On March 23, the President signed the Consolidated Appropriations Act, 2018 (H.R. 1625), a $1.3 trillion dollar spending bill that funds the federal government through September 30, 2018. In addition to preventing a government shutdown, this omnibus spending bill incorporated the following key provisions that help to strengthen and expand the Low Income Housing Tax Credit (LIHTC):

  • A 12.5% increase in the annual per capita LIHTC allocation ceiling (after any increases due to the applicable cost of living adjustment) for calendar years 2018 to 2021.
  • An expansion of the definition of the minimum set-aside test by incorporating a third optional test, the income-averaging test. Pursuant to the Code, a project meets the 40-60 minimum set aside test when 40% of the units in the project are both rent restricted and income restricted at 60% of the area median income. Under the new law, the income test is also met if the average of all the apartments within the property, rather than every individual tax credit unit, equals 60% of the area median income. Notwithstanding, the maximum income to qualify for any tax credit unit is limited to 80% of area median income.

This legislation is a great win for affordable housing advocates who have been pushing for LIHTC improvements through the Affordable Housing Credit Improvement Act, introduced in both the Senate (S. 548 sponsored by Senators Cantwell and Hatch) and the House (H.R. 1661 now sponsored by Congressmen Curbelo and Neal) in 2017, as discussed previously in a prior blog post.

We will continue to provide updates on legislation related to Tax Reform. Just in case you missed it, last month Ballard Spahr hosted a webinar on the impact of Tax Reform on the Low Income Housing Tax Credit with our colleagues from RubinBrown LLP, Enterprise Community Partners, Inc. and Red Stone Equity Partners. Presentation slides and a recording of the webinar are available on our event page.

The Maryland Affordable Housing Coalition (MAHC) held its annual Housing Day in Annapolis today.   The event brings together over 200 affordable rental housing advocates to inform legislators of the value of affordable housing and funding needs to continue to develop and rehabilitate affordable housing in Maryland.  Housing Day also provides the opportunity to hear from State representatives regarding current issues and legislation related to the affordable housing industry.  During today’s program, many State elected and appointed officials emphasized the need to continue to think creatively to meet the increasing demand for affordable housing in Maryland – including the opportunity to focus on work force housing.

A priority of the 2018 Housing Day was to advocate for increased funding for Rental Housing Works (RHW), subordinate gap financing used solely for projects utilizing 4% low-income housing tax credits and Maryland Department of Housing and Community Development’s Multifamily Bond Program.  The Governor’s current budget proposes funding RHW at $20 million, but MAHC is advocating for a $5 million increase in this amount to $25 million in order to keep up with the demand for this popular financing.   MAHC notes that for every $1 invested in RHW generates nearly $11 in new public and private investments and each RHW project creates 174 jobs.  We heard from a number of elected officials regarding the value of speaking about RHW projects that have closed in their districts and the linked map provides a snapshot of the impact of RHW within each Maryland County.

Turning to the national stage, Molly Bryson, a Partner at Ballard Spahr, provided attendees of the 2018 Housing Day with an update on the need to continue to advocate for the expansion and enhancement of the federal low-income housing tax credit through the passage of the Cantwell-Hatch Affordable Housing Credit Improvement Act (S.548) in the U.S. Senate and the U.S. House of Representatives companion bill (H.R.1661 – Affordable Housing Credit Improvement Act of 2017).  The Cantwell-Hatch Act was recently included in the Senate’s initial version of the budget bill, but it unfortunately did not make it into the House’s approved budget bill.  Continued outreach is needed to keep up the momentum of this important legislation.

Ballard Spahr will continue to monitor both Maryland and federal legislation related to affordable housing and provide updates in future blog posts.

On October 22, 2014, the federal regulatory agencies responsible for implementing regulations under Dodd-Frank finalized the risk retention rule for asset-backed securities (the “Risk Retention Rule”). For the securitization of multifamily loans, compliance with this rule is required beginning December 24, 2016. Securitizations for multifamily loans created before December 24, 2016 do not need to comply with the Risk Retention Rule requirements. While we will only discuss multifamily loans here, please note that the Risk Retention Rule applies to the securitization of residential (single family) mortgages beginning December 24, 2015. Also note loans originated through a state Housing Finance Agency (“HFA”) are exempt from the Risk Retention Rule.

On and after December 24, 2016, Section .7 of the Risk Retention Rule gives commercial mortgage-backed securities (“CMBS”) sponsors the option to satisfy their risk retention obligation by exercising the third-party purchaser option, which allows up to two third-party purchasers (“B-Piece Buyers”) to hold a pari passu portion of eligible horizontal residual interest (“B-Piece”). Below is a list of the requirements necessary if exercising this option:

  • Each B-Piece Buyer must perform an independent review of the credit risk of each securitized asset, pay for the B-Pieces in cash at closing, without financing, and must not be affiliated with any party to the securitization transaction, other than the Special Servicer, investors, and originators of less than 10% of the unpaid principal balance of the securitized assets in the transaction.
  • An unaffiliated “Operating Advisor” must be appointed, whose responsibility is to consult with the Special Servicer on any material decisions after the principal balance of the B-Piece has been reduced by principal payments, realized losses, and appraisal reduction amounts to a principal balance of 25% or less of its initial principal balance. The Operating Advisor is required to act in the best interest of the investors as a whole and has the authority to recommend that the Special Servicer be replaced.
  • Sponsors must make certain disclosures to potential investors, including the name and form of organization of each B-Piece Buyer, a description of each B-Piece Buyer’s experience in investing in CMBS; a description of potential conflicts; the fair value of each B-Piece, the dollar amount to be acquired by the B-Piece Buyer, the purchase price paid for the CMBS interest, and other material information.

A B-Piece Buyer must comply with the Risk Retention Rule’s requirements concerning hedging of interest as if it were the retaining sponsor and may not transfer its B-Piece for 5 years following closing of the securitized transaction. After 5 years, the B-Piece may be transferred to a different B-Piece Buyer, who complies with the requirements of B-Piece Buyers generally. All subsequent B-Piece Buyers must comply with the transfer restrictions. When all mortgage loans in a CMBS transaction have been fully defeased, the risk retention obligation is terminated.

Housing Plus bloggers Michael Skojec and Amy Glassman will be featured speakers on Novogradac’s webinar: “Consequences of Disparate Impact for Multifamily Housing” on July 22. The webinar will discuss the implications of the Supreme Court’s decision in the Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. case and explore how the Court’s opinion will shape future cases, HUD’s fair housing efforts, and the larger housing landscape.

The discussion points will include the following topics:

  • Fair Housing Act and defining disparate impact
  • Making a disparate impact claim (including examples)
  • How HUD’s three-step burden-shifting rule works
  • Recent lower-court decisions in Washington, D.C., and Illinois
  • Two prior cases (Magner and Mount Holly)
  • ICP v. TDHCA facts and history
  • Key issues argued in the Supreme Court case
  • Majority opinion, causation, and other safeguards
  • How this plays out—future litigation
  • Possible HUD modifications to the rule
  • One housing authority’s concerns
  • The upcoming affirmatively furthering rule

Registration is still open, but will close at 2 p.m. on July 21. We will be sure to follow up with the webinar’s key takeaways.

Roof OutlineLast week, HUD’s Office of Multifamily Housing Programs announced Thomas R. Davis as the new Director of the Office of Recapitalization. Mr. Davis will oversee the Office’s efforts to further financial stability and viability for the preservation and recapitalization of affordable housing. The Office’s key programs include Mark-to-Market (M2M), Section 236 Preservation, Senior Preservation Rental Assistance Contracts (SPRAC), and the Rental Assistance Demonstration (RAD).

Prior to his new appointment, Mr. Davis led the affordable housing consultant practice at Recap Real Estate Advisors and directed public housing recapitalization projects, particularly those under HUD’s RAD program. Mr. Davis also worked extensively with multi-state nonprofit affordable housing owners and developers. He directed large-scale affordable housing revitalization projects with The Community Builders, and managed a multi-jurisdictional portfolio financing of government-assisted, LIHTC units at the Preservation of Affordable Housing, Inc. (POAH). He began his career at Morrison & Foerster, where he specialized in affordable housing and LIHTC issues.

We at Housing Plus have had the pleasure of professionally collaborating with Mr. Davis, and we are excited to see his diverse affordable housing experience and background shape HUD’s multifamily housing programs.

RoadAs a follow up to our January 12, 2015 post, HUD published a proposed rule that seeks to alleviate administrative burdens and streamline requirements across the public housing, Section 8, and multifamily housing rental assistance programs. Many of HUD’s proposals stem from innovations implemented by Moving to Work (MTW) participants. The proposed rule makes these innovations available to non-MTW agencies and owners, which is particularly important in light of increasingly limited resources to serve low-income families.

Ballard Spahr’s comments to the proposed rule supports many of HUD’s proposals and suggests ways to further improve other proposals. We look forward to the next stage in the process and are hopeful the rule will lead to new ways of enhancing the delivery of services to the families living in the nation’s affordable housing stock.

DominoesIn the last few years, we have seen an increase in the number of multifamily housing projects being sold at the completion of the 15-year low-income housing tax credit compliance period. Strong rental demand in many areas of the country and low financing rates have created a favorable market for selling these types of projects.

Many of the projects being sold have been financed with proceeds of tax-exempt bonds. Some project owners are surprised to learn that it can be somewhat complicated to prepay the bonds. Sometimes closings are delayed because of the prepayment requirements contained in the related bond documents.

Here is a useful list of items that are commonly required to be provided in connection with the prepayment of an issue of tax-exempt bonds: (1) timely notice from the project owner to the bond trustee, bond issuer, credit enhancer and servicer, (2) direction letters from the project owner and the bond issuer to the bond trustee, (3) timely notice from the trustee to bondholders, (4) consents from the bond issuer and the credit enhancer, (5) tax opinions from bond counsel, (6) opinions from borrower counsel regarding certain bankruptcy code provisions, (7) defeasance escrow agreements, (8) releases of liens from the bond trustee and the credit enhancer, (9) release of the bond regulatory agreement from the bond issuer, (10) certificates from the bond trustee, bond issuer and credit enhancer and (11) dissolution agreements may be required if the tax-exempt bonds are secured by a mortgage-backed security structure.

In addition, bond counsel will usually require evidence from the project owner that the qualified project period will end with the redemption of the tax-exempt bonds. The project owner may need to provide evidence of the date on which at least 50% of the units in the project were first occupied and evidence that the project has been in compliance with the terms of the bond regulatory agreement.

Project owners who are considering selling a multifamily project financed with tax-exempt bonds will want to be aware of the process and time required to prepaying the bonds.



Housing Plus BlogSeveral exciting developments have recently brought changes to the affordable housing industry and we are inviting you to explore them with us at our fifth annual Western Housing Conference. Ballard Spahr and CSG Advisors are pleased to announce this year’s Best of the West in Affordable Housing Development and Financing conference on March 13, in San Francisco. The conference features movers and shakers in affordable housing leading panels, roundtables, and discussion about the most pertinent issues and developments shaping the housing industry.

The Legislative Update Panel has its hand on the pulse of Capitol Hill. Discussion will explore the implication and future of legislation and policies that affect the affordable housing industry.

HUD’s Rental Assistance Demonstration (RAD) Program experienced a boost in governmental support with the recent cap increase. The RAD program now offers renewed opportunities for housing authorities and developers to finance, transform, and create long-term housing options for low-income residents. The RAD Panel brings together a panorama of perspectives to discuss the need-to-know policies, timelines, financing structures, and organizational approaches to the revitalized RAD program.

The Finance Trends and Innovations Panel will offer insights to new loan products, lender programs, and interest rate structures taking shape in affordable housing finance. The discussion will examine new funding sources as a strategic means to preserve and sustain affordable housing.

Roundtable forums will feature Year 15 challenges and the implications of Fair Housing: Disparate Impact. Discussion will examine these two important topics and provide strategies, considerations, and expectations for the future of affordable housing development and management.

Registration for the event is free, and a detailed program description is available.

It is our privilege to create such an informative and collaborative forum for dialogue, exploration, and networking within an industry about which we feel so passionate. Though we will certainly blog about conference updates and insights, we hope you will join us in person.

Earlier this year, President Obama included within his Administration’s budget to Congress certain tax proposals.  Among those was a proposal to allow states to convert up to 8 percent of their private activity bond (PAB) volume cap into Low-Income Housing Tax Credit (LIHTC) allocations.  For every $1,000 of PAB volume cap converted, a state would receive 9 percent LIHTCs equal to $1,000 times the applicable percentage of the 4 percent LIHTC for the previous December times two.  This proposal was recently discussed at the Bipartisan Policy Center Housing Commission roundtable on affordable housing held on July 23.  Those in favor of this proposal suggest that because states have failed to use a large portion of PAB volume cap in recent years, the proposal would increase available low-income housing projects which are in short supply.  Others, however, argue that as interest rates rise and the demand for PAB increase, more PAB volume cap will be utilized which would limit or possibly eliminate a state’s ability to convert PAB volume cap into LIHTC allocations.  In addition, multifamily housing bonds are just one of the many types of bonds that PAB volume cap can be used for, and housing finance agencies do not necessarily determine the use for PAB volume cap allocations.  Either way, the proposal is interesting.  For additional information about the proposal and additional context for this debate please see Housing Solutions: What Role Should Affordable Multifamily Housing Bonds Play?

DominoesFor many years multifamily housing apartment projects could be financed with tax-exempt drawn-down bonds and loans with all of the bonds issued pursuant to a draw-down loan being treated as part of a single issue.  The date of issuance for the bonds would be the first date on which the aggregate draws exceeded the lesser of $50,000 or 5 percent of the issue price of the bonds.  Draw-down bond structures were used in many private placements as a means to eliminate negative arbitrage.

Faced with the possibility that a governmental issuer could use a draw-down structure for a Build America Bond (BABs) issue and avoid the statutory deadline for issuance of BABs, the Internal Review Service issued Notice 2010-81 creating separate definitions for (i) the issue date of a bond and (ii) the issue date of an issue of bonds. The issue date of a bond was determined to be the date that the issuer received funds in exchange for the bonds and the issue date of an issue of bonds was determined to be the first date on which the aggregate draws exceeded the lesser of $50,000 or 5 percent of the issue price of the bonds.

After the release of Notice 2010-81, the Internal Revenue received comments that the definition of the issue date of a bond in Notice 2010-81 created concerns for the treatment of draw-down bonds for purposes of the allocation and administration of volume cap on private activity bonds.  Finally, in 2011 the Internal Revenue Service issued Notice 2011-63 and indicated that, solely for purposes of private activity bond volume cap under Section 146 of the Internal Revenue Code, an issuer may treat a bond as issued either (i) on the issue date of the bonds under the general rule of Notice 2010-81, or (ii) on the issue date of the issue, provided that all of the bonds of the issue are delivered no later than the earlier of (a) the statutory deadline of issuing the bonds, or (b) the end of the maximum carryforward period of unused volume cap under the applicable statute treating all of the unused volume cap for the issue as volume cap arising in the year in which the issue date of the issue occurs. Notice 2011-63 also indicates that an issuer must type special language on the IRS form 8030 filed with respect to the bonds. 

Although Notice 2010-81 gives guidance as to which definition to use for purposes of the administration of volume cap, several questions remain.  For example, which definition of issue date should be used in applying the public hearing rules and should all draw-down bonds be treated as a single issue for purposes of applying use of proceeds rules such as limits for land and bad costs.