Affordable Housing Finance

HOUSING POLICY

Washington Update

Tax Credit Advocates Seek Relief to Attract Investors

AFFORDABLE HOUSING FINANCE • February 2009

BY BARRY G. JACOBS

With the low-income housing tax credit (LIHTC) market staggering from a massive reduction in equity investment, program advocates are pressing Congress for legislative changes to attract new investors.

The Affordable Housing Tax Credit Coalition (AHTCC) has revised its proposals, dropping plans to give states three years, rather than two, to allocate credits and, because of potential accounting problems, to reduce the credit period from 10 to five years.

Instead, the AHTCC is focusing on a plan that would provide deferred federally funded loans to bridge the equity gap and make the credits refundable for corporate investors.

Refundability would be aimed at corporations’ reluctance to make taxmotivated investments in an economic environment in which they can’t predict their tax liability. Under the AHTCC proposal, the government would provide cash refunds to corporations that can’t use all of their credits. The refundable credits would be limited to widely held, publicly traded C corporations and regulated investors, such as insurance companies, which don’t materially participate in the development or operation of the tax credit project (unless they replace a defaulting project sponsor).

To speed up the implementation of the proposed loan program, the AHTCC recommended that the funds be administered by state housing finance agencies. Under the proposal, the funds would be provided as a subordinate loan for projects with some tax credit equity but not enough for project feasibility.

The loan would have flexible repayment and interest rate terms so that rents wouldn’t have to be raised to cover debt service. The loan would also be considered bona fide indebtedness under the Internal Revenue Service so that the funds could be included in eligible basis.

Alternatively, the AHTCC said the funds could be treated as a federal grant, provided they are exempted from the prohibition on including grant funds in basis.

The coalition recommends appropriations for the program of $5 billion in fiscal 2009, to cover projects with credit allocations from 2007 through 2009; $4 billion for 2010; and $3 billion for 2011.

AHTCC also called for Congress to change the rules for the first year of the credit period, allowing an owner to claim the full credit as long as actual occupancy satisfies the minimum lowincome set-aside. First-year credits are determined by the average of monthly occupancy, and any credits that can’t be used under this calculation are carried forward to the 11th year.

Other AHTCC proposals would allow investors with insufficient current income to use all of their credits to carry the excess back for up to five years, off-setting alternative minimum tax liability during that period, and fix the tax credit rate for bond-financed projects at 4 percent.

HUD outlines self-implementing HERA provisions

The Department of Housing and Urban Development (HUD) has determined that several Sec. 8 and public housing provisions of the Housing and Economic Recovery Act of 2008 (HERA) are self-implementing without regulatory action and will be considered effective as of July 30, 2008, when HERA was signed.

For the Sec. 8 voucher program, a rent reasonableness provision intended to improve coordination with other housing programs is self-implementing. Accordingly, for tenant-based voucher units receiving LIHTC or HOME assistance, a rent comparison with unassisted local units won’t be required if the rent doesn’t exceed the rent for other tax credit or HOME units in the project. The voucher rent will be considered reasonable if it doesn’t exceed the greater of the rent for the other tax credit or HOME units or the applicable voucher payment standard.

In addition, public housing authorities (PHAs) can use the Sec. 8 rent for a tax credit unit with project-based Sec. 8 assistance if the tax credit rent is lower than the rent that would otherwise be permitted. The rent reasonableness test must be met. Project-based voucher provisions extending the maximum housing assistance payments contract term from 10 to 15 years and applying the 25 percent unit cap to projects, rather than buildings, are also self-implementing.

For public housing, PHAs administering a combined total of no more than 550 public housing and voucher units that aren’t designated as troubled and don’t have a failing Sec. 8 management assessment program score will be exempt from the requirement to file an annual PHA plan as of the first annual plan submission date after July 30.

In addition, for Sec. 8 tenantbased and project-based assistance, as well as for public housing, any deferred Department of Veterans Affairs disability benefits that are received in a lump sum or in prospective monthly payments will be excluded from annual income as of July 30, though periodic payments going forward will be included in income.

NSP funds can be used for mixed-income housing

State and local governments can use neighborhood stabilization program (NSP) funds allocated under HERA to support mixed-income housing developments, according to HUD guidance.

HERA provided $3.92 billion for states and localities to acquire and redevelop vacant and foreclosed properties. All of the funds must be used to provide housing for families with incomes no higher than 120 percent of the area median income (AMI), and at least 25 percent must be used for families with incomes no higher than 50 percent of the AMI.

For multi-unit properties, HUD has determined that the 120 percent requirement will be applied on a proportional basis. For example, if NSP funds account for 50 percent of the total development cost of a project, at least 50 percent of the units must be occupied by families within that income limit.

Also, the amount of funds that can be counted toward the 25 percent requirement will be proportionate to the number of units occupied by households with an income no higher than 50 percent of the AMI.

Barry G. Jacobs is editor of Housing and Development Reporter, the nation’s premier source for in-depth, factual coverage of all aspects of affordable housing and community development. The two-part publication includes informed reports and insightful analyses in “HDR Current Developments,” and an up-todate compilation of essential documents in the “HDR Reference Files.” Jacobs is also the author of the annually updated HDR Handbook of Housing and Development Law. For more information, call (800) 723-8077.