City's loan tainted by refunded bond savings

There's an IRS private letter ruling out today, PLR No. 200539003, involving a city development authority that issued tax-exempt bonds to fund affordable housing, with the bonds guaranteed by an unnamed federal agency. The city authority issued refunding bonds at a lower interest rate and split the savings with the federal agency. The IRS ruled that the savings constitute federal funds for purposes of the Low Income Housing Tax Credit (LIHTC) program. It found that a loan made by the authority to an LIHTC project was funded in part with these savings, therefore in part with federal funds, and at an interest rate lower than the applicable federal rate -- making the loan a below-market federal loan for Sec. 42 purposes. The project is therefore considered to be federally subsidized and eligible to apply only for 30% present value credits. Private Letter Rulings may not be cited as precedent.