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Hello! I’m Michael Novogradac and welcome to another Tax Credit Tuesday. Each week on Tuesday, Novogradac & Company presents this weekly podcast for tax credit professionals. Our
complete archives are available free in the iTunes store by searching for Tax Credit Tuesday or Novogradac. If you like the podcast, we invite you to take a moment to rate the podcast and submit a customer review. You can also find us online at www.novoco.com slash podcast.
Today is Tuesday, May 12th, 2009. This week we will discuss the Department of Housing and Urban Development’s recent announcement about its Neighborhood Stabilization Program. Then we will share some good news from the IRS about utility allowances for low-income housing tax credit properties. We will also examine the recently-approved state new markets tax credit in Florida.
But first, we have an update on the Tax Credit Assistance Program, or TCAP, and the tax credit exchange program created by the Recovery Act of 2009.
As we announced last week, HUD and Treasury issued initial guidance on the low-income housing tax credit programs created by the Recovery Act on May 4th. The two agencies then presented a joint webcast on TCAP and the exchange program on May 6th. During the session, HUD and Treasury representatives reviewed the programs
and walked through the recently issued guidance. In case you missed it, the webcast is archived and still available for viewing online at www.hud.gov slash webcasts.
Let’s start our recap of the session with the information that was presented about the tax credit exchange program. The exchange program has been referred to by many names since the Recovery Act was passed. During last week’s webcast the Treasury representative explained that the formal name of the program is and I quote “Grants to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits” program. However, given the length of the formal name, she said she has also begun referring to it as the Section 1602 program. Section 1602 is the section of the legislation that contains the program’s provisions.
The most significant point that was covered from the guidance was when Treasury explained that funds awarded as part of the exchange program must be distributed in the form of grants. Housing credit allocating agencies are prohibited from providing subawards as loans.
Many, if not most, LIHTC allocating agencies had anticipated using the exchange program to provide loans. For example,
California and Michigan in their draft implementation proposals had planned to make loans under the exchange program.
Eligible properties must meet the same requirements as
properties receiving LIHTCs through Section 42 and that was made clear in the webcast. Before they receive exchange grants,
tax credits. The determination of what constitutes a good faith effort is left up to the state agencies. And as we discussed last week, they reiterated that states cannot -- that’s right cannot -- return GO Zone credits and Midwest Disaster credits for exchange grant money.
Although LIHTC allocating agencies cannot use any of the grant money for administrative costs, they can charge properties a reasonable fee for their increased responsibilities. Further, the Davis Bacon Act, National Environmental Policy Act, Lead Safe Housing Regulations or Buy American regulations do not apply to projects funded with exchange proceeds.
The Treasury Department says it will accept applications throughout the year, but encourages allocating agencies to submit their initial applications as soon as possible. Agencies will be able to request additional money after their initial request. The Recovery Act does require that all grants be distributed by December 31, 2010.
During their webcast, the Treasury said it plans to release additional guidance soon on recapture events and the quarterly reports that will be required for participating properties.
A representative of the Department of Housing and Urban Development also participated in the webcast last week and
explained the basics of the Tax Credit Assistance Program, or TCAP. Under the program, HUD will award grants to the state LIHTC
agencies, which will in turn distribute the grants to eligible projects. Projects must have received LIHTCs awards between 2006 and September 30, 2009. Properties awarded 2010 tax credits before
September 30, 2009 qualify for the program. TCAP grants can only be used for costs included in a LIHTC project’s eligible basis.
During the webcast, HUD’s representative said that projects with allocations of GO Zone or Midwest Disaster credits may be eligible for TCAP funds, as long as the project also receives a nominal amount of regular LIHTCs. HUD’s representative did not define “nominal.”
Throughout the webcast, HUD’s representative stressed the need for transparency. HUD requires each finance agency to include its TCAP selection criteria in its application to HUD and post the information online.
As the affordable housing community reviews and digests the information that was provided in the webcast and in the guidance itself, Novogradac & Company will discuss the Recovery Act and the questions that remain at our conference this week in New Orleans. If you’re not able to join us in person, you can tune in to next week’s podcasts to hear highlights from that event.
We will also present analysis of - and industry reaction to - the rules for the Recovery Act’s LIHTC programs in the June issue of the Novogradac Journal of Tax Credit Housing.
Now, let’s move on to related news involving another Recovery Act housing initiative -- the Neighborhood
Stabilization Program.
Last week, HUD invited applications for grants under the Neighborhood Stabilization Program. The Recovery Act provided
nearly $2 billion in funding to states, local governments and not-for-profit housing developers to combat the effects of home foreclosures.
This round of Neighborhood Stabilization funding will award grants to applicants who will target their efforts in areas with the
greatest extent of abandoned and foreclosed homes. Applications for Neighborhood Stabilization funds are due July 17th, 2009.
HUD has already allocated nearly $4 billion in Neighborhood Stabilization grants to help state and local governments respond to rising foreclosures and falling home values. The additional $2 billion in Neighborhood Stabilization grants that HUD is making available in this round will further assist these state and local governments—as well as not-for-profit developers—to acquire land and property; to demolish or rehabilitate abandoned properties and/or to offer
downpayment and closing cost assistance to low- to middle-income homebuyers. Grantees can also stabilize neighborhoods by creating "land banks" to assemble, temporarily manage and dispose of
foreclosed homes.
In addition, HUD will provide up to $50 million in technical
assistance grants to help grantees better manage their neighborhood stabilization programs. Applications for Neighborhood Stabilization technical assistance will be due June 8th, 2009.
Once awarded, HUD's Neighborhood Stabilization technical assistance grants will help grant recipients implement sound underwriting, management and fiscal controls.
The grants will also help measure outcomes; build public-private partnerships; develop strategies to serve low-income
households; and incorporate energy efficiency into state and local stabilization programs.
HUD’s use of Recovery Act funds can be reviewed and tracked at HUD's Recovery Act web site: www.hud.gov slash recovery. The text of HUD's funding notices is also available at that address.
Our next topic is guidance released by the IRS last week regarding utility allowances for LIHTC properties.
On May 5th, the Internal Revenue Service issued guidance in Notice 2009-44 to clarify that utility costs paid by a tenant based on actual consumption in a sub-metered rent-restricted unit are treated as paid directly by the tenant for purposes of Section 42 of the Internal Revenue Code.
As many of our listeners know, rents in low-income housing tax credit properties include a utility allowance for resident-paid utilities. Last July, the IRS published regulations that changed the way rents are adjusted for tax credit properties where residents pay for their own utilities. The final rule published on July 29th, 2008 allowed
owners to use more accurate data to calculate resident-paid utilities. In that guidance, the IRS unexpectedly added language to the final regulations that changed an owner’s ability to submeter.
Specifically, the regulations state that only utilities paid directly by the resident to the utility company can be included in the utility allowance. This position was opposed by the affordable housing community.
The IRS notice released last week confirms that for purposes of calculating the utility allowance, utilities paid by a renter occupying a
submetered unit that are based on actual consumption of that unit will count as resident-paid utilities under the utility allowance regulation.
The National Multi Housing Council and National Apartment Association applauded the guidance in a statement released on May 5th. David Cardwell, NMHC's vice president of capital markets said quote "This is good news for apartment renters and for apartment owners. By helping to ensure sufficient operating capital for these properties, the rules preserve a critical source of affordable housing during an economically challenging time." end quote
The IRS will accept comments on the notice through July 27, 2009. More information on this guidance and what it means for tax credit properties will be presented in the June issue of the
Novogradac Property Compliance Report.
Now, let’s examine the details of the community development program recently approved in Florida.
Gov. Charlie Christ last month approved the Florida New Markets Development Program, which was unanimously passed by both the Florida House and Senate. The new program will provide almost $100 million dollars of tax incentives to spur economic development in the state.
Created by H.B. 485, the program provides state tax credits for capital investment in rural and urban low-income communities.
Supporters of the credit say it will make Florida more attractive to national investors investing funds raised under the federal New Markets Tax Credit program by creating a state tax credit similar to the federal program. Tax credits allocated under the new program
may be used to offset corporate income, insurance premium or retaliatory tax liabilities.
The Florida New Markets Tax Credit Development program will award a maximum of $97.5 million in tax credits between 2009 and 2022, with no more than $20 million claimed in each state fiscal year. The program is administered by the Florida Office of Tourism, Trade and Economic Development, in consultation with Enterprise Florida Inc.
The tax credits will be allocated on a first come, first serve basis and there is a cap of $10 million per development. Over seven years this credit totals 39 percent of the original investment, similar to the federal credit. Therefore, a company with a qualified investment for both the federal and state program would receive up to 78 percent of the purchase price of the investment in combined federal and state tax credits.
If a taxpayer’s tax liability is less than their tax credit, then the tax credit may be carried forward for future taxable years, however all tax credits allocated under the Florida New Markets Development program expire December 31st, 2022.
Before we wrap up today’s discussion, I’d like to alert listeners to the Treasury invitation to submit suggestions for its annual Priority Guidance List.
In Notice 2009-43 the Department of Treasury and Internal Revenue Service invited recommendations for items to be included on the 2009-2010 Guidance Priority List.
The Treasury Department's Office of Tax Policy and the IRS use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices and other published guidance. The 2009-2010 Guidance Priority List will establish the guidance that the Treasury Department and the IRS intend to issue from July 1st, 2009, through June 30th, 2010. The notice says the Treasury
Department and IRS recognize the importance of public input to formulate a guidance priority list that focuses resources on guidance items that are most important to taxpayers and tax administration.
The notice says that—as is the case whenever significant legislation is enacted—the Treasury Department and the IRS have continued to dedicate substantial resources during the current plan year to published guidance projects necessary to implement the provisions of the multitude of tax laws that have been enacted during the past several years. The Treasury Department and IRS will
continue to evaluate the priority of each guidance project requested in light of that tax legislation and other developments occurring during the 2009-2010 plan year.
In reviewing recommendations and selecting projects for inclusion on the 2009-2010 Guidance Priority List, the Treasury Department and the IRS will consider five criteria:
One, whether the recommended guidance resolves significant issues relevant to many taxpayers.
Two, whether the recommended guidance promotes sound tax administration.
Three, whether the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance.
Four, whether the Service can administer the recommended guidance on a uniform basis.
And five, whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the IRS.
Taxpayers may submit recommendations for guidance at any time during the year and those recommendations are not required to be in any particular format. Taxpayers should, however, briefly
describe the recommended guidance and explain the need for the guidance. In addition, taxpayers may include an analysis of how the issue should be resolved. The notice also says it would be helpful if taxpayers suggesting more than one guidance project prioritize the projects by order of importance. If a large number of projects are being suggested, it also would be helpful if the projects were grouped in terms of high, medium or low priority.
Additional details about submitted requests in response to this invitation can be found online at www.taxcredithousing.com by
clicking on IRS Guidance in the LIHTC menu. There you can find a link to Notice 2009-43.
The Novogradac LIHTC Working Group and the Novogradac New Markets Tax Credit Working Group are working on separate comment letters. If you are interested in the NMTC Working Group, contact Brad Elphick in our Atlanta office or Annette Stevenson in our Cleveland office. If you are interested in learning more about the
LIHTC Working Group, contact either Jeff Nishita or Mike Morrison in our San Francisco Office.
Well, that brings us to the end of this week’s report. Next week we will present highlights from our New Orleans conference this week.
Next week we will also review the “Green Book”, which was released on Monday of this week. What is the Green Book you ask? The Green Book is a list of revenue raising proposals by the Obama administration. We will discuss them in detail next week, but I can tell you now that they include higher taxes on higher income taxpayers, codification of the economic substance doctrine, as well as taxation of carried interests at ordinary income tax rates. Tune in next week for details.
This is Michael Novogradac. I’ll be back next Tuesday. Thanks for listening.
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Editorial material in this transcript is for informational purposes only and should not be construed otherwise. Advice and
interpretation regarding tax credits or any other material covered in this transcript can only be obtained from your tax advisor.
© Novogradac & Company LLP, 2009 All rights reserved.
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