HOUSING TAX CREDIT MODERNIZATION PROPOSALS

Richard S. Goldstein

Nixon Peabody LLP

October 19, 2007

Background

• With Democratic takeover of the House, new Chairmen, Rangel (Ways and Means) and Frank (Financial Services), agree to work on coordinating and improving the LIHTC

• Rangel staff person, Jon Sheiner, seeks input from industry groups on tax credit provisions

• Financial Services staff working on HUD and RHS coordination

Status

• Bills still being worked on

• Discussions with Joint Tax Committee on “scoring”

• Dates for introduction still unclear

Possible Tax Credit Proposals

• Allow the use of housing credits to offset corporate and individual AMT

– A number of corporate investors are or will be in AMT (including Fannie Mae)

– Proposal caught up in larger AMT issues

Possible Tax Credit Proposals

• Tax-exempt bond interest not a preference item for AMT

• Repeal recapture bonds

• Repeal ten percent carryover test

• Conform certain housing credit and bond rules

– Next available unit rule

– Student definition

– Allow bonds to finance SROs

Possible Tax Credit Proposals

• Repeal the prohibition of use of credits with Section 8 moderate rehabilitation projects

• Allow states to increase eligible basis by up to 30% for properties that meet state-specified criteria

• Do not reduce eligible basis by interest reduction payments (IRPs) or rent subsidies

• Allow acquisition costs to qualify for the 9% credit

Possible Tax Credit Proposals

• Eliminate the concept of Below Market Federal Loans, i.e., all new construction and sub rehab projects get 9% credits, except if bond financed

• Allow income targeting of up to 80% of median income where severe housing shortage

– Not clear if offsetting lower targeting would be required

Possible Tax Credit Proposals

• Over-income tenants would be required to pay 30% of household income for rent

• Use different methodology to determine annual rent adjustments due to change in HUD calculation

– Most likely proposal involves using CPI to adjust rents

Possible Tax Credit Proposals

• Re-use tax-exempt bond authority if bonds are redeemed early (will not generate new credits)

• Fix credits at 4% and 9%

• Liberalize rules for community service facilities to be included in eligible basis

• Liberalize the “anti-churning” rules for acquisition credits from 10% to 50%

Other AHTCC Proposals

• Allow below AFR HOME-assisted properties located in QCTs or DDAs to receive the 30% basis boost

2 out of 3 Rule would become 3 out of 3:

– Below Market HOME Loan

– 9% Credits

– 30% Boost

Other AHTCC Proposals

• Do not reduce eligible basis by Historic Credits or Energy Credits

• Re-name the Low Income Housing Tax Credit the “Affordable Housing Tax Credit”

• Preferences for “first responders”, teachers and other groups allowed by the housing credit agency

Other AHTCC Proposals

• Allow housing credits to continue for properties suffering a casualty, even if not in a disaster area, if re-built in a reasonable time

• Repeal the ten year rule

Possible Proposals re HUD and Tax Credits

• Improve FHA processing procedures

• Eliminate subsidy layering review if only FHA insurance is only HUD program involved

• Eliminate or coordinate cost certifications

• Redefine “equity” to include tax credit equity for limited dividend limitation purposes

Possible Proposals re HUD and Tax Credits

• Eliminate equity escrow requirements

• Coordinate asset management requirements with housing credit agency compliance monitoring