The Housing and Economic Recovery Act of 2008 (the “Act”) was signed into law by the President on July 30, 2008. The Low Income Housing Tax Credit (“LIHTC”) and other housing related programs were modified through the Housing Tax Incentives title of the Act.
This Client Advisory highlights key changes below. Generally, the changes are effective for projects placed in service after the date of enactment, July 30, 2008.
Allocation authority for the 9% LIHTC is increased by 10% for 2008 and 2009.
The state-by-state limit is increased from $2 per person to $2.20 per person and the small state minimum annual cap is increased by 10%. State allocating agencies will therefore be able to make more or larger 9% LIHTC awards. The subsequent 2008 award rounds would forecast to have even more LIHTC than the first rounds in 2008.
LIHTC may now offset the Alternative Minimum Tax.
Under pre-Act law, LIHTC could not offset alternative minimum tax (“AMT”) liability. The Act now provides that the LIHTC and rehabilitation credit may be used against AMT liability. This provision is effective for buildings placed in service after Dec. 31, 2007. This change should increase the market for LIHTC equity investors by broadening the applicability of the credit value.
Recapture bond posting requirement is eliminated and replaced with an extended statute of limitations period for LIHTC noncompliance.
Under pre-Act law, no recapture of the LIHTC was required for a disposition of an ownership interest if the taxpayer furnished the IRS with a bond to protect against future project noncompliance. The Act eliminates this bond requirement and replaces it with an extended statute of limitations of three years after the taxpayer notifies the IRS of noncompliance with the LIHTC rules. Taxpayers must reasonably expect that the building will continue to be operated as a qualified low-income building for the remaining compliance period. This provision will lower the initial exit transaction costs for equity investors, but the potentially open ended liability period for noncompliance may negate that savings. Investors may want to consider other alternatives to ongoing noncompliance risk after interest disposition. This change applies to dispositions after the date of enactment and, at the taxpayer’s election, to earlier dispositions.
LIHTC 9% credit rate percentage floor established until 2014.
The 70% present value credit (the nominal “9% credit”) fluctuates with interest rates and is currently at 7.8%. The Act provides that the 70% present value credit rate will not be less than 9%. If future interest rates push the 70% present value credit rate higher than 9%, then the project will receive the higher rate. This applies to 9% LIHTC projects placed in service after July 30, 2008 and before Dec. 31, 2013. This change should increase the eligible basis of LIHTC projects about 15%, but there will be no increase of actual credit allowed unless a corresponding credit increase is awarded by the state allocating agency. There is no change to the 4% credit percentage determination.
“Below-market” federal loans are allowed to finance 9% LIHTC projects.
The Act removes the concept of “below market federal loan” for determining whether a building is federally subsidized. Buildings now financed with debt with interest below the applicable federal rate (“AFR”) can become eligible for the 9% credit. Buildings federally subsidized through tax-exempt bonds are still limited to the 4% credit. This change should be of substantial benefit to projects, such as HOPE VI projects, that have federally funded loans as substantial elements of their financing. Allowing such loans to bear interest rates below the AFR will significantly ease the pressure on residual value analyses intended to demonstrate that the values of the projects will be sufficient to pay such loans when due.
New federally or state-assisted buildings exception to 10-year acquisition rule.
Under pre-Act law, the LIHTC was not generally allowed on the acquisition of an existing building unless the building was last placed in service more than 10 years prior to acquisition. The pre-Act exceptions to this rule allowed for waivers necessary to prevent assignments of certain HUD or FHA mortgages and claims against federal mortgage insurance funds. The Act replaces this ruling process for waivers and now excepts from the ten-year rule the acquisition of any federally or state-assisted building. The exception is automatic, it is no longer necessary to obtain a waiver from the IRS. A federally assisted building is any building that is substantially assisted, financed or operated under §8 of the Housing Act of 1937, §§221(d)(3), 221(d)(4), or 236 of the National Housing Act, §515 of the Housing Act of 1949, or any other housing program administered by HUD or the Department of Agriculture. A state-assisted building is any building that is substantially assisted, financed, or operated under any state law similar in purposes to any of the above federal laws. This change should provide for increased opportunities for preservation of these types of buildings with the 4% acquisition credit. The only waiver still available under the pre-Act ruling process is the waiver for a building acquired from an insured depositary institution in default.
Minimum substantial rehabilitation expenditure is increased.
The Act now requires an expenditure of the greater of 20% of the adjusted basis of the building or $6,000 per low-income unit to qualify for the 9% LIHTC, up from pre-Act law which required the greater of 10% of basis or $3,000 per low-income unit.. Minimum expenditures for federally assisted 4% credit projects are two-thirds of the $6,000 per low-income unit. Future per low-income unit limits are indexed annually to inflation. This change is effective for projects receiving allocations after July 20, 2008, the date of enactment.
State allocating agencies may now determine 130% basis boost buildings outside of federally defined areas.
Pre-Act law provided that buildings located in federally defined qualified census tracts and difficult development areas were entitled to a basis increase from 100 to 130 percent of the otherwise applicable eligible basis. The Act now provides that the state allocating agencies may grant the 130% basis boost to any project which needs the basis boost in order to be financially feasible. This change increases the eligible basis of selected LIHTC projects by 30%. This rule does not apply for buildings financed with tax-exempt bonds subject to volume cap.
Compliance period federal grants that do not fund increases in eligible basis items will not trigger a reduction in eligible basis.
The Act clarifies that projects receiving compliance period federal grants for operating assistance, rental assistance and interest reduction payments (“IRP”) may do so without triggering a reduction in eligible basis on the LIHTC. The Act establishes that costs financed with federal grant funding is not included in eligible basis. Therefore, no basis reduction occurs during the compliance period for federal grants received if those federal grants do not otherwise increase the eligible basis in the building.
Community service facility qualified basis limit increased to 25% of the project.
Certain “community service facilities” used by non-tenants may be included in the qualified basis of a building if certain requirements are satisfied. Pre-Act law limits the eligible basis of these facilities to 10% of the project. The Act increases the amount of eligible basis to 25% of a $15m eligible basis cap plus 10% of the remaining eligible basis above the $15m cap.
Related party common ownership threshold is increased to the 50% attribution rule level.
Pre-Act law used a lower 10% attribution rule used to determine whether parties are related for purposes of determining whether certain existing buildings qualify for the LIHTC. The Act now provides that two persons are related if they bear a relationship to each other specified in Code §§267(b) and 707(b)(1), which is set at 50% common ownership. This change will increase opportunities for acquisition credit deals and will allow sellers increased economic participation in preservation transactions.
LIHTC 10% carryover deadline increased to 1 year after date of allocation.
Under pre-Act law, a carryover allocation may be made if the building is placed in service not later than the close of the second calendar year after the allocation, provided that the taxpayer’s basis in the project was more than 10% of the reasonably expected basis at placement in service. Pre-Act law allowed for this 10% basis to be incurred 6 months after the allocation is made. The Act now allows for this 10% basis to be incurred 1 year after the allocation is made. This change is effective for buildings placed in service after July 30, 2008.
2009 LIHTC QAPs will introduce mandated energy efficiency and historic selection criteria.
State Qualified Allocation Plans (“QAPs”), which provide criteria for the credit allocation process for LIHTC projects, are now required to consider the energy efficiency of the project and the historic nature of the project. This requirement affects all allocations made after Dec. 31, 2008.
Interest on tax-exempt housing bonds is now not subject to the Alternative Minimum Tax.
Under pre-Act law, interest on qualified private activity bonds was exempt from income tax but not for the purposes of determining AMT. For certain bonds issued after July 30, 2008, the Act now provides that tax-exempt interest is exempt for AMT purposes. This exemption is applicable to: (1) certain exempt facility bonds used at least 95% for qualifying residential rental projects; (2) qualifying mortgage bonds; and (3) qualifying veterans’ mortgage bonds. This change should broaden the applicability of the tax-exemption and increase the investor market for these types of debt instruments.
Additional $11 billion volume cap for tax-exempt housing bonds is authorized.
The Act allows states to issue an additional $11 billion of tax-exempt bonds to provide loans to first-time home buyers and to finance the construction of low-income rental housing. The additional amount is allocated to each state in the same proportion as the pre-Act volume cap. Qualified mortgage bonds may be used either to finance new mortgages or to refinance qualified subprime loans.
Repayment of tax-exempt bond financing of a first residential rental project may be used to finance a second residential rental project without counting against the state volume cap.
The Act provides that states may recycle an original tax-exempt issue by providing new loans for TEFRA approved qualified projects within 6 months of the date of repayment of the original loan. The original bond issued will be treated as a refunding bond which does not count against the volume cap. The refunding issue must be issued within 4 years after the original issue and the latest maturity date allowed on the refunding is 34 years. The Act allows only one refunding of the original issue. Recycled bonds do not give rise to tax credits for the second project. This rule is effective with repayments of loans received after July 30, 2008.