Affordable Housing Finance

HOUSING POLICY

Washington Update

Frank Introduces Preservation Bill

AFFORDABLE HOUSING FINANCE • April/May 2010

Provision giving HUD first right of refusal creates opposition

BY BARRY G. JACOBS

House Financial Services Committee Chairman Barney Frank (D-Mass.) has introduced a long-awaited affordable housing preservation bill (H.R. 4868) that has been under development for almost a year, but owners say they can’t support it because of a complex provision giving the Department of Housing and Urban Development (HUD) a first right of refusal when a property is put up for sale.

Under the bill, an owner who wants to sell a project that has low-income housing tax credits (LIHTCs), HUD assistance, or Rural Housing Service (RHS) support would have to provide a one-year notice and give HUD a chance to make the first offer. The owner could reject the offer and seek another buyer, but HUD would still be able to match any other offer or make a counteroffer.

The provision is a modification of a federal first right of purchase included in an earlier version of the legislation, and the backers of the bill have emphasized that owners won’t be forced to sell a project for less than its market value. However, owners who opposed the previous draft don’t like this plan either.

Attorney Raymond K. James, testifying for the National Leased Housing Association (NLHA) at a hearing on the bill, said NLHA will oppose it as long as it contains the right of first refusal.

“It is unclear why the committee believes that a restricted sales process is necessary in today’s environment,” James said in his written testimony. “There is a viable and active community of preservation entities that have the resources, sophistication, and desire to acquire assisted properties to preserve them for long-term use. As a result, opt-outs are few and far between.”

James said NLHA supports other parts of the bill, including the creation of a voluntary preservation exchange program and expansion of the authorization for enhanced vouchers to protect tenants when project-based subsidy contracts are terminated.

The preservation exchange would facilitate the transfer of subsidized projects with mortgages expiring or maturing within five years to purchasers who agree to maintain them as affordable housing for very low-income families for at least 40 years.

As incentives to encourage such transfers, HUD could suspend inspections and management reviews; streamline approvals of requests for prepayments, assignment of Sec. 8 contracts, and transfers of physical assets; provide forgivable loans to the seller for the costs of preparing a project for transfer; and provide grants or loans for project acquisition and rehabilitation.

The bill also would authorize federal grants and loans to current owners to rehabilitate projects with expiring-use restrictions and extend their affordability for at least 30 years. Assistance could also be provided to support the sale of such projects to nonprofits and public housing authorities, which will maintain them as affordable housing.

The current provisions for enhanced vouchers, which allow tenants to remain in their current housing without a rent increase when subsidy contracts expire, would be extended to include the maturation of Sec. 221(d)(3) and Sec. 236 mortgages, along with mortgage prepayments and refinancings by nonprofits.

Enhanced vouchers or projectbased Sec. 8 could also be provided when a state housing finance agency (HFA) mortgage subsidized through Sec. 236 is prepaid or matures.

The bill also provides for vouchers to replace subsidized housing units lost through demolition, disposition, or conversion on a one-for-one basis, though this provision would be subject to the appropriation of the necessary funds.

Other parts of the bill include extension of the Sec. 8 mark-to-market program until Oct. 1, 2015, support for the refinancing and recapitalization of Sec. 202 elderly housing projects, and authorization of a preservation program for rural multifamily housing.

Senate OKs extender bill

The Senate has joined the House in approving tax extender legislation (H.R. 4213) with a refundable LIHTC provision that would effectively extend the credit exchange program through 2010.

The bill as approved by both houses also includes an extension of the New Markets Tax Credit program through calendar 2010, with an investment allocation for 2010 of $5 billion.

However, differences in other parts of the legislation must be reconciled before it can become law. For example, the House bill, but not the Senate version, includes a provision taxing carried interest income from investment funds, including real estate partnerships, as ordinary income, even if the income at the partnership level is capital gain.

The credit exchange program enacted as part of the American Recovery and Reinvestment Act authorized state HFAs to swap a portion of their 2009 tax credit allocation authority for cash grants from the Treasury. The HFAs in turn provide subgrants to property owners to support the development of low-income housing with or without tax credits.

The extender bill would make comparable payments to HFAs electing the refundable credit for 2010, and the funds would have to be used by Jan. 1, 2012, to finance low-income housing.

The Senate version would also extend the 2009 credit exchange program, along with the 2010 refundable credits, to designated disaster areas because of 2008 storms and flooding in the Midwest and Hurricane Ike in the Gulf. In addition, the Senate legislation would extend the placed-in-service deadline for tax credit projects in the Gulf Opportunity (GO) Zones for hurricanes Katrina, Rita, and Wilma to Jan. 1, 2013, and the deadline for GO Zone tax-exempt bond financing to Jan. 1, 2012.

Separately, the House has approved a bill (H.R. 4849) that would provide the equivalent of credit exchange assistance to owners of bond-financed tax credit projects with 4 percent credits. This program wouldn’t go through HFAs since they don’t allocate 4 percent tax credits.

Instead, the owner of a bondfi nanced project could elect to convert the 10-year tax credit to a direct payment amount, which would be treated as a payment against current year federal income tax liability. The direct payment amount would be 25.5 percent of the qualified basis of the project. The election would be available to owners of projects placed in service after the date of enactment of the legislation in a taxable year beginning before Jan. 1, 2011. It would not be available for governmental units or tax-exempt organizations.

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-to-date 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.