Preserving an Expired LIHTC 30 Percent Basis Boost

Making the numbers work for a Federal Low Income Housing Tax Credit (LIHTC) transaction can be challenging, or sometimes even impossible. This reality is partly by design: the purpose of Internal Revenue Code (IRC) Section 42 is for households to have lower rents, limiting the amount of private-sector debt a development can sustain.

Congress recognized that certain circumstances merit additional support by creating what’s known as a 30 percent basis boost. The consequence can be substantial, but its availability is subject to change annually. This article explains how to avoid the expiration at the end of a calendar year. The rules vary based on whether the development is using:

• A jurisdiction’s population-limited nine percent LIHTCs; or
• Four percent LIHTCs, which accompany tax-exempt private activity bonds.

Effect of the 30 Percent
How does the basis boost help? The math works as follows:

Initial eligible basis (depreciable items serving tenants)
x   30 percent basis boost, if applicable
=   Eligible basis

Eligible basis
x   Applicable fraction (building’s low-income portion)
=   Qualified basis

Qualified basis
x   Tax credit percentage (minimum of four or nine percent)
=   Maximum annual LIHTC allocation

Increasing the eligible basis by 30 percent flows through the calculation to allow a correspondingly larger amount of LIHTCs, reducing the amount of private debt necessary to cover costs. As such, it can be helpful or even necessary to make a development financially feasible.

Three Types of Basis Boost
In IRC Section 42(d)(5)(B)(iii)(I), Congress asks the Department of Housing and Urban Development (HUD) to designate difficult development areas (DDAs), specifically those with “high construction, land and utility costs” relative to area median income (AMI). However, because data on costs is not readily available, HUD follows the IRC’s legislative history and uses a ratio of fair market rents (numerator) and the income of eligible tenants (denominator).

The second type is in IRC Section 42(d)(5)(B)(ii)(I). HUD designates qualified census tracts (QCTs), which are areas with either a poverty rate of at least 25 percent or where more than half of households have an income less than 60 percent AMI. HUD uses the most recent three years of American Community Survey data.

There’s more to the methodologies for determining DDAs and QCTs, but it’s not something most practitioners need to understand. What matters is the IRC limits the totals nationally, so not all eligible areas end up on the list. Instead, HUD ranks them from top to bottom, and only a certain percent qualify. Since this sorting happens annually based on new information, there’s always a possibility of an area not generating the 30 percent in a subsequent year.

The third type of basis boost is IRC Section 42(d)(5)(B)(v) allows LIHTC allocating agencies to count specific buildings as qualifying, although not if they’re financed with tax-exempt bonds. This treatment varies over time in a manner different than what’s covered in this article.

Once a development qualifies for the additional 30 percent, it’s locked in for the 15-year compliance period. Subsequent changes in the list do not matter.

Initial Effective Date: Current and Next Year Lists
In September 2023 HUD announced the DDAs and QCTs for this calendar year. More specifically, according to HUD’s official notice, the designations are in effect between two points in time.

The starting point for Nine percent LIHTCs is if the agency allocates after Dec. 31, 2023; andFour percent LIHTCs are if the bonds are issued, and the building is placed in service after Dec. 31, 2023.

The endpoint is when the new designations start. On September 6th HUD released the 2025 DDAs and QCTs, which go into effect on January 1st. Historically the time period corresponds with the calendar year.

The main reason why the effective date matters is if an application is not awarded, the developer plans on trying again next year, and the basis boost is important for financial feasibility. If the location of the parcel/structure planned for development/rehabilitation is on both lists, then there’s no issue. What raises a concern is when it drops off the latter.

In response to this problem, HUD created two allowances to preserve an otherwise expiring basis boost. For nine percent LIHTCs, keep in mind how the period relates to awards and forward commitments, as those are not the same as an allocation.

Continued Effective Date: Complete Application
From a conceptual perspective, the extension occurs by prolonging the end of a DDA’s or QCT’s effective date, but only for specific LIHTC developments.

If an area is set to lose its designation, a building in it will still qualify for a basis boost by meeting two criteria:

1. It’s the subject of a “complete application” submitted before the effective date of the subsequent list (for four percent LIHTCs the application must go to the bond issuing agency).
2. No later than 730 days after submission, either of the following, is applicable:

• The nine percent LIHTCs allocation happens; or
• Bonds are issued or the building is placed in service (Note: both must occur after the application goes in).

According to the HUD notice, a “complete application” means the allocating or issuing agency needs “no more than de minimis clarification” to decide on awarding the LIHTCs or bonds. Naturally what the agency has to say about the extent of clarification necessary is crucial for knowing whether the application is sufficient.

Presuming it was complete, submission started a clock. The development preserves its basis boost only upon meeting the applicable subsequent two-year deadline. As such, the effective date extension is a limited, likely one-shot opportunity.

Continued Effective Date: Multiple Phases
The second allowance to extend an effective date is potentially longer lasting but more specialized. Each subsequent stage of a “multiphase project” can have a basis boost if the following happened while a DDA or QCT was in effect:

• The allocation of nine percent LIHTCs to the first phase; or
• Either “the building(s) in the first phase was (were) placed in service” or bond issuance.

What counts as a “multiphase project” is the key. HUD’s notice defines it as follows:

1. The initial application specifies the multiphase nature, including “total number of buildings and phases, with a description of how many buildings are to be built in each phase and when each phase is to be completed, and any other information required by the agency…”
2. The reason for staging is the overall development would exceed the allocating agency’s limit on the amount of LIHTCs it will award in a year.
3. The developer submits applications for each phase “in immediately consecutive years.”

While possible to implement, the definition above is quite narrow. In addition to requiring careful planning, the second component is not always the motivation behind a preference for staging. Note there is no requirement for any phase to be right up to the agency’s maximum award, nor that the application for each phase wins on its first try.

Hypothetical Examples
The HUD notice provides seven hypothetical examples of how its policy works, two of which merit calling out.

Case D

• Developer submitted a complete application for bond financing to the issuing agency on Oct. 30, 2024;
• The property is in a DDA or QCT in effect for 2024 but not 2025 or 2026;
• Bonds are issued on April 30, 2026 (or the buildings placed in service by this date); and
• The development maintains its basis boost.

Case G

• Developer submitted a complete application for bond financing to the issuing agency in 2024;
• The property is in a DDA or QCT in effect for 2025, but not 2024 or 2026;
• Buildings placed in service in 2025 (or the bonds are issued that year); and
• The development becomes eligible for the basis boost.

Conclusion
LIHTC developers face many challenges, so any added task can be unwelcome. Even so, spending the time necessary to know the current and upcoming DDA and QCT designations is worthwhile. A lack of awareness can be disastrous, or in the fact pattern of Case G above, potentially very rewarding.

On a broader level, the Affordable Housing Credit Improvement Act contains several provisions regarding the basis boost. Of note is the legislation would remove the artificial limit on DDAs and QCTs mentioned above, which would greatly reduce the possibility of losing a designation.