American Recovery and Reinvestment Act of 2009

The recently enacted American Recovery and Reinvestment Act of 2009 (the "Act") includes several provisions designed to strengthen the low-income housing tax credit ("LIHTC") and new markets tax credit ("NMTC") programs.

NMTC Funding Boost

The Act allocates an additional $1.5 billion in NMTCs for each of 2008 and 2009. An earlier version of the Act included a provision allowing for 2009 NMTCs to offset alternative minimum tax, a provision not included in the final version.

LIHTC Project Gap Financing

As a result of reduced tax credit pricing, many LIHTC projects are being stalled by a shortfall in anticipated funding. The Act allocates $2.25 billion in gap funding for such LIHTC projects. These funds will be allocated to state housing credit agencies that will then distribute funds to those projects that will benefit from gap funding.

Projects which were awarded LIHTCs in 2007, 2008, or 2009 are eligible for gap financing. Under the Act, state agencies are required to: (1) commit at least 75% of the gap funds each is allocated under this provision within one year of the passing of the Act; (2) allocate funds competitively based on each agency's qualified allocation plan; (3) give priority to those projects expected to be completed within three years of enactment of the Act; and (4) demonstrate that project owners who receive gap financing under the Act expend 75% of those funds within two years of enactment of the Act and 100% within three years.

Economic Stimulus: New Markets Tax Credit

On the heels of the opening of the most recent round of New Markets Tax Credit ("NMTC") competition, the Senate Finance Committee (the "Committee") released its economic recovery provisions to be included as part of the economic stimulus package currently being negotiated by Congress. The authorization of an additional $1.5 billion in NMTCs for each of 2008 and 2009 was included as a provision by the Committee. In addition, 2009 NMTCs made after the date of enactment of the final stimulus bill could be used against alternative minimum tax liability if the Committee's provisions are adopted.

Housing and Economic Recovery Act of 2008

The Housing and Economic Recovery Act of 2008 (the “Act”), which became law on July 30, 2008, includes significant changes to the Low-Income Housing Tax Credit (“LIHTC”) and the Historic Rehabilitation Tax Credit (“HRTC”). While these modifications are likely to impact developers, investors, and advocates of affordable housing, several changes are likely to significantly impact LIHTC and HRTC project investors (“Investors”).

Modifications to the Applicable Percentage Rate Determination

New buildings that are not federally subsidized and are placed in service after July 30, 2008 but before December 31, 2013 will qualify for a temporary applicable percentage rate increase under the Act of “not less than 9%”. Therefore, the risk associated with a floating applicable percentage rate has been removed for 9% deals.

Modifications to the “Federally Subsidized” Building Definition

Buildings receiving a federal subsidy are not eligible for the 9% LIHTC. The Act limits the definition of a federal subsidy by removing below-market federal loans as a source of federal subsidy. Properties placed in service after July 30, 2008 may benefit from a below-market federal loan and still qualify for the 9% LIHTC.

Repeal of the Bonding Requirement

The Act repeals the requirement that a bond be posted in the case of a change in ownership in order to avoid recapture of any applicable LIHTC. If the taxpayer reasonably believes that the LIHTC project will continue to be operated for the duration of the compliance period as a LIHTC project then the taxpayer may dispose of the property without worry of recapture. The removal of this requirement applies to all properties disposed of after July 30, 2008. In addition, taxpayers who have disposed of LIHTC projects prior to July 30, 2008 and are currently subject to the bonding requirement may elect to benefit from the repeal of the bond requirement by submitting a letter to the IRS.

Reducing the Impact of the Alternative Minimum Tax

A taxpayer subject to the alternative minimum tax (the “AMT”) may use LIHTCs and HRTCs to offset AMT liability. This provision applies to those properties placed in service after December 31, 2007. As a result, Investors who are, or may be, subject to the AMT may benefit from investment in LIHTC and HRTC projects. The provision eliminates potential risk to those Investors who may become AMT investors at some point during the tax credit compliance period.

Temporary Increase in the Housing Credit Volume Limits

The volume cap for LIHTCs that each state housing agency may allocate is temporarily increased by 10% for 2008 and 2009. This increase, along with other modifications provided for under the Act, should increase the supply of LIHTCs in each state.

Expanding Eligible High Cost Areas

Projects eligible for LIHTCs located in areas designated as high cost areas by state housing agencies are eligible for a 30% increase in eligible basis to encourage the development of these projects. The Act expands the definition of high cost areas to now include those buildings designated by a state housing credit agency as requiring this increase in basis in order for the project to be financially feasible. Given ongoing restraints in the credit market, LIHTC eligible projects may benefit from this provision.

The market for LIHTCs and HRTCs has not been insulated from the volatility in the credit markets. Several of the provisions of the Act are designed to mitigate these effects and promote continued growth in affordable housing through the use of tax credits. These changes may act to both stabilize some common elements of risk in LIHTC and HRTC investments and promote the availability of these credits on a going forward basis. It remains unclear what impact such changes will have on the yields being demanded by Investors in tax credit projects. If you have questions regarding how the Act and its tax credit related provisions may impact your interest in investing in LIHTC and HRTC projects, please contact Peter Duffley, Jonathan Jenkins or another member of our Community Development and Affordable Housing Team.

Rural Areas and NMTC

In a letter this month, leaders of the Senate finance committee urged the Treasury Department and the CDFI Fund to ensure that rural areas receive a proportional share of New Markets Tax Credits (NMTC). In the 2005 round, the Senators pointed out that only 10% of NMTC allocations went to non-metropolitan areas. The Senators then suggested that 25% should be the minimum amount awarded to rural areas.

How would such a change affect our large institutional investor clients? Would this be a welcome change, helping banks to attain their Community Reinvestment Act (CRA) goals? Or would this be viewed as a problem by institutional investors, who may prefer to invest in urban and suburban areas where growth is stronger?

Legislation Introduced for National Affordable Housing Trust Fund

Last week, the House introduced H.R. 2895 for the creation of a National Affordable Housing Trust Fund ("Trust Fund"). The idea of creating a trust fund is interesting enough in its own right, but this legislation contains some restrictions and aspirations that deserve some discussion.

First, the formula for allocating Trust Fund money is nuanced. Trust Fund money would be allocated among the states, not on a per capita basis (as the Low-Income Housing Tax Credit (LIHTC) is allocated), but instead on the basis of a formula that accounts for the age of housing stock, the percentage of citizens spending 50% or more of their income on housing, the percentage of citizens in sub-standard housing, vacancy rates, and the percentage of citizens living below the poverty line. It remains a question whether the formula, to be developed by HUD using the aforementioned factors, would result in a sensible allocation among the states.

Second, in order for states or localities to use the funds, matching contributions would be required if federal-source funds (including Federal Home Loan Bank funds) were used to provide the match than if private or state-controlled resources were used.

Third, nonprofits can apply for allocations from the Trust Fund alongside states and localities. Would this create beneficial competition between governmental entities and nonprofits, or would it prevent state governments from forming consistent and effective allocation plans for their states?

Finally, the Trust Fund is designed to be used in "mixed-income settings" and to "promote low-density owner-occupied housing," among other goals. Urban planners have long espoused the benefits of mixed-income developments, but states nonetheless continue to allocate LIHTCs to projects that concentrate low-income residents into single projects. Will there be teeth to the aspirational language contained in this Trust Fund legislation? Audit and recapture requirements are currently written into the bill, so it is a possibility.

If the Trust Fund becomes law, it will create new opportunities for our large lender and investor clients. Private equity and debt would be sought for Trust Fund projects to meet the matching funds requirement. Investors and lenders who partner with nonprofit developers and localities would be in the best position to take advantage of this new funding source. The full text of the bill is available at http://www.house.gov/apps/list/press/financialsvcs_dem/hr2895.pdf

If you would like to learn more about the Trust Fund and the investment and lending opportunities it may present, please contact Peter Duffley .

State Tax Credits to Supplement Federal New Markets Tax Credits

Mississippi recently enacted a credit for equity investments in Community Development Entities (CDEs) that use the capital to make qualified low-income community investments in Mississippi. This Mississippi tax credit, by supplementing investments made under the federal New Markets Tax Credits (NMTC) program, provides an additional incentive for investors to choose Mississippi when selecting where to send their NMTC dollars. The Mississippi tax credit incentive, of course, is only valuable to the extent that investors have an appetite for Mississippi state tax credits.

We are assisting a client with passing a similar state tax credit in North Carolina, where a number of large banks and other institutional investors have a significant appetite for North Carolina tax credits. Due to the fact that many recipients of NMTC allocations have a choice as to where they make qualified NMTC investments, the addition of a state tax credit incentive may help North Carolina to increase its share of NMTC investments. Will the North Carolina legislature act to improve the climate for NMTC investments in North Carolina's low-income communities? If you are interested in supporting our efforts to pass a North Carolina state tax credit companion to the federal NMTC, or if you are interested in working with us to push similar state tax credit incentives in other mid-Atlantic states, please contact Peter Duffley.

Reportable Transactions and the "Forgotten" Historic Rehabilitation Tax Credit

The Internal Revenue Service recently released Revenue Procedure 2007-20 to the cheers of the low-income housing tax credit (LIHTC) and New Markets Tax Credit (NMTC) investment community. Revenue Procedure 2007-20 specifically excluded LIHTC transactions from being considered reportable transactions under the U.S. Treasury Department's tax shelter reporting regulations. LIHTC limited liability corporate investors breathed a collective sigh of relief, but concern remains about the status of federal Historic Rehabilitation Tax Credits (HTC). Why did the Internal Revenue Service (IRS) fail to extend this relief to HTC transactions? What is the effect of these regulations for projects involving both LIHTC and HTC, or NMTC and HTC? While the results are sorted out by the IRS, we have advised our banking and other institutional investors to continue to make protective disclosures to the IRS when investing in funds or properties involving HTC.