106th Congress approves Cap Increases, New Markets Initiative and Section 202 Syndication

 
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Note: this Memorandum to Clients was reprinted from Nixon Peabody LLP'S web site, dated December 20, 2000.
Tax Credit and Bond Cap Legislation
In a result as unexpected as it was welcome, Congress, on the last day of its session, raised the $1.25 cap on the low income housing tax credit to $1.75. The increase will be in two steps - to $1.50 in 2001 and to $1.75 in 2002. After that time, the credit will be indexed for inflation. For the first time, there will be a state low income housing tax credit minimum of $2 million, which becomes effective in 2001, which will provide additional tax credits for the District of Columbia, Alaska, Delaware, Montana, North Dakota, South Dakota, Rhode Island, Wyoming and Vermont. In addition, the application of the small state minimum will benefit Hawaii, Idaho, Maine and New Hampshire in 2001.
The increase in the tax-exempt bond volume cap was accelerated. The $50 per capita cap will be raised to $62.50 next year, and $75 in 2002, and thereafter be indexed for inflation. Likewise, the state minimum will be raised from $150 million to $225 million in two equal steps in 2001 and 2002.
Included in the bill are substantive changes which were advocated by Representative Nancy Johnson (R-CT). The following is a brief summary of the amendments to the tax credit program.
An amendment which was advocated by the Affordable Housing Tax Credit Coalition (which Nixon Peabody LLP represents) allows a building that receives a carryover allocation in the second half of a calendar year to qualify under the 10% expenditure test if such test is met within six months of the allocation date, rather than by the close of the calendar year. However, the building must still be placed in service by December 31 of the second year after the year in which the allocation is made, even if the expenditure test is not met until after the close of the allocation year. For example, if a project receives a carryover allocation on December 1, 2001, it must meet its 10% test by June 1, 2002 but must be placed in service (as under current law) by December 31, 2003. This will provide much needed sanity to developers and investors (and their tax advisors) regarding projects which receive end of the year carryovers. Please note that like the other changes in the legislation, this provision becomes effective for allocations beginning in 2001.
The definition of qualified-census tract is expanded to include any census tract with poverty rates of 25% or more. However, the limit on the portion of a metropolitan statistical area (MSA) that can be designated a qualified census tract will continue to be 20% of the population of the MSA.
For purposes of determining eligible basis of projects located in qualified census tract, there may be included the portion of buildings used as community service facility, not in excess of 10% of the total eligible basis. A community service facility is defined a facility designed to serve "primarily" individuals whose income is 60 percent or less of area median income. However, the caption of this new provision makes clear that the intent of this provision is that such individuals may be non-residents or employees of the project. As noted above, this provision will only apply to properties located in QCTs.
Assistance under the Native American Housing Assistance and Self-Determination Act of 1996 is not taken into account in determining whether the building is federally subsidized for the purpose of the credit, putting that program on a par with HOME. Accordingly, in order to not be considered a federal subsidy, the "40 at 50" set-aside test will apply to this program, as in HOME.
The bill deletes from the required Qualified Allocation Plan criteria the provision relating to non-profit participation, i.e., states no longer must consider the participation of such non-profits as part of the QAP. In its place, Congress added two new criteria - tenant populations of individuals with children and projects intended for eventual tenant ownership.
In one of the more controversial provisions contained in the legislation, Congress created a new preference for projects located in qualified census tracts that contribute to a concerted community revitalization plan (a term which is not defined in the legislation or accompanying explanation). In other words, states must give preference to such projects, together with the preferences in existing law-for projects serving the lowest income tenants and those obligated to serve low income tenants for the longest periods.
The bill codifies what has become in recent years a common requirement of QAPs-that there be conducted a comprehensive market study of housing needs by an independent party approved by the state agency but paid for by the developer. In addition, in response to concerns about the administration of the program in certain states, the legislation requires that there be a written explanation by the allocating agency, which is made available to the public, for any allocation not made in accordance with established priorities and selection criteria.
Housing credit agency will be required to monitor compliance with habitability standards applicable to the project through "regular" (undefined) site visits.
In a provision of great interest to the state agencies, the stacking rule (which provides for the order in which the various components of the overall credit limit are deemed to be allocated by the housing agencies) has been modified so that each state is treated as using its allocation of the unused state housing credit ceiling from the preceding year before the current year's allocation of credit. States were concerned that without this change, they would forfeit previous year's credits to the national pool. The result is that there will likely be less "national pool" credit available in future years.
These provisions become effective for allocations made beginning in 2001, which could cause some administration problems for the state agencies. For example, the changes pertaining to QAPs will require state housing agencies to make amendments to QAPs for 2001 allocations. With respect to bond financed projects, the changes become applicable to buildings placed in service after 2000, but only those which are financed by bonds issued after December 31, 2000.
Section 202 Syndication
In a related development, Congress, in the American Homeownership and Economic Opportunity Act of 2000, permitted limited partnership ownership of Section 202 projects provided that a non-profit is the sole general partner. This achieves the long sought goal to open the 202 program to tax credit syndication.
New Markets Credit
The bill creates a New Markets Tax Credit to encourage investments in low income communities. It would appear that this tax credit will provide new opportunities for syndication of these investments or for direct investment by corporate entities.
Credits are given for investments in a Community Development Entity (CDE), which may be a corporation or a partnership whose primary mission is providing investment capital for a qualified active business in low income communities:
a) that has a board or advisory board that maintains accountability to residents of such communities; and
b) is certified by the Treasury Department. The amount of the credit to the investor is 5% for the year in which the equity is purchased from the CDE, and for the next two years thereafter and a 6% credit for the following four years or a total credit of 39% over a seven year period.
A low income community is defined as census tracts with either poverty rates of at least 20% or minimum family income that does not exceed 80% of metropolitan area median. Qualified active business is defined as a business with at least 50% of its total gross income derived from a trade or business in low income communities, a substantial portion of the services performed and use of tangible property in such community and less than 5% of the average aggregate of the unadjusted basis of the property of such business is attributed to non-qualified financial property or collectibles. Rental of improved commercial real estate (not including residential rental property) located in a low income community is a qualified active business.
The total amount of equity investment eligible for the credit is $1 billion in 2001, $1.5 billion in 2002 and 2003, $2 billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. The program will be administered by the Treasury Department, which is required under the legislation to issue regulations within 120 days of enactment which will, among other things, specify how entities are to apply to Treasury for the tax credit.
If you have any further questions about the legislation, please feel free to contact Chuck Edson, Rick Goldstein, Herb Stevens or Kate Sullivan in Washington (202-585-8000), or Ken Alperin or David Kavanaugh in Boston (617-345-1000).
This memo is intended as an information source for the clients and friends of Nixon Peabody LLP. Its content should not be construed as legal advice, and readers should not act upon this information without professional counsel.
Copyright© 2000 Nixon Peabody LLP. All rights reserved.

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