Low Income Housing Tax Credits

After legislation to repeal the Affordable Care Act was pulled from the House floor last Friday, news headlines across the country began reporting that tax reform is next on the Trump Administration’s agenda. As noted in our prior blog post, tax reform that changes the corporate tax rate, the tax-exempt bonds program and the tax-credit programs will have significant impacts on the production of the affordable housing across the country.

In an effort to protect affordable housing programs, legislators have introduced amendments to the Internal Revenue Code (“IRC”) that either (1) create savings to be reinvested in affordable housing programs or (2) expand the availability of housing tax credits and fix related technical issues.

The following bills were introduced in the past 60 days –

  1. The Affordable Housing Credit Improvement Act of 2017 (S. 548) (the “Cantwell-Hatch bill”). According to The Affordable Housing Tax Credit Coalition, the bill builds upon prior bills (S. 2962 and S. 3237), also introduced by Sentor Maria Cantwell (D) and Senator Orrin Hatch (R), and includes “a new provision addressing planned foreclosures, a provision raising the cap to 30 percent from 20 percent on Difficult to Develop Areas (DDAs), additional criteria for community revitalization plans, a provision which codifies, rather than leaving up to Treasury regulations, the prohibition against any state QAP from including local approval or local contribution requirements, and other technical changes.” A section by section summary can be found here.
  2. Affordable Housing Credit Improvement Act of 2017 (H.R. 1661). The purpose of the bill, as reported in a press release issued by co-sponsor Representative Pat Tiberi (R), is to “make the financing of affordable housing more predictable and streamlined, facilitate housing credit development in challenging markets like rural and Native American communities, increase the housing credit’s ability to serve extremely low-income tenants, and support the preservation of existing affordable housing.” The bill is co-sponsored by Representative Richard Neal (D). A section by section summary can be found here.
  3. Common Sense Housing Investment Act of 2017 (H.R.948). The goal of the legislation, introduced by Representative Keith Ellison (D), is to expand the mortgage interest deduction to lower income homeowners and reinvest an estimated $241 billion in savings over 10 years into affordable housing. More information on the bill can be found here.

Bi-partisan support for these bills, especially S.548 and H.R. 1661, suggest that tax reform protecting housing tax credits is good policy. Monitoring the evolution of these bills; the President’s plan for tax reform and the industry’s response to anticipated changes in the IRC will be telling of the future affordable housing programs, especially those authorized under the IRC.

 

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.

 

In an announcement on January 12th, the U.S. Department of Housing and Urban Development (HUD) published a significant third revision to the Rental Assistance Demonstration (RAD) Notice (PIH 2012-32/ H 2017-03 Rev-3). According to HUD, the RAD notice was revised in order to maintain the increased pace of RAD transactions in a manner that is consistent and flexible. The revised notice is effective upon its forthcoming publication in the Federal Register, though several eligibility criteria will remain subject to a 30-day public comment period. Some of the substantive changes to the RAD Notice include the following:

  • Project-Based Voucher (PBV) Unit Cap

The revised RAD notice eliminates the standard 25% limit so that there is no longer any cap on the number of units in a project that may receive PBV assistance.  Before this latest modification, RAD allowed up to 50% of the units in a project to receive PBV assistance; provided 100% of the units could receive such assistance if at least 50% of the units were occupied by (i) elderly or non-elderly disabled households or (ii) families receiving supportive services.

  • Resident Notification

The revised RAD notice expanded the notification requirements public housing authorities (PHAs) must give residents at a project identified for conversion. Most significantly, before submitting a RAD application, PHAs must now disclose to residents any preliminary intent to (i) include a transfer of assistance; (ii) partner with a third party entity that will have a general partner/managing member interest in the new project owner; (iii) make changes in the number or configuration of any assisted units; (iv) impose any  change potentially impacting the household’s ability to reoccupy the unit; (v) the scope of work; and (vi) implement any deminimis reduction of units vacant for more than 24 months at the time of the RAD application. PHAs must issue a RAD Information Notice and General Information Notice (if required) according to the RAD Fair Housing, Civil Rights, and Relocation Notice (H/PIH 2016-17)  to inform residents of their rights in connection with the conversion. PHAs are also required to have an additional resident meeting prior to submitting its Financing Plan, and conduct subsequent meetings with residents to discuss any material changes to utility allowance calculations or substantial changes to the conversion plan.

  • Right to Return & Rescreening

Under the new RAD notice, existing public housing residents at a project converting to RAD who will occupy non-RAD PBV units or non-RAD PBRA units following conversion are protected against post-conversion occupancy exclusion due to revised rescreening, income eligibility, or income targeting policies.  Thus, even those public housing residents that will reside in non-RAD units post-conversion will preserve this right to return.

  • Use of PHA Acquisition Proceeds

Any cash acquisition proceeds a PHA receives in excess of seller take-back financing must be used for “Affordable Housing Purposes.” The definition of “Affordable Housing Purposes” is now set out in the definitions section of the Notice and applies in more instances.  The revised RAD Notice defines “Affordable Housing Purposes” as those activities that support the predevelopment, development, or rehabilitation of other RAD conversions, public housing, Section 8, Low Income Housing Tax Credits (LIHTC) or other federal or local housing programs that either (i) serve households with incomes at or below 80% of the area median income or (ii) provide services or amenities that will be used primarily by low-income households as defined by the United States Housing Act of 1937.

  • Expanded Criteria for Ownership or Control Requirement

The latest revisions to the RAD Notice describes further circumstances under which a public or non-profit entity acting directly or through a wholly owned affiliate can meet the ownership or control requirements, including if it (i) holds a fee simple interest in the land; (ii) is the ground lessor pursuant to a ground lease with the project owner; (iii) has legal authority to direct the financial and legal interests of the project owner with respect to the RAD units; (iv) owns 51% or more of the general partner/managing member interest in a limited partnership or limited liability company; (v) owns less than 51% of a general partner/managing member interest but holds certain HUD-approved control rights; (vi) owns 51% or more of the total ownership interests and holds certain HUD-approved control rights; or (vii) enters other ownership and control arrangements as approved by HUD.

  • Maximum Developer Fee

For LIHTC transactions, undeferred portions of earned developer fee are now capped at the greater of (a) 15% of total development costs less acquisition payments to the PHA, developer fees and reserves; and (b) the lesser of (i) $1 million and (ii) 15% of the total development costs without any offsets for acquisition payments to the PHA, developer fees and reserves. Developer fee limits applicable under the prior version of the RAD Notice continue in effect for all transaction in which the RAD Conversion Commitment (RCC) was issued within 60 days following the current revisions to the Notice and which close prior to the later of 60 days after the revised Notice and 60 days after the RCC.

Developer fee remains subject to the LIHTC allocating agency’s schedule for payment. For non-LIHTC deals, the total earned developer fee can be up to 10% of total development costs less any acquisition costs, reserves, or developer fee payments. The revised RAD Notice also states that earned developer fee is also not subject to any federal restrictions, whereas RAD Notice Rev-2 only stated that it was not to be counted as program income.

  • Capital Needs Assessment (CNA) Exemptions

The revised RAD Notice allows HUD to exempt projects from the need to conduct a Capital Needs Assessment where the total number of RAD and other PBV-assisted units constitute less than 20% of total units at project, or a higher amount at HUD’s discretion. It is also important to note that under this revision, all CNA exemptions listed are discretionary not automatic, and must be confirmed with the assigned RAD Transaction Manager for the project conversion.

To review additional changes made in the latest version of the RAD Notice, HUD has also offered a blackline comparison to Revision 2.  

After several years of litigation, the U.S. District Court for the Northern District of Texas recently dismissed disparate impact claims filed against the Texas Department of Housing and Community Affairs (TDHCA) in the fair housing case, The Inclusive Communities Project, Inc. v. The Texas Department of Housing and Community Affairs.

The Inclusive Communities Project (ICP) claims alleged that TDHCA’s procedures for allocating low-income housing tax credits had a disparate impact on racial minorities and thus violated the Fair Housing Act (FHA). Following the District Court’s initial ruling that ICP made a successful prima facie showing of disparate impact, the case was appealed to the Fifth Circuit and U.S. Supreme Court. Even though the Supreme Court held that disparate impact claims were cognizable under the FHA, the case was remanded so ICP’s claims and TDHCA’s defenses could be reassessed in light of the standards in the Supreme Court verdict and new U.S. Department of Housing and Urban Development regulations for evaluating disparate impact claims.

On August 26, 2016, the District Court held that ICP failed to make a prima facie showing of disparate impact under the current standard because its claims (i) did not identify any specific, facially neutral policy that caused the disparate impact, (ii) were in essence claims disparate treatment, and (iii) failed to demonstrate that TDHCA’s policies actually caused the statistical disparities asserted by ICP. For more information, see the Housing Group’s e-alert on this verdict.

Congress recently passed a short-term extension to keep the EB-5 Regional Center Program (commonly known as the EB-5 Program or the Immigration Investor Program) from expiring. The EB-5 program adds versatility to the financing options available to affordable housing, and can be used with certain Low Income Housing Tax Credits. The extension of this program allows the Senate and House more time to enhance EB-5 legislation.

Strengthened through bi-partisan support, several extension bills have been proposed this year. The proposed bills have sought to add a variety of legislation to the EB-5 Program:

  • Make regional centers permanent in addition to program enhancements;
  • Reauthorize regional centers for five years, and create oversight, security, and anti-fraud stipulations that increase transparency of the program (an overview of the Reauthorization Bill is available);
  • Provide visas for foreign entrepreneurs who have obtained venture capital, seed financing, or operate existing business with proven growth.

The EB-5 Program has generated nearly $12 billion in foreign direct investments, and has created nearly 30,000 jobs per year since 2008. The Program has already stimulated affordable housing financing and development on a national level, and the Program is poised to grow.

Our Housing or EB-5 Groups would be happy to provide more information.

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.

On May 5, 2015, Senators Maria Cantwell (D-WA) and Pat Roberts (R-KS) introduced the “Improving the Low-Income Housing Tax Credit Rate Act” (S. 1193), which would create a permanent 9% minimum low-income housing tax credit rate for non-tax-exempt bond-financed new buildings or substantially rehabilitated buildings, and a permanent 4% minimum rate for acquisition credits. The bill would apply to all buildings placed in service after December 31, 2014.

Co-sponsors include Senators Richard Blumenthal (D-CT), Cory Booker (D-NJ), Barbara Boxer (D-CA), Ben Cardin (D-MD), Mike Crapo (R-ID), Dianne Feinstein (D-CA), Al Franken (D-MN), Kirsten Gillibrand (D-NY), Mazie Hirono (D-HI), Angus King (I-ME), Amy Klobuchar (D-MN), Patrick Leahy (D-VT), Robert Menendez (D-NJ), Patty Murray (D-WA), Bernie Sanders (I-VT), Chuck Schumer (D-NY), Jeanne Shaheen (D-NH), Debbie Stabenow (D.MI), Elizabeth Warren (D-MA) and Sheldon Whitehouse (D-RI).

The text of the Senate bill is identical to H.R. 1142, a bill introduced by Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA) in late February. Although it’s unknown at this point how either bill will fare, the fact that this legislation has been introduced in both houses of Congress illustrates the importance and value of the low-income housing tax credit program, and hopefully indicates that there is some momentum behind the enactment of permanent minimum credit rates.

 

Flag CapitolWould private developers build affordable housing if there were no government subsidies? Rep. Mike Capuano (D-MA) and his colleagues explored that question and other topics during a House Financial Service Subcommittee hearing held last Thursday on private sector participation in affordable housing programs. The hearing covered a wide range of housing programs that help leverage private resources including HUD programs, such as the Rental Assistance Demonstration (RAD), Housing Choice Vouchers, and Public Housing, particularly the innovative Moving to Work program. Other government incentive programs that support affordable housing development, notably the Low Income Housing Tax Credit Program, were also the discussed.

The panel of witnesses, including Adrianne Todman, Executive Director of the District of Columbia Housing Authority, Brad Fennell of William C. Smith Company and Company, ‎Jim Evans of Quadel Consulting and Shelia Crowley of the National Low Income Housing Coalition, all responded to Rep. Capuano’s question with a resounding “no”. The witnesses clearly agreed that without some level of government investment, we would not have an available supply of decent housing for people of modest means. This begs another question: why has Congress continued to slash housing budgets year after year when the effect is to reduce the ability to leverage needed private funds?

All of the panelists echoed the ever growing need for affordable housing, as evidenced by countless studies. There was interest expressed by all in the RAD program as a way to leverage more private capital investment in public housing, using both FHA and the low income housing tax credit. Many of the Republican members of the Subcommittee indicated their support for the Moving to Work (“MTW”) program which enables public housing authorities to have more flexible program requirements which enable them to better partner with private entities to address local housing needs in a cost effective manner. While most of the panelists pointed to the success of MTW, even long time critic, Ms. Crowley, stated that she has seen that the ability to use funds fungibly, which is the center of the MTW idea, is important to helping public housing adapt more to the private market.

The one thing that was clear from the discussion: Congress is very interested in finding new ways for the private sector to play a larger role in providing the resources – both in terms of capital and private sector business models – to incentivize affordable housing investments. We have not heard the last of this topic . . . Legislation to follow?

Last week, HUD has announced a proposed rule to implement protections arising under the Violence Against Women Reauthorization Act of 2103 (VAWA).  The reauthorization added a number of programs covered by VAWA, including:

  • HOME Investment Partnerships program for rental housing;
  • Section 202 supportive housing for the elderly;
  • Section 236 Rental Program;
  • Section 811 supportive housing for people with disabilities;
  • Section 221(d)(3) Below Market Rate Interest Rate Program;
  • HOPWA (Housing Opportunities for Persons with AIDS) housing program;
  • McKinney-Vento homeless programs;
  • U.S. Department of Agriculture Rural Housing properties that receive Section 8 assistance;
  • Low-income Housing Tax Credit properties.

These programs are in addition to VAWA’s initial application to housing assisted with public housing funds, Section 8 vouchers and project-based Section 8 assistance proposed.  HUD’s proposed rule also adds the Housing Trust Fund (HTF) to the list of programs (the HTF was not yet implemented at the time of VAWA reauthorization).

HUD has also posted a summary of key elements of the proposed rule. Among these are:

  • extension of protections to “intimate partners” and “affiliated individuals” (i.e., spouse, parent, brother, sister or child of the individual of a child for whom the individual is loco parentis, or any other individual, tenant or lawful occupant living with the individual);
  • clarifies the provision that allows for the bifurcation of the resident lease and the eviction of a tenant who commits criminal acts of physical violence against family members or others, to permit the remaining residents a reasonable opportunity to establish eligibility to maintain tenancy under an assisted housing program or find other housing;
  • requires agencies to adopt a model transfer plan when a tenant reasonably believes there is a threat of imminent harm from further violence if the tenant remains in the unit.

The proposed rule was not published in the Federal Register this Wednesday.  The deadline for submitting comments on the proposed rule is June 1, 2015.

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.