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Treasury and HUD Issue Guidance on the Tax Credit Exchange Program and the Tax Credit Assistance Program

By D. Hara Sherman
May 2009
People: Julia C. Livingston, D. Hara Perkins
PDF

On May 4, 2009, the United States Department of Treasury (“Treasury”) issued guidance for the tax credit exchange program (“TCEP”) and the United States Department of Housing and Urban Development (“HUD”) issued guidance for the tax credit assistance program (“TCAP”). Treasury and HUD conducted a webinar on May 6, 2009 to provide additional information with respect to the written guidance. The written guidance and the webinar guidance provide some clarification with respect to the two low-income housing tax credit (“LIHTC”) programs included in the American Recovery and Reinvestment Act (“ARRA”) passed on February 17, 2009. We are monitoring how individual states decide to implement TCEP and TCAP, and we are monitoring continuing information from HUD and Treasury about the details of these two programs.

Tax Credit Exchange Program (also referred to as the Section 1602 program)

Under TCEP, state housing credit agencies may elect to exchange a portion of their LIHTC allocation for grants from Treasury in an amount equal to $0.85 per dollar of tax credit. The written guidance from Treasury provides an application for state housing credit agencies to complete in order to receive a grant under TCEP. State housing credit agencies may submit an application in May-June 2009. State housing credit agencies are permitted to submit subsequent applications for additional grant funds through 2010.

Once Treasury receives an application, it will have ten days to review the application and notify the state housing credit agency of incompleteness or eligibility. After Treasury determines that an application is complete, it will enter into a grant agreement with the state housing credit agency. Treasury will then make funds available for the state agency to draw upon as needed to make subawards. Any grant funds not used to make subawards before January 1, 2011 must be returned to Treasury.

After entering into a grant agreement with Treasury, a state housing credit agency may make subawards in the form of  grants to developers or owners to finance new construction or acquisition and rehabilitation. Project recipients must meet the requirements of the LIHTC program.

In order to receive a grant, the developer or owner must demonstrate a good faith effort to obtain an investment commitment from a LIHTC investor. It is not yet clear what constitutes a “good faith effort,” however each state housing credit agency must establish a written policy for making a determination as to whether applicants have demonstrated this good faith effort.

The state agency must enter into a written agreement with the developer or owner receiving a subaward, imposing the requirements of the LIHTC program and providing for recapture to assure that the building remains a qualified low-income building during the 15-year compliance period.

According to comments made by a representative of Treasury during the webinar guidance: (i) TCEP funds cannot be loaned from the state agency to the developer or owner; (ii) the grant will not constitute taxable income to the developer or owner; (iii) there will be no reduction in depreciation basis or LIHTC eligible basis; (iv) the state agency is required to perform asset management services for the project; and (v) TCEP funds may be used for construction, acquisition and rehabilitation of projects.

The representative of Treasury also stated in the webinar guidance that projects receiving funds under TCEP will not be subject to the federal laws that generally apply to grants (such as Davis-Bacon, the Environmental Review Program, or Lead-Based Paint) because the TCEP program is not a federal appropriation program. The written guidance confirmed that TCEP does not apply to the Gulf Opportunity Zone or Midwestern Disaster Area Housing Credit allocations.

 

Tax Credit Assistance Program

HUD’s written guidance for the TCAP program requires state housing credit agencies to deliver to HUD a TCAP Submission Packet within 30 days of the publication of the Notice (i.e., June 3, 2009). Among other things, the TCAP Submission Packet must include the state agency’s selection criteria for competitively awarding TCAP funds. Prior to the submission of the TCAP Submission Packet, the state housing credit agency must give the public five days to comment on the competitive allocation plan. State housing finance agencies have flexibility with respect to the competition criteria and program administration. For instance, each agency may provide its own definition for “award of LIHTC.” HUD has a ten-day period to review an agency’s Submission Packet. After HUD determines a Submission Packet is complete, HUD will enter into a grant agreement with the agency for distribution of the TCAP funds.

The state agencies will administer the program and award TCAP funds to individual projects. TCAP funds must be distributed competitively, with a first priority to projects with expected completion dates on or before February 16, 2012, pursuant to each state’s existing Qualified Allocation Plan (“QAP”) and a plan that provides how the state credit agency intends to competitively allocate TCAP funds. Also, state housing finance agencies may elect to grant or loan the TCAP  funds to eligible projects.

As set forth in the Notice, eligible projects are limited to rental housing projects (i) that received or will receive an award of LIHTC under Internal Revenue Code Section 42(h) during the period from October 1, 2006 to September 30, 2009 and (ii) require additional funding to be completed. Bond financed projects are eligible. TCAP funds must be used for capital investment, that is, costs included in eligible basis. This will require tracing of funds, but no details are available about how that tracing should be done.

Project owners will apply for TCAP funds directly to the applicable state housing credit agency. An environmental review under the National Environmental Policy Act of 1969 (“NEPA”) is required for each project, prior to a commitment of TCAP funds. The state is authorized to administer NEPA, but the state may designate its state housing credit agency to perform these reviews. If a NEPA review has already been completed for the project, and neither the project nor the environmental conditions have changed, no additional NEPA clearance is required by the Notice.

If a project is selected by a state housing credit agency to receive TCAP funds, the project owner and agency will enter into a TCAP Written Agreement. HUD intends to provide further guidance on the required content of TCAP Written Agreements.

While NEPA review is required, HUD HOME statutory and regulatory requirements do not apply to TCAP funds. Other federal laws generally applicable to federal grants do apply to TCAP, including Fair Housing rules, affirmative fair housing marketing requirements, Lead-Based Paint rules and Davis-Bacon prevailing wages.

Hara Sherman is a member of the affordable housing group and can be reached at hsherman@goulstonstorrs.com.


For questions relating to the information contained in this alert, please contact your customary Goulston & Storrs attorney or:

Julia C. Livingston
617.574.4151
jlivingston@goulstonstorrs.com

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and
cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

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