New Law Has Housing Bond Provisions
By A. J. Johnson & Caitlin Jones
4 min read
The new Housing and Economic Recovery Act revises federal tax law to provide extra tax-exempt housing bond authority to states, increase the attractiveness of housing bonds to investors, and make other changes that collectively should boost the volume of bond-financed apartments.
These bond-specific provisions are separate from numerous amendments in the Act to the low-income housing tax credit (LIHTC). The LIHTC amendments nearly all apply as well to low-income rental housing projects receiving housing credits without a credit allocation because they are financed more than 50% by tax-exempt private activity bonds subject to annual state bond volume caps.
Volume Cap Increase
Under federal law, the maximum amount of tax-exempt private activity bonds that can be issued in each state annually is equal to the product of the state’s population times a specified dollar amount that is adjusted annually. A floor amount, also adjusted annually, applies to states with small populations. Tax-exempt private activity bonds can be issued to finance low-income rental housing projects, below-market home loans for first-time home buyers (i.e. mortgage revenue bonds), and certain other eligible purposes.
Prior to the Act, the calendar 2008 private activity bond volume cap for each state was the greater of $85 per resident (per capita) or $262.095 million.
The new law provides an extra $11 billion nationally in tax-exempt housing bond authority to states for calendar 2008, which they can issue as qualified mortgage bonds or as private activity bonds for low-income rental housing during 2008-2010. The extra amount allocable to each state is proportionate to its share of the national population. The law permits mortgage bond proceeds to also be used to refinance certain subprime mortgages.
AMT Exemption
The Act exempts interest on tax-exempt mortgage revenue bonds, low-income rental housing private activity bonds, and qualified veterans mortgage bonds from federal income tax under the alternative minimum tax, for both corporate and individual taxpayers. This change is effective for interest on bonds issued after 7/30/08.
Recycling of Proceeds
Another amendment permits loan repayments made after 7/30/08 for a low-income rental housing project financed by a tax-exempt bond issue, to be recycled to fund a loan to a second rental project. The new bonds issued for the second project (“refunding bond”), which refinance and take out the first bond issue (“refunded bond”), won’t count against the state’s annual tax-exempt bond volume cap. But the second project to receive housing credits must obtain a credit allocation.
To qualify, the original bond issue must have had an allocation of tax-exempt bond authority from the state’s annual bond volume cap. Also, the refunding bond must: have a maturity of 34 years or less; be issued within four years of the issuance date of the refunded bond, and within six months of the date of the loan repayment; and follow the normal “TEFRA” approval process.
Conforming Changes
The Act also contains amendments to conform the “next available unit” rule and the definitions and rules for students and for single-room occupancy units used for rental projects financed by tax-exempt bonds, to be the same as the rules in these areas for the LIHTC program.
These amendments apply to determinations made after 7/30/08 for projects financed by bonds issued before, on, or after 7/30/08.
As a result, for example, the next available unit rule will now be applied on a building-by-building basis for bond-financed projects rather than project-wide as before. Under this rule, a unit occupied by a household that originally qualified as a low-income household will continue to be treated as a low-income unit once the tenant’s income exceeds 140% of the applicable income limit for a low-income household, provided the next vacant unit in the building of comparable or smaller size is rented to a low-income tenant.
