, the following provisions are effective for buildings placed in service after the Act's Effective Date. Because of the way that the Effective Date operates, there are some issues to be resolved and planning that needs to be done, some of which are described in this Alert. As issues arise, we will issue further Affordable Housing Alerts discussing them and planning considerations.
Tax Credit And Tax Exempt Bond Availability And Allocation
- Tax Credit Ceiling Increase. State credit ceilings for
calendar years 2008 and 2009 will be increased by $0.20 per
resident or, in the event of a state operating under the
small state exception, by 10 percent.
- Fixed Applicable Percentage (9 percent
deals). The applicable percentage for nonfederally
subsidized projects placed in service after the Effective
Date and prior to December 31, 2013 will be not less than 9
percent. This is a very significant and welcomed change for
the industry. However, to the extent that a project qualifies
for additional credits, state agencies must still provide
additional allocations to the project. Additional issues to
be resolved include (i) whether projects that have
"locked" the applicable percentage will be able to
change to 9 percent, (ii) whether the state agencies will
re-underwrite the amount of its tax credit allocation at the
Form 8609 stage if the 9 percent rate is applicable and
(iii), in multiple building projects, whether buildings
placed in service before the Effective Date would have the
pre-Act rate and buildings placed in service after the
Effective Date would have the 9 percent rate (which appears
to be the intent). The applicable percentage for "30
Percent Present Value" credits (which now are limited to
bond financed projects) will continue to be set
monthly.
- Discretionary Basis Boost. For 9 percent
deals, state allocating agencies may designate specific
buildings to receive a 30 percent basis boost for such
buildings to be financially feasible. With falling prices and
lower income targeting, this is a significant tool for the
state agencies and the housing industry.
- Private Activity Bond Volume Cap
Increase. The 2008 private activity bond volume cap
is increased by $11 billion, to be used for housing bond
issues (single or multifamily) and to be allocated among the
states in the same manner as the current private activity
volume cap allocation, which is based on population.
- Repeal of AMT Limitation. For (i) the
interest on single family and multifamily housing bonds
issued after the Effective Date, (ii) credits determined
under Section 42 to the extent attributable to buildings
placed in service after December 31, 2007 and (iii) credits
determined under Section 47 to the extent attributable to
rehabilitation expenditures incurred after December 31, 2007,
the alternative minimum tax limitations (AMT) have been
repealed. This is another positive change, as some
traditional LIHTC and HTC investors and most institutional
purchasers of housing bonds are presently subject to the
AMT.
- Additional Qualified Allocation Plan (QAP)
Selection Criteria. For allocations made after
December 31, 2008 state allocating agencies must consider a
project's energy efficiency and historic
nature.
Project Level Structural, Finance And Cost Concerns
- Modified 10-Year Rule for Federally and State-Assisted
Buildings. The 10-year rule will not apply for a Federally
Assisted Building or a State-Assisted Building. In general,
Federally Assisted Building means any building substantially
assisted, financed or operated under Section 8 of the United
States Housing Act of 1937, Section 221(d)(3), Section
221(d)(4) or Section 236 of the National Housing Act, Section
515 of the Housing Act of 1949 or any other housing program
administered by HUD or the Rural Housing Service of the
Department of Agriculture. The term State-Assisted Building
means any building substantially assisted, financed or
operated under any similar state law program.
- Modification of the Definition of Related
Persons. The 10 percent attribution rule used to
determine whether parties are related for purposes of
determining whether an existing building qualifies for the
low-income housing credit is repealed. Two persons are
related for this purpose if they bear a relationship to each
other specified in Sections 267(b) or 707(b)(1), which is a
50 percent related party rule, rather than the 10 percent
rule.
- Relief for Below Market Federal Loans.
Below market federal loans will not be considered federal
subsidies. Furthermore, 9 percent projects receiving below
market HOME loans are no longer prohibited from receiving the
30 percent basis boost.
- Federal Grants Used for Eligible Basis
Costs. Eligible basis of a building does not include
costs (eligible basis costs) financed with federal grant
proceeds whether received before or during the compliance
period. It is not clear yet whether federal grants used for
non-eligible basis project costs (such as land) reduce
eligible basis, although that could be the case.
- Federal Grants Received During the Compliance
Period. No basis reduction is required for federally
funded grants to enable the property to be rented to
low-income tenants received during the compliance period if
those grants do not otherwise increase the taxpayer's
eligible basis in the building. The significance of this
change is that federally funded rental, operating and
interest reduction subsidies received during the compliance
period will no longer reduce eligible basis.
- Increased Rehabilitation Expenditure
Minimums. For buildings that receive credit or bond
allocations after the Effective Date the minimum
rehabilitation expenditures necessary to qualify for tax
credits have been increased to the greater of (i) 20 percent
of the adjusted basis of the building or (ii) $6,000 per
unit. The $6,000 threshold will be increased annually by a
cost of living adjuster for buildings placed in service after
2009.
- Modification of 10 Percent Test.
Taxpayers have one year from the date of the allocation to
incur 10 percent of the project's cost.
- Bonding and Recapture Requirements
Modified. After the Effective Date, there is no
longer a bonding requirement or a recapture event upon the
disposition of a building or interest therein if it is
reasonably expected that the building will continue to be
operated as a qualified low-income building for the remainder
of the compliance period. The statutory period for the
assessment of a recapture event with regard to any reduction
in qualified basis shall run for three years after the IRS is
notified of such reduction in qualified basis. This
modification is also effective for
interests in buildings disposed of on or before the Effective
Date if it is reasonably expected the buildings will remain
qualified low-income buildings and the taxpayer elects this
treatment in the manner prescribed by the IRS, in which case
outstanding bonds may be retired and premiums may be
saved.
- Community Service Facility Eligibility for the
Credit. The size of the community service facility
that may be included in qualified basis has been increased.
The size of the community service facility may not exceed the
sum of (1) 25 percent of the eligible basis of the project
(for the first $15 million of eligible basis) and (2) 10
percent of any excess over $15 million of the eligible
basis.
-
Recycling of Multifamily Housing Bonds.
Multifamily Housing Bonds may be refunded, and the proceeds
used to finance a second project, under the following
circumstances:
- Within six months of the receipt of repayment of the
original bonds, the new bonds are issued;
- Within four years of the original bond's
issuance, the new bonds are issued; and
- The maturity date of the new bonds is not later than
34 years after the date the original bond was
issued.
- Within six months of the receipt of repayment of the
original bonds, the new bonds are issued;
- Since the new, "recycled" bonds would not have
a private activity bond volume cap allocation, it appears
that the state agency would need to provide an allocation of
tax credits from the state's housing credit ceiling
for the project to generate tax credits. The recycling of
bonds amendment is applicable to repayments of loans received
after the Effective Date.
Occupancy Guidelines And Modifications
- Modifying Rural Area Median Gross Income. For
determinations made after the Effective Date, area median
gross income limitations for projects in rural areas shall be
measured by the greater of area median gross income or
national nonmetropolitan median income. This new income
targeting rule does not apply in the case of buildings that
do not require a low-income housing credit allocation because
they are substantially bond-financed.
- Setting a Floor for Area Median Income.
For determinations made after 2008, any determination of area
median gross income with respect to a project shall not be
less than the immediately preceding year. HUD Hold Harmless
projects face differing adjustment guidelines set forth more
fully in the Act.
- Eligibility of Foster Care Students. For
determinations made after the Effective Date, foster care
students do not disqualify a unit for purposes of the student
rule.
- General Public Use Clarifications. For a
building placed in service before, on or after the Effective
Date, a building will not be disqualified as a low-income
building solely because occupancy of the building is
restricted to, or preference is given to, individuals (a)
with special needs, (b) who are members of a specified group
under a federal program or state program or policy that
supports housing for such a specified group or (c) who are
involved in artistic or literary activities. The housing must
still comply with applicable Fair Housing laws.
- Military Allowances Excluded from
Income. For determinations made after the Effective
Date and before January 1, 2012, and subject to additional
qualifications set forth in the Act, for certain
"qualified buildings" basic pay allowances provided
by the military will be excluded for the purposes of
determining income.
- Bond Projects: Next Available Unit Rule, Student
Credit Rules and SROs. For determinations made after
the Effective Date, projects financed with tax-exempt bonds
and 4 percent credits, the next available unit rule is now
applied on a building, not project, basis, the student credit
rules will now mirror Section 42, and a unit will not fail to
be deemed a residential unit merely because the unit is a
single-room occupancy unit.
- Section 8 Moderate Rehabilitation. The
prohibition on the use of credits with regard to a building
to which Section 8 moderate rehabilitation assistance is
provided has been repealed.
- Income Recertifications. After the
Effective Date, income recertifications will not be required
for 100 percent low-income projects.
The contents of this update are only a general summary of the Act and are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations. Counsel should be consulted for legal planning and advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.