Unpacking the Four Percent Floor and More

The Consolidated Appropriations Act of 2021, the year-end legislative package passed by the previous Congress, provided big wins for affordable housing, such as the four percent Low Income Housing Tax Credit (LIHTC) floor, but it also created some gray areas that will require further guidance.

Panelists at NH&RA’s January 21 Unmute the Mic Member Town Hall webinar, “Unpacking the Affordable Housing Provisions in the Year-End Bill,” parsed both details of the package, as well as lingering questions.

One of the most consequential aspects of the statute was setting a permanent floor for the four percent LIHTC. Congress also provided, among other things, $25 billion for rental assistance.

The effective date for the new four percent LIHTC credit floor was Jan. 1, 2021, so the new statute won’t necessarily help projects facing obstacles due to the COVID-19 pandemic, where bonds were issued in 2020.

The 2021 effective date brings up some eligibility questions, such as the treatment of 2020 bond issues with draw-downs in 2021, Glenn Graff, chair of Applegate & Thorne-Thomsen’s tax practice, said.

“There is a reasonable argument to make under the strict reading of the statute,” Graff said. “Yes, they could qualify [for the flat four percent LIHTC] under some of the old [Internal Revenue Service] guidance talking about issuance date of ‘the obligation’ rather than the issuance date of the issue.”

Because this may not be what Congress intended, the IRS could release guidance that states the credit is based on the issuance date of the bonds, not the draw-downs.

This regulatory uncertainty may make tax credit investors wary of claiming the four percent floor on a draw-down deal that started in 2020, Graff said.

It is also ambiguous whether a project that has a cost overrun and makes a subsequent bond issue would qualify for the four percent minimum credit, Gaff said.

Developers wanting to claim the four percent floor in these circumstances should expect that their investors will require a tax opinion, Michael Gaber, executive vice president of industry and government affairs at WNC & Associates, Inc., said. This may be a problem if tax professionals don’t know yet if the property qualifies.

“Fortunately, there is a small window of transactions that has to deal with this,” Gaber said. “In six months to a year, this issue will be gone and we will be moving forward.”

For deals that were supposed to close in 2020, but were delayed to 2021, a new 42(m) letter, which confirms a development’s compliance with Section 42 of the IRS Code, should be issued in order to claim the four percent floor, but some state housing finance agencies aren’t updating the 42(m) letter, Graff said.

After a determination is made on the eligibility of the property for the four percent minimum, there may also need to be different considerations given based on whether the deal is part of a proprietary single-investor fund or part of a multi-investor fund, Gaber said.

“There are a lot of special rules that are in different funds,” he said.

The year-end legislation also provided $25 billion in emergency rental assistance to states, as well as directly to large municipalities, but it’s unclear how overlapping jurisdictions will function, Jennifer Schwartz, director of Tax and Housing Advocacy at the National Council of State Housing Agencies, said.

“There’s a lot of talk right now how that will work, and how states will coordinate with localities,” Schwartz said.

The legislation states there can’t be any duplication of assistance, though IRS guidance does allow tenants that receive a subsidized rent to apply for emergency rental assistance. What’s unclear is whether residents who get some other type of assistance, like vouchers, can apply for ERA for their portion of the rent, Schwartz said.

One area of concern is income certification requirements, which allows applicants to provide documentation for 2020 or the prior month. Prior month documentation from third parties can be difficult to obtain today, Schwartz said.

“We think there is ample precedence for allowing some sort of self-certification, self-documentation that can be auditable,” Schwartz said.

Landlords can help tenants apply for relief, and they can also apply on behalf of their tenants. If applying on behalf of the tenant, the tenant must co-sign the document and the money should be used for rent on behalf of the tenant.

Congress also approved $284 billion for a second round of the Paycheck Protection Program (PPP), which was included in the CAA. Businesses can apply for round one funding through March 31.

Round two of the PPP is targeted at smaller businesses that were heavily impacted by the COVID-19 crisis, Nic Mathias, partner at CohnReznick LLP, said. Businesses have had to participate in the first round of funding and use all the funding from the first round to apply for the second round. First round funding is still available.

Mathias advised businesses applying for round two of funding to make sure there are no compositional changes to their funding application between the two rounds. He also advised to go through the same lending institution as round one.

“That’s going be a big red flag,” he said of such changes in the application. “You want to make sure all of your organizational structures are the same. You’re applying in a similar fashion.”

Businesses can also expect an additional level of scrutiny of the IRS 3509 loan necessity affidavits in the second round.

“That’s been one of those subjective and gray areas,” Mathias said. “Demonstrating financial hardship and proving that you have a financial need to be served with the PPP program.”

Interpretation of IRS guidance related to forgiveness applications has varied among banks and lenders, leading to different practices among lending institutions, Mathias said.

One silver lining that came with the end-of-year legislation, Mathias said, is a change that simplified forgiveness for loans under $150,000.

Additionally, the new legislation said that the expenses funded by way of the PPP loans are deductible, both for round one and round two.