Rep. Jim Ramstad (R-Minn.), a senior member of the House Ways and Means Committee, has introduced legislation (H.R. 4873) to encourage investment in affordable housing by making improvements to the low-income housing tax credit and tax-exempt housing bond programs.

One change would rename the tax credit program by replacing “low-income” with “affordable,” in an effort to improve the program’s image.

On a more substantive level, the bill would replace the current system for setting tax credit rates monthly with one that fixes the rates at 9% and 4%. The legislation would also make more new projects eligible for the 9% credit.

Currently, any project financed by a below-market federal loan is limited to the smaller credit, with an exception for HOME-funded loans with deeper low-income targeting. The latter projects aren’t eligible for the 30% basis increase for projects in qualified census tracts and difficult-to-develop areas.

Under the Ramstad bill, new projects would be limited to the 4% credit only if they are financed through tax-exempt bonds which aren’t subject to the state private-activity bond caps. Alternatively, the owner of a bond-financed project could exclude the bond proceeds from eligible basis and take the 9% credit.

The liberalization of the financing restriction would also make HOME-assisted projects eligible for the 30% basis increase. In addition, the bill would expand eligibility for the 30% increase to include projects designated by state housing tax credit agencies.

The bill would also make Sec. 8 moderate rehabilitation projects eligible for tax credits and apply the “next available unit” rule on a building, rather than project, basis for bond-financed projects with tax credits.

Other provisions would repeal the recapture bond requirement when tax credit project interests are sold, substituting an information requirement; allow the credit to be taken against the alternative minimum tax (AMT); and exempt interest on housing bonds from the AMT.

For bonds, the bill would also repeal the 10-year limit on the recycling of payments on bond-financed mortgages into new mortgages and treat displaced homemakers, single parents, and certain disaster victims as first-time home buyers.

Mark-to-Market rules changes proposed

HUD has proposed several changes to the regulations for the Sec. 8 Mark-to-Market (M2M) program, including a revision designed to facilitate use of low-income housing tax credits with the program.

Congress established the M2M program in 1997 in an attempt to get a handle on the costs of Federal Housing Administration (FHA)-insured Sec. 8 projects with above-market rents. Under the program, rents are marked down to market levels and, if necessary, the FHA mortgage is restructured so the reduced rents can cover the debt service. HUD takes back a second and, if necessary, an additional mortgage for the amount of the debt reduction.

Under current M2M rules, interest is charged on the junior debt at a rate up to the applicable federal rate (AFR), and the interest isn’t compounded. However, the Internal Revenue Service treats a government loan as a subsidized loan, limiting the financed project to 4% tax credits if the rate is below the AFR or the interest isn’t compounded.

To address this problem, the revised rules would allow HUD to charge compound interest on M2M debt, though the department says simple interest will remain the general practice.

In other changes, the proposed rules would address the use of surplus project funds in connection with the creation of HUD-held subordinate mortgages. The treatment of the surplus funds would depend on whether they are subject to the Sec. 8 regulations allowing such funds to be used to reduce housing assistance payments or for other project purposes.

In addition, the regulations would implement provisions of the 2001 M2M extension act. That legislation authorized a restructuring plan to require the addition of “significant features” to a project, such as an elevator, air conditioning system or community space, with the aim of attracting unsubsidized tenants to the project.

The statute provides for a cap on owner contributions to the cost of such features, and the regulations would generally require a 3% contribution. However, the participating administrative entity could propose a higher or lower cap not to exceed 20% of the costs. The latter amount would equal the statutory limit of 25% of the assistance provided for significant additions.

The extension act also made properties subject to plans of action under the Emergency Low-Income Housing Preservation Act of 1987 or Low-Income Housing Preservation and Resident Homeownership Act of 1990 eligible for the M2M program, but only if the projects are sold. The proposed regulations would implement this provision.

The rules would also authorize the refinancing of M2M mortgages under the FHA Sec. 223(a)(7) program and exempt transfers of physical assets and substitution of mortgagors in connection with M2M restructurings from the fees HUD normally charges for such transactions.

Cost methodology rules issued for voucher conversions

HUD has issued final regulations establishing the methodology to be used by public housing agencies (PHAs) in comparing the costs of continuing to operate a project as public housing with the costs of converting the residents to tenant-based assistance.

The rules apply both to mandatory conversions of distressed public housing under Sec. 33 of the U.S. Housing Act of 1937, where modernization would be too costly or the long-term viability of the project couldn’t be assured, and to voluntary conversions under Sec. 22, where a PHA determines that the conversion would be cost-effective, would primarily benefit the tenants and surrounding area, and wouldn’t have an adverse impact on the availability of affordable housing.

Under the methodology, the net present value of modernizing and continuing to operate a project as public housing for its remaining useful life would be compared with the net present value of tenant-based assistance for the same period.

The remaining useful life would be set at 30 years if the modernization addresses all backlog needs and ensures long-term viability, 40 years if the work is equivalent to new construction or produces as-new conditions, and 20 years if the modernization meets code requirements but doesn’t cover all backlog needs.

Public housing operating costs would take into account 20% of vacant units not fully funded under the operating fund program. For voluntary, but not mandatory, conversions, the costs of continuing to operate a project as public housing would also include the residual value from a project sale as a forgone opportunity cost.

The costs for tenant-based assistance would be the total of the unit-weighted average voucher payment standard for tenants who have recently moved to the area, the PHA voucher administrative fee, and $1,000 per unit (or any higher amount allowed by HUD) for relocation assistance.

HUD provides guidance on transition funding

HUD has provided guidance on transition funding under the new public housing operating subsidy rule, in Notice PIH 2006-14.

PHAs that stand to lose funding under the new project-based formula system will have the reductions phased in over five years, but they can stop the reductions by converting to asset management at an earlier date.

The notice provides guidance on the first stop-loss deadline, under which PHAs can hold their subsidy cut to 5% by converting to asset management by Oct. 1, 2006.

Generally, PHAs must show that they have met criteria in the notice for project-based accounting, project-based management, a central office cost center, centralized services, review of project performance, capital planning, and risk management responsibilities related to regulatory compliance.

The notice also sets guidelines for reasonable management, bookkeeping, and asset management fees.

PHAs seeking to qualify for the 5% stop-loss must submit the required information to HUD by Oct. 15. They will then have until Jan. 15 to show that they have implemented project-based accounting systems.

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 always 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.