Loan arranging on the HOME funds

Of possible interest to developers using federal Low-Income Housing Tax Credits (LIHTC): here's a Technical Advice Memorandum (TAM) from the IRS on the proper tax treatment of HOME and Affordable Housing Program (AHP) funds received by the general partner in a LIHTC project and loaned by that general partner to the entity owning and operating the project.

The TAM considers whether the generous terms of these loans, and the source of the money -- a HOME grant and an AHP forgivable loan -- mean that the "loans" might really count as "grants," thereby possibly reducing the eligible basis of the project. The TAM concludes that for LIHTC purposes the transactions are not grants. However, it does find that the loans are "below market loans." It says the loan of HOME funds is a "below market Federal loan under Sec. 42(i)(2)(D)," while the loan of AHP funds is a "below market loan under Sec. 1.42-3(a), and not... a below market Federal loan under Sec. 42(i)(2)(D)." It is a conclusion that appears to affect the project's eligibility for the full 70 percent present-value tax credit.

TAMs and Private Letter Rulings may not be cited as precedent but can suggest how the IRS is likely to rule. New installments appear each Friday under "Written Determinations" on the IRS Electronic Reading Room page. Updated indices such as this one are included in the Reading Room's directory. Both indices and determinations are numbered according to the year and week of their public release. For example the item just discussed, TAM No. 200523023, was released in the 23rd week of 2005, or two Fridays ago.