- Newly Enacted Stimulus Law Includes Major Changes for Real Estate, Redevelopment of Distressed Areas and Affordable Housing
- March 13, 2009 | Author: Kenneth G. Lore
- Law Firm: Bingham McCutchen LLP - Washington Office
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”). The Act is designed primarily to generate short-term stimulus and job creation, and thus most of its provisions are in the form of either one-time appropriations or tax relief of short-term duration. A day later, February 18, President Obama outlined his administration’s Homeowner Affordability and Stability Plan, described briefly below, to stem foreclosures and provide support for the housing market.
While the Housing and Economic Recovery Act of 2008 enacted last July contained an array of measures to spur economic activity, prevent foreclosures and support the housing industry, it became clear that far more extensive measures were needed to accomplish these goals. The Act is one milestone in this ongoing effort. In the coming months we expect additional initiatives to facilitate housing finance, including measures to increase the availability, flexibility and efficiency of FHA, Fannie Mae and Freddie Mac programs for single family and multifamily financing, both for affordable and market-rate housing, and efforts to address the problems created by mortgage securitization.
Summarized below are some of the key tax relief measures and funding provisions in the new Act that are of particular interest to the multifamily housing industry and real estate developers in general:
Low Income Housing Tax Credits (LIHTC)
Tax Credit Exchange Program: The Act creates a program, for 2009 only, under which states may exchange a portion of their LIHTC allocations for cash. This program was created because the demand for LIHTCs has fallen sharply over the past year due to lower corporate profits and other factors. The exchange program will enable developers to access equity on a temporary basis, and also will help to ease the downward pressure on LIHTC pricing caused by an oversupply of LIHTCs on the market. From the standpoint of the industry, the temporary nature of the program is seen as critical, because of concerns that converting the LIHTC program permanently to a cash grant program would expose it to recurring appropriations risk.
The program permits states to obtain cash grants, at the rate of 85 cents on the dollar, in exchange for their tax credit allocation rights under Section 42(h)(2)(C) up to the sum of 100 percent of their unallocated 2008 credits and 100 percent of any credits returned in 2009 plus up to 40 percent of their 2009 per capita and national pool credits, multiplied by 10. For example, a state that forfeits $4 million of unallocated and/or returned credits and $2 million of its per capita and/or national pool credits would receive a cash grant of $51 million ($4 million + $2 million = $6 million x 10 = $60 million x $.85 = $51 million).
States are authorized to use the cash grants to provide financing for projects with LIHTC allocations, or, if such use “will increase the total funds available to the state to build and rehabilitate affordable housing,” to provide financing for projects without LIHTC allocations. The meaning and impact of the quoted language is unclear. For projects without LIHTC allocations, applicants must demonstrate good faith efforts to obtain commitments.
Although it appears that it would be legally permissible for a state to provide exchange grant money to a tax-exempt bond-financed project, we think that in many cases states will be reluctant to commit both bond volume cap under Section 146 and exchange grant funding to a single project. Moreover, because a bond deal does not otherwise have a Section 42(h)(2)(C) allocation, to make such a grant to a bond deal a state would be required under the Act to demonstrate that making such a grant to the particular project would increase the total funds available to the state to fund affordable housing. It may be difficult (or at least burdensome) for a state to make such a showing with respect to a particular bond-financed project; moreover, as noted above, it is not entirely clear what this requirement in the Act means.
Projects receiving exchange grant funding will be subject to the same limitations as other LIHTC properties. State housing credit agencies are required to perform asset management oversight functions at the owner’s expense, and must award the grant funds before January 1, 2011.
Eligible basis will not be reduced by the amount of any grant under program. The conference report for the Act indicates that funds received under the program do not constitute taxable income.
Given the fact that LIHTCs are currently priced at below $.85 on the dollar, there is expected to be strong interest in the program. Because of the vagueness of the enacting statute, however, there remains a substantial amount of uncertainty as to what procedures would need to be enacted by states to implement the program, and how long the process would take.
Gap Funding for Tax Credit Projects: The decline in LIHTC pricing over the past year has made many transactions infeasible in the absence of gap funding. The Act addresses this problem by providing $2.25 billion under the HOME program to state housing credit agencies for gap financing for LIHTC projects. The funds shall be distributed among the states in accordance with the 2008 HOME funding formula. Each state credit agency must award the funds competitively to projects that have received an award of 4 percent or 9 percent tax credits in fiscal years 2007, 2008 or 2009 or receive simultaneously an award of tax credits.
Agencies must commit at least 75 percent of the funds within one year of enactment, and project owners must expend 75 percent of the funds made available to them within two years of enactment and 100 percent of the funds within three years of enactment.
Eligible basis will not be reduced by the amount of any grant under the gap funding program.
Projects receiving funding under the program must comply with federal “prevailing wage” labor standards and with the HOME program’s environmental compliance review requirements. State housing credit agencies must perform asset management functions, at the owner’s expense.
Priority must be given to projects expected to be completed within three years of the date of enactment. Since the Act requires states to allocate the funds pursuant to their qualified allocation plans (“QAPs”), it is expected that state housing credit agencies will need to amend their QAPs before allocating funds under the program.
Provisions not Enacted: The Act in its final form does not contain two provisions that had been sought by the affordable housing industry: (1) acceleration of the amount of the LIHTC that can be claimed in the first three years; and (2) a 5-year carryback of general business credits. As drafted, the provision to allow temporary acceleration of the LIHTC would have applied only to 9 percent credits, which would have placed 4 percent credit transactions at a substantial disadvantage.
New Markets Tax Credits
The Act increased the amount of New Markets Tax Credits (“NMTCs”) available for the 2008 and 2009 allocation rounds. Previously, the NMTCs program allocated $3.5 billion for 2008 and $3.5 billion for 2009; the Act increases the allocation to $5 billion for each of 2008 and 2009. The additional $1.5 billion allocation for the 2008 round will be awarded to: (a) qualified community development entities that applied for, but did not receive, allocations in the initial wave of allocations made during the 2008 round; and (b) qualified community development entities that received an allocation in 2008 less than the amount applied for in their allocation application. (Note: The application process for the 2009 allocation round started last month and the deadline to apply for the 2009 round is April 8, 2009.)
Recovery Zone Bonds: The Act creates a new category of bonds for investment in economic recovery zones, authorizing $10 billion in recovery zone economic development bonds and $15 billion in recovery zone facility bonds, to be issued in 2009 and 2010. The bond authority will be allocated to states based on their job losses in 2008, and may be used to invest in infrastructure, job training, education and economic development in areas with significant poverty, unemployment or home foreclosures.
Investments in Tax Exempt Bonds: The Act made several changes to the tax treatment of investments in tax exempt bonds to reduce their interest rates, including: (a) exempting investments in tax-exempt municipal bonds issued during 2009 and 2010, to the extent they constitute less than 2 percent of a financial institution’s assets, from the bar on taking a deduction for interest expense allocable to tax-exempt investments; (b) expanding the definition of “qualified small issuer,” whose bonds are exempted from restrictions on deduction of interest expense allocable to tax-exempt investments, for 2009 and 2010; and (c) excluding interest on all categories of private activity bonds issued in 2009 and 2010 as an item of tax preference under the alternative minimum tax (AMT)(interest on tax-exempt housing bonds was excluded by statute last year) and allowing AMT relief for current refunding of private activity bonds issued after 2003 and refunded during 2009 and 2010.
Cancellation of Indebedtedness Tax Relief
Generally, taxpayers that reacquire debt at a discount or otherwise modify their loans in such a way as to result in a debt-for-debt exchange at a discount must pay tax on the difference between the “adjusted issue price” (usually, the face amount) of the debt and the reacquisition price. This difference is referred to as cancellation of debt income. Under the Act, certain cancellation of debt income realized as a result of a taxpayer’s or a related person’s reacquisition of debt instruments during 2009 or 2010 can be, at the taxpayer’s election, deferred until 2014 and then included in income ratably over five years. In order to make the election, the relevant taxpayer must include a statement with the income tax return for the year in which the debt instrument is reacquired. The definition of “debt instrument” includes bonds, notes and other instruments or contractual arrangements constituting indebtedness. This relief provision applies to debt repurchases for cash, debt-for-debt exchanges (including a modification of debt that is treated as an exchange), debt-for-equity exchanges, contributions to capital and complete forgiveness by the holder of the instrument. The cancellation of debt income recognition is accelerated if the taxpayer liquidates, dies, sells substantially all of its assets or sells an equity interest in an electing partnership, limited liability company or S corporation.
S Corporation Built-In Gains
The Act contains a provision that reduces the so-called “built-in gains tax” for many S corporations. “Built-in gains” are items for which a former C corporation had accrued economic benefit as of the date that the S corporation election takes effect, but which have not been recognized for tax purposes. The built-in gains tax normally only applies to a corporation's built-in gains for assets sold during its first ten years as an S corporation. The Act reduces from ten years to seven years the recognition period for built-in gain assets sold by S corporations in 2009 and 2010. For 2009, this benefits corporations that made S corporation elections effective in 2000-2002; for 2010, this benefits corporations that made S corporation elections effective in 2001-2003. These S corporations generally will be able to sell built-in gain assets without paying a corporate level tax. The provision does not apply to built-in gains recognized as a result of an S corporation's distribution of appreciated assets.
The Act provides additional funding of:
- $34.5 million for Army family housing construction
- $3.9 million for Army family housing operations and maintenance
- $80.1 million for Air Force family housing construction
- $16.5 million for Air Force family housing operations and maintenance
- $2.19 billion in additional funds for other military construction, including troop housing, child development centers, energy conservation and alternative energy projects, and hospitals
Public Housing: The Act provides $4 billion in additional funding for public housing repair and modernization (but not operating fund activities), of which $3 billion is to be distributed by the existing formula and $1 billion is to be made available by competition for priority investments, including investments that leverage private sector funding or financing for renovations and energy conservation retrofit investments. Public housing agencies are to give priorities to projects that can award contracts based on bids within 120 days of the availability of funds; rehabilitation of vacant rental units; and capital projects already underway or included in their 5-year plans. The Act requires HUD to obligate the funds to be allocated by formula within 30 days of enactment and contains deadlines for the obligation and expenditure of funds by PHAs, and provisions for recapture if the deadlines are not met.
Section 8 and Section 202/811 Programs
Funding of Section 8 Contracts: The Act provides $2 billion in additional funds for project-based rental assistance in order to provide sufficient funding for full one-year contract periods.
Energy Retrofits: The Act provides $250 million for loans and grants to owners of Section 202, Section 811 and Section 8 projects to accomplish energy retrofit investments. Projects funded with such grants or loans will be subject to wage rate requirements, and owners must agree to maintain the affordability of their projects for at least an additional 15 years. HUD may provide incentives to owners to undertake energy or green retrofits as part of such grant or loan or to encourage job creation for low-income or very low-income persons. Funds must be expended within two years of receipt. Given the relatively small amount of funds appropriated, we expect the amounts awarded to specific projects will be fairly modest, which may make the program unattractive to owners in light of the requirement to extend affordability for 15 years. In this respect, the program may bear a similarity to HUD’s Flexible Subsidy program under which owners locked themselves into long-term affordability restrictions as a condition to receiving limited short-term assistance.
Redevelopment of Abandoned and Foreclosed Homes: The Act provides $2 billion for competitive grants to state and local governments and nonprofit organizations for neighborhood stabilization activities related to emergency assistance for the redevelopment of abandoned and foreclosed homes and residential properties.
Community Development Block Grants: The Act provides $1 billion in additional CDBG funding, to be allocated by formula, with recipients required to give priority to projects that can award contracts based on bids within 120 days from the date the funds are made available to the recipient. The Act does not specify the use of the funds beyond stating that they are available to carry out the community development block grant program.
Native American Housing Block Grants: The Act provides $510 million in additional funding for Native American Housing Block Grants. Half of the additional funding will be allocated using the same formula used in 2008, and the other half will be disbursed through competitive grants. Priority is to be given to projects that can award contracts within 180 days of when funds are made available to the recipient.
General Comment on Waiver of Requirements: Many of the provisions summarized above contain language authorizing HUD to waive otherwise-applicable statutory or administrative requirements, subject to certain exceptions.
Homeowner Affordability and Stability Plan
The Obama Administration’s foreclosure prevention program will include the following features:
- Relaxing Fannie Mae and Freddie Mac lending standards to enable homeowners whose mortgages do not exceed 105 percent of current value to refinance their loans
- Providing that if a lender lowers a borrower’s payment to no more than 38 percent of income, the government will share the cost of lowering the payment further, to 31 percent of income
- Providing cash payments to lenders and borrowers as incentives for loan modifications
- Requiring large banks that have received bailout funds to comply with new standards for loan modifications
- Seeking legislation to modify the bankruptcy code to permit judges to modify home mortgages