How Housing Act Will Help Site Developments
The Housing and Economic Recovery Act of 2008 (H.R. 3221), which generally applies to buildings with placed-in-service (PIS) dates occurring after July 30, 2008, is expected to provide a boost to developers, says Glenn A. Graff, an Illinois attorney with Applegate & Thorne-Thomsen, PC, in Chicago.
One of the main reasons for the boost is the provision that sets the minimum credit percentage at 9 percent for both new construction and non-federally subsidized major rehabs.
“Because of the way the law is written, it doesn't matter whether you were rate-locked,” Graff says. “As long as your building is placed in service after July 30 and before Dec. 31, 2013, the 9 percent credit factor applies,” he says.
However, projects will continue to be limited by the dollar amount of a tax credit reservation unless the allocating agency permits the amount to be increased. For this reason, some tax credit buildings might not be allowed to take full advantage of the 9 percent credit factor.
Here's a rundown on the Housing Act's other key features affecting tax credit owners and developers.
Public Use Rule
H.R. 3221 also helps developers and owners of buildings being audited by the IRS for violation of the public use rule, Graff says. The law provides an occupancy preference to certain groups. For example, according to H.R. 3221, a building will not violate the public use rule as a result of occupancy restrictions or preferences that favor residents with special needs, who are members of a protected class under state or federal housing programs or policies, or who fall within the category of “persons involved in artistic or literary pursuits,” Graff says. Thus the law alters a prior IRS policy, as found in the Form 8823 Guide, that housing projects cannot provide certain groups with a preference.
In addition, because the law applies retroactively on this point, the IRS should terminate audits of buildings that certain states had encouraged to give preferences to if those buildings house persons involved in artistic or literary pursuits. According to Graff, if state housing agencies want tax credit buildings to provide preferences to certain groups, the agencies must make it a formal policy. Giving projects competitive scoring points for certain preferences on behalf of residents would be a way to apply the new law.
Exception to 10-Year Rule
H.R. 3221 also widens the scope of the exception to the 10-year PIS rule for government-subsidized projects, thereby letting more developers obtain acquisition tax credits when they purchase a building for rehab.
“This change can be a real opportunity for building owners who, within the past 10 years, may have purchased a building with federal subsidies, such as a project-based Section 8 contract, and who would like to renovate the building using tax credits,” Graff says. “The owner could sell the building to a tax credit partnership of which he is the general partner. Under the new rules, the owner may retain a significant portion of the building's cash flow and still generate substantial tax credits to pay for the building's rehabilitation,” he explains.
The law applies to buildings that are “substantially assisted, financed, or operated under a HUD or Rural Housing Service (RHS) program or other state program,” Graff says. Although the law does not define “substantial,” experts seem to agree that having federal or state assistance for 20 percent of a building's units would be sufficient to meet the requirement.
“There are many other issues relating to the exception to the 10-year rule, the limitations of which may take the industry a while to figure out,” Graff says. Several industry groups recently requested guidance from the IRS on this particular provision.
Potential for Interest Rate Reductions
H.R. 3221 excludes below-market federal loans from the definition of “federally subsidized” buildings. “For new deals, buildings will no longer need to have federal loans carry the applicable rate of interest to avoid a reduction in tax credits,” Graff says. But owners should consult a tax attorney before seeking an interest rate reduction on existing buildings. Before modifying any debt, you should review the tax implications of doing so, particularly in light of the effective date of the legislation.
Graff also foresees that H.R. 3221's provision eliminating the recapture bond requirement might attract investors to tax credit projects and help stabilize tax credit prices.
In addition, the H.R. 3221 provision allowing tax credits on new buildings to be used against the alternative minimum tax should also help attract investors, thereby providing additional support for tax credit pricing.
Another lure for investors is the change in the related party rules for the acquisition tax credits. Prior to the enactment of H.R. 3221, a building did not qualify for acquisition credits if parties holding 10 percent or more of the ownership interest of the acquiring partnership also had at least a 10 percent ownership interest in the selling entity. But because of financial institution mergers, sites completing their 15-year compliance period for extended-use agreements (EUP) were having difficulty locating unrelated investors for purchase/rehabs. As a result, the law raises the common ownership limit to 50 percent.
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