Industry Awaits Guidance on New LIHTC Funding Initiatives
By Caitlin Jones & A. J. Johnson
10 min read
Tax Credit Advisor, April 2009: The federal government has taken some initial steps to implement the new low-income housing tax credit (LIHTC) funding resources established by the economic stimulus act. But the industry is awaiting critical guidance so state housing credit agencies can begin awarding the funds to stalled LIHTC projects.
At present, there’s more questions than answers regarding how state housing credit agencies (HCAs) can and will implement the new credit exchange and gap financing programs. State agencies, though, are doing all they can to prepare for implementation.
Under the credit exchange program, HCAs will be able to turn in a portion of their unused housing credits to the U.S. Treasury Department for cash grants, which they can then use to provide financial assistance (“subawards”) to projects with or without housing credit awards that have funding gaps.
Under the gap financing program, called the Tax Credit Assistance Program (TCAP), HCAs will be able to use federal funds accessed from the U.S. Department of Housing and Urban Development (HUD) to provide financial assistance to fill funding gaps in projects that have received or that receive credits in federal fiscal years 2007, 2008, or 2009.
In both programs, HCAs and developers receiving assistance will be up against specified deadlines for committing and expending the funds. (For background on details of two programs, see Tax Credit Advisor, March 2009, p. 1.)
HUD took the first step to implement TCAP in late February when it announced the allocation amounts – totaling $2.25 billion nationwide – for each of 50 states, the District of Columbia, and Puerto Rico. The allocations ranged from $325,877,114 for California down to $4,846,908 for Wyoming.
The next step will be for HUD to issue a notice, expected shortly, announcing the availability of the funds and setting out programmatic and federal cross-cutting requirements, and instructing HCAs on what they must do before they can access and distribute the funds. This notice will likely be posted on a new recovery act Web page created by HUD (http://www.hud.gov/ recovery/index.cfm).
Industry participants hope HUD’s notice will also provide guidance and clarity on certain TCAP program requirements. Some questions include whether HCAs can award TCAP funds to projects as loans as well as grants; whether grants will create taxable income to the project owner; what HCAs must do to satisfy the requirement that awards be competitive; and whether states must first amend their current qualified allocation plan (QAP).
Issuance of guidance by the Internal Revenue Service and/or Treasury is the next critical step for implementation of the credit exchange program. At a minimum, HCAs need to find out how to exchange 9% housing credits to Treasury for cash grants. But again, HCAs and the industry hope for more guidance and clarification.
The IRS/Treasury guidance, including procedures, might not be issued for a number of weeks, and might be issued in stages.
Some questions include whether subawards to projects may be made as loans as well as grants; what developers must do to demonstrate they’ve made a “good faith” effort to obtain tax credit equity; whether federal Davis-Bacon prevailing wage rates will apply to exchange fund-assisted projects [they will to TCAP-assisted projects]; and what states must do to determine how a subaward to a project without a credit allocation will increase the total funds available to the state to build and rehabilitate affordable housing.
State Agency Actions
Since the stimulus act was signed on 2/17/09, state housing credit agencies while awaiting federal guidance have informed their stakeholders about the new TCAP and credit exchange programs, issued notices about their tentative plans, and met with developers, syndicator/investors, and others to solicit comments and suggestions.
“They’ve been spending a lot of time trying to determine how they will use the new funding,” said Garth Rieman, of the National Council of State Housing Agencies. In addition to meeting with stakeholders, he said HCAs have been trying to determine which federal rules will apply to the funds and the implications, and trying to determine what priorities they will establish as far as “which projects they will award funds to and under what circumstances.”
“They’re trying to do everything they can to get ready to apply for the funds and use them as quickly as possible,” said Rieman, who expects all state HCAs to participate in both programs.
Washington, DC attorney Anthony Freedman, counsel to several HCAs, said he’s raising questions with state agencies, urging them to think about how they might satisfy the asset management requirement under both programs, and advising them to look at their pipelines and decide how they might want to make the funds available to projects. “I’m offering them thoughts on how to leverage those funds, and [how] to use those funds to leverage private equity,” said Freedman, a partner in Holland & Knight LLP. “A mix of exchange funds or TCAP funds and private equity can make a project stronger and can increase the return to investors, and therefore help bring more private equity into the market – that’s what I’d like to see.”
Deborah VanAmerongen, Commissioner of the New York State Division of Housing and Community Renewal (DHCR), said she’s “delighted” with the two new LIHTC funding resources. She indicated that DHCR will go ahead and award TCAP funds where needed, but will probably take a wait-and-see attitude about participating in the credit exchange program and consider doing so just on a case-by-case basis for projects as a last resort.
VanAmerongen noted that the timing of the new resources is fortuitous to DHCR. She said DHCR has awarded all its 2008 credits, has committed $6.6 million of its 2009 credits to projects, and is in the midst of reviewing 120-plus applications received in its 2009 funding round to select for awards. She anticipated DHCR will award all of its remaining $22.6 million in 2009 credits, and has all the information it needs on the proposed projects to consider and approve for gap funding awards, once the federal guidance comes out. She expected that DHCR will utilize in-house staff for asset management functions for both programs.
In New York State, another $16.1 million in 2009 credit authority was suballocated to the New York City Department of Housing Preservation and Development (HPD); VanAmerongen said DHCR is talking and coordinating on the new resources with HPD and with two city and state agencies that run active tax-exempt multifamily housing bond programs.
Anxious to Participate
LIHTC developers and others are anxious for the start-up of the two new programs.
Matthew Greer, CEO of Miami, FL-based Carlisle Development Group, Florida’s largest LIHTC developer, expects to pursue TCAP or exchange funds for at least some of his roughly 12 pending Florida projects that have tax credit awards. Some have started construction; others haven’t. Some have equity commitments. Others had equity commitments once, but lost them. “That’s sort of when you start to try to make a determination of whether you hold out for an equity commitment, or whether to start looking for opportunities to exchange credits under the new program or to receive the TCAP subsidy sources,” Greer said.
He also indicated he’s experienced the rescission of a previous commitment of state soft second mortgage funds to a workforce housing project, due to state budget legislation that recaptured from the Florida Housing Finance Corporation millions of dollars of previously appropriated funds.
Greer welcomed the new funding sources, but hoped they will be infused in projects to supplement private tax credit equity, in order to preserve the public-private partnership model that he and other sources said has been the foundation of the LIHTC program’s success.
Alexandria, VA-based developer Patrick Sheridan, of nonprofit Volunteers for America, indicated that some of his current LIHTC projects might be candidates for the new funding sources. “At the current time,” he said, “we have six projects across the country that are allocated credits that we don’t have an investor for.” These projects are in five states.
Sheridan said VoA has investor interest for most of the deals but no hard letter of intent with a fixed credit price. “My suspicion is we’re going to have a gap on the financing because of the low [credit] price,” he said. “As such, if we can access some of the [TCAP] gap funds or the refunded credits that the state might have, that would be our ideal situation.”
Cynthia Lacasse, of John Hancock Realty Advisors., Inc., a direct investor, described the additional TCAP and credit exchange program funds as “positive” for the LIHTC market. “What we’re seeing anecdotally – we talk to developers every day – it that they’re exploring their options,” she noted. Lacasse said John Hancock doubled its annual tax credit investment volume to about $100 million in 2008, but doesn’t yet have a target for 2009. “We’re basically processing out pipeline, and then we’re stepping back and watching what’s happening, [being] cognizant of our specific need for tax credits, and taking a breather,” she said.
Lacasse, though, said there was nothing in the stimulus act’s provisions to motivate her firm to increase its investment in housing credits. She noted her firm, though, would have benefited from enactment of the proposal – not included in the act – that would have allowed investors to go back five tax years to fully utilize their housing credits.
Chicago syndicator Joe Hagan, of National Equity Fund, Inc., felt the two new LIHTC funding sources should go a long way toward helping to “clear out” the stalled projects with 2007 and 2008 tax credit awards that haven’t been able to get funded, and to help fund about 40% of the 2009 credit deals. Hagan said with the extra subsidies many deals can probably make sense at 80 cents, noting LIHTC pricing for most deals now is probably 70 to 76 cents. Hagan said HCAs could use the new dollars to fill funding gaps in stalled projects, facilitate conservative underwriting, and allow for a higher yield to investors that serves to attract private equity.
He warned developers that they won’t get 85 cents per credit dollar if they turn in their credits to state agencies, but rather something less. Eight-five cents is what HCAs will receive from Treasury for each dollar of credit they exchange.
Possible Complexity
Hagan said states’ credit exchange programs could be “incredibly complicated.” HCAs that participate in the program will have to make decisions about which projects they will require or allow to turn in credits and from what year(s); how much if any unused 2009 credits to exchange; whether to provide assistance just to the projects that returned credits or to other projects; the form in which they will provide assistance; criteria and priorities for selecting projects for assistance; whether to provide credit exchange dollars to projects alone or in combination with other resources (e.g., TCAP, credits, other); whether to assist tax-exempt bond-financed projects; and more.
“We’re kind of grasping at straws here [now], without having a road map on how a lot of this is going to get done,” said David Gasson, of syndicator Boston Capital and spokesman for the Housing Advisory Group.
Speaking at a March conference of the National Housing & Rehabilitation Association, syndicator Ronne Thielen of Centerline Capital Group said one possible approach states might take would be to put TCAP funds into deals with 2007 or 2008 credit awards to get them under construction, and then give the developer a specified time to find an equity investor. If the developer doesn’t find one, the state could take back the credits from the developer and provide exchange funds. If the developer finds an investor, the state agency could leave some TCAP dollars in the deal to supplement the private equity and take back the rest. Thielen said investors would be more interested with this approach because they wouldn’t bear construction risk.
