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Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Welcome and Thanks for Joining Us

Michael D. Saad Partner – Columbus +1.614.365.2735 msaad@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

Our Program Today

• Michael Saad: Opening Remarks
• Holly Heer: Introduction and Overview of Changes
• Michael Cullers: Provisions Dealing with Tax-Exempt Bonds
• Harry P. Teichman: Allowing LIHTC and Rehab Credit Against

AMT

• Daniel N. Weber: Modified Substantial Rehabilitation

Requirement

• Matthew D. Rule: Simplification and Reform
• Philip R. Westerman: Modifications to Definition of Eligible Basis
• Michael Saad: Q&A and Wrap-Up

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Introduction and Overview of Changes

Holly H. Heer Partner – Columbus +1.614.365.2716 hheer@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

Overview

• The Housing Assistance Tax Act of 2008 consists of

several different types of changes:

– A. Fundamental changes to the nature of the program (such as changes to use of federal grants and definition of federal subsidies) – B. Changes that reaffirm the critical importance of state housing authorities in the low-income housing tax credit process (such as expansion to state ability to designate preferences for various programs for general public use; design state-determined DDAs) – C. Changes harmonizing many provisions between the tax- exempt bond programs and the tax-credit program

Exploring the Housing and Economic Recovery Act of 2008

Overview

– D. Changes making various technical corrections and modernizing various provisions (such as changes to acquisition credit rules and substantial rehabilitation and changing hold harmless rules regarding determination of AMI) – E. Changes refocusing the IRS away from certain audit issues that had the potential to undermine the industry (such as general public use rules and issues relating to whether certain interest bearing loans were true debt) – F. Changes broadening the potential investor market for the credit because of the ability to apply the credit against the alternative minimum tax

Exploring the Housing and Economic Recovery Act of 2008

Overview

• Effective Dates of Changes

– A. Generally the effective dates of the various provisions are for buildings placed in service after the date of enactment – B. Other dates are tied to date of allocation or apply to any projects for all of calendar year 2008 – C. Generally effective date provisions appear to try not to prejudice existing projects while giving them the benefit of any changes

Exploring the Housing and Economic Recovery Act of 2008

Increase in Credit Limits for 2008-2009

• The Act increases the per resident allocation authority by $.20 per

resident for each of calendar years 2008-2009 (with a corresponding 10% increase to the small state minimum)

• Implementation of this provision will require most states to amend

their QAPs to permit additional allocations of credit for 2008, as well as allocation priorities for such credits (although historic nature and energy efficiency may not be taken into account until 2009

• allocations. Additionally, states may identify buildings as located in a

state-designated DDA at any time after enactment of the Act

Exploring the Housing and Economic Recovery Act of 2008

Temporary Minimum Increase in Credit Rate

• Credit rate for non-subsidized new buildings and

rehabilitation costs shall be not less than 9%

– Provision only applies to buildings placed in service after the date of enactment and through December 31, 2013 – Appears to permit all projects that have not been placed in service to qualify for the 9% rate, although projects that have irrevocably locked their credit rates may be impacted – Note potential impact on credit adjuster provisions if 9% rate is permitted for projects that had locked their credit rates – Note that there is no corresponding change for acquisition credits or bond-financed projects

Exploring the Housing and Economic Recovery Act of 2008

Increase in Credit for Certain State Designated Buildings

• States have authority to designate an individual building

as requiring an increase in credits in order for the building to be treated as financially feasible

– Such buildings will be treated as if they are in a difficult development area (DDA) and will receive a basis boost equal to 30% of their eligible basis (like other buildings in QCTs and DDAs per Section 42(d)(5)(C)) – States will be able to focus on particular types of projects that need additional funding or support to be financially feasible (such as historic tax credit projects that reduce low-income basis or projects with extremely low ongoing rents or serving special needs populations)

Exploring the Housing and Economic Recovery Act of 2008

Increase in Credit Cont.

– This designation is only available to projects that have gone through the competitive allocation process and not to tax-exempt bond financed projects

Exploring the Housing and Economic Recovery Act of 2008

Other Simplification and Reforms

• Repeals prohibition on use of the credit with any low-

income housing building that received moderate rehabilitation assistance under section 8(e)(2) of the United States Housing Act of 1937

• Repeals bonding requirement for the disposition of a

building or an interest therein

– Bonds are no longer required on any disposition – Law continues to require that you have a reasonable expectation that the building will remain low-income, otherwise a taxpayer must pay any recapture owed at time of disposition

Exploring the Housing and Economic Recovery Act of 2008

Other Simplification and Reform

– On most foreclosures taxpayers will have to pay recapture for year of disposition – Statute of limitations is increased to three years from date taxpayer notifies the IRS of any reduction in basis subject to recapture – This provision is effective for dispositions prior to date of enactment if it was reasonably contemplated at the time of disposition that the project would remain low-income for the remainder of the project’s compliance period and the taxpayer elects to be governed by the provision

Exploring the Housing and Economic Recovery Act of 2008

Other Simplification and Reform

• Effective for allocations made after December 31, 2008,

state housing authorities must take into account the historic nature and energy efficiency of a project in the state’s QAP

• For non-bond projects, the income limitations for projects

in rural areas will be measured by reference to the greater of area median gross income or national non- metropolitan median income. This provision applies to any determination made after the enactment of the Act

Exploring the Housing and Economic Recovery Act of 2008

General Public Use

• The Act clarifies the general public use requirements of

Section 42(g), by providing that for all projects (regardless of the placed in service date)

– A project will not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants with special needs, or who are members of a specified group under a federal or state program that supports housing for such specified groups or who are involved in artistic

• r literary activities

– Projects still must comply with other federal laws (such as the Fair Housing Act)

Exploring the Housing and Economic Recovery Act of 2008

General Public Use

– This is a substantial reversal to recent IRS policy – This is another example of Congress clarifying that state agencies have the power to develop programs under their respective QAPs that meet special needs populations within their

• wn states

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Provisions Dealing with Tax-Exempt Bonds

Michael A. Cullers Principal – Cleveland +1.216.479.8477 mcullers@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

Provisions Dealing with Tax-Exempt Bonds

• Interest on qualified mortgage bonds, qualified veterans’ mortgage bonds

and exempt facility bonds issued for qualified residential rental projects is no longer subject to alternative minimum tax for individuals and corporations.

– The AMT exemption takes effect for such bonds issued on or after July 30, 2008 – It has been reported that this new AMT exemption will lower coupon rates for state and local housing issuers by as much as 60 to 65 basis points – Applies both to new money and refunding bonds issued on or after July 30, 2008. In the case of refunding bonds, the AMT exemption applies only if the refunded bonds are AMT-exempt qualified mortgage bonds, qualified veterans’ mortgage bonds or exempt facility bonds issued for qualified residential rental projects. – Qualified mortgage bonds, qualified veterans’ mortgage bonds and exempt facility bonds for qualified residential rental projects cannot be advance refunded, they can only be currently refunded (i.e., the refunded bonds must be callable within 90 days after the issuance of the refunding bonds)

Exploring the Housing and Economic Recovery Act of 2008

General Provisions Dealing with Tax- Exempt Bonds

• Volume Cap

– An additional $11MM of volume cap is available for 2008 for qualified mortgage bonds or exempt facility bonds issued for qualified residential rental projects – Additional volume cap that remains unused at the end of 2008 may be carried forward to 2009 and 2010 for such bonds

• Qualified Mortgage Bonds can now be issued to

refinance qualified subprime loans originated after December 31, 2001 and before January 1, 2008

Exploring the Housing and Economic Recovery Act of 2008

General Provisions Dealing with Tax- Exempt Bonds

• Certain guarantees of state and local bonds by any

Federal Home Loan Bank are not treated as a federal guarantee of such bonds that are issued after July 30, 2008 and before January 1, 2011

• First-time homebuyer requirement is waived for qualified

mortgage bonds issued after May 1, 2008 and before January 1, 2010 for residences located in a Presidentially declared disaster area

Exploring the Housing and Economic Recovery Act of 2008

Tax-Exempt Bond Provisions Involved in Low-Income Housing Credit Transactions

• Certain provisions governing tax-exempt bonds for qualified residential

rental projects are harmonized with low-income housing credit provisions, as follows:

– “Next available unit” rule now satisfied if the next available unit in the bond- financed building, rather than the bond-financed project, is leased to a new tenant who satisfies both the income and rent-restriction requirements – Tax-exempt bond rules for qualified residential rental projects now satisfied if

• therwise eligible units are occupied entirely by (i) full-time students who are

single parents and their children or (ii) full-time students who are married and file a joint federal income tax return – Single-room occupancy housing used on a non-transient basis can now be financed with tax-exempt bonds for qualified residential rental projects, even where such housing provides eating, cooking and sanitation facilities on a shared basis, rather than providing such facilities in each unit

Exploring the Housing and Economic Recovery Act of 2008

Tax-Exempt Bond Provisions Involved in Low-Income Housing Credit Transactions

• Annual certification requirement for bond-financed qualified residential

rental projects is waived for any such project as long as each residential unit in the project is occupied by tenants who satisfy the income limits for such projects

• Where a governmental issuer receives repayment of a conduit loan

financed with qualified residential rental project bonds and within 6 months after such repayment uses the repayment to finance another qualified residential rental project, a refinancing of the qualified residential rental project bonds is treated as a refunding of those bonds

– This refunding treatment applies even though the obligors of the conduit loans are different – This refunding treatment applies only (i) to the first refunding of the qualified residential rental project bonds, (ii) where the refunding bond is issued within 4 years of the refunded bond and (iii) where the final maturity of the refunding bond is no later than 34 years after the issuance date of the refunded bond

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Allowing LIHTC and Rehab Credit Against AMT

Harry P. Teichman Senior Associate – Tampa +1.813.202.1345 hteichman@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

AMT Changes – New Sections/ Effective Date

• New Sections

– Prior IRC Sections 38(c)(4)(B)(ii) - (iv) are redesignated as IRC Sections 38(c)(4)(B)(iii)-(vi)

• Effective Date

– The following changes to the use of the credits are effective with respect to

• LIHTC (IRC Sec. 42) attributable to buildings placed in service after

12/31/2007

• Rehab credits (IRC Sec. 47) attributable to qualified rehab expenses

properly taken into account for periods after 12/31/2007 (Act Sec. 3022(d))

• Assume effective for buildings treated as placed in service after 12/31/2007

even if actually placed in service earlier

Exploring the Housing and Economic Recovery Act of 2008

AMT Changes – Prior Law

• LIHTC and Rehab credit were not available to offset the AMT

– General business credits pursuant to Sec. 38 generally cannot exceed a taxpayer’s net income tax less the greater of (i) the tentative minimum tax; or (ii) 25% of the taxpayer’s regular tax liability in excess of $25,000 – “Net income tax” is the sum of the regular tax liability and the AMT liability – reduced by various tax credits – AMT equals any excess of the tentative minimum tax less the regular tax. The tentative minimum tax is a percentage of the alternative minimum taxable income – Section 38 credits (that include Sec 42 and Sec 47) generally cannot offset the tentative minimum tax – and AMT is calculated by subtracting the regular tax from the tentative minimum – meaning that AMT cannot be reduced by those credits – Section 38(c) provides credits that exceed certain limitations are not allowable (i.e. because of AMT) and Section 39 provides that unused credits may be carried forward 20 years and back one year

Exploring the Housing and Economic Recovery Act of 2008

AMT Changes – Current law

• LIHTC and Rehab Credits are now “specified credits”

– Other credits that are on the list of specified credits include Sec. 45 energy production credit for first 4 years of production and the work

• pportunity credit
• For “specified credits”, when applying the Sec. 38(c) limitation, the

tentative minimum tax is equal to zero

– This means that specified credits can offset AMT

• What remains unchanged?

– Still subject to “at risk” AMT rules and passive activity loss limitations that apply to use of AMT credits and other losses – Still subject to Section 168 limitations which include: exclusion from bonus depreciation and limitations on losses from tax exempt use property

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Modified Substantial Rehabilitation Requirement

Daniel N. Weber Associate – Phoenix +1.602.528.4058 dweber@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

Modified Substantial Rehabilitation Requirement

In order to qualify for 9% federal tax credits, under previous federal law rehabilitation expenditures were to equal the greater of:

• At least 10% of the adjusted basis of the building

being rehabilitated; or

• At least $3,000 per low-income unit in the

building being rehabilitated

Exploring the Housing and Economic Recovery Act of 2008

Modified Substantial Rehabilitation Requirement

The Housing and Economic Recovery Act of 2008 increases the minimum rehabilitation expenditures to the greater of:

• At least 20% of the adjusted basis of the building being

rehabilitated; or

• At least $6,000 per low income unit in the building being

rehabilitated (Indexed for inflation)

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Simplification and Reform

Matthew D. Rule Associate – Columbus +1.614.365.2755 mrule@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

Community Service Facility Eligibility for the Credit

• The Act increases the size of a community service facility with respect to

which the low-income housing credit may be claimed

• The Act allows costs related to a community service facility to be included in

eligible basis in the following percentages: – (1) 25% of the eligible basis of the project (for the first $15 million of eligible basis); and – (2) 10% of any excess over $15 million

• Prior to the Act, the costs related to a community service facility included in

qualified basis could not exceed 10% of the eligible basis of the project

• The community service facility still must serve primarily individuals whose

income is 60% or less of AMI

• The provision is effective for buildings placed in service after the date of

enactment

Exploring the Housing and Economic Recovery Act of 2008

Carryover Allocation Rule

• The Act allows a taxpayer 12 months after a carryover allocation is

made to incur 10% of the taxpayer’s reasonably expected basis in the project

• Prior to the Act, a taxpayer had until the later of six months after the

allocation was made or the end of the calendar year in which the allocation was made

• The taxpayer’s building still must be placed in service not later than

the close of the second calendar year following the calendar year of the allocation

• The provision is effective for buildings placed in service after the date of

enactment

Exploring the Housing and Economic Recovery Act of 2008

Treatment of Individuals Who Previously Received Foster Care Assistance

• The Act adds a third exception to the general rule that student

housing is not eligible for the low-income housing credit. The new exception applies in the case of a student who was previously under the care and placement responsibility of a foster care program (under part B or E of title IV of the Social Security Act)

• Students receiving assistance under title IV of the Social Security

Act and students enrolled in a job training program receiving assistance under the Job Training Partnership Act (or other similar federal, state or local laws) are still excepted

• The provision is effective for determinations made after the date of

enactment

Exploring the Housing and Economic Recovery Act of 2008

Military Basic Pay Allowances For Housing Excluded from Income

• “Basic Pay Allowances” for housing provided by the military are excluded for

the purposes of determining income for certain “Qualified Buildings”

• “Basic Pay Allowances” for housing are determined under section 403 of

title 37 of the United Sates Code. In 2008, the Basic Pay Allowance for an E-1 without dependents, living in Columbus, Ohio, is $695

• “Qualified Buildings” means any building located:

– 1. In any county in which is located a “qualified military installation” to which the number of members of the Armed Forces assigned to units based out of such qualified military installation, as of June 1, 2008, has increased by not less than 20 percent, as compared to such number on December 31, 2005; or – 2. In any county adjacent to a county described in Number 1

• “Qualified Military Installation” means any military installation or facility the

number of members of the Armed Forces assigned to which, as of June 1, 2008, is not less than 1,000

Exploring the Housing and Economic Recovery Act of 2008

Military Basic Pay Allowances For Housing Excluded from Income (Cont.)

• The provision is effective for income determinations made after the date of

enactment and prior to January 12, 2012

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Modifications to Definition of Eligible Basis

Philip R. Westerman Partner – Columbus +1.614.365.2836 pwesterman@ssd.com

Exploring the Housing and Economic Recovery Act of 2008

Modification of Definition of a Federally Subsidized Building

• The provision limits the definition of a Federal Subsidy

for the purposes of the 70-percent credit to any

• bligation the interest of which is exempt from tax under

Section 103

• Below Market Federal Loans will no longer be

considered federal subsidies

• There are no longer restrictions on the ability of 9

percent projects to receive both (i) below market HOME loans and (ii) the 30 percent basis boost

Exploring the Housing and Economic Recovery Act of 2008

Clarification of Treatment of Federal Grants

• Federal Grants Used for Eligible Basis Cost: Eligible basis does not

include costs (eligible basis costs) financed with federal grant proceeds whether received before or during the compliance period. It is not clear yet whether federal grants used for non-eligible costs (such as land) reduce eligible basis, although that could be the case

• Federal Grants Received During the Compliance Period: No basis

reduction is required for federally funded grants to enable the property to be rented to low-income tenants received during the compliance period if those grants do not otherwise increase the taxpayer’s eligible basis in the building. The significance in this change is that federally funded rental, operating and interest reduction subsidies received during the compliance period will no longer reduce eligible basis

Exploring the Housing and Economic Recovery Act of 2008

Exception to the 10 Year Rule Related to Prior Placement in Service of Certain Buildings

1. The new exception waives the ten-year rule in the case of any Federally or State-assisted building. For these purposes, the definition of Federally-assisted building is expanded to include any building which is substantially assisted, financed, or operated under Section 8 of the United Sates Housing Act of 1937, Section 221(d)(3), 221(d)(4) or 236 of the National Housing Act, Section 515

• f the Housing Act of 1949, or any other housing program

administered by the Department of Housing and Urban Development or the Rural Housing Service of the Department of Agriculture. The term State-assisted building means any building which is substantially assisted, financed, or operated under any State law similar in purpose to those of the Federal laws used in the definition

• f a Federally-assisted building.

2. Waiver with respect to any building acquired from an insured depository institution in default or from a receiver

• r conservator of such an institution.

1. Waiver for a Federally-assisted building if the waiver is necessary to (1) avert an assignment of the mortgage secured by the property in the project to HUD or the Farmers Home Administration or (2) avert a claim against a federal mortgage insurance fund with respect of a mortgage which is so secured. For the purposes of this rule a federally-assisted building is a building substantially assisted, financed, or operated under (1) Section 8, (2) Section 221(d)(3) or 236, or (3) Section 515. 2. Waiver for a Federally-assisted building if (1) the mortgage is eligible for prepayment under subtitle B of the Emergency Low Income Housing Preservation Act of 1987 or under 502(c) of the Housing Act of 1949, (2) certification from the appropriate Federal official, and (3) eligibility to prepay mortgage without approval of Federal official is waived by all persons. For the purposes of this rule a Federally-assisted building is a building substantially assisted, financed, or operated under (1) Section 221(d)(3) or 236, or (2) Section 515. 3. Waiver with respect to any building acquired from an insured depository institution in default or from a receiver or conservator

• f such an institution.

New Exception Old Exceptions

Exploring the Housing and Economic Recovery Act of 2008

Hold Harmless for Reductions in Area Median Gross Income

• The provision makes two modifications to the determination of AMGI

for the purposes of tax-exempt bonds and the low-income housing credit:

– 1. Any determination of AMGI with respect to a project may not be less than the determination of AMGI with respect to the project for the preceding year. This modification applies to all projects and is not limited to projects benefiting from the HUD hold harmless policy – 2. In the case of a HUD hold harmless impacted project, the determination of AMGI for the project is the greater of (i) the amount determined without regard to the special rule for HUD hold harmless impacted projects and (ii) the sum of the AMGI determined under the HUD hold harmless policy with respect to the project for 2008 plus any increase in AMGI after 2008

• The provision applies to determinations of AMGI for calendar years

after 2008

Exploring the Housing and Economic Recovery Act of 2008 August 5, 2008

Questions & Answers

Michael D. Saad Partner – Columbus +1.614.365.2735 msaad@ssd.com