Congress Extends New Markets Tax Credit Program, Minimum 9% LIHTC rate, Wind Credit, and Bonus Depreciation

The American Taxpayer Relief Act of 2012 passed by Congress yesterday extends several Federal tax credit benefits critical to the development of affordable housing, low-income community development, and renewable energy. The Act authorizes the extension of the Federal New Markets Tax Credit Program for two additional years at $3.5 billion dollars of New Markets Tax Credit authority for each year. The American Taxpayer Relief Act of 2012 also extends the minimum credit rate for the Federal low-income housing tax credit of not less than 9% for non-federally subsidized new buildings for allocations made prior to January 1, 2014, the Wind production tax credit for facilities placed in service before January 1, 2014, and bonus depreciation for an additional year.

Senate to Vote on Hurricane Sandy Bill

Voting 91 to 1, Senate Democrats and Republicans joined to move for a vote this week on the Hurricane Sandy and National Relief Act of 2012. This $60.4 billion Bill would fund recovery efforts in states affected by Hurricane Sandy. If passed by the Senate, the Bill would still need passage by the Republican controlled House. Although the Bill is less than the $82 billion requested by the governors of New York, New Jersey and Connecticut, the Bill would provide much needed funds for affected states to clean up storm damage and undertake long-term projects to protect against the effects of future storms. The Bill would authorize an increase of allocation of Federal low-income housing tax credits, Historic Tax Credits, and New Markets Tax Credits as well as Recovery Zone Bonds in those areas affected by Hurricane Sandy.

Senate Proposes Hurricane Sandy and National Relief Act of 2012

The Senate introduced a summary of the proposed Hurricane Sandy and National Relief Act of 2012. The major provisions of the Act include special allocations of Federal New Markets Tax Credit authority, Federal Low-Income Housing tax credit allocation; and Recovery Zone Bond authority. The proposed Act provides for an allocation of Federal New Markets Tax Credit authority of $500 million a year for three years to be used in federally declared major disaster areas. For the years 2013, 2014, and 2015, the Act permits States affected by Hurricane Sandy to allocate additional amounts of Federal Low-Income Housing tax credits for use in the disaster area of up to $8.00 multiplied by the State’s disaster area population. The Act will also permit affected States to issue tax-exempt Sandy bonds to finance qualified activities including residential rental projects, nonresidential real property and public utility property located in the disaster area.

Duane Morris Forms Hurricane Sandy Sub-Practice Group

In anticipation of the Federal programs which will be enacted to assist in the redevelopment of areas affecting by Hurricane Sandy, Duane Morris has formed the Hurricane Sandy Housing and Community Development Sub-Practice Group. In the aftermath of Hurricane Katrina Congress passed legislation which provided Federal low-income housing tax credit allocation, Federal New Markets Tax Credit Authority and special tax subsidized bond financing designated for effected areas. The Hurricane Sandy Housing and Community Development Sub-Practice Group is an interdisciplinary group including attorneys with the following specialties: Art Momjian, Federal tax credit programs, Harvey Johnson (NJ) and Jon Popin (NY), affordable housing; Bob Archie, Nat Abramowitz, and Bruce Jurist tax exempt bond finance; Marty Monaco (NJ), tax-exempt entities; and Chester Lee (NY) and Chris Winter, real estate and commercial financing. Members of the Hurricane Sandy Housing and Community Development Sub-Practice Group will provide a unique value to clients as a result of their experience with the Katrina programs, and their extensive knowledge and experience with state and local affordable housing and community development programs in New Jersey and New York. Members of the group can assist clients combine state and local programs with the Federal Hurricane Sandy relief legislation.

Developing Real Estate Projects – A New Look at Old Subsidies

The change in focus of the Federal New Markets Tax Credit Program to non-real estate businesses together with the high demand on the Program has deprived the real estate industry of a very valuable financing subsidy. Developers could use the New Markets Tax Credit Program to generate a subsidy of almost 20% of total project costs. The unavailabilty of the Program going forward will necessitate a new look at some old subsidies. For example, residential rental properties financed with volume cap tax-exempt bonds are eligible for the 4% Federal low-income housing tax credit without competition. The trade off for this subsidy is the restriction of the rental units to tax credit tenants for 30 years. However, this credit subsidy may be a very attractive where market and tax credit units are very similar or the project is focused on senior tenants. Similar traditional subsidies worth looking at in a new light include tax increment financing, financing through the EB-5 Program, and the variety of funding and subsidies available for green properties and properties using renewable energy. There may be some very creative uses for established subsidy programs in the development of new real estate projects.

Demand for NMTC Allocation Remains Strong

The Community Development Financial Institutions (CDFI) Fund announced that under the 2012 round of the New Markets Tax Credit (NMTC) program it had received 282 applications requesting an aggregate of $21.9 billion in NMTC authority. The CDFI Fund also described innovative uses of New Markets Tax Credit Authority which would be favored by the CDFI Fund. Innovative uses of NMTC Authority include the deployment of New Markets Tax Credit proceeds to underserved states, “qualified low-income community investments” (“QLICs”) of $2,000,000 or less, non-real estate QLICIs such as working capial and equipment loans, and revolving QLICs which would serve multiple “qualified active low-income community businesses”. In this vein, the emphasis on non-real estate QLICIs was recently supported by final NMTC Treasury Regulations which facilitate the redeployment of non-real estate QLICIs.

Treasury Issues Final NMTC Regulations

On September 28th the Department of Treasury issued final regulations modifying the New Markets Tax Credit Program to facilitate and encourage investments in non-real estate businesses in low-income communities. To address the concern that an investment in a non-real estate business would result in a liquidity event for the community development entity prior to the expiration of the 7 year compliance period, the final regulations provide that a CDE may reinvest a qualified low-income community investment during the compliance period in a “qualifying entity” provided that such reinvestment occurs within 30 days. A “qualifying entity” is defined as a certified CDFI or an entity designed by the Secretary of the Treasury. The regulations define a non-real estate qualified active low-income community business as any business whose predominant business activity (measured by more than 50% of the business’ gross income) does not include the development, management or leasing or real estate.

Freshman Members of Congress Urge Extension of NMTC Program

On September 18, 2012 twelve freshman members of the House of Representatives signed a letter addressed to the leaders of Congress urging the extension of the Federal New Markets Tax Program which expired on Dec. 31, 2011. The authors of the letter urged that the New Markets Tax Credit Program is a critical tool for financing small businesses and creating jobs. Proposed Senate Bill 3531 provides for a two year extension of the New Markets Tax Credit Program at $3.5 billion of allocation per year. The President had requested an extension of the New Markets Tax Credit Progam at $5 billion a year wth a specific set aside for super markets in food deserts.

CDFI Fund Encourages Deployment of NMTC proceeds to Underserved States

In its New Markets Tax Credit 2012 Application Q & A issued last week the CDFI Fund identified those states receiving fewer New Markets Tax Credit proceeds in proportion to its state population. The CDFI Fund indicated that the deployment of New Markets Tax Credit proceeds to these underserved states would be considered an innovative us of New Markets Tax Credit Allocation and favored by the CDFI Fund. Since the inception of the New Markets Tax Credit Program, “qualified low-income community investments” have been made in all 50 states, the District of Columbia, and Puerto Rico. However, the CDFI Fund has identified Puerto Rico, along with the following 10 states, as areas that have received fewer dollars of “qualified low-income community investments” in proportion to their statewide population residing in Low-Income Communities: Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, and West Virginia. The CDFI Fund also considers the Island Areas of the United States (American Samoa, Guam, Northern Mariana Islands, and the U. S. Virgin Islands) to have received lower levers of NMTC investment, as these four territories have not received any “qualified low-income community investments.”

CDFI Fund Issues 2012 Application Q and A

The CDFI Fund recently issued a New Markets Tax Credit 2012 Application Q and A. Contained within this document is guidance provided by the CDFI Fund as a result of two conference calls held on July 24th and July 26th 2012 for potential 2012 Round New Markets Tax Credit allocation applicants. The participants on these calls asked for additional clarification on specific questions within the application to which the New Markets Tax Credit Program team responded. Additional guidance and clarification is provided in the Q and A with respect to what the CDFI Fund considers as innovative uses of NMTCs which includes but is not limited to: investing in Unrelated CDEs that do not have a NMTC Allocation; targeting states identified by the CDFI Fund as having received fewer dollars of QLICIs; providing QLICIs in amounts of $2 million or less; revolving QLICIs to serve more QALICBs; and providing non-real estate financing such as working capital or equipment loans. The CDFI Fund also provided examples of uses of NMTCs that would not be considered innovative which include the use of the leverage structure, combining NMTCs with historic tax credits, and investments in real estate (either to real estate QALICBs or non-real estate QALICBs) in states other than the 10 states and territories identified in the Application Q&A.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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