President Bush Signs Massive Bill That Modifies Housing Credit
By A. J. Johnson & Caitlin Jones
16 min read
President Bush on 7/30/08 signed into law a massive housing stimulus/rescue bill (H.R. 3221) that makes sweeping changes to the low-income housing tax credit (LIHTC) program.
In addition to changes to the LIHTC, the Housing and Economic Recovery Act of 2008 (P.L. 110-289) includes provisions that: modify rules for and boost the volume of tax-exempt housing bonds; make certain federal housing program requirements more housing credit-friendly; enhance the federal historic rehabilitation tax credit; create a new national affordable housing trust fund; provide aid to states for the purchase of foreclosed homes; create a new tax credit for first-time homebuyers; assist homeowners at risk of foreclosure; increase single-family loan limits; and modify and strengthen federal oversight and regulation of Fannie Mae and Freddie Mac while adding financial backstops.
LIHTC Package
The 260-page law contains numerous substantive “modernizing” and technical changes to the LIHTC, arguably greater in number and scope than the sweeping 1989 reforms.
For the most part, the LIHTC amendments are effective for buildings placed in service after 7/30/08, the date of enactment of the legislation.
Unless otherwise noted below, the amendments apply both to projects receiving allocations of housing credits, and to projects qualifying for credits without a credit allocation because they are financed more than 50% by tax-exempt private activity bonds subject to state annual bond volume caps.
Temporary Cap Increase
The new law authorizes additional “per capita” housing credits for each state for calendar years 2008 and 2009, equal to 20 cents per resident for each of these two years, or an extra 10% in credits each year for states with small populations subject to the “small state minimum.”
With the boost, the revised per capital credit volume cap for each state for calendar year 2008 is now the greater of $2.20 per capita or $2,557,500. The precise size of the 2009 volume caps isn’t certain since the annual per capita ceiling amounts for states is adjusted for inflation.
AMT Exemption
The Act permits housing credits attributable to buildings placed in service after 12/31/07 to be used by corporate or individual taxpayers to offset their federal income tax liability under the alternative minimum tax (AMT). This is particularly beneficial for corporate investors in housing credits, and for developers and other real estate professionals who can now offset any AMT liability with housing credits and do so exempt from the benefit amount curb imposed by the so-called passive loss rules on all other individual taxpayers.
“This provision in particular may significantly boost the market for tax credits and thus make tax credit transactions feasible for many owners who recently have been unable to obtain an adequate price,” according to a memo on the new Act by the law firm of Bingham McCutchen LLP, written by partners Kenneth Lore and Martin Siroka, referring to developers of proposed LIHTC projects with insufficient tax credit equity. “In addition,” the memo continues, “many owners who have not sold tax credits in mixed income transactions and who were subject to AMT limitations with respect to the tax credit may now be able to use some or all of their tax credits.”
Recapture Bond Posting
Another benefit to investors is an amendment that repeals the previous requirement that an owner post a surety bond (“recapture bond”) upon the sale or transfer of a credit building (or interest in one) during the 15-year tax credit compliance period, in order to avoid triggering any recapture tax. In place of this requirement, the Act extends the deadline by which the IRS can impose penalties for a reduction in a building’s eligible basis triggering recapture tax liability, to three years after the Service is notified of such reduction.
The amendment is effective for dispositions after 7/30/08. However, for dispositions on or before this date, a taxpayer can take advantage of this amendment if: (1) there’s a reasonable expectation that the building will continue to be operated by the new owner as a low-income building for the rest of the compliance period; and (2) the taxpayer makes an election to be subject to the extended statute of limitations. The Act doesn’t say how an election is to be made.
Besides freeing investors from having to post bonds for future transactions, the amendment means investors will also be able to retire bonds that they have already posted and cease paying annual insurance renewal premiums.
Temporary Rate Floor
The Act establishes a temporary floor for the applicable percentage for the 70% present value (“9%”) housing credit for new construction or substantial rehabilitation expenditures, for non-federally subsidized buildings placed in service after 7/30/08 and before 12/31/13. This minimum rate is the greater of: (1) a flat 9%; or (2) the prevailing floating rate as traditionally determined, adjusted, and published monthly by the IRS.
This change would mean roughly 13.4% additional credit today than the amount generated by the IRS published floating rate of 7.94% for the 70% present value credit for buildings placed in service in August 2008.
The new law doesn’t set a floor for the 30% present value (“4%”) credit; the floating rate for this was 3.40% in August.
Eligible Basis Provisions
The Act makes more projects eligible for the 9% housing credit, through several changes.
Under the LIHTC program, if any portion of the eligible basis of a project is federally subsidized, new construction or rehabilitation expenditures aren’t eligible for the 9% housing credit but rather limited to the 4% credit.
The Act narrows the definition of federally subsidized buildings to only buildings financed by the proceeds of tax-exempt private activity housing bonds.
No longer classified as federally subsidized are buildings receiving direct or indirect federal loans bearing a below-market interest rate (i.e. interest rate below the Applicable Federal Rate). The concept of federal below-market loans is eliminated. Also repealed is the prior classification as federally subsidized, projects assisted under the federal HOME Investment Partnerships or Native American Housing and Self Determination Act (NAHASDA), unless the project met a special stiffer tenant income set-aside requirement.
As a result, new projects assisted by federal loans – regardless of interest rate – or by HOME or NAHASDA funds are no longer barred from eligibility for the 9% credit. Also, HOME- or NAHASDA-assisted projects, if located in high-cost areas, are no longer disqualified from the maximum 30% boost in eligible basis for projects located in qualified census tracts (QCTs) or difficult development areas (DDAs).
Acquisition costs remain limited to the 4% tax credit.
The preceding amendments are effective for buildings placed in service after 7/30/08.
The Act also gives state housing credit agencies (HCAs) new authority to award, for new construction or substantial rehabilitation expenditures, an “enhanced” credit – a 30% boost in eligible basis – to any building located outside a QCT or DDA that the agency designates as needing extra credit to be “financially feasible.” This change, effective for buildings placed in service after 7/30/08, isn’t available for tax-exempt bond-financed projects.
According to an explanation of this provision by the congressional Joint Committee on Taxation (JCT) in a document (JCX-63-08) dated 7/23/08, “It is expected that the State allocating agencies shall set standards for determining which areas shall be designated difficult development areas and which projects shall be allocated additional credits in such areas in the State allocating agency’s allocation plan. It is also expected that the State allocating agency shall publicly express its reasons for such area designations and the basis for allocating additional credits to a project.”
The Act also increases, for buildings placed in service after 7/30/08, the maximum portion of an LIHTC project within a QCT that can be used as space for a community service facility and included in eligible basis, to 25% of the first $15 million in eligible basis, plus 10% of any additional basis.
Clarification of Federal Grants
The Act clarifies the treatment of federal grants, through amendments effective for buildings placed in service after 7/30/08.
Before, if a grant was made “with respect to” a building or its operation during any year of the 15-year compliance period, the building’s eligible basis had to be reduced by the portion of the grant funded with federal funds, both for the year in which the grant was made and for subsequent years of the compliance period. The IRS has issued clarifications that certain specific types of federal payments, such as U.S. Department of Housing and Urban Development (HUD) Section 8 rent subsidies, aren’t treated as federal grants.
The Act clarifies that eligible basis must be reduced by the federally funded portion of grants received before the start of a building’s compliance period.
In addition, the law provides that no basis reduction is required for federally funded grants – received during the compliance period – that enable a property to be rented to low-income tenants, if such grants don’t otherwise increase the taxpayer’s eligible basis in the building.
The JCT explanation also directs the IRS to amend its existing regulations in this area to explicitly provide that 13 specific types of payments (e.g., rental, operating subsidies) won’t be treated as a federal grant. Twelve are federal payments under certain specific HUD and USDA Rural Housing Service (RHS) housing programs (e.g. HUD Section 202/811 rental assistance, Section 236 Interest Reduction Payments). The 13th category covers “any other ongoing payment used to enable the property to be rented to low-income tenants.”
The JCT explanation says no basis reduction is necessary for loans – regardless of interest rate – that are capitalized by federally funded grants.
Median Income Rules
Two amendments modify the rules used to set tenant income and rent limits for housing credit units and for low-income units in tax-exempt bond-financed projects, for certain projects.
In general, tenant income and rent limits for LIHTC units in a building are based on the income limit for the particular area for a very low-income (VLI) household, as estimated and published annually by HUD for each metropolitan area and non-metropolitan county in the U.S. This dollar amount is supposed to equal 50% of HUD’s separate published estimate of “area median gross income” (AMGI, often also referred to as area median income) for the area for the current year.
One amendment permits determinations of LIHTC tenant income and rent limits made after the date of enactment for buildings located in rural areas (as defined by Section 520 of the U.S. Housing Act of 1949), to be based on the greater of the current: (1) HUD AMGI; or (2) the national median income for nonmetropolitan areas (currently $49,300). Projects in areas that benefit from this change will be entitled to higher tenant income and rent limits for LIHTC units. The amendment is applicable for future determinations for existing as well as new buildings, but not available for tax-exempt bond-financed buildings.
The second, two-part amendment seeks to rectify and prevent in the future the problem of “frozen” LIHTC tenant income and rent limits that have afflicted projects in a number of areas nationwide.
Under HUD’s methodology, specifically the application of a “hold harmless” exception, if the AMGI amount for an area falls from one year to the next, the VLI amount – the basis for setting LIHTC tenant income and rent limits – isn’t also decreased, but rather is kept the same. This means, however, that LIHTC tenant income and rent limits won’t rise until the AMGI amount has caught up to and exceeded the level where it was before. As a consequence, the tenant income and rent limits are said to be “frozen.”
In 2006 HUD modified the way it computes estimates of AMGI, resulting in decreases in HUD’s FY 2007 published estimates of AMGI for a number of areas of the country. In many cases, application of the hold harmless exception maintained the VLI figures the same as in FY 2006.
One part of the new amendment, applicable for future LIHTC projects, codifies into law the HUD hold harmless exception, effective for determinations of AMGI after calendar 2008.
The second part of the amendment, narrow in scope and complex, provides a formula to make possible increased tenant income and rent limits, starting in 2009, for projects that had their initial income determinations in 2007 or 2008 and were protected by the hold harmless exception. If the area’s median income increases in 2009, the VLI figure would be boosted.
The result will be that HUD will have to publish two sets of annual income estimates – one for the special group of “hold harmless-impacted” projects, and another for all others.
Increased Rehab Threshold
The Act doubles the minimum amount of rehabilitation expenditures that must be spent to qualify for the 9% housing credit, for buildings placed in service after 7/30/08.
The minimum threshold is now the greater of: (1) $6,000 per low-income unit; or (2) 20% of the adjusted basis of the building being rehabbed. The $6,000 figure is to be adjusted annually for inflation for buildings placed in service after 2009.
The amendment is effective for buildings receiving credit allocations after 7/30/08, or financed by tax-exempt bonds issued from bond authority received after 7/30/08.
Acquisition Credits
The Act makes two changes regarding eligibility of properties for the housing credit for acquisition costs.
Under the LIHTC program’s “10-year rule,” housing credits generally aren’t allowed for acquisition costs for an existing building unless there is a period of at least 10 years between the date of acquisition by the taxpayer, and the later of the date the building was last placed in service or had a substantial improvement. In addition, the building can’t have been purchased by the taxpayer from a “related party,” or have been previously placed in service by the taxpayer or a related party.
Prior law provided two exceptions allowing waivers of the 10-year rule for certain federally-assisted buildings, to prevent certain negative financial consequences or the conversion of a housing project from low-income use. Federally assisted meant buildings substantially assisted, financed, or operated under the HUD Section 8, 221(d)(3), or 236 programs, and the RHS Section 515 program.
The Act replaces these two prior exceptions with a single exception that broadens the definition of federally assisted to add HUD’s Section 221(d)(4) program to the previous list of programs, plus “any other programs” of HUD or RHS. In addition, the exception now permits waivers for buildings receiving state assistance under state laws similar to the federal laws used to define federally assisted buildings. The amendment is effective for buildings placed in service after 7/30/08.
Related Party Rule
The Act changes the maximum threshold for determining whether a person is a related party for purposes of the 10-year rule.
Previously, the acquisition credit wasn’t available for the purchase of a building if any party that was both in the old and new ownership entities (i.e. seller and buyer) had more than a 10% interest. Otherwise the taxpayer would be classified as a related party. The Act raises the threshold to 50%, effective for buildings placed in service after 7/30/08.
Other Changes
The Act also:
- Extends the deadline by which the 10% carryover allocation expenditure test must be met, to 12 months after the date of the credit allocation, for buildings placed in service after 7/30/08.
- Waives annual tenant income recertifications for 100% low-income projects, effective for years ending after 7/30/08.
- Repeals the prior ban on housing credits for projects assisted under HUD’s Section 8 Moderate Rehabilitation program.
- Expands the list of qualified allocation plan criteria that states must consider in allocating credits after 12/31/08, to add: (1) the energy efficiency of a project; and (2) the historic nature of a project.
- Clarifies that a project won’t be deemed to fail to satisfy the LIHTC program’s general public use requirement solely because of occupancy restrictions or preferences that favor tenants who: (1) have special needs; (2) are members of a specified group under a federal or state program or policy that supports housing for such a specified group; or (3) are involved in artistic or literary activities.
- Excludes the Basic Allowance for Housing (BAH) received by military personnel from the definition of income for determining LIHTC income eligibility. To qualify, the building must be in or adjacent to a county containing a military installation with at least 1,000 Armed Forces personnel, and which experienced military personnel growth of 20% or more between 12/31/05 and 6/1/08. Neither the statute nor JCT explanation specify which military installations are covered.
- Permits occupancy of LIHTC units by students that once received foster care assistance.
- Requires a Government Accountability Office study on the housing credit program by 12/31/12.
Additional Amendments
The Act also includes non-tax amendments designed to better facilitate the use of the housing credit in the same project with FHA mortgage insurance and/or other federal housing programs of HUD and RHS.
Some of these provisions:
- Bar HUD from requiring the upfront escrow of housing credit equity for HUD-insured multifamily mortgages, or to require a letter of credit or some other security for the equity contribution.
- Eliminate FHA cost certifications for housing credit projects with a loan-to-value ratio below 80%.
- Direct HUD to establish a pilot program to streamline processing of FHA loan applications for LIHTC projects.
- Modify various rules for HUD project-based housing choice vouchers.
- Direct HUD within six months, after soliciting recommendations from stakeholders, to implement administrative and procedural changes to expedite HUD approvals for new or existing projects under HUD’s jurisdiction using housing credits and/or tax-exempt bonds. HUD is also to consult with the IRS to simplify the coordination of rules, regulations, forms, and approvals of projects.
- Direct RHS, after soliciting input, to implement actions to expedite timely RHS approval of requests for transfers of ownership or control, of USDA-assisted multifamily projects with housing credits or bonds. RHS also must consult with the IRS to simplify coordination of rules, forms, and project approvals.
- Eliminate HUD subsidy layering reviews for certain projects if the housing credit agency performs an LIHTC subsidy layering review.
- Require state housing credit agencies to collect and report certain data on LIHTC project tenants.
