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Two Pilot Programs Announced for Low Income Housing Tax Credit Projects

(from Memo to Members' of the NLIHC) Two pilot programs were announced that could affect projects assisted with Low Income Housing Tax Credits (LIHTC). One pilot is described in HUD Multifamily Housing Notice H 2012-1, the other is outlined in Internal Revenue Service Notice 2012-18.

HUD’s Tax Credit Pilot will be carried out in Chicago, Detroit, Boston, and Los Angeles. It will test an accelerated approval process for the purchase or refinancing of certain multifamily rental properties assisted with LIHTC. An expedited HUD application process is needed to meet tight deadlines associated with the LIHTC program. The failure to meet bond closing or other LIHTC performance deadlines may result in the loss of a tax credit allocation or bond reservation, and may jeopardize a borrower’s ability to secure future LIHTC assistance. The Housing and Economic Recovery Act of 2008 (HERA) required HUD to streamline mortgage insurance applications for projects with LIHTC.

Notice H 2012-1 launches the first phase of the pilot by providing Section 223(f) loans of up to $25 million for three types of low-risk projects: properties with project-based Section 8 assistance needing preservation; older, stable tax credit properties that need new tax credits; and recently constructed and occupied properties. In general, Section 223(f) insures mortgage loans to purchase or refinance existing multifamily rental housing, and only allows moderate rehabilitation.

Transactions intended to preserve project-based Section 8 properties must entail acquisition or refinancing. At least 90% of the units must have Section 8 housing assistance payment (HAP) contracts, which must be renewed for 20 years once the pilot loan is approved. Moderate rehabilitation of up to $40,000 per unit in hard costs is allowed, an amount greater than usual under Section 223(f). Tenants must be able to remain in place during rehabilitation; however, temporary relocation of no more than two weeks is allowed. Projects with other forms of rental assistance (including Rent Supplement, RAP, or project based vouchers) do not qualify.

For transactions at stable projects seeking new tax credits, called “re-syndicating,” the property must have a history of 85% or greater occupancy for the previous 12 months. Tenants must be able to remain in place and no more than $40,000 per unit may be spent on rehabilitation.

These projects are considered low-risk because they will continue to have HAP contracts or have stable occupancy.

A third category of eligible property is one that is newly constructed or substantially rehabilitated and has reached stable occupancy. Normally under Section 223(f) a project must have been completed at least three years prior to applying for permanent financing.

The IRS Physical Inspection Pilot Program will be carried out by housing finance agencies (HFAs) in Michigan, Minnesota, Ohio, Oregon, Washington, and Wisconsin. Under LIHTC regulations, HFAs just conduct an on-site inspection of each building in a project, and for at least 20% of a project’s LIHTC-assisted units the HFA must both inspect the units and document that rents tenants pay meet the LIHTC program limits.

The Rental Policy Working Group proposed that projects benefitting from more than one federal source be subject to only one coordinated physical inspection in order to avoid duplication. The Administration created the Rental Policy Working Group to better align the operation of rental policies across federal agencies. It is comprised of representatives of HUD’s Office of Multifamily Housing, USDA’s Rural Development (RD), and Treasury’s Office of Tax Policy, as well as the White House Domestic Policy Council, the National Economic Council, and the Office of Management and Budget.

According to IRS Notice 2012-18, the six HFAs participating in the Physical Inspection Pilot Program would be allowed to satisfy the LIHTC program’s physical inspection requirements by using the existing LIHTC protocol or by using HUD’s Real Estate Assessment Center (REAC) protocol.

If a participating HFA chooses to use the REAC inspection protocol, then HUD (or its agent) will conduct the physical inspections on behalf of the HFA using REAC. The HFA will be deemed to have met the LIHTC rule of physically inspecting at least 20% of the LIHTC units, even if the number of units inspected under the REAC protocol does not meet the 20% requirement. In addition, the HFA can satisfy the rent limit monitoring obligation by reviewing rent records for at least 20% of the LIHTC units in the project regardless of whether those units were the ones inspected under the REAC protocol.

Notice 2012-18 poses a number of questions and requests public comments regarding the pilot. Comments are due May 31. HUD’s Notice H 2012-1 is at http://portal.hud.gov/hudportal/documents/huddoc?id=12-01hsgn.pdf, and HUD’s media release regarding the Multifamily accelerated approval process is at http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2012/HUDNo.12-028. IRS Notice 2012-18 is at http://www.irs.gov/pub/irs-drop/n-12-18.pdf. It will be formally published in Internal Revenue Bulletin 2012-10 on March 5.