The American Recovery and Reinvestment Act of 2009 (the Act), expected to be signed by the President today, contains provisions intended to provide relief for low-income housing tax credit projects in response to the collapse of the tax-credit market, to enhance the marketability of certain tax-exempt bonds, and to provide additional financing options for infrastructure, schools and economic development through the use of tax-exempt and tax-credit bonds. The following is a summary of provisions that will affect tax credit housing and public finance.

Note that this summary reflects our current understanding of the Act, which may change based on our experience working with these provisions and on additional guidance from the Department of the Treasury. This summary is not intended as advice for any specific transaction and may not be relied upon or used by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code or by any person to promote, market or to recommend any Federal tax transaction or other matter addressed in this summary.


Exchange of tax credit allocations for grants.

State housing credit authorities (including, in Minnesota, tax credit suballocators) may exchange certain tax credit authority for cash grants from the Treasury in an amount equal to 85% of the total value of the tax credits. For example, by exchanging $100,000 of 2009 tax credit allocation authority, a housing credit agency is entitled to a grant in the amount of $850,000 – 85% of the product of 10 (the number of years for which the tax credit could be claimed) and the amount of the allocation authority exchanged.

  • The allocation authority that may be returned includes:
    • 100% of any unused credit for 2008 (if any).
    • 100% of any previously allocated credit returned during 2009.
    • 40% of the 2009 credit allocation and the state’s 2009 share of the national pool.
  • Housing credit agencies are required to use the grants to make subawards that will directly finance qualified low-income buildings. In effect, the Treasury replaces the tax-credit investor.
    • Subawards are to be made in the same manner and subject to the same rent, income and use restrictions as an allocation of tax credits.
    • Subawards may be made to buildings that have allocations of tax credits and, upon a determination that such an allocation will increase the total funds available to the state for affordable housing, to buildings without a tax-credit allocation.
    • In making the determination referenced above, housing credit agencies must establish a process requiring applicants to demonstrate good faith efforts to get a commitment for the syndication of tax credits before making a subaward. Presumably this means that an applicant must indicate that it was unable to obtain a commitment for tax credits at a price equal to $0.85/credit.
  • The housing credit agency is required to perform (or hire a contractor to perform) asset-management functions to ensure compliance with the rules and long-term viability of buildings financed with subawards. The housing credit agency may collect reasonable fees to cover such expenses.
  • Failure to comply with the tax-credit rules will result in recapture of a subaward, using liens or other methods the Treasury deems appropriate.
  • Grant moneys not used to make subawards before January 1, 2011, are returned to the Treasury.
  • The legislative history provides that the subawards are not treated as income to the project owner and that the owner’s basis in the project is not reduced by the amount of any subaward.
  • Effective the date of enactment.


In 2008 the Housing and Economic Recovery Act (HERA) provided additional low-income housing tax credits, adding supply to a market in which the primary problem was a dramatic reduction in demand. This provision reverses that action, with the Treasury agreeing to buy tax credits at a price of 85 cents on the dollar. With tax-credit prices currently around 70%, this appears to be a deal that is too good to pass up.

Having said that, the issue will be how quickly subawards can be made to tax-credit projects. It will take time to figure out the process by which states get the money from the Treasury. It will also take time and additional effort on the part of housing credit agencies to determine how, and under what conditions, to allocate grants or soft loans to projects and to amend qualified allocation plans accordingly. Housing credit agencies have the additional task of putting in place asset-management procedures for projects that receive grants and therefore will not have tax-credit investors monitoring program compliance.

Additional HOME funds.

  • $2.25 billion of HOME funds will be made available to housing credit agencies to fund gaps for projects awarded low-income housing tax credits in 2007, 2008 or 2009. The HOME Funds are available until September 30, 2011, and are to be awarded competitively, based on a housing credit agency’s qualified allocation plan.
  • 75% of the funds are required to be committed within the first year and spent by project owners within two years. All committed funds are required to be spent within three years.
  • Eligible basis is not reduced by any grant made pursuant to this provision.
  • The Secretary of Housing and Urban Development may waive statutes and regulations relating to the obligation of HOME funds to facilitate timely expenditure (other than requirements of fair housing, nondiscrimination, labor standards and the environment).


First-time homebuyer tax credit.

  • The Act modifies the first-time homebuyer refundable tax credit created by HERA in 2007. The amount of the credit is the lesser of 10% of the purchase price or $8,000 (up from $7,500). The credit phases out for singles earning $75,000 and couples earning $150,000.
  • The new rules apply to homes purchased after December 31, 2008, and before December 1, 2009.
  • The repayment obligation is eliminated as long as the homeowner continues to own and occupy the home for three years. If the home is sold (or not occupied as the owner’s principal residence) within three years, the credit is required to be repaid.
  • The prohibition against using the credit with a mortgage revenue bond program is eliminated. Presumably it is also available to be used with Mortgage Credit Certificate programs.


The increased amount of the tax credit, the elimination of the obligation to repay the credit as long as a homeowner stays in the home for three years and the ability to use the credit with mortgage revenue bonds are all improvements to the tax-credit provision as enacted last year. However, the provision does not solve the basic problem of how to bridge the credit so it is available to purchase the home.

De minimis safe harbor for financial institutions and bank qualified bonds.

  • De minimis safe harbor exception for tax-exempt interest expense of financial institutions. The Act extends the 2% de minimis rule, available to individuals and certain corporations, to financial institutions. As a result, banks can deduct 80% of the cost of purchasing and carrying tax-exempt bonds as long as their tax-exempt holdings don’t exceed 2% of their assets. The safe harbor applies to bonds issued in 2009 or 2010. (Refunding bonds are treated as issued on the date of the refunded bond.)
  • Bank-qualified bonds. The Act increases the annual limit for qualified small issuers from $10 million to $30 million. In addition, pooled or composite bond issues and conduit issues funding loans to governmental units or 501(c)(3) organizations are treated as being issued by the borrowers (but only if they individually qualify as small issuers).
  • These provisions are effective for bonds issued after December 31, 2008.


The value of bank qualification for a bond issue has at times been as high as 70 basis points. However, given the reduced tax exposure of banks, the value of bank qualification today is lower and unpredictable. This provision increases the supply of bank-qualified bonds at a time when demand is depressed.

Temporary modification of AMT limits on tax-exempt bonds.

  • Interest on all tax-exempt private activity bonds issued in 2009 and 2010 is exempt from the alternative minimum tax (AMT) (i.e., the interest is not a preference item and is not included in the corporate adjustment based on current earnings). The exemption from AMT applies to new money bonds and to refunding bonds that currently refund bonds issued after December 31, 2003, and before January 1, 2009.
  • Effective for bonds issued after December 31, 2008.


HERA extended the exemption from AMT to housing bonds (other than refunding bonds). The extension of the AMT exemption to refundings of bonds issued in the last five years (apparently both refunding and new money bonds) enhances the ability of single-family issuers to continue to recycle repayments and prepayments.

Temporary expansion for uses of small issue IDBs.

  • Small issue industrial development bonds (IDBs) issued after the date of enactment and before January 1, 2011, can be issued to finance facilities used in the “manufacturing, creation or production of tangible property or intangible property.” The legislative history indicates that this provision is intended to permit the financing of software development and intellectual property associated with bio-tech and pharmaceuticals.


The biggest problem for small issue IDBs for years has been the $1 million and $10 million limits. The change in 2007, permitting capital expenditures up to $20 million, provided some relief, but doesn’t change the fact that $10 million in 1986 dollars compares with more than $18 million in 2007 dollars (according to the Google inflation calculator). The question will be whether there are research and development facilities that can fit within these limits.

School construction tax-credit bonds.

  • The Act authorizes the issuance of $11 billion in each of 2009 and 2010 for tax-credit bonds to be used to finance school construction, rehabilitation or repair, or the acquisition of school land. The $11 billion limit is allocated among states and large school districts pursuant to specific requirements in the Act.
  • Maturities on the school construction bonds are established to provide that the present value of the payment obligation is 50% of the face amount of the bonds, using as a discount rate the average rate on tax-exempt bonds with a term of 10 or more years.
  • The bondholder is entitled to a tax credit at a rate permitting the issuance of the bonds at par. The credit accrues quarterly, is includible in gross income and can be claimed against regular and AMT liability. Unused credits can be carried forward. The credit can be separated from the ownership of the bond in the same manner in which coupons can be stripped.
  • Projects financed with these bonds are subject to prevailing wage requirements.


This provision permits a school to borrow money interest-free and to repay principal on a schedule that allows it to repay 50% of the principal on a present-value basis. The issue will be the depth of the market for tax-credit bonds. In addition, states will need to establish procedures for allocating the bonding authority.

Additional allocations of tax-credit bonds.

  • The Act authorizes increased limits on three kinds of tax-credit bonds:
    • Qualified Zone Academy Bonds by an additional annual amount of $1.4 billion in both 2009 and 2010.
    • New Clean Renewable Energy Bonds by an additional amount of $1.6 billion.
    • Qualified Energy Conservation Bonds by an additional amount of $2.4 billion.

Build America tax-credit bonds.

  • The Act authorizes state and local issuers to issue bonds, which would otherwise qualify as tax-exempt governmental bonds, as taxable bonds before January 1, 2011, and designate them as Build America Bonds (BABs). The interest on BABs is eligible for a 35% tax credit allowable against regular and alternative minimum taxable income. Unused credit may be carried forward. The credit, as well as interest paid by the issuer, is included in gross income. The credit may be stripped.
  • The conference committee expects BABs to bear interest at 74.1% of the market rate for taxable bonds without the credit.
  • If 100% of the available project proceeds of an issue of BABs will be used for capital expenditures, the bonds are “qualified bonds” and the issuer may elect to receive a credit equal to 35% of each interest payment, in lieu of a credit to the holder. The credit would be paid to the issuer by the Treasury secretary contemporaneously with the interest payment made by the issuer.
  • Unless and until a state provides otherwise, the interest on BABs and the amount of credit paid to a holder are treated as exempt from Federal income for purposes of the State income tax laws.


This provision doesn’t allow issuers to finance anything they couldn’t finance with tax-exempt governmental bonds. Its usefulness will depend on whether there is a market for tax-credit bonds in general at favorable rates, which is an open question.

Recovery zone bonds.

  • Issuers may designate one or more distressed areas as “recovery zones.” The areas must have significant poverty, unemployment, general distress or home foreclosures, or be an empowerment zone or renewal community. Issuers may issue Recovery Zone Economic Development Bonds (Economic Development Bonds) and Recovery Zone Facility Bonds (Recovery Facility Bonds) with respect to designated zones.
  • Recovery Zone Economic Development Bonds.
    • The Act creates a national limit of $10 billion for Economic Development Bonds, allocated among the states and local jurisdictions based on their relative loss of jobs, with a minimum amount for each state.
    • Like Build America Bonds, Economic Development Bonds are bonds that would qualify as tax-exempt governmental bonds, but are issued as taxable bonds. Designated bonds are eligible for a credit paid by the Secretary of the Treasury equal to 45% of the interest paid on the bonds.
    • 100% of the available project proceeds (net of amounts used to fund a reasonably required reserve) must be used for one or more qualified economic development purposes. Qualified economic development purposes include expenditures to promote development or economic activity in a recovery zone, including capital expenditures for property in the zone, public infrastructure and construction of public facilities in the zone.
    • Projects financed with Economic Development Bonds are subject to prevailing wage requirements.
  • Recovery Zone Facility Bonds.
    • The Act creates a national limit of $15 billion for Recovery Facility Bonds, allocated among thesStates in the same manner as Economic Development Bonds.
    • Recovery Facility Bonds are a new category of exempt facility bonds.
      • The bonds must be issued before January 1, 2011.
      • The bonds are designated by the issuer as Recovery Zone Facility Bonds.
      • 95% or more of the net proceeds must be used for recovery zone property, defined as:
      • Depreciable property constructed, reconstructed, renovated or acquired after designation of the zone.
      • The original use of which in the zone begins with the purchaser.
      • Substantially all of the use of the property is in the recovery zone in the active conduct of a qualified business by the taxpayer. “Qualified business” includes any trade or business except residential rental property (not including the certain prohibited uses like massage parlors and liquor stores).


Like the Build America Bonds, the Recovery Zone Economic Development Bonds provide a tax-credit bond for facilities that could otherwise be financed with tax-exempt governmental bonds. Unlike the Build America Bonds, the credit available to the issuer from the Treasury is 45% of interest paid on the bonds.

The Recovery Zone Facility Bond provisions create a broad new category of exempt facility bonds that may provide opportunities for businesses that have not previously been eligible for tax-exempt financing. The usefulness of the provision will depend in part on which areas are designated by issuers as recovery zones and how quickly the designations can be made.

In each case, states will need to develop rules for allocating the bonds.

Increase in new market tax credits.

  • The maximum amount of qualified equity investments for 2008 and 2009 is increased to $5 billion in each year (up from $3.5 billion).
  • The 2008 increase is to be allocated to qualified CDEs that submitted an allocation request for 2008, but got less than they applied for (or nothing).


The primary problem for tax credits has been a reduction in demand—as taxpayers owe less in taxes because of decreased earnings—resulting in an increase in yield. This provision and the other parts of the Act that create new tax credit bonds increase supply without addressing the underlying issue with demand