(This is the first in a series of Legal Alerts from Arent Fox LLP that will examine the potential legal and economic impact of the sweeping new Housing and Economic Recovery Act of 2008 signed into law by President George W. Bush on July 30, 2008)

The Housing and Economic Recovery Act of 2008 (the Act) was signed by President Bush today. It has provisions that are expected to stimulate the low income housing tax credit and tax-exempt bond market s . Each state has a federally mandated volume cap which allows the state to issue private activity tax-exempt bonds and low income housing tax credits to fund various projects throughout the state. Many states have been unable to fund or have had to postpone much needed affordable housing projects due to limited volume cap. This Legal Alert highlights some of the main provisions of the Act that directly or indirectly increase the volume cap for low income housing credits and tax-exempt bonds. 

Increase in Volume Cap for Housing Bonds

The Act temporarily increases the total volume cap for the issuance of housing bonds in calendar year 2008 by $11 billion. Each state will receive a pro-rata share of the increase,  which is proportional to each state’s population. As a result of the bond volume cap increase, there should be an escalation in the number of housing bond transactions until year's end in order to take advantage of the newly available allocations.

Recycling of Short-term Bonds as Refunded Issuances

Tax-exempt bonds are often utilized to fund the construction of multifamily housing. For various reasons, part of these bonds may be repaid within four years of their issuance.  Such repayment may be due to a mandatory redemption for tax reasons or due to an expectation that such bonds would be paid from tax credit equity contributions paid within such four year period.

Presently upon repayment of such short-term bonds, the volume cap allocated to such bonds is forever lost. Under the Act, the volume cap is recycled. The Act will treat the payoff of such bonds as a refunding for tax purposes and allows issuers to “recycle” the monies from such refunding to finance additional projects, including projects for different obligors, without the “recycled” funds counting against the volume cap. The new loan must be made within six months of the repayment of the original loan. This will effectively give issuers more bond capacity to fund additional projects by recycling bonds that are already accounted for under the volume cap.

Increase in Volume Cap in Low Income Housing Tax Credits

The Act temporarily increases the volume cap in low income housing tax credits for each state for calendar years 2008 and 2009 by the greater of (i) an additional 20 cents for each person residing in the state or (ii) the increases in the set-aside tax credit volume cap by 10 percent. This increase will provide states with additional tax credits to allocate for affordable housing projects currently in the pipeline that are normally pushed into the following year due to limited volume cap availability.  

 Increase in 9% Tax Credits

The 9% tax credits are mainly available for the construction and substantive rehabilitation of affordable housing projects provided that the project is not financed with tax-exempt bonds. (If tax-exempt bonds are used, the allowable credit percentage is reduced.) The 9% figure is the approximate percentage of the qualified project costs that investors may claim annually on their annual federal income tax returns for a 10-year period. Although the denominated credit percentage is 9%, under current law the credit percentage applicable to new projects is adjusted monthly to reflect changes in interest rates, with the purpose of keeping the present value of the credit constant. Consequently, the credit percentage applicable in July, 2008 to new projects is 7.93%. The law limits the amount of credits that are available to new projects in any one year. This aggregate limit is allocated among the states, and states in turn allocate their respective shares of this limit among projects they deem worthy by means of an application and review process.

The Act temporarily increases the annual aggregate amount of the 9% tax credit available for new projects in 2008 and 2009 by nearly 10%. The increased availability of 9% tax credits is intended to promote investing in affordable housing projects and allow for more projects to go forward immediately rather than have to wait until a future year.  In addition, the Act will also stabilize the 9% tax credit by making it a fixed rate at 9% for buildings placed in service after the date of enactment and until December 31, 2013 (no longer tying it to the interest rates during that period).  In light of the current interest rate environment, this will increase the present value of the credits, which in turn will enhance the economic viability of proposed new projects.

Conclusion

These measures were implemented in the Act to spur economic growth in the affordable housing community. The expansion of volume cap for housing bonds and the recycling of bonds is likely to have an immediate impact in the financing of multifamily affordable housing projects. The increase in volume of low income tax credits may only minimally impact the weakened tax credit market. Major tax credit investors exited the market due to major financial losses resulting in the elimination of their need to purchase tax credits. While the changes in the Act will enhance the financial appeal and availability of tax credits, a strengthening of the tax credit market will more likely come when financial institutions once again benefit from purchasing tax credits.

If you have any question or comments on this Legal Alert, please do not hesitate to contact the Arent Fox attorneys listed.