• New Guidance Issued on TCAP and Exchange Funds
  • June 9, 2009 | Author: Angela M. Christy
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The U.S. Department of Housing and Urban Development (HUD) and Department of the Treasury issued guidance on May 4 regarding the Tax Credit Assistance Program (TCAP) and the 1602 Program (which HUD and the IRS have named the Tax Credit Exchange Program).

    Among its provisions, the guidance says states must submit requests for TCAP funds within 30 days of the date the guidance was issued or be "deemed to have declined the receipt of its entire TCAP formula allocation." At least five days published notice must be given before adopting a plan—so state allocating agencies must act quickly.

    The following article covers this and other provisions of the guidance—highlighting what states need to know now—and where addition clarifications may be forthcoming.

    Structure of the Guidance

    The guidance consists of CPD Note 09-03, which deals with implementation of TCAP, along with application and terms and conditions with regard to the 1602 Program. The guidance also includes questions and answers on:

    • General TCAP issues
    • Program income
    • Uniform Relocation Act
    • National Environmental Policy Act
    • Lead Safe Housing Rule

    This guidance leaves many unanswered questions, however, and it is anticipated that additional questions will be answered by HUD and Treasury. A webcast by HUD and Treasury on May 6 also provided some helpful information.

    Key areas of the guidance, based on information provided thus far, are explained below.

    Guidance Highlights With Respect to TCAP

    Applicability of Federal Rules

    While HOME Program rules do not generally apply to TCAP funds, the federal rules relating to appropriated funds generally apply. The act did waive the Uniform Relocation Act requirements. In addition, the Buy American provisions do not apply to TCAP funds. The following requirements do apply:

    • Davis-Bacon
    • Lead Based Paint Rules (24 CFR Part 35)
    • National Environmental Protection Act (NEPA) (24 CFR Part 58)
    • ADA
    • Fair Housing Act (42 USC 3601-19 and 24 CFR Part 100)
    • Title VII of the Civil Rights Act of 1964
    • Section 504 of the Rehabilitation Act of 1975 (29 USC 794 and 24 CFR Part 8)
    • Age Discrimination Act of 1975 (42 USC 6101-07 and 24 CFR Part 146)
    • Anti-Lobbying Restrictions
    • The Drug-Free Workplace Act of 1988

    This means any project that intends to use TCAP funds should commence all environmental review requirements immediately and modify budgets as necessary to meet Davis-Bacon requirements.

    Use of Funds

    TCAP funds must be used for capital investment. This means funds must be used on items includable in eligible basis. HUD has also expressly said that TCAP funds may not be used for swimming pools. TCAP funds may not be used by the agency for administrative costs. This will require careful planning on use of funds. Clearly a project cannot be financed 100 percent with TCAP funds since other sources will be needed to fund land costs, reserves, financing costs, syndication costs and other items not included in eligible basis.

    Project Selection

    To receive TCAP funds, a project must be awarded credits between October 1, 2006, and September 30, 2009. Even a small credit allocation can entitle a project to receive TCAP funds. This fact could be important for projects awarded GO Zone Credits and Midwest Disaster Credits as discussed below. An award of 2010 credits before September 30, 2009, will make a project eligible for TCAP funds. If a project has already returned its credits, it is not eligible for a TCAP award.

    TCAP funds must be awarded competitively in accordance with a state's qualified allocation plan (QAP). However, a state does not have to amend its QAP to award TCAP funds.

    There must be a separate competitive process for award of TCAP funds. The process must be transparent and posted on the state agency's website. In addition, the TCAP allocation process must be subject to a five-day public comment period.

    Because the process must be implemented within 30 days (by June 3, 2009), state agencies must act quickly to adopt a TCAP allocation system. Notice CPD-09-03 contains many technical details about state submissions for TCAP funds, which are important for agencies to review.

    Award of Credits

    The guidance leaves it to states to define what constitutes an award of credits. This can be as early as the date of public notice of a funding decision for a particular process. The same definition of award must be applied uniformly by the agency.

    Tax-Exempt Bond Transactions

    Notice CPD-09-03 specifically states "Project awarded LIHTCs that will also receive bond financing are eligible to receive TCAP funds." Based on this statement, it appears the guidance is saying projects financed with tax-exempt bonds that receive "automatic" tax credits can receive TCAP funds. Whether this is the intent is not entirely clear—and further clarification has been requested.

    GO Zone Credits and Midwestern Disaster Area Housing Credits

    Since GO Zone and Midwestern Disaster Area Credits are technically not allocated under Section 42(h), those projects are not eligible for TCAP funds. However, one of those projects could receive a small allocation of "regular" credits and be eligible for TCAP funds. While HUD has not defined what constitutes a small allocation for this purpose, HUD has very clearly indicated that it intends to be flexible in this area.

    TCAP Fund Distribution

    A state agency may subgrant funds to another agency but the state agency remains primarily liable for compliance with the TCAP requirements. A sub-grant must be subject to a written agreement that contains all federal requirements. Any gross income received by the state from the use of grant funds during the three-year grant period is treated as program income and must be disbursed before any additional grant funds are drawn down.

    TCAP funds cannot be disbursed until after there is a written agreement with the project owner. TCAP funds must be disbursed immediately (within three days of receipt) for an eligible cost. TCAP funds cannot be placed in escrow. This may be somewhat difficult to administer.

    Grants or Loans Documentation

    Unlike the 1602 Program funds, TCAP funds may be provided as a grant or a loan. The advance of funds must be documented with a written agreement which includes all of the federal cross cutting requirements. The agreement must be recorded as a covenant on the land, binding on successors. The agreement cannot be executed until the environmental clearance for the project is completed and the request for release of funds is approved.

    Guidance Highlights With Respect to Section 1602 Program (Tax Credit Exchange Funds)

    Far less guidance was issued on the 1602 Program. Most is in the form of instructions to the state about how to apply for the funds.

    Timing

    The application for 1602 Program funds will be on a pipeline basis. States can apply for funds to make subawards through December 31, 2010. Any funds not used by January 1, 2011, must be returned to the Treasury. The Treasury must review applications within 10 working days of receipt.

    Grants

    All 1602 Program funds must be disbursed as grants. States cannot loan 1602 Program funds.

    Documentation

    The state agency must enter into a written agreement with the recipient of the fund that provides for recapture if the building does not remain a qualified low-income building during the 15-year compliance period. The recipient must also enter into an extended low-income housing commitment which may be incorporated in the agreement.

    Recapture

    The guidance did not answer many of the outstanding questions about recapture and hopefully a future question and answer sheet will address those issues.

    Not Taxable Income

    Grants of exchange subawards are not taxable income. However, the question of how to treat the grants for tax purposes has not been fully resolved. Presumably, the grants would be treated as income for purposes of increasing partners' capital accounts, but would not be taxable income.

    Minnesota Housing Finance Agency Guidance

    The Minnesota Housing Finance Agency has issued guidance on the TCAP and 1602 Program. Due to deadlines established by HUD, the public comment period is limited and will close at 4:30 p.m. on May 19.

    If you have been awarded credits, have not closed, or if you intend to close on a 4 percent bond transaction in 2009, you should review the guidance and scoring criteria, which can be viewed on the agency's Web site.

    Note the readiness to proceed requirements in the scoring criteria and determine which of these you can complete before the application deadline. You should also contact any proposed tax credit investors to discuss how to best structure your transaction with TCAP or 1602 Program funds.