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The Tax Experts: Squires Sanders - Legal Counsel Worldwide

Exploring the Housing and Economic Recovery Act of 2008 A Rural Collaborative Round Table Discussion October 6, 2008. The Tax Experts: Squires Sanders - Legal Counsel Worldwide. Holly Heer: Introduction and Overview of Changes Michael Cullers: Provisions Dealing with Tax-Exempt Bonds

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The Tax Experts: Squires Sanders - Legal Counsel Worldwide

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  1. Exploring the Housing and Economic Recovery Act of 2008A Rural Collaborative Round Table DiscussionOctober 6, 2008

  2. The Tax Experts: Squires Sanders - Legal Counsel Worldwide • 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

  3. Your “Expert” Today • Michael Jacobs – Deal Guy

  4. Effective Dates Generally the effective dates of the various provisions are for buildings placed in service after the date of enactment

  5. Increase in Credit Limits for 2008-2009 • Act increases the per resident allocation by $.20 per resident for 2008-2009 • 10% increase to the small state minimum • States may identify buildings as state-designated DDA’s at any time after enactment of the Act • Deal Guy – Your States are getting more credits and can give projects the Basis Boost at will

  6. 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. • 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 • Deal Guy – the 9% credit rate is 9% for any deal not PIS’d prior to the date the legislation was enacted. 4% deals still float.

  7. 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 • Deal Guy – State designated Individual buildings are now eligible for the 30% boost

  8. 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 • Deal Guy - you can now use Tax Credits in conjunction with early Section 8 Mod Rehab buildings

  9. Other Simplification and Reforms • Repeals bonding requirement for the disposition of a building or an interest therein • Deal Guy - Recapture Bonds are no longer required on an early disposition so long as there is a reasonable expectation that the building will remain low-income.

  10. 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 • Deal Guy - States will start giving scoring points for historically significant buildings and “Green” elements if not already doing so.

  11. Other Simplification and Reform • 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 • Deal Guy - income limits for rural areas will be the greater of the present AREA median income or the NATIONAL rural median income

  12. 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 or literary activities

  13. General Public Use • Projects still must comply with other federal laws (such as the Fair Housing Act) • Deal Guy – It’s now ok to do projects that target specific groups like Grandparents, Artists and Farm Workers. Congress just slapped the IRS!!!

  14. Compliance Provisions for 9% and 4% Deals Simplified • “Next available unit” rule now satisfied if the next available unit in the building, rather than the project, is leased to a qualified resident • A unit can now be considered a qualified residential unit when 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

  15. Compliance Provisions for 9% and 4% Deals Simplified • Annual certification requirement for 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 • “Basic Pay Allowances” for housing provided by the military are excluded for the purposes of determining income for certain “Qualified Buildings” • Deal Guy – • Next available unit is now by building not by project • You can rent to student if they’re married or if they’re single parents (or they’re receiving Foster Care assistance) • 4% bonds can now finance SRO’s • Military “Basic Pay” doesn’t count as income

  16. 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

  17. 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

  18. 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 opportunity 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

  19. AMT Changes From the Deal Guy • Deal Guy - Hitting Alternative Minimum Tax (AMT) will no longer cause corporations to pull out of the Tax Credit Market. • However, AMT relief does nothing if the aforementioned organizations don’t have a tax liability

  20. Modified Substantial Rehabilitation Requirement Then 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

  21. Modified Substantial Rehabilitation Requirement NOW • 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

  22. Community Service Facility Eligibility for the Credit • 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 • Deal Guy – Community Buildings can now generate credits so long as the target population served have incomes of 60% of AMI or less

  23. Carryover Allocation Rule • Sponsors/Developers now have 12 months after an 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

  24. Federal Funds per the Deal Guy • Below Market Federal Loans will no longer be considered federal subsidies • There are no longer restrictions on the ability of 9% deals to receive both (i) below market HOME loans and (ii) the 30% boost

  25. Clarification of Treatment of Federal Grants • 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 • Deal Guy - SHP Operating Subsidies no longer reduce basis

  26. Exception to the 10 Year Rule Related to Prior Placement in Service

  27. Deal Guy - 10 Year Rule • Ten-year rule waived in the case of any building which is substantially assisted, financed, or operated under Section 8, Section 221(d)(3), 221(d)(4), 236 and/or RD 515 • Ten-year rule waived for any building acquired from a bank in default or from a receiver or conservator of such an institution.

  28. Mike Jacobs Midwest Regional Vice President 312-697-6442 mjacobs@nefinc.org

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