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Federal Low Income Housing Tax Credit Exchange Program
On July 9, 2009, the United States Treasury Department (Treasury) issued guidance for the requirements of the federal low income housing tax credit exchange program (Exchange Program). Under the Exchange Program, state housing credit agencies (HAs) make grants to owners of low income housing projects in lieu of awarding the owners federal tax credits.
Summary of the Treasury Guidance
Project Eligibility
To be eligible for an Exchange Program grant, the project owner must demonstrate that it has made a good faith effort to obtain a commitment from a tax credit investor to purchase the credits that the owner seeks to replace, regardless of whether or not the owner has actually received a low income housing tax credit (LIHTC) allocation. Each HA must establish a fair and open process for making this “good faith effort” determination, based upon local investment conditions. The Exchange Program’s funds can be used in a project funded with the proceeds of tax exempt bonds. A new building or a rehabilitation of a building that was placed in service prior to 2009 is not eligible to receive an Exchange Program grant.
Amount of Subawards and Eligible Uses
The amount of the HA’s subaward to project owners cannot exceed 85 percent of the amount of the building’s eligible basis, including any basis boost awarded to the project. The project owner must maintain sufficient documentation to show that the allowable construction, acquisition and rehabilitation costs of the building (i.e. eligible basis items) equal or exceed the amount of the Exchange Program subaward. Project owners are not required to trace Exchange Program funds by tracking the sources and uses of each expenditure. The Treasury guidance implies that Exchange Program funds cannot be used to pay for land acquisition costs, but the Treasury has indicated that it will clarify in the near future that Exchange Program funds can be used to pay for any costs that LIHTC equity can be used to pay for.
Recapture Event
A recapture event occurs if, at any time during the 15-year compliance period, the applicable fraction of a building (low income units over residential rental units) falls below the percentage of Exchange Program funds that comprise the eligible basis of the building (taking into account any basis boost attributable to the building) (Section 1602 Percentage), or below the minimum set-aside elected for the building, whichever is greater.
There is an alternative recapture event trigger if the building’s applicable fraction specified in the extended use agreement is lower than the Section 1602 Percentage. In that case, recapture occurs if the applicable fraction of the building falls below the applicable fraction specified in the extended use agreement, or below the building’s minimum set-aside, whichever is greater.
The following example illustrates the recapture rules:
Example
Facts: - $1.5 million of Exchange Program funds were awarded to a building with an eligible basis of $4.5 million.
- The Section 1602 Percentage is 33.3% ($1.5 million / 4.5 million).
- The building has 100 units and is fully occupied by low income tenants.
- The 20/50 minimum set-aside test was elected.
- The applicable fraction specified in the extended use agreement is 100%.
Analysis:
Since the building’s applicable fraction specified in the extended use agreement is not lower than the Section 1602 Percentage, the alternative recapture event trigger will not apply. The Section 1602 Percentage (33.3%) is greater than the minimum set-aside (20%), so a recapture of Exchange Program funds will not occur until the applicable fraction of the building falls below 33.3%.
If the 40/60 minimum set-aside test was elected, then a recapture event would occur once the applicable fraction falls below 40%, because the applicable fraction (40%) would be greater than the Section 1602 Percentage.
Assume the facts are changed and the Section 1602 Percentage is 66.7%, 50 of the 100 units are occupied by low income tenants and the applicable fraction in the extended use agreement is 50%. The alternative recapture event trigger would be used because the applicable fraction in the extended use agreement (50%) is less than the Section 1602 Percentage (66.7%). So, if fewer than 50% of the units qualify for the LIHTC, a recapture event would occur.
Amount of Recapture and Payment of Recapture Penalty:
Upon a recapture event, the full amount of the Exchange Program subaward is owed minus 6.67 % (1/15th) for each full year of the building’s 15-year compliance period during which an Exchange Program recapture event did not occur.
The recapture amount is paid by the project owner, including any subsequent owner during the compliance period. The project owner pays the recapture amount to the HA, and the HA must return the recapture amount to the Treasury. Also, the HA can impose its own conditions or restrictions on the recapture, such as specifying an entity other than the tax credit partnership that will be subject to the recapture penalty.
Placed In Service Date
The Treasury guidance states, “Whether or not any LIHTCs remain in a stalled building that utilizes 1602 funds, the placed-in-service date for the building does not change.” This language seems to suggest that the date that a building using Exchange Funds is deemed to be placed in service for purposes of the LIHTC rules will not be affected by whether or not the building owner will actually use LIHTCs. Further clarification from the Treasury is needed.
Form of Exchange Program Funds
Cash provided from the Exchange Program to project owners must be in the form of a grant rather than a loan, unless the loan is non-interest bearing and not repayable except in the event of noncompliance with the LIHTC program during the 15-year compliance period. Note that such loans will be treated as grants for federal income tax purposes.
Fees Charged by State Housing Credit Agency
An HA may not charge an application fee, but it may collect reasonable fees from a project owner to cover expenses relating to the HA’s performance of asset management responsibilities.
Disbursement of Exchange Program Funds
Once an HA makes a subaward to a project owner, the HA will make the funds available to the project when there is a need to pay a project cost, similar to the procedure for the HOME and CDBG programs. Note that Exchange Program funds must be distributed by the HA to the subawardee by December 31, 2010.
Compliance Period
Project owners who receive Exchange Program funds will be subject to the 15-year compliance period that applies to LIHTCs. Project owners who receive Exchange Program funds will also have to enter into an extended use agreement with the HA which extends certain restrictions for at least an additional 15 years.
Cross-Cutting Federal Requirements
The “Buy American” provisions in the American Recovery and Reinvestment Act of 2009 do not apply to the Exchange Program. The National Environmental Policy Act and the Davis-Bacon Prevailing Wage Rates do not apply to projects solely based upon the fact that the projects receive Exchange Program funds. Section 504 of the Rehabilitation Act of 1973 and other cross-cutting Federal requirements apply in the same manner that they would apply to an LIHTC project that does not receive Exchange Program funds.
Form 8609
The HA and a project owner receiving Exchange Program funds must complete certain portions of the IRS Form 8609, even if the project receives no LIHTCs.
A link to the Treasury's frequently asked questions and answers is available here.
If you have questions about the federal low income housing tax credit exchange program, please contact any one of the following Gallagher Real Estate and Business Transactions tax attorneys:
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