As we know, the President has signed what was originally titled Tax Cuts and Jobs Act, the most significant overhaul to the U.S. Tax Code since 1986. The President signed the Act into law after the first of the year in order to avoid some automatic spending cuts.

In its final form, this Tax Code overhaul retains private activity bonds and the the low-income housing tax credit. However, according to A Call To Invest in Our Neighborhoods (ACTION) Campaign, the amendment of other critical provisions of the Tax Code, especially, the lowering of the corporate tax rate from 35 percent to 21 percent and the creation of a base erosion and anti-abuse tax, present concern for affordable housing, as these provisions can impact an investor’s tax credit appetite. In an analysis performed by Novogradac and Company, the final version of the bill “would reduce the future supply of affordable rental housing by nearly 235,000 homes over 10 years.” Further, it is anticipated that other changes to the Tax Code, such as those relating to bonus depreciation, depreciation, and interest expense limitations, will impact equity pricing.

The legislation also retains the new market tax credit, with no change to its expiration which is after the 2019 allocation. The 20% historic tax credit was also retained, but with significant modification, including claiming the credit ratably over 5 years.

Ballard Spahr’s Tax Group is also following the legislative developments of other provisions of the bill. Late yesterday, the Tax Group issued a thoughtful analysis of the final bill.

Please use our Tax Reform Alert Center as a resource to find more information on the bill and/or reach out to us directly.

 

 

shankun-roberts_maia_1We are excited that Maia Shanklin Roberts has joined Ballard Spahr LLP and our Housing Plus team. Maia’s background is in community development. She worked with the Maryland Department of Housing and Community Development and the Citywide Coordinating Committee on Youth Violence Prevention in Washington, D.C.

Maia is looking forward to bringing her keen insights about community development to blog readers. She has been involved in numerous affordable housing, adaptive reuse, and mixed-use transactions involving more than $800 million in federal, state, historic, and energy tax credit syndications, tax-exempt private activity bonds, and other public financing.

Please join us in welcoming Maia to the firm and our Housing Plus team.

 

Wind Mills and Solar PanelsAs in prior years, the Obama administration’s FY 2016 budget includes a number of impactful, and generally positive, tax credit proposals. With respect to the Low-Income Housing Tax Credit (LIHTC), the budget retains many of last year’s proposed modifications, and adds a new proposal to remove the population cap for Qualified Census Tract designations. Specifically, the budget would modify the LIHTC program by:

  • authorizing States to convert up to 18% of their private activity bond volume cap into additional low-income housing tax credit (LIHTC) allocating authority (last year’s proposal limited the percentage to 8%);
  • allowing LIHTC development owners’ to elect a third possible low-income set aside in which at least 40% of a project’s units must be occupied by tenants whose incomes average no more than 60% of area media gross income (with the caveat that no low-income unit could be occupied by a tenant with income over 80% of AMI);
  • increasing the discount rate used in calculating LIHTCs for non-bond financed projects;
  • adding preservation of federally assisted affordable housing to Qualified Allocation Plan criteria;
  • removing the population cap for Qualified Census Tract designations (new proposal for 2016); and
  • implementing a requirement that LIHTC-supported housing protect victims of domestic abuse.

Among other non-LIHTC highlights, the budget would permanently extend the New Markets Tax Credit (NMTC) with a $5 billion annual allocation, and permanently extend both the renewable energy production tax credit (PTC) and energy investment tax credit (ITC). The ITC would be extended at its current 30% credit level (which is set to expire for properties placed in service after December 31, 2016), and the election to claim ITCs in lieu of PTCs for certain qualified facilities would be made permanent.

The U.S. Department of the Treasury’s General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals (the “Greenbook”) can be found here.

Although the Obama administration’s tax proposals generally tend not to get much traction with lawmakers, the FY 2016 budget is significant in that it adds another voice to the tax reform debate, and signals Presidential support for the NMTC and renewable energy tax credit programs.

ClockThe Senate passed the “Tax Increase Prevention Act of 2014” (H.R. 5771) on Tuesday night just before Congress adjourned for 2014. As Molly Bryson described in her December 5, 2014 post following the House’s passage of the bill, the tax extenders package provides a one-year retroactive extension of certain tax provisions that expired at the end of 2013. Some specific extensions that are of interest to the tax credit community include the following:

  • extension of 9% tax credit floor for low-income housing tax credit allocations made prior to January 1, 2015
  • extension of $3.5 billion in allocating authority for new markets tax credits for the calendar year 2014 round
  • extension of the production tax credit for wind and certain other renewable energy projects that begin construction in 2014
  • extension of 50% bonus depreciation for certain new equipment placed in service in 2014 (2015 for certain longer period production property)

The extent to which this legislation is beneficial really depends on the type of tax incentive involved.  This is a boon for the new markets tax credit community, because it guarantees another full $3.5 billion round of funding. The benefit to renewable energy projects is less clear, as eligibility for the production tax credit is subject to a year-end construction commencement deadline. It’s also not clear how many affordable housing projects will really benefit from a 9% credit floor this late in the tax credit allocation season. In any event, January 1, 2015, when these tax extenders expire, is going to feel a lot like January 1, 2014. It will be interesting to see if this two-week extenders package becomes the poster child for the need for permanent tax reform.

Solar RoofThe American Taxpayer Relief Act of 2012 modified the definition of certain “qualified facilities” under Section 45(d) of the Internal Revenue Code to require that the construction of such facilities must begin prior to January 1, 2014 (i.e. on or before December 31, 2013).  Accordingly, taxpayers may only receive renewable electricity Production Tax Credits under Section 45 of the Code or energy Investment Tax Credits (which a taxpayer may elect to receive in lieu of Production Tax Credits for certain qualified facilities) under Section 48 of the Code with respect to a facility if the construction of such facility began in 2013.

IRS notices published in 2013 established a framework in which a taxpayer may use either of two methods to establish that the construction of a “qualified facility” has begun.  The first method is a subjective “Physical Work Test,” in which a taxpayer must establish that, under all the relevant facts and circumstances, “physical work of a significant nature” has begun.  The alternative method is a more mechanical “Safe Harbor Test,” in which the construction of a facility will be deemed to have begun before January 1, 2014 if (i) the taxpayer incurs 5% or more of the total cost of facility (in accordance with its method of accounting) prior to January 1, 2014, and (ii) thereafter, the taxpayer makes continuous efforts to advance towards completion of the facility.  Both methods require that the taxpayer make continuous progress towards completion, which requirement is deemed to be satisfied if the facility is placed in service before January 1, 2016.

The IRS released Notice 2014-46 on August 8, 2014 (the “2014 Guidance”), which provides additional guidance on the application of the Physical Work Test and the Safe Harbor Test. The guidance makes the following clarifications:

  • The Physical Work Test focuses on the nature of the work performed, not the amount or the cost (i.e. there is no no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test as long as the work performed is of a significant nature).
  • A fully or partially developed facility may be transferred without losing its qualification under the the Physical Work Test or the Safe Harbor Test.
  • For purposes of the Safe Harbor Test, if a taxpayer pays or incurs less than 5% of the total cost of a facility that is a single project comprised of multiple facilities, but at least 3% of the total cost of such facility before January 1, 2014, the safe harbor may be satisfied and the credits may be claimed with respect to some of the individual facilities as long as the total aggregate cost of those individual facilities at the time the project is placed in service is not greater than 20 times the amount the taxpayer paid or incurred before January 1, 2014.

Rather than re-writing the rules, the 2014 Guidance appears aimed at providing certainty and alleviating concerns raised by a conservative reading of the prior IRS guidance. Even though the sunset date of the Production Tax Credit has yet to be extended by Congress, these clarifying changes will hopefully at least give confidence to developers of projects that will have to rely solely on the Physical Work Test, or are worried about hitting the 5% threshold for the Safe Harbor Test.

Electric MeterElectricity filled the room at the “Preservation Through Energy Efficiency Road Show” in Philadelphia last week.  This initiative is the brainchild of Thom Amdur, Executive Director of the National Housing and Rehabilitation Association (NH&RA), who was awarded a grant from the MacArthur Foundation to spread the word across the country about immediate actions that can be taken to finance and implement energy efficiency improvements in affordable housing.  The Philadelphia event received additional support from the Philadelphia Housing Finance Agency.  This was truly an action packed, day-long event that included seven panel discussions on various energy efficiency topics such as planning, financing, operations & measurement, and tenant engagement.

Financing energy efficiency improvements in multifamily housing is still an evolving area, with many panelists commenting that they feel like they are flying the plane while still working on the engine.  Only a small number of lenders are willing to lend for these types of improvements and underwrite using the cost savings created by the improvements.  There is no one-size-fits all approach.  Variables can include the age of the building, climate, different utilities, how the building is operated, systems management, and how energy savings are calculated, acknowledging there are constant fluctuations in energy pricing.

While there were a lot of juicy nuggets of information, one of the most interesting was the fact that utility companies are an often-overlooked source of funds for energy improvements.  Utilities often have rebate programs for energy efficient equipment.  PSE&G, servicing New Jersey, has a remarkable program that will pay for the majority of the costs of a major energy efficiency retrofit.  All funds for this particular program are committed at the moment, but it is an interesting model for other utilities that may have something similar.

Another underlying issue is that the incentives for making energy efficiency improvements do not always accrue to the Owner – sometimes Owners benefit only from the costs of the common areas, which may be nominal in the overall cost of operations.  However, many in the room agreed that there is payback, although it may not be immediately evidenced in the daily bottom line.  Greater energy efficiency can save tenants money paying utilities, freeing up more money for rental payments.  Such improvements can extend the life of the building, decrease long-term maintenance costs, and make the property more desirable for tenants.   With improvements in technology, even improvements made five years ago can be made more efficient with new equipment – for example, less expensive low-flow toilets and L.E.D. light fixtures.  We also learned a new term: “green-skimming” – only making improvements that provide the quickest payback (low-flow toilets shower heads, faucet aerators, and hall lighting) can jeopardize future financing of a more complete retrofit that could include systems upgrades, appliances, and insulation.   

In addition to securing financing for energy efficient improvements, owners and operators of HUD subsidized housing have to consider the HUD program requirements which sometimes work at cross purposes with the financing tools.  HUD has clearly heard these concerns and shared that it will be creating new flexibility around energy efficiency for HUD-insured multifamily properties which will be released in series of Housing Notices this summer.  We are hopeful that there will be additional flexibility for our public housing authority clients, many of whom participate in HUD’s EPC program, but would also like additional options and incentives to “green” their stock.          

Hats off to Thom and NH&RA for creating an great vehicle for elevating the conversation around one of the most cutting edge and important issues in affordable housing today.  The “Road Show” will come to Denver on July 14th with plans to make additional stops in Minneapolis and Atlanta in Fall, 2014, and Indianapolis in Winter, 2015.  NH&RA is also hosting a web-based  knowledge exchange for PTEE participants to access resources, exchange ideas, and otherwise network following the events.  More information about NH&RA events can be found here.  For housing policy geeks like us, this was like eating candy all day long.  We strongly encourage you to participate one of these lively and informative programs.