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Q:Does the passage of the Housing and Economic Recovery Act of 2008 mean finding an equity investor for my low-income housing tax credit (LIHTC) deals will become easier?
A: In order for the equity market to improve, either new investors need to come into the market or previous investors need to return to the market. In order for this to happen, three things need to happen. First, investors want certainty they can use the tax benefits that typically inure to investors in low-income housing projects. Second, if they can’t use the benefits, they want to be able to freely sell the investment to another investor who can use the tax benefits. Third and finally, investors want a market return on their investment.
The new law has provisions that directly impact the first two requirements and could improve the third.
First, with respect to certainty that investors can use the tax benefits, the new law allows investors to use LIHTCs to offset both their regular tax, and if applicable, their alternative minimum tax liability. The ability to use the LIHTC to offset alternative minimum tax is true with respect to LIHTCs from all buildings placed in service after Dec. 31, 2007.
Remember that the LIHTC flows for 10 years from the date the applicable building is placed in service. Certain investors shied away from the market because they couldn’t be certain that they would have taxable income and only be subject to regular tax for the 10-year investment horizon. The ability to use LIHTCs to offset both regular and alternative minimum tax may qualm investor’s reluctance to make investments with a 10-year return horizon.
Although the ability to use LIHTCs to offset alternative minimum tax was a huge step in the right direction, in today’s rapidly changing business climate, many potential investors are concerned about what would happen with their investments if they somehow found themselves with neither a regular tax liability nor alternative minimum tax liability.
What if they wanted or needed to sell their investment? One of the barriers to the free transfer of LIHTC investments was the requirement to post a recapture bond. Under old law, the bonding requirement could be expensive, was cumbersome to calculate, and was viewed as an impediment to movement into and out of the investor market.
A second major improvement contained in the new law is the repeal of the requirement that a recapture bond be posted upon the disposition of an investment in a low-income housing building or investment therein. Recapture bonds were replaced with a provision that extended the otherwise applicable statute of limitation until three years after the secretary of the Treasury is notified of noncompliance with the LIHTC compliance rules. This provision in the new law is applicable to all transfers occurring after the date of enactment of the legislation—July 30, 2008.
In addition, at the election of a taxpayer, this provision will apply with respect dispositions prior to the date of enactment if it is reasonably expected that the applicable building will continue to be a qualified building for the remainder of the compliance period. This means that taxpayers can go back and effectively unpost prior posted recapture bonds. The technical guidance for how to mechanically do this has not been published as of press time.
The repeal of the bond posting requirement should help allow for the free transfer of LIHTC investments where the original investor finds themselves in the position of not being able to take advantage of the tax benefits that inure to the holder of such an investment.
Finally, investors want a market return. The new law contains many provisions that could help boost returns for LIHTC investments. This is especially true for 9 percent deals and includes the fixing of the applicable percentage of not less than 9 percent for newly constructed non-federally subsidized buildings placed in service after the enactment date and before Dec. 31, 2013, and the ability of state housing finance agencies to designate buildings as eligible for the 130 percent basis boost.
Both of these changes in the law do not apply to tax-exempt bond deals. Increased credit to loss ratios could make LIHTC investments more attractive to investors. A combination of these two provisions with the appropriate allocation of LIHTCs from the state housing finance agency could increase the amount of equity a project could command in the market place while delivering a yield that would make it an attractive opportunity from an investor’s perspective.
Reznick Group has more than 25 years of experience providing accounting, tax, and business advisory services to clients nationwide. The expertise of the firm is broad, ranging from real estate and management advisory services to auditing and tax preparation. Ranked among the top 20 public accounting firms in the nation, Reznick Group is on the move—continuing to grow nationally, expanding its services, and building upon its leadership as industry experts.
Terence Kimm, CPA, is a principal with Reznick Group and co-head of the Real Estate Consulting Group in the Bethesda, Md., office, where he works with developers and syndicators in structuring low-income housing, historic, and New Markets tax credit transactions.