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TaxCreditAdvisor
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News, Ideas and Information for
Tax Credit Developers and Investors
www.housingonline.com
Development GivesHomeless FamiliesNew Lease on LifeHOMELESS FAMILIES in LongBeach, Calif., are getting a new leaseon life, thanks to a $32 millionaffordable housing developmentopened by Century HousingCorporation in December.
Built on a former U.S. Navyhousing site, the new FamilyCommons at Cabrillo developmentincludes six residential buildings, aclubhouse and library, counseling andadministration offices, meetingrooms, and laundry facilities.
The 81-unit project, which fea-tures a mix of townhomes and flats,
Low-Income Housing..............3Tax Credit
Energy Tax Incentives ..........10Green Building .....................13Historic Rehabilitation .........18New Markets Tax Credit.....20Washington and....................23State Update
National Housing & Rehabilitation Association2009 Summer Institute
July 29 - August 1, 2009Woodstock Inn & Resort, Woodstock, VT
THEEVENT
OF THE SEASON
Cabrillo,continued on page 28
First,continued on page 26
Build,continued on page 24
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Build America Bonds: A New Tool toFinance Government-OwnedAffordable and Workforce HousingBy Margo BeVier Stern and Linda B. Schakel,Ballard Spahr Andrews & Ingersoll, LLP
FOR HOUSING AUTHORITIES, municipalities, and other governmen-tal entities that self-develop and desire to provide government-ownedaffordable housing, including workforce housing, Build America Bonds(Direct Payment BABs) provide a new financing vehicle to do this.Authorized by the American Recovery and Reinvestment Act of 2009(ARRA), Direct Payment BABs can provide significant cost savings overprevious options to finance rental housing that addresses specific local
Issue Theme: Energy Tax Incentives
New TCAP, Exchange ProgramGuidance Issued; Rhode Island EntersFirst TCAP Projects to FundTHE FEDERAL GOVERNMENT has issued additional guidance tostates for the Tax Credit Assistance Program (TCAP) and the Section1602 credit exchange program.
The new guidance is but one of several recent new developments.Others include the first formal funding commitments to projects underTCAP, a legislative expansion of the TCAP program, and the release of aset of principles to guide states in the operation of the two new programs.
C a l e n d a r o f E v e n t s
Tax Credit Advisor
August 2009Vol. XXI No. 8
Publisher: Peter Bell
Editor: Glenn Petherick202-939-1774
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Copyright 2009 by Dworbell, Inc.Photocopying or other reproduction ofany part of this publication without the
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EDITORIAL ADVISORY BOARD
Jerome BreedBryan Cave
Richard EdsonHousing Capital Advisors, Inc.
Anthony FreedmanHolland & Knight LLP
Richard GoldsteinNixon Peabody LLP
Kenneth LoreBingham McCutchen LLP
Trudy McFallHomes for America, Inc.
D. Garry MunsonWhitney Capital Company
David ReznickReznick Group
Michael I. SandersBlank Rome LLP
Wally ScruggsHousing Trust of America LLC
Ronne ThielenCenterline Capital Group
Barbara ThompsonNational Council of State Housing Agencies
New York Firm Signs Agreement To Purchase Syndicator MMA JEN PARTNERS, A NEW YORK-BASED private equity real estate firm, hasentered into an agreement to acquire virtually all of the low-income housingtax credit (LIHTC) equity business of MMA Financial, a subsidiary ofMunicipal Mortgage & Equity, LLC (MuniMae).
The $31 million transaction, expected to close by year-end, will befinanced by equity contributed by JEN Partners and by Real Estate CapitalPartners (RECP), a New York real estate investment firm. MMA Financialwill become a private company wholly owned by JEN Partners and RECPand be renamed Boston Financial Investment Management (BFIM).
Allen Anderson, a managing partner of JEN Partners, will be the chairman of BFIM; Kenneth Cutillo, chief executive officer. The firm’sheadquarters will remain in Boston and most current employees of MMAFinancial will be retained, Anderson said in an interview.
In addition to acquiring the operating business, JEN Partners will take overthe assets of MMA Financial, including nearly all its existing LIHTC funds.MMA Financial aggregates, syndicates, and manages portfolios of federal stateand housing tax credits. The firm has $8.3 billion of equity under managementand manages approximately 1,800 apartment properties containing about180,000 units in 48 states, the District of Columbia, and Puerto Rico.
MMA, originally founded as Boston Financial, has been a major syndicatorof LIHTCs, though in the past 18 months hasn’t done much new syndication.
Anderson said, “We’ve been interested in the low-income housing taxcredit business for a while, and we became aware of the possibility of thistransaction a little over a year ago.” He acknowledged the LIHTC equitymarket is in a tough period, but added, “We see opportunity in times likethis…We think bringing fresh capital and new leadership to an industry intimes like these can be good for all parties involved, and we think it can be avery attractive investment for us.”
Anderson said JEN Partners has three plans for the new company. Oneis to expand the asset management side of the business. A second is to“selectively take advantage of opportunities to raise new [LIHTC equity]funds and make appropriate investments as time and conditions warrant.”Third, he noted, “Because we will be building off of a fairly substantial assetmanagement base and have very sophisticated IT systems, I think there areopportunities to expand even outside the low-income housing tax creditbusiness. But that would be longer term.”
MMA Financial executive Bernie Husser said MMA has about 140LIHTC funds it owns and operates that go back as far as the 1980s.Regarding future activity after the acquisition, he noted, “We definitely planon being back as a low-income housing tax credit syndicator, with probablyhistorics as well.” n
Advertise Your Business!Tax Credit Advisor is now accepting adver-tising. For information or to place an order,contact Scott Oser, Director of AdvertisingSales, 301-279-0468, [email protected]
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Details at http://www.housingonline.com
National Housing & Rehabilitation Association 2010 Annual Meeting
March 10-13, 2010 • Ritz Carlton • Miami Beach, Florida
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09Low-Income HousingTax Credit
Developers Target Private Individuals,Regional Banks to Help Fund NewHousing Tax Credit ProjectsUPSTATE NEW YORK DEVELOPER Nelson Leenhouts is raising equity fromprivate individuals. Susan Jenning’s firm is targeting smaller regional banks.And consultant Nick Ratti is encouraging developer clients to explore cheapdollars from the Federal Home Loan Bank System.
Because of the difficulty raising equity for low-income housing tax credit(LIHTC) projects from syndicators and major direct corporate investors, moreand more developers are looking to other, non-traditional capital sources.
“In this environment, you have to be creative and sell the credits anywayyou can,” says Boston real estate consultant Nick Ratti, of Reznick Group, anational accounting and consulting firm.
Individual InvestorsRochester-based Nelson Leenhouts is raising equity from high net-worth
individual investors, for a new 62-unit senior LIHTC project near Rochester.Leenhouts, chairman of Rochester-based Home Leasing, LLC, had unsuccess-fully shopped the deal to several syndicators before deciding to go the privateplacement route.
So far he’s sold 16 of the 20 investment units ($72,000 each), mostly tosmall businessmen and corporate executives. Leenhouts said the projectedafter-tax return to an individual investor in the 35% federal tax bracket withoutpassive income is 9%. “If you do have passive income, it’s much higher,” he says.
Equity will account for nearly $1.9 million of the nearly $9 million, 4% taxcredit project, which is being funded mostly from tax-exempt financing.Leenhouts said 57 of the project’s 62 units are tentatively “spoken for.”
To undertake the private placement, Leenhouts had an offering plan prepared and submitted to the state. To target prospective investors, he reliedmostly on a list of individuals who were limited partner investors in a previousfirm started by himself and his brother. By the time they took the firm publicin 1994, they had 400 limited partners. “I invited a number of people to ameeting, where we made a presentation,” Leenhouts explained.
Ratti’s firm has encouraged developers to try to sell their LIHTC deals to agroup of individual investors on projects smaller than those of potential interestto small to midsized regional banks. He noted one client developer is activelyseeking individual investors for a private placement that will have 20-25 invest-ment units of $50,000-$55,000 each, and a projected after-tax internal rate of
Alternative,continued on page 4
Groups Strive to FinishCrafting LIHTC Proposals
More than 20 organizations support-ive of the low-income housing taxcredit (LIHTC) are seeking to
reach consensus on a limited final packageof proposed legislative changes to the pro-gram designed to boost equity investment.
As of 7/16/09, tentative consensusagreement had been reached on two pro-posals. Discussions were continuing on athird about amending the current passiveloss rules.
Among the groups that have partici-pated in the meetings on the package arethe Affordable Housing Tax Credit Coalition,Housing Advisory Group, NationalAssociation of Home Builders, NationalCouncil of State Housing Agencies, andAffordable Housing Investors Council.
Washington, DC attorney RichardGoldstein, a partner in Nixon Peabody LLPand counsel to the Affordable Housing TaxCredit Coalition, said the organizations feeladditional legislative changes are neededbecause “the [LIHTC] market is still notback to where it needs to be to provideenough equity for all the deals that need it.”
One of the two tentative proposalspertains to the “carryback rules.” The proposal would permit existing LIHTCinvestors to carry back for up to the pastfive tax years, instead of the current one,unused LIHTCs from tax returns they file in2008, 2009, and 2010, provided that theseinvestors make new LIHTC investmentsequal in amount to their tax savings real-ized from the carryback of unused credits.For new investors, the proposal wouldextend the carryback period to five years,without any reinvestment requirement.
The second tentative proposal would extend the current LIHTC “creditexchange” program for one year. It wouldalso permit the exchange by state housingcredit (HCAs) agencies of so-called 4%housing credits – credits generated by tax-exempt bond financing – subject to certainlimitations. At present only 9% housingcredits can be exchanged.
Once consensus is reached on all ele-ments, the package of legislative proposalsis expected to be outlined in a joint lettersigned by organizations endorsing it that issubmitted to Congress. n
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return (IRR) – from housing creditsalone – of anywhere between 9%and 10.5% depending on the indi-vidual’s tax bracket.
Ratti says the best prospects fora developer to approach are “thepeople you know.”
Smaller Regional BanksRochester-based Conifer
Realty, LLC is also expanding itsscope in searching for equity fornew LIHTC projects. The firmdevelops, owns, and manages all ofits properties, which are nearly allLIHTC deals and contain morethan 10,000 units in five states (NY,PA, NJ, MD, OH). Projects rangefrom 24 to more than 500 units.
Susan Jennings, vice presidentand general counsel of ConiferRealty, indicated the firm has tradi-tionally raised LIHTC equity fromsyndicators, and even in the past 18months has found equity for everyone of its new LIHTC projects.Still, she noted, “It’s definitely gotten more difficult to find aninvestor, and the investors have gotten a lot more picky about thedeals that they’re willing to do.”
Jennings adds: “We’ve been trying to find other investors forour deals. We’ve been working witha variety of syndicators, and thenwe’ve also been doing some directplacement with some of the smallerregional banks that we’ve got rela-tionships with. And we’ve also beenapproaching other types of compa-nies to see if they’d be interested inparticipating in tax credit deals.”
Conifer has already had somesuccesses in raising equity fromsmaller regional banks. In one case,
an Upstate rehab project, Coniferbrought in new investors, a largebank and a smaller bank, after theoriginal investor, a large multi-national bank, backed out of thedeal two days before the scheduledclosing. “We haven’t yet closed, butexpect to do so in the next monthor so,” she said.
Broader MarketingJennings indicated Conifer is
doing several things to marketeffectively to smaller regional banks.One is to market the company andits many strengths (30-plus years ofsuccessful experience, no defaults, a
one-stop shop, etc.), and not justthe proposed project. In addition,Conifer might agree to open depositsfor the project (e.g., reserve forreplacement, security) with the bankthat provides the equity. In somecases, the bank provides the con-struction loan as well as the equity.
Ratti said his company isencouraging client developers to try to sell smaller projects to smallto midsized regional banks, and isworking on two such private place-ments for projects that will generatefrom $100,000 to $150,000 inannual tax credits.
“You really have to understandyour selling points” as a developer,
Alternative,continued from page 3
he says. One is that these banks can help satisfy their CommunityReinvestment Act (CRA) require-ments by investing money in proj-ects in their area. “The other thingyou can dangle over them,” Rattisays, is the potential deposits con-nected with the project that couldbe made in their institution, such asoperating and replacement reserves.
FHLBank DollarsRatti said borrowing short-term
debt under the Federal Home Loan Bank System’s CommunityInvestment Program (CIP) is a way that developers can boost theprojected yield on their LIHTCproject to make it more attractive to a syndicator or direct investor
Under this approach, the devel-oper approaches a financial institu-tion (e.g., bank) that is a member ofthe Federal Home Loan BankSystem. The member bank obtainsan advance under the CIP programfrom one of the 12 district FederalHome Loan Banks. The memberbank adds a spread and re-lends thefunds to the developer at a below-market rate, providing cheap moneythat the sponsor can use to bridgethe equity proceeds by pushing thetiming of the investor’s capital con-tributions further out. The sponsorrepays the loan when the capitalcontributions are received. Ratti sug-gested this could boost the projectedIRR for a deal by as much as 1 to 2percentage points. He noted the cur-rent all-in 12-month borrowing ratefor a developer could be 3% to 4%.
In a different approach, aMaryland developer tapped the CIPprogram for construction, permanent,and second mortgage financing for anLIHTC project. (See Tax CreditAdvisor, May 2009, p. 9.) n
Ratti said his company isencouraging client developersto try to sell smaller projectsto small to midsized regionalbanks, and is working on two
such private placements forprojects that will generatefrom $100,000 to $150,000
in annual tax credits.
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On June 23, 1986, Senator GeorgeJ. Mitchell addressed his colleaguesfrom the floor of the U.S. Senate.Much was at stake that day.Congress was in the midst of debat-ing the Tax Reform Act of 1986,which would become the mostsweeping reform of the InternalRevenue Code in a generation.Senator Mitchell spoke eloquentlyabout a new program – the low-income housing tax credit – intend-ed to use federal tax credits toattract private capital to invest inmuch needed affordable rentalhousing. Senators from both sidesof the aisle rose in support of thisnew program. That year, the low-income housing tax credit (LIHTC)program was signed into law undera Republican President, RepublicanSenate, and Democratic House ofRepresentatives.
What these government leadersknew, and what we as an industryshould not forget, is that theLIHTC program is, at its core, aprivate-public partnership. It is apartnership that brings two distinctand essential perspectives togetherto achieve the common goals ofbuilding and maintaining qualityaffordable housing. The private sector, which brings a unique abilityto assess and manage risk whileoverseeing asset performance, iscombined with the public sector’sfocus on the social purpose of theprogram.
Troubled Equity MarketAfter 20 successful years of
uninterrupted growth, the LIHTC
industry is under pressure.Triggered by the mortgage melt-down of 2008 and the demise ofFannie Mae and Freddie Mac, thetwo largest LIHTC investors formuch of this decade, LIHTC pricing has tumbled. The resultingequity shortage has left many developers with large funding gapsand, in some cases, projects thatsimply can’t be sold or completed.
Most industry participants seemto agree that, at least in the shortterm, prospects for a quick recoveryof the LIHTC equity marketremain dim absent additional tem-porary assistance from Congress.But what kind of assistance can beprovided that supports – yet doesn’tcompete with – the private-publicpartnership?
We have seen Congress pass thetax credit exchange program andthe Tax Credit Assistance Program(TCAP) earlier this year. Likemuch of the first stimulus package,it is taking a long time to fullyimplement these programs. Theeffectiveness of each program andthe impact of each on the LIHTCprogram is yet to be determined.
TCAP was designed andappears to be working to supportthe private-public partnership uponwhich the LIHTC program wasfounded. TCAP funds are intendedfor projects that have received anaward of LIHTCs under Section42(h) of the Internal RevenueCode. On May 4, 2009, HUD published a notice setting forthrequirements for, and eligible usesof, TCAP funds. The notice makes
clear projects must actually haveLIHTCs in order to be eligible.Therefore, projects that exchange100% of their LIHTCs under theexchange program (discussed below)would not be eligible.
Tax Credit ExchangeThe exchange program, on the
other hand, appears to be workingin competition with the private-public partnership. Under this pro-gram, individual states (not proj-ects) can exchange up to 100% oftheir unused 2008 and 40% of their 2009 LIHTC ceiling for cashgrants from the federal government.A participating state receives 85cents on the dollar through theexchange. In turn, the amount ofany cash grant made to a project isdetermined by the state allocatingagency. The amount is not depend-ent on the amount of LIHTCs allo-cated to or given up by the project.
Since states can exchange 100%of their unused 2008 authority for85 cents, and the current marketprice for LIHTCs is now less than80 cents, there appears to be littleincentive for states or developers tolook for private investors to buytheir LIHTCs. Consequently, manystate agencies – using direct federalfunding – are not only bypassingprivate investors but are effectivelycompeting with them under theexchange program.
If the developments of the lastseveral months are any indication,the impact the exchange program
Protect the Private-Public PartnershipBy Will Cooper, Jr., President and CEO, WNC & Associates, Inc.
Cooper,continued on page 6
Op Ed
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Cooper,continued from page 5
will have on the LIHTC equitymarket will not be positive.Developers are submitting projectsto exchange 100% of their LIHTCseven after investors have signed let-ters of intent and spent considerabletime, money and other resources toperform due diligence. This is fur-ther damaging a less than robustLIHTC equity market at a timewhen industry participants – devel-opers, state agencies and syndicators– should be working to attract newinvestors.
The exchange program shouldnot be used by the states to com-pete with private investors. Doingso is counter to the spirit of theLIHTC program and jeopardizes
States need to find ways to leverageexchange funds with private equityto accomplish this. The first andmost important step necessary is tolet the market set the price for taxcredits and use the exchangemoney to fill the gap on projectsthat obtain equity commitments.Because exchange funds come fromthe U.S. Treasury to state agencies,not to individual projects, it’s up to the states to decide how and to whom such grants are made.Directing exchange funds to proj-ects that are able to obtain equitycommitments will not only acceler-ate a return of investor capital intothe state, it will help the states fundmore properties.
States should also look for creative ways to incentivize devel-
the private-public partnership uponwhich the program was founded.By establishing the LIHTC pro-gram, Congress chose to have the
private sector, not the federal gov-ernment, invest directly in housing.
Attracting new investors tobring more equity into the marketshould be the focus of the industry. Cooper,
continued on page 7
Attracting new investors to
bring more equity into the
market should be the focus of
the industry. States need to
find ways to leverage
exchange funds with private
equity to accomplish this.
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Cooper,continued from page 6
opers to find equity for their proj-ects. Allowing higher cash develop-ment fees and cash flow for projectsthat obtain equity commitments is away to do this. Projects that areunable to secure any private equity,however, could be required to pay asmaller development fee, defer alarger amount of their fee and/orreceive less cash flow. The idea is to create a system of incentives –and disincentives – that are inalignment with, not against, theprivate-public partnership.
Developers and investors alsoneed to be given sufficient time tonegotiate, underwrite and closetransactions. Even when the equitymarket was robust, it was not
uncommon for a project to takefrom six months to a year afterreceiving a LIHTC allocation toidentify an investor, negotiateterms, complete investor under-writing and close. Under the cur-rent exchange program, many stateshave set very aggressive deadlinesfor developers to commit to usingthe exchange funds, leaving littletime for investor participation.
When Congress returns fromits summer recess, the debate for asecond stimulus is expected toreach a crescendo. Lobbyists frommany and disparate industries willbe descending on Washington,D.C., all seeking a piece of theaction. Further assistance for theLIHTC industry is warranted, aslong as it doesn’t jeopardize theprivate-public partnership. n
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Grayson,continued on page 9
“DIVERSITY HAS HELPED us inthis last real estate boom-to-bust,”says developer Chickie Grayson,president and CEO of Baltimore,Md.-based Enterprise Homes, Inc.,referring to the organization’s shiftin development strategy.
Enterprise is a familiar name inthe affordable housing industry.Enterprise Homes, Inc., is a sub-sidiary of Enterprise CommunityInvestment, Inc. (ECI), which syn-dicates low-income housing taxcredits, historic tax credits, and newmarkets tax credits, and providespermanent financing and otherfinancial services for the affordablehousing industry. ECI is a subsidiaryof Enterprise Community Partners,Inc. (ECP), the nonprofit parentorganization that provides technicalexpertise, grants, and public policyadvocacy to help create affordablehousing nationwide. Also under theEnterprise umbrella is the EnterpriseGreen Communities Initiative, thefirst national building standard forgreen affordable housing.
Enterprise Homes does the“bricks and sticks” through itsdevelopment and consulting services.It develops affordable, workforce,and mixed-income rental and for-sale homes.
“We act as a [development] labfor [ECI and ECP], and they act asa resource for us,” says Grayson.Enterprise Homes develops thehousing, obtains equity for projectsthrough ECI, and develops all itshousing to Green Communitiesstandards.
Enterprise Homes developsalone or in partnership with others,
usually nonprofits, primarily in theBaltimore and Washington, DCmetropolitan areas, Virginia, andPennsylvania. It’s produced around4,500 housing units, and has roughlyanother 1,000 under development.
Grayson, a native of nearbyBaltimore who still lives there,joined Enterprise in 1987 to help itclose and build two housing devel-opments. Before joining Enterprise,she developed smaller multifamilyresidential properties.
Success from EvolutionGrayson credits Enterprise
Homes’ success in large part tochanging course over time.
“You have to keep evolving,”she says. “That’s an important partof the development process, becausenothing is static; it’s a very dynamicprocess. So it’s really important tostay ahead of the game and to haveas much diversity as you can, whilesticking to your knitting.”
That practice has helpedEnterprise Homes remain success-ful in the single-family housingmarket. Enterprise Homes managedits way through the downturn inthe single-family market by adjust-ing its development strategy toinclude more rental projects, beforethe home sector began to sour.Today about 70% of the housingunits it develops are rental and 30%are homeownership, compared to90% homeownership in the organi-zation’s early years. As financingdwindled in the late 1990s andearly 2000, Enterprise Homesbegan focusing more of its effort ondevelopment of affordable and
workforce rental housing.Grayson said the foreclosure
rate on Enterprise-developed for-sale homes has been “really minimal.”
Enterprise Homes makes heavyuse of the federal low-income housing tax credit (LIHTC) for itsrental housing developments, typi-cally reserving a large chunk of theunits in each project for householdsearning well below 50% of the areamedian income (AMI).
For-sale developments usuallyconsist mostly of affordable andsome market-rate homes. Units aremade affordable to lower-incomehouseholds through favorable fixed-rate, 30-year first mortgage financ-ing and some other subsidy source,such as a soft second mortgage.Affordable buyers must completehomeownership counseling sessionsprior to settlement.
Biggest Current ChallengeGrayson said obtaining financ-
ing for new projects is her biggestchallenge today. “We’re seeing it inevery phase of what we’re doing,” shenotes. “We’re seeing it with private
Chickie Grayson Leads Enterprise Homes to Produce Housing, Navigate Challenges
D EV EL O P ER P R O F I LE
Chickie Grayson
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Graysoncontinued from page 8
lenders. We’re seeing it with low-income housing tax credit equity.”
To meet this challenge,Grayson says, “we’re working reallyhard to figure out how to put thefinancing together. The thing that’shelped us is the stimulus [act]money, particularly the TCAP.”
Grayson noted EnterpriseHomes planned to submit applica-tions within days to request federalTax Credit Assistance Program(TCAP) funds for four stalledLIHTC projects in Maryland.
In spite of the current chal-lenges, Enterprise Homes is busycompleting new developments,including:
n The Greens at Rolling Road,a new construction, green
LIHTC development inBaltimore County with 65one-bedroom and 18 two-bed-room apartments for seniors.Now in lease-up, the three-story building is designed withsteep sloping roofs and stonecladding that complement sur-rounding early 20th centuryhistoric residences.
n Stevens Forest Apartments, a $13.8 million preservation of a37-year-old apartment propertyinto 106 units of green, afford-able rental housing in HowardCounty, Md. The refinancedand renovated property, now inlease-up and targeted to fami-lies earning up to 60% of AMI,has 18 one-bedroom, 60 two-bedroom, and 28 three-bed-room units in a garden-stylecommunity.
n Renaissance Square, a 196-unit new construction develop-ment in Baltimore County thatclosed in early 2009. Occupying17 acres, it will include 81affordable apartments for seniors, and 115 for-sale town-houses, cottages, and single-family homes. Prices will rangefrom $250,000 to $375,000,with a little over half the unitsincome-restricted and the restmarket-rate. A soft secondmortgage will reduce the firstmortgage amount for affordablebuyers to as little as $150,000.
Asked what she enjoys aboutbeing an affordable housing devel-oper, Grayson says it’s the positiveimpact made on residents’ lives,and the high-quality housing thatis produced. “You get the best ofboth worlds,” she says. n
Energy TaxIncentives
Renewable Energy Incentives Offer Extra Benefits for RealEstate Projects; New Changes Promise New Opportunities
Incentives,continued on page 12
NEWLY IMPLEMENTED CHANGES made by thisyear’s economic stimulus act promise new opportuni-ties and shifts in the use of federal renewable energytax credits. This applies both for real estate projectswhere the energy credits are used alone, and wherepaired with federal low-income housing, historicpreservation, or new markets tax credits. (See p. 11 forchart on federal energy tax credits.)
Renewable energy tax credits can help developersand owners raise extra equity by “selling” the tax creditsto syndicators or corporate investors. And in affordablemultifamily rental housing, renewable energy systemssuch as solar can help a developer win an award oflow-income housing tax credits (LIHTCs) under thestate’s qualified allocation plan (QAP).
Renewable energy “is not only a good thing toreduce your energy costs, but it helps you get the taxcredits, too,” says Boston attorney James Duffy, a partnerin the law firm of Nixon Peabody LLP. He noted stateQAPs and other incentives for solar energy and energyefficiency have “really accelerated” in the past 18 months.
New OptionsLast fall’s financial rescue act extended the lifespan
of federal renewable energy tax credits, the deadlinesby which energy equipment or projects must be placedin service. In addition, the stimulus legislation, theAmerican Recovery and Reinvestment Act (ARRA),made two radical changes that will alter the use of federal energy tax credits in the near term. Thesechanges relate to the two types of federal renewableenergy tax credits: the investment tax credit, or ITC,and the production tax credit, or PTC.
One change permits owners of new projects thatqualify for the PTC to elect to take the ITC instead.In June, the Internal Revenue Service issued guidance(Notice 2009-52) that describes the procedures taxpayersmust follow to elect to take the ITC instead of the PTC.
(Notice: http://www.irs.gov/pub/irs-drop/n-09-52.pdf )The second change permits owners of new proj-
ects that qualify for the ITC to elect to obtain a cashgrant from the U.S. Treasury Department in lieu ofthe tax credit, similar to the LIHTC “exchange”program established by ARRA.
On July 9, Treasury issued guidance, requirements,and a sample application form regarding the election toobtain a cash grant in lieu of the ITC. As of 7/15/09,Treasury wasn’t yet accepting applications. (Guidance,other materials: http://www.treas.gov/recovery/1603.shtml; Nixon Peabody memo, http://www.nixonpeabody.com/publications_detail3.asp?ID=2830)
Under both options, projects generally must beginor complete construction by year-end 2010.
Duffy said both new elections may be combined.For instance, the sponsor of a new energy project qualifying for the PTC could elect to take the ITCand then apply for a cash grant in lieu of the ITC.
The options will enable developers or owners toobtain equity or cash upfront. Obtaining cash insteadof taking and then trying to “sell” the ITC will enablesponsors to bypass the current challenges in the energytax credit equity market.
Duffy said today there probably are only four orfive large energy tax credit investors that are still veryactive, and “all of them have sort of limited demand forcredits.” But he added there also are some small region-al banks or companies “doing much smaller numbers.”
Duffy indicated current pricing for energy ITCs isprobably about $1.10 per dollar of tax credit, downfrom around $1.20 a year or two ago.
Types of Energy CreditsTaxpayers can use either the production tax credit
or the investment tax credit to reduce federal corpo-rate or individual income taxes. Taxpayers don’t have
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Federal Renewable Energy Tax CreditsProduction Tax Credits (PTCs) Energy (Investment) Tax Credits (ITCs)
Governing Section of Section 45 Section 48Internal Revenue Code
Types of Energy Wind, biomass, geothermal, Solar (including solar photovoltaic, hotFacilities/Equipment municipal solid waste, hydropower, water), fuel cell, microturbines, small
and marine and hydrokinetic power. wind, and those facilities electing out of PTCs and into ITCs.
Amount of Tax Credit A formula price of cents per kilowatt 30% of the basis of the energy propertyhour (2.1 cents in 2009) of electricity placed in service during a taxable year.produced and sold to an unrelated person for a 10-year period from placement in service (reduced to 1.1 cents/kwh, for open loop biomass,landfill gas, trash facilities, hydropower and water based hydrokinetic facilities.
Credit Claimed Annually for 10 years, starting with One time only, at placement in service.placement in service.
Recapture No. Five-year recapture period, credit vesting 20%/year.
Subsidized Energy Financing PTC reduced by up to 50% to the No credit reduction.Credit Reduction extent project costs are funded by
tax-exempt obligations or other subsidized energy financing or government grants.
Alternative Minimum Tax PTCs can reduce federal AMT for ITCs can reduce AMT.(AMT) first 4 years of the 10-year PTC
period (but not for the final 6 years).
Credit Basis Reduction None. Depreciable basis reduced by 50% of amount of ITCs claimed.
Leasing Structures Available Available for closed loop Available.to Pass-Through Credits biomass only.
Expiration of Credit Must place in service by Must place in service by 12/31/2016 12/31/2012 for wind and by (other than facilities which opted out of 12/31/2013 for other facilities. PTCs into ITCs, which remain subject to
the deadlines which had applied under the PTC program).
Requirement That Must be sold to an unrelated No sale requirement.Electricity Be Sold third party.
Conversion of Credits to Must first opt out of PTC into ITC, Must complete or commence construction U.S. Treasury Grants* then ITC requirements apply. in 2009 or 2010 and complete by the
foregoing deadline for the type of facility;Treasury grants not available to government entities, non-profits, and pass-through entitiesany party or equity or profits holder of whichis a governmental or tax-exempt entity.
Source: Chart prepared by James F. Duffy, Nixon Peabody LLP.
* Note that only one of ITC, PTC (if applicable) or Treasury grant may be claimed for a particular facility.
Note: This chart is intended solely as a quick summary reference and is not intended to reflect all provisions or variations in these tax credits. This chart doesnot constitute legal advice; advice pertinent to any particular facility should be sought from qualified professionals.
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Incentives,continued from page 10
to obtain an allocation of theseenergy credits for a renewable energy system or facility, unlikewith the LIHTC.
The production tax credit isavailable for facilities that generateelectricity from certain eligiblerenewable energy sources (e.g., solar,wind, biomass, geothermal). Thecredit is claimed annually, and theannual credit amount is based onthe amount of electricity producedthat year. The PTC generally hasn’tbeen paired with low-income hous-ing or historic tax credits, but hasbeen paired with the new marketstax credit for energy projects suchas solar or wind “farms.”
The ITC is available for quali-fying renewable energy systems(e.g., solar, geothermal heat pumps,small wind turbines). The creditamount is claimed entirely in thefirst year and is equal to a percent-age (30% for solar) of the cost ofthe energy equipment, includinginstallation.
Solar Most Popular“Typically the renewable energy
credit that affordable housing andhistoric developers are using issolar,” says Duffy. The ITC for solarphotovoltaic (PV) is more popularthan that for solar hot water sys-tems. While both utilize solar panels, PV systems generate elec-tricity for use in a property, whilesolar water systems produce hotwater for the building.
There generally are no rules ofthumb for determining the appro-priate size of a solar PV system foran affordable housing project. Thesize will be shaped by various fac-
renewable energy “on any projectwhere it is feasible” – both in newconstruction and in rehabilitation.He recommends that developersand owners identify the public and private energy incentives avail-able in their state and determinehow much of the energy system’scost can be paid for from the com-bination of these and the federalincentives.
Many states offer tax credits,other tax incentives, grants, low-interest loans, or other assistancefor renewable energy systems andenergy efficiency. Many utilitiesoffer rebates. (For comprehensivestate-by-state list, go to http://www.dsireusa.org.)
Duffy advised developersthinking of incorporating a renew-able energy system (such as solar)into a new construction or rehabili-tation project to investigate theconcept early in the planningprocess and talk to their architect.“Maybe you might want to tweakthe plans that you’ve been usingfaithfully for 10 years on everyproject you do, and see if a roofdesign would give you even bettersolar access,” he says.
Developers and owners canseek an initial analysis from a solarinstaller – a company that designsand install solar systems. With anexisting building, Duffy says,“Some of these guys can go righton Google Earth and look at yourrooftop and where the trees nearyour building are and [tell] you,right [from] the desktop, whetherit makes sense to even look at it, orwhether it’s just not going to workfor your deal.”
If a building hasn’t been con-structed, Duffy says, “you canalways plan to make it work.” n
tors, such as the sponsor’s budgetand preferences, available fundingand incentives for the system (governmental, utility, other), theefficiency of the system, space con-straints (i.e. the total area availableand suitable on rooftops or else-where for installation of solar panels), and the number of peaksun hours per day at the site.Systems may supply all or a portionof the property’s electric needs.
Pairing the solar tax credit with the LIHTC can reap severaladvantages. The solar tax credit canraise additional equity to help payfor the equipment and installation.In addition, much of the cost of thesolar energy system can be includedin LIHTC eligible basis and gener-ate additional housing credits.Pairing the solar with historic taxcredits also generates extra equity.
Certain precautions are neces-sary, though. For example, solar PV systems in LIHTC projectsgenerally supply power just forcommon areas and not for tenants’units since the sale of electricity toresidents can risk the loss of housing credits.
Another beneficial changemade by ARRA is that the amountof the energy ITC is no longerreduced if the cost of the energysystem is funded by grants or by“subsidized energy financing,” suchas tax-exempt bond proceeds. “Formost solar installations,” Duffynotes, “you can now use below-market loans or tax-exempt bondswithout having to reduce theamount of ITC you claim.”
Advice to DevelopersDuffy advises LIHTC and
historic tax credit developers andowners to consider the use of
HOPE HOUSE, A NONPROFIT residential treatmentcenter for male alcoholics and substance abusers inBoston’s South End, is a renewable facility in severalways.
The new, relocated complex is a place where alcoholics and substance abusers address their issuesand rebuild their lives.
At the same time, the new facility is a green build-ing that relies heavily on renewable energy, throughgeothermal and solar energy systems.
Hope House, founded in 1955, previously operatedout of five old buildings at three locations cobbledtogether over the years. On April 1, it moved into anew home in the Roxbury neighborhood, a 35,000-square-foot, four-story residential treatment centercomprised of an interconnected new building and renovated existing building. The new facility provideshousing for residents, amenities, program space, andadministrative space.
Hope House has two components. One is an 80-bed “Recovery Home” where clients reside and partici-pate in the four- to six-month treatment program. Thesecond part is a “Graduate Home,” which consists of 22units of affordable single-room occupancy (SRO) apart-ments occupied by graduates of Hope House’s treatmentprogram and of similar other treatment programs in thestate. These SRO residents pay 30% of their incomeeach month; state housing vouchers subsidize the rest.
The roughly $15 million project had various funding sources, including dollars generated by thefederal new markets tax credit.
Hope House Executive Director Thomas Dufflysaid the organization was “crowded” in its operations atits previous buildings but made them work. “But it wasobvious when I took over as executive director 10 yearsago,” he said, “that we needed better space, more effi-cient space, so that we could expand our program, domore for the graduates, and do more education and
Green Building
Hope House,continued on page 14
substance abuse treatment.”Hope House, which embarked on its quest for a
new facility four years ago, had a feasibility analysisprepared, and later purchased the property for its newcomplex. The new facility was designed by Mostue &Associates Architects, Inc., of Somerville, Mass.
Architect Clifford Boehmer, a principal of Mostue& Associates, reported that the design presented severalchallenges. One was that business leaders in the newneighborhood, an industrial and commercial section,didn’t want a building that looked residential. “Theywanted the building to appear to be commercial inuse,” he said. The motivation was to preserve the area asmostly industrial/commercial.
Architect Sharon MacNulty, of Mostue &Associates, said the facility’s exterior was designed withan industrial appearance. The grouping of windowsand grid overlays make the building appear to havemany, very large windows, just like those in industrialbuildings. Inside, however, the reality is fewer andsmaller windows, which provide a residential feel forresidents and staff. “They’re trying to balance the moreindustrial feel to fit in with the neighborhood,” saysMacNulty, “with a more intimate residential feel sothat the men who live there [are] able to call it homefor the time they [are] there.”
Geothermal, Solar SystemsThe new facility is very energy efficient, sustain-
able, and utilizes two renewable energy sources.“We decided to build a green building,” says
Duffly, “so that we could cut our expenses over thelong term and do some good for the environment.” Hecited, for instance, the use of waterless urinals, “envi-ronmentally friendly” materials, and geothermal andsolar energy systems.
The geothermal system provides all the heating and
Renewal and Renewables Are at Heart ofNew Home for Boston Treatment Center
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Hope House,continued from page 13
air conditioning for the complex,negating the need for a conventional,natural gas-burning boiler system tosupply heat.
The concept behind a geother-mal system is that the temperatureof the earth below four or five feetfrom the surface is fairly constantyear round – warmer than the sur-face air temperature in winter andcooler in summer.
The way a geothermal systemworks is that one or more holes –“wells” – are drilled into the earth,vertically or horizontally. MacNultysaid the two wells for Hope House– they cost $30,000 apiece – are1,200 to 1,500 feet deep. Water iscirculated by pumps through anenclosed pipe system that runs intothe earth, bringing back cooler waterin summer and warmer water inwinter. Heated or cooled air is thendistributed through the building.
“We’re bringing up an ambienttemperature – 49-, 50-degree water –from 1,500 feet down,” says Duffly.
MacNulty said geothermal sys-tems can be installed in buildings“almost anywhere.” Boehmer said atypical restraint is whether there isenough site area to accommodatethe wells and access to them. Eachwell is capped by a manhole-likecover typically located on theground outside the building.
Use of geothermal reduces theutility bills for a building for heat-ing and air conditioning. But adownside is that electric bills arehigher, because of the extra powerconsumed to constantly run thepumps that circulate the water.
At Hope House, this extra costwas offset by installing a solar pho-
tovoltaic (PV) energy system – solarpanels and companion equipment –that generates electricity. This solar-generated electricity helps supplypart of the total power used byHope House, thereby reducing thefacility’s electric bill. Duffly said thesolar PV system generates an aver-age 33.5 kilowatts of power daily.
MacNulty noted a geothermalsystem typically makes economicsense only if it will provide air conditioning as well as heating fora building.
Duffly said pretty much theentire cost of the geothermal andPV solar systems was paid for withgrants received from theMassachusetts TechnologyCollaborative and utility rebates.
Funding SourcesThe Hope House project
tapped multiple funding sources.Sales proceeds from the old build-ings covered about a third of thecost. In addition, there were fundsreceived from the state and fromthe city, green grants and rebates,and capital generated by the federalnew markets tax credit (NMTC).
The NMTC allocation wasprovided by a community develop-ment entity – AI Wainwright LLC – that was a joint venture of Affirmative Investments, ofBoston, and Wainwright Bank andTrust Co.
The new markets investor in thedeal was US Bancorp CommunityDevelopment Corporation. n
Ta x C r e d i t A d v i s o r • G R E E N B U I L D I N G
People in the NewsSeveral more top officials
have been sworn in or con-firmed at the U.S. Departmentof Housing and UrbanDevelopment. David Sternswas sworn in on July 15 asAssistant Secretary forHousing and Federal HousingAdministration (FHA)Commissioner. Previously,Sterns was president and chiefoperating officer of Long &Foster Companies. Meanwhile,the U.S. Senate has confirmedthe nominations of MercedesMarquez to be HUD AssistantSecretary for CommunityPlanning and Development,and of Raphael WilliamBostic to be AssistantSecretary for Policy Develop-ment and Research. Mercedespreviously was general managerof the City of Los AngelesHousing Department. n
Use of geothermal reduces
the utility bills for a
building for heating and
air conditioning.
HUD Issues NewChanges to Handbook
THE U.S. Department of Housingand Urban Development on6/23/09 released new changes(Change 3) to HUD Handbook4350.3 (Occupancy Requirementsof Subsidized MultifamilyHousing Programs). They areeffective 8/1/09. Some of thechanges impact HUD projectsonly; others both HUD and low-income housing tax credit projects.
(Major LIHTC changes:http://www.ajjcs.net/News/Entries/2009/7/7_Change_3_To_HUD_Handbook_4350.3.html) n
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Scattered,continued on page 16
MANY STATE HOUSING financeagencies in their low-income hous-ing tax credit (LIHTC) programsfavor preservation projects, usuallyby giving preference or extra com-petitive points to projects involvingthe acquisition and rehabilitation ofexisting properties. Preservation ofaffordable housing is also an emerg-ing priority in this Congress.
Opportunities are expanding forurban infill tax credit deals, whichoften require consolidation of mul-tiple sites to develop one project.Scattered-site development oppor-tunities are particularly prevalentwhen combining the LIHTC withthe new federal NeighborhoodStabilization Program (NSP) funds.NSP provides competitive fundingawards for the purchase and rede-velopment of foreclosed or aban-doned residential properties, to stabilize neighborhoods marred byhigh foreclosures and distress.There are opportunities to assembletracts of foreclosed/distressed prop-erties into one LIHTC project.
Scattered-site developmentpresents unique opportunities insome areas since dispersed, smallproperties (1- to 4-units) may bepart of the housing stock in greatestneed of preservation.
Scattered-site development has risks: non-standard properties,and potentially greater difficultymaintaining properties, supervisingtenants, achieving site control ofmultiple properties in a short timeframe, and finding LIHTC equityinvestors.
But there are also potential
advantages. Preservation of single-family homes as rental housing maybe less expensive than renovationsof larger multifamily apartmentcomplexes. In addition, in distressedareas, rental housing may be theonly viable marketing option.Finally, local renters may prefer ahouse or duplex with yard to a stan-dard apartment.
To be successful in developingand operating a scattered-siteLIHTC project, as opposed to asingle building, a sponsor must takecare in structuring the deal upfrontand line up property managementwith the special skills and expertiseneeded for this product.
Development IssuesIn the area of structuring, a
number of these development issuesrelate to the elections that are madeby the LIHTC sponsor (owner) onIRS Form 8609. This form must be submitted to the IRS for eachbuilding before the owner can beginclaiming housing credits. Eachbuilding in an LIHTC project musthave a separate Form 8609 and itsown Building IdentificationNumber (BIN).
Following are the electionsmade on Form 8609 (all irrevocableonce made) that will impact thesuccess of a scattered-site develop-ment:
n Line 8b. Here the owner makesthe election indicating that thebuilding is part of a multiple-building project. Under theLIHTC program, each building
is considered a separate projectunless, before the close of thefirst calendar year in the projectperiod, each building that is orwill be part of a multiple-build-ing project is identified as suchby attaching to the building’sForm 8609 a statement contain-ing certain information. Thisinformation is: the name andaddress of the project and eachbuilding in it; the BIN of eachbuilding in the project; theaggregate credit dollar amountfor the project; and, the creditamount allocated to each build-ing in the project. If this infor-mation isn’t attached, the build-ing will be treated as a separateproject.
In general, a multiple-buildingproject includes two or more low-income buildings located on thesame tract of land. There is anexception, however, for scattered-site projects A multiple-buildingproject can include two or morebuildings not located on the sametract if all of the buildings: (1) arefully occupied by low-incomehouseholds; (2) are owned by thesame entity for federal tax purposes;(3) have a common financing plan;and (4) have “similarly constructed”units. Accordingly, a scattered-siteproject can’t have any market-rateunits.
A “unit” must contain separateand complete facilities for living,sleeping, eating, cooking, and sani-tation. An example of a unit is an
Considering a Scattered-Site Tax Credit Project? Be Aware of the Special Issues and Necessary Skills
By A. J. Johnson
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Scattered,continued from page 15
apartment that contains a livingarea, sleeping area, bathing andsanitation facilities, and cookingfacilities. Regardless of scattered-site building types, if the unitsmeet these basic requirements, the“similar construction” test should be satisfied.
n Line 10a: Here the owner may elect to begin the 10-year taxcredit period in the tax yearafter the building is placed inservice, as opposed to the sameyear. Special rules determinethe start of the credit period formultiple-building projects. Forpurposes of determining thestart of the tax credit and com-pliance periods, prior buildings
placed in service in a project aretreated as placed in service onthe most recent date that anyadditional building elected bythe taxpayer was placed in serv-ice. Owners must be carefulwhen making this election. Forexample, a building completedand placed in service in 2008could, for tax purposes, be con-sidered as placed in service in2009 if a later building in thesame project was placed inservice in 2009. If credits forthis project are first taken in2009, the first year of the creditperiod will not be deferred forthe building placed in service in2008, since it will be treated asbeing placed in service in 2009.Failure to make the properelections here in a multiple-building project can result in a
significant reduction in taxcredits from the amount towhich the project is entitled.This area is confusing, so competent professional adviceshould be sought.
n Line 10c: Here the owner chooses one of the two stan-dard minimum set-asiderequirements for the project:“20/50” or “40/60” (a third,25/60 option is available forNew York City projects only).Under 20/50, at least 20% of allthe units in the project must beboth rent-restricted and occu-pied by households earning50% or less of the area medianincome (AMI). With 40/60, atleast 40% of the units must berent-restricted and occupied by
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Scattered,continued on page 17
It’s Not Too Late to Enter!Have an Outstanding Historic Project? Nominate It for a 2009 ‘Timmy’ Award
The National Housing & Rehabilitation Association (NH&RA) is soliciting nominations of outstanding historicpreservation projects for the Fifth Annual J. Timothy Anderson (Timmy) Awards for Excellence in Historic
Rehabilitation. Anyone can submit a nomination; the entry deadline is 8/7/09.
The awards competition honors outstanding historic rehabilitation developments, including those that use
the federal historic tax credit. Winners will be chosen by a panel of judges based on overall design and quality,
interpretation and respect of historic elements, impact on the community, and financial and market success.
The 2009 award winners will be recognized this fall.
Award categories this year (some are new) include: Best Commercial/Retail/Non-Residential Project; Best
Historic Rehab Utilizing Low-Income Housing Tax Credits (Small/Up to $5 million Total Development Cost);
Best Historic Rehab Utilizing LIHTCs (Large/Over $5 million Total Development Cost); Best Historic Rehab
Utilizing New Markets Tax Credits; Best Market-Rate Residential; Best Mixed-Income Residential; Best Historic
Rehabilitation Project Involving New Construction; and Most Innovative Adaptive Reuse.
The Timmy Awards were named after the late Boston architect and preservation advocate J. Timothy
Anderson, a leader in the historic preservation field.
Details and a nomination form are posted at http://www.housingonline. com/TimmyAward.aspx. n
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Scattered,continued from page 16
households at or below 60% ofAMI. Maximum unit rents forlow-income units are lowerunder the 20/50 test thanunder 40/60. As previouslymentioned, scattered-site proj-ects must consist entirely oflow-income units. In general,an owner should elect the40/60 minimum set-aside for ascattered-site project, since ifthe 20/50 election is made alllow-income units will be limit-ed to lower monthly rent capsbased on 50% rather than 60%of AMI.
Special Management SkillsScattered-site LIHTC projects
present special management chal-lenges and require special propertymanagement skills and expertise tobe successful. It is essential to planin this area even before construc-tion begins.
Differences in managing ascattered-site development com-pared to a “single-site” LIHTCproject include:
n The added expense and effort to manage physically separateproperties, including extra stafftime and travel;
n Higher maintenance costs, due to properties constructed ofdifferent materials;
n Difficulty executing an ongoingproperty inspection programand maintaining direct contactwith residents;
n Less control over the physical environment surrounding theproperties; and,
n Difficulty controlling access to the properties, since there isn’t acentral supervisory location.
Property management for scat-tered-site projects must be flexibleand mobile, and requires specializedknowledge and skills. The bestmanagers tend to be individualsexperienced in running develop-ments comprised of multiple dispersed small urban properties.These same managers, though,often lack LIHTC managementskills. But this can be rectified withtraining and oversight from taxcredit compliance professionals.
The scattered-site developershould line up the property man-agement team before starting construction. The developer shoulddetermine early whether there exists
– in-house or locally – the special-ized management expertise neededfor this product.
Property managers skilled inscattered-site operations can also be a great help pre-construction indeveloping operating budgets,assessing the rental market, anddetermining the particular amenitiesrequired to ensure the marketabilityand long-term success of the project.
A. J. Johnson is president of A. J.Johnson Consulting Services, Inc., aWilliamsburg, Va.-based full servicereal estate consulting firm specializingin due diligence and asset manage-ment issues, with an emphasis on low-income housing tax credit properties.He may be reached at 757-259-9920,[email protected]. n
Historic Rehabilitation
Think Historic Buildings and Renewable Energy Can’t Mix? Think Again
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Combined,continued on page 19
THINKING OF INSTALLING a renewable energysystem in an historic building?
The concept may sound impossible, even ludicrous,particularly for a renovation project seeking to qualifyfor the federal historic rehabilitation tax credit.
But these kinds of rehabilitation projects arepossible, with the right building and approach, accord-ing to experts.
“It’s going to work in some buildings, in somerehab scenarios, and it’s not going to work in others,”says Washington, D.C. historic preservation consultantWilliam MacRostie, a principal of MacRostie HistoricAdvisors, LLC.
By far, the most popular type of renewable energysystem being installed in historic buildings is solar.Here the most common installation is a solar photo-voltaic (PV) system, where solar panels collect solarenergy to produce electricity for use in the building.Less common is solar thermal, where energy collectedby solar panels is used to heat water. Both types ofinstallations qualify for the federal investment taxcredit, which is claimed entirely in the first year andequal to 30% of the cost of the installed system.
Out of Sight Is Key“Sightlines are a huge issue” when designing a
solar array for a building seeking the historic tax credit, says Boston area architect Clifford Boehmer, aprincipal of Mostue & Associates Architects, Inc.,Somerville, Mass. This generally means, according to Boehmer and MacRostie, designing the solar installation so it won’t be visible from the street or anypublic right-of-way. According to the pair, the mostpromising candidates are buildings with a flat roof, andthe taller the building the better.
The ideal, MacRostie adds, is a flat-roofed build-ing with a parapet. A parapet is an extension of the
building’s exterior wall above the roof line. This per-mits even greater concealment of renewable equipmentsuch as solar panels installed on the roof.
Concealment of solar panels or other renewableenergy equipment generally is necessary to win reviewapproval of the renovation plans for an historic rehabproject from the National Park Service, and to complywith the U.S. Department of the Interior Secretary’sfor Rehabilitation. Rehab plans must also pass musterwith the state’s historic reviewers, in the state historicpreservation office (SHPO).
“The historic credit world is all really visualimpact-driven,” says MacRostie.
MacRostie and Boehmer said it’s tough to designand install a solar energy system on a building with asloped roof and obtain the requisite Park Serviceapproval to obtain the historic tax credit.
Besides installation on a flat-roofed building, anoth-er possibility is to locate the solar system at a nearbybuilding that isn’t part of the historic structure, or onanother part of the site. But even here care must betaken so that the installation isn’t visible or detracts fromthe historic appearance or character of the building.
Boehmer said his firm is working on an historictax credit project in Boston’s Beacon Hill neighbor-hood, in which three existing historic masonry buildings used as a rooming house will be renovatedinto 115 single-room occupancy dwelling units. Panelsfor a solar hot water system will be installed on a flatroof at the development, called Bowdoin Manor.
Wind, GeothermalThe experts said it’s virtually impossible to incor-
porate wind energy production equipment – say mini-turbines – into an historic tax credit project, because ofthe high exterior visibility of this equipment.
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Another, less intrusive possiblerenewable energy resource for his-toric buildings is geothermal, whichcan also qualify for energy tax cred-its. Geothermal systems depend onthe circulation of water throughpipes to supply the heat and/or airconditioning for a building. Thephysical equipment is located in thebuilding’s interior, and the neces-sary pipes run through one or morewells drilled into the earth. The vis-ible exterior signs of the latter aremanhole-like covers that cap thewells and are typically located onthe ground outside the building.
Advice for ProceedingThe experts offered some
advice to developers or building
and decide what’s appropriate.”Architect Sharon MacNulty,
a colleague at Mostue & Associates,says an initial meeting can also help “flush out” possible conflictsbetween the strict historic preserva-tion standards and the requirementsto qualify for funding sources forthe energy equipment or building.For instance, she noted that toqualify for financing from theMassachusetts TechnologyCollaborative for a rooftop solar PV system, the project and buildingmust meet Energy Star standards.“But if you’re preserving your exterior wall finishes and if you’rekeeping historic windows, there’s no way to meet the Energy Starrequirements,” she says. “So rightaway you’ve missed out on one ofthe major pre-requisites for thefunding.” n
Combined,continued from page 18
owners thinking of incorporating a renewable energy system in anhistoric tax credit project.
MacRostie suggested a goodfirst step is to discuss the conceptwith reviewers at the National ParkService and SHPO, to get theirview on whether such a projectseems approvable.
Boehmer also favors holding a“green charrette” at the outset of theplanning process for a project. Thisis a meeting where all of the keyparties to a project get together totalk and brainstorm – the developer,architect, engineer, historic preser-vation consultant, renewable energyspecialist, general contractor, andothers. “That’s a very good prelimi-nary strategy,” Boehmer says, “tohave a big meeting with everybodysitting around the same table andrun through all the different options
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New Markets Tax Credit
New Markets, Energy Credits to Help Finance Power Facilities in Pacific Northwest
NMTC,continued on page 21
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TWO EARTH-FRIENDLY ENERGY projects in thePacific Northwest that are combining federal new markets and renewable energy tax credits will do goodfor their communities by doing well financially.
One project is a wind farm that will help generateadditional revenues for the social services programsoperated by a local nonprofit. The second is a new biomass plant that will benefit the environment and theeconomy of the sponsoring Native American tribe.
In both cases, the energy facilities will be funded inlarge part by capital generated by the federal new mar-kets tax credit (NMTC) and federal energy tax credits.
Both facilities were described by speakers at arecent conference in Washington, D.C. sponsored byNovogradac & Company LLP.
Wind Farm ProjectThe roughly $17 million wind farm project is located
near Aberdeen, Wash., a city of about 16,000 on thestate’s west coast.
The six megawatt capacity wind farm project,which hadn’t closed yet as of mid-July, will be devel-oped by a nonprofit social services organization, CoastalCommunity Action Program (CCAP) on land it owns.
Colin Rowan, of United Fund Advisors (UFA),Portland, Ore., said CCAP should receive about $11million in revenues each year from selling the electricitygenerated by the wind farm to the local utility compa-ny. “That money will go into their services, help themcontinue to do what they do,” said Rowan. Noting thegroup’s current annual operating budget is about $7million, he said the extra revenues will enable CCAP toreach “further into the community.” CCAP providescritical help to predominantly low-income householdsin the rural community, including housing services,health care, food, employment, and other aid.
Rowan said the project is an example of how federalnew markets and energy tax credits can be harnessed
and combined for a project that will satisfy theNMTC program’s community impact goals (e.g., jobcreation, benefiting low-income households). “You’vegot a great mission-driven underlying organizationthat provides critical services to the low-income com-munity, and they’re going to now generate revenuefrom this wind farm,” he explained.
Two community development entities (CDEs) are providing allocations of new markets tax creditauthority for the wind project. US BancorpCommunity Development Corporation (CDC), oneof two tax credit investors, will claim new markets andenergy tax credits. The second investor is Wells Fargo.
The federal energy tax credits claimed will be the30% investment tax credit (ITC). Steve Cramer, ofUS Bancorp CDC, indicated that the use of the ITC,rather than the energy production tax credit (PTC)made it easier for his firm to underwrite the deal andget comfortable with it as an investment. “We don’tknow how to really underwrite the risk of the windblowing,” he said, referring to the PTC. With theITC, the credit amount is known and claimed all inthe first year. With the PTC, the credit amount generated is uncertain and varies, since it’s based onthe amount of electricity produced each year.
Cramer said US Bancorp CDC decided last yearto “put our toe in the water” on renewable energy taxcredits, and did about six deals, all involving ITCs,totaling $80 million. He anticipated his firm willprobably do another $120 million in transactions in2009, all solar ITC deals.
A master lease pass-through structure has been usedfor the Aberdeen transaction. CCAP made a leveragedloan for the project from a grant received from the state.
Biomass PlantIn rural North Central Oregon, the NMTC and
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PTC are being paired to help fund a newbiomass energy plant to be built on thereservation of The Confederated Tribes ofWarm Springs, which consist of the WarmsSprings, Wasco, and Paiute NativeAmerican Tribes.
The plant, to be located by the triballumber mill, will burn wood chips to generate“clean” electricity that will be sold. Portland,Ore. attorney Karen Williams, of LanePowell PC, which structured the deal, saidthe plant will produce a net 15.8 megawattsof power – enough for 15,000 homes.
Williams said the project will createadditional jobs and economic and environ-mental benefits for a tribe of 4,000 peoplethat has a 60% unemployment rate. In addi-tion to 25 to 30 new jobs at the biomassplant, the project is expected to create at least50 extra jobs in nearby forests, which willsupply part of the fuel for the biomass plant.This will include debris generated by a forestrestoration and thinning effort designed tokeep the forests at a healthy level and reducethe threat of fires common in the region.
Another source of fuel for the plant willbe wooden pallets that a major tire companyhas piled up for years in landfills.
Williams described the biomass plantproject as a “sustainable perfecta” for thetribe. “We end up with economic, social,and environmental benefits,” she noted.
Williams said the roughly $54 millionproject will use new markets tax credit allo-cations from three CDEs.
The tribe will lease the plant to a tax-able entity – the tax credit tenant – that willoperate the plant and receive tax credits. Asa tax-exempt entity, the tribe has no use forthe tax credits itself.
Williams said critical requirements forthe success of a biomass project include hav-ing a power purchase agreement, qualifiedcontractor, and long-term fuel supply for theplant lined up at the outset. n
NMTC,continued from page 20
Enterprise Study Finds ManyGrantees Plan to Use NSP Dollars for Rental HousingLARGER GOVERNMENT recipients plan to use much of theirfirst-round Neighborhood Stabilization Program (NSP) grantdollars for rental housing, according to a recent report byEnterprise Community Partners, Inc., a national nonprofit.
These uses include the acquisition and rehabilitation of existing properties into apartments, for lease-purchase programs,and for projects assisted by the federal low-income housing taxcredit (LIHTC).
The report presents findings from an analysis of 87 of the 306“action plans” filed by entities – states, counties, cities – allocatedgrants in the initial funding round of the NSP program. These 87grantees, the largest recipients (e.g., major cities), received 58% ofthe $3.92 billion in total nationwide funding.
Established by the Housing and Economic Recovery Act of2008, NSP provides federal dollars through state and local govern-ments to fund housing-related activities designed to reduce andreverse the decay of targeted neighborhoods plagued by high ratesof foreclosed and vacant homes. Formula grants were allocated toeligible grantees, which had to submit action plans to the federalgovernment last fall outlining how they planned to use their NSPdollars. The resulting grant agreements were signed at the end ofMarch 2009, according to Amanda Sheldon, Enterprise researchand policy analyst and one of the report’s authors. Sheldon notedgrantees now are slowly getting their NSP funds “out the door” tospecific projects and activities; by law they have 18 months to commit these monies.
The recent stimulus act provides another $2 billion for theNSP program, for competitive grants.
The Enterprise study has two parts. One part summarizeshow the 87 grantees intend to use their funds, based on the information in their action plans. The second part highlights“promising approaches” – specific activities or programs by individ-ual grantees – that have the potential to become “best practices.”These promising approaches are in seven areas: property acquisi-tion and discount strategies; disposition strategies; geographic targeting; green building and rehabilitation strategies; income targeting and long-term affordability; leveraging of NSP funds withother resources; and partnerships and management.
Use for Rental HousingMost NSP funds are likely to be used for activities related to
single-family housing, such as funding the purchase and renova-
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tion of foreclosed and vacant housesfor resale to low-income and first-time buyers. However, each granteemust spend at least 25% of its NSPfunds for eligible purposes thatbenefit households at or below 50%of the area median income (AMI) –a common tenant income thresholdin many governmental rental hous-ing programs. NSP permits therental of acquired and renovatedforeclosed and vacant houses, andthe rental of housing units createdfrom the acquisition and redevelop-ment of foreclosed, vacant, andabandoned multifamily residentialand commercial buildings.
The report notes the 87 granteeshave allocated about 27.7% of theirtotal NSP funds for rental housing.The study, though, doesn’t break thisdown between multifamily rentalbuildings (5-plus units) and one- tofour-unit rental properties. Sheldonindicated that in some cities therehas been much talk about currentproblems with foreclosed one- tofour-unit rental properties.
In addition, the grantees haveallocated 58.1% of their funds forhomeownership, 10.2% for propertydemolition/ holding, 2.2% for pub-lic facilities, and 1.8% for lease-purchase of properties.
The 87 grantees plan to spendthe majority of their aggregate funds(56.2%) for the purchase and reha-bilitation of properties, followed by:financing mechanisms, 21%; rede-velopment, 12.6%; demolition, 6%;and land banks, 4.2%. Regardingpurchase/rehab and redevelopment,the report doesn’t provide a break-down between single-family andmultifamily properties, or between
owner-occupied and rental housing.Sheldon said Enterprise decided
to undertake the study after observ-ing the negative impacts from homeforeclosures in certain neighbor-hoods where Enterprise has beenactive. “We’ve spent decades build-ing and stabilizing neighborhoods,”she said, “and we were noticing thatthese [home] foreclosures were real-ly bringing down otherwise healthyneighborhoods, and threatening theeconomy as a whole.”
Some of the “promisingapproaches” related to rental hous-ing profiled in the report include:
New York City, N.Y.: The city willtarget 25% of NSP funds for acqui-sition and rehabilitation of fore-closed multifamily rental buildingsin poor condition housing tenantsup to 50% of AMI. This strategyprotects tenants of privately ownedbuildings that are functionally aban-doned by their owners, where theconditions threaten the tenants’ life,health, and safety. In this program,a court appoints administrators tooperate these abandoned buildings.
Cleveland, Ohio: The city will useNSP funds as gap financing fordevelopment of rental or lease-pur-chase housing serving households ator below 50% of AMI. A focus onscattered-site housing will help avoidconcentrating very low-income fami-lies in neighborhoods. Projects must:(1) Be for the rehabilitation of vacantstructures or the redevelopment ofvacant land; (2) Be for single-familylease-purchase units or for multifam-ily rental housing (including perma-nent supportive housing for personswith disabilities); and (3) have anLIHTC allocation and/or an project-based rental subsidy commitment.
St. Louis County, Mo.: The coun-ty will partner with the St. LouisCounty Housing Authority andfor-profit and nonprofit developersto rehabilitate and rent foreclosedhomes to income-eligible partnersor families. The county will provideloans to developers to acquire andrehabilitate properties in targetedareas that they re-sell or rent.
Detroit, Mich. is considering usingNSP dollars to close financing gapsin LIHTC projects stalled by thedecline in the tax credit market.The city will look for ready-to-goprojects.
Sacramento City and County,Calif.: Sacramento is offering twoprograms that provide gap financ-ing. The first provides an incentivefee to developers and contractorsafter a vacant property is rehabilitat-ed. The second aims to partner withfor-profit developers to acquire alarge number of properties withinone block, rehab them, and operatethem as affordable rental properties.Selected developers will receive subsidized financing.
Miami-Dade County, Fla.: Todeal with foreclosed and aban-doned multifamily rental housing,the county will purchase propertiesand add them to its existing afford-able rental housing inventory. Thecounty will subcontract the man-agement and maintenance of theseproperties to firms. The county mayalso select for-profit and nonprofitdevelopers or partner with entitle-ment cities to acquire, rehabilitate,and manage properties.
(Report: http://www.enterprisecommunity.org/resources/publications_catalog/pdfs/nsp_2009.pdf ) n
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Washington and State Update
Congress Active on Range of Housing IssuesCongress in recent weeks has been busy on several fronts in the area of
affordable housing. Rep. Barney Frank (D-Mass.), chairman of the HouseFinancial Services Committee, released a draft of a major housing preservationbill that was discussed at hearings by the full committee and its housing sub-committee. During July, the full committee also marked up a bill (H.R. 3045)to reform the federal Section 8 voucher program. Separately, Frank introduceda bill (H.R. 3068) that would direct dividends paid by firms assisted under theTroubled Asset Relief Program for use for certain housing purposes. The billwould direct $1 billion to the National Housing Trust Fund and $1.5 billion tothe Neighborhood Stabilization Program.
(http://financialservices.house.gov)
HUD Solicits Applications for HOPE VI FundsThe U.S. Department of Housing and Urban Development (HUD) has
issued a notice to solicit applications by 11/17/09 from public housing authoritiesfor $113 million in grants available under the HOPE VI program to revitalizeseverely distressed housing projects. Significant changes from past competitionsinclude that points will be given for proposals that incorporate an early childhoodeducation and incorporate green development and energy efficiency strategies.
(http://edocket.access.gpo.gov/2009/E9-16742.htm)
RHS Releases NOFA for Section 538 Rural Housing LoansThe U.S. Department of Agriculture’s Rural Housing Service has issued a
notice to solicit proposals for guaranteed loans for rural rental housing projectsunder the Section 538 program. Under the notice, new Section 538 loans won’tbe subject to a guarantee fee but also won’t be eligible for an interest subsidy.
(http://edocket.access.gpo.gov/2009/E9-14940.htm)
Coalition Sends Letter on GSE-Held Housing CreditsThe Affordable Housing Tax Credit Coalition on 6/29/09 sent a letter to
Senate Banking Committee Chairman Christopher Dodd (D-Conn.) andHouse Financial Services Committee Chairman Barney Frank (D-Mass.)expressing concern about possible impending sales of housing credit invest-ments by Freddie Mac and Fannie Mae. The letter noted the sale or possiblesale by either government-sponsored enterprise of its existing credits is havinga “chilling” effect on the market for new housing credits.
A Freddie Mac spokesperson declined comment(http://www.taxcreditcoalition.org/news).n
State BriefsKentucky Soliciting for Market Analysts
The Kentucky HousingCorporation has issued a Request for Qualifications to solicit responsesby 8/14/09 from qualified marketanalysts and/or market analysis firmswith experience in income-restrictedmultifamily properties to provideprofessional market analysis servicesto KHC. Responses will be reviewedand qualified respondents included onthe list of approved market analystseligible for selection by multifamilydevelopers working with KHC.
(http://www.kyhousing.org/full.aspx?id=1984)
New York Senate Passes HistoricCredit Bill
The New York State Senate on7/16/09 approved a bill (S. 6056)that would enhance the state’s exist-ing tax credit for the rehabilitation of historic commercial buildings.The measure is identical to a bill (A. 9023) approved by the stateAssembly in June. For commercialrehabilitations, the legislation wouldraise the credit percentage to 20%,raise the per-project credit cap to $5million, limit the credit to distressedareas, and impose a five-year sunseton the program.
(http://www.nysenate.gov) n
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housing needs. These needs mightinclude workforce housing, mixed-income housing, and housing tar-geted toward first responders,teachers, firefighters, police offi-cers, and hospital workers.
Likewise, there are opportuni-ties for private developers to workwith housing authorities in develop-ing mixed-use and mixed-incomecommunities that include govern-ment-owned affordable-housingfinanced by Direct Payment BABs.
Basics About BABsCongress has long been con-
cerned that the tax-exempt bondmarket is not efficient in deliveringthe federal subsidy to state andlocal governments intendedthrough the exemption of interestincome on the bonds from federalincome taxes. Direct PaymentBABs are designed to address thisconcern for the governmental bondportion of the municipal market.
Direct Payment BABs, whichmust be issued before 2011, beartaxable interest. In lieu of bond-holders (i.e. investors) receiving alower interest rate on the bonds (asoccurs with tax-exempt bonds),Direct Payment BABs are sold witha taxable interest rate and the gov-ernmental issuer receives a directpayment from the federal govern-ment (Treasury Payment), equal to35 percent of the interest paid tothe investors.
This taxable interest approachis also intended to expand theinvestor market for municipalbonds, which has been stagnant forthe past year or so. An investmentwith a tax-exempt return is not
attractive to a segment of the mar-ket that does not pay federalincome tax, such as pension fundsand nonprofit foundations. DirectPayment BABs that finance afford-able housing may be attractive topension funds and foundationsboth from a return standpoint andto meet social investment goals.
As taxable market participants,credit rating agencies, and issuershave become more familiar withDirect Payment BABs, the volumeof Direct Payment BABs issued hasincreased. So far, the TreasuryPayment has caused a reduction inthe net interest rate on DirectPayment BABs below rates oncomparable tax-exempt municipalbonds issued to finance the sametype of facility.
Governmental BondsDirect Payment BABs are gov-
ernmental bonds that may beissued by any governmental entityauthorized under state law to issuebonds. The proceeds from DirectPayment BABs may be used forany purpose for which tax-exemptgovernmental bonds may be issued,including affordable rental housing.There are no statutory limitationsas to the term of the bonds orinterest rate. Actual financial termsare dictated by the market.
Direct Payment BABs may besecured by the same sources thegovernmental entity would use ifissuing tax-exempt governmentalbonds for affordable housing, suchas federal public housing capitalfunds or public housing capitalgrants provided under ARRA. TheTreasury Payments will likely be animportant source of payment andsecurity for Direct Payment BABs.While low-income housing tax
credits, an important source offinancing for privately ownedaffordable rental housing, cannotbe used to fund government-ownedhousing, public housing authoritiesand housing finance agencies haveother sources of “gap financing”that might be used to help financegovernment-owned housing, per-haps in the form of soft subordi-nate loans. Some of these commonsources are federal dollars under the Community DevelopmentBlock Grant, Home InvestmentPartnerships, and NeighborhoodStabilization Programs adminis-tered by the U.S. Department ofHousing and Urban Development,and HUD Section 108 guaranteedloan funds.
Direct Payment BABs do nottrigger Davis-Bacon prevailing wagerules or the Buy American rules ofARRA, but some gap financingsources or local laws may imposethese or similar requirements.
Direct Payment BABs are sub-ject to several limitations not gen-erally applicable to tax-exemptbonds. For instance, proceeds ofDirect Payment BABs cannot beused to refund outstanding tax-exempt or taxable obligations.Proceeds must be used to fund cap-ital expenditures, or to reimbursecapital costs that may be financedunder the tax-exempt rules, such asshort-term bridge loans issued afterFebruary 17, 2009. Proceeds mayalso be used to pay up to 2% ofbond issuance costs and to fund a reasonably required reserve (maximum 10% of proceeds).
Direct Payment BABs are subject to the same limits on privatebusiness use, private business pay-ment, and security that apply to
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tax-exempt governmental bonds. Agovernmental entity must be theowner of the financed project forfederal tax purposes, but privatedevelopers can receive fees to devel-op and construct the housing andto manage the project within man-agement contract safe harbors published by the Internal RevenueService (IRS). In cases whereDirect Payment BABs will berepaid from generally applicabletaxes (e.g., property, sales, recorda-tion, or payments in lieu of taxes)there are no private business uselimitations. For example, if anissuer gives the land to the developer or ground leases it to thedeveloper for a nominal amount,and neither the property nor prop-erty revenues are pledged to makepayments on the bonds, the devel-oper’s private ownership of theproperty or leasehold interest willnot preclude the issuance of DirectPayment BABs. Private businessuse is not permitted if the bondsare secured by the privately usedproject or by lease payments fromthe project’s tenants. Tax analysis isextremely important here, becauseprivate business use beyond the taxlaw limits could eliminate theTreasury Payment.
Unlike with private activitybonds, no public hearing or priorapproval is required to issue DirectPayment BABs, although localsunshine laws may apply. DirectPayment BABs also are not subjectto any annual bond volume cap.
The tenant income restrictionsapplicable to rental housing proj-ects financed by tax-exempt privateactivity bonds or low-income
housing tax credits do not apply to housing financed by DirectPayment BABS. But again, locallaws may impose income limita-tions, such as for workforce hous-ing, based on local conditions orneeds.
Treasury Payments IssuesThere remain some issues and
concerns about the TreasuryPayments. IRS Notice 2009-26 pro-vides that the issuer or a designee(e.g., bond trustee) must file IRSForm 8038-CP for each interestpayment period. The IRS expects toprovide Treasury Payments by checkwithin 45 days of the receipt of aproperly filed Form 8038-CP.Treasury Payments related to vari-able interest rate bonds will be paidquarterly in arrears with the filingof each Form 8038-CP, once the
total interest paid during the previous quarter is known.
Timing of the bond interestpayments is one concern that themunicipal market is workingthrough. Each issuer must make fulltaxable interest payments to bond-holders on specified interest pay-ment dates. If the issuer does notreceive the Treasury Payments ontime, or receives them in arrears, theparties will need to address the tim-ing issue upfront. The first TreasuryPayments were scheduled to bemade on July 1, 2009, so there is notoperational history at this point.
Notice 2009-26 also clarifiesthat Treasury Payments are a“refund” from the IRS, and that theIRS therefore can deduct, from theTreasury Payment amount, anypayments owed by the issuer to the
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Our public finance, tax credit, and housing practicesassist clients in developing and financing affordablehousing, workforce housing, and mixed-income andmixed-use communities. Our experience spans arange of financing structures and sources, includingBuild America Bonds, tax-exempt bonds, low incomehousing tax credits, historic tax credits, New MarketsTax Credits, and a variety of HUD programs.
For more information, please contactMargo BeVier SternPublic Finance and [email protected] B. SchakelTax, Housing, and Public [email protected]
Atlanta | Baltimore | Bethesda | Denver | Las Vegas | Los Angeles | New Jersey | Philadelphia | Phoenix | Salt Lake City
Washington, DC | Wilmington | www.ballardspahr.com
federal government, such as payroll taxes. This characterizationas a refund suggests that payment of Treasury Payments is notsubject to congressional appropriations. Issuers, rating agencies,and potential bond purchasers are still assessing the degree ofcertainty that Treasury Payments will be made to issuers,because of the “refund” nature of the payment, and aboutwhether the federal government will be able to fund these pay-ments over the next 30 to 40 years.
BABs for Mixed-Use ProjectsPrivate developers cannot own or lease multifamily housing
financed by Direct Payment BABs because of the private busi-ness restrictions previously mentioned. However, developers mayinclude workforce housing financed with Direct Payment BABswithin a larger mixed-use or mixed-income development. Tofurther mixed-income project goals, this can be accomplishedutilizing a scattered-unit condominium structure, where DirectPayment BABs are used to fund the workforce units, and low-income housing tax credits (9%, or 4% with tax-exempt bonds)are used to fund the tax credit units.
Direct Payment BABs secured by a general tax may also beused to finance the acquisition of land by an issuer that is thenground leased to a private developer. These ground lease pay-ments must be nominal to avoid the private payment test, andthe land cannot secure the Direct Payment BABs. The land rep-resents a distinct property interest, permitting the developer toobtain other sources of financing for the buildings, such as tax-exempt private activity bonds or housing credits.
SummaryDirect Payment BABs are an evolving market. Published
reports indicate that the market is responding positively to thesenew obligations; already a number of Direct Payment BABsissued for various governmental purposes have been oversub-scribed.
Authority to issue Direct Payment BABs is set to expire onDecember 31, 2010. In the meantime, for government-ownedworkforce or affordable housing projects that are “shovel ready,”Direct Payment BABs may be an efficient source of financing.
Linda B. Schakel is a Partner and Margo BeVier Stern is aSenior Counsel in the law firm of Ballard Spahr Andrews &Ingersoll, LLP, in its Washington, D.C. office. Among their areas ofpractice are housing, public finance, and tax credits. Schakel may bereached at 202-661-2228, [email protected]. Stern may bereached at 202-661-7620, [email protected]. n
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The TCAP and exchange programs,established by the American Recovery andReinvestment Act (ARRA), are designed toprovide financial assistance through statehousing credit agencies (HCAs) to stalledlow-income housing tax credit (LIHTC) proj-ects to help them move forward.
In recent weeks, state HCAs have madesignificant strides forward in implementingthese programs. Many have finalized theirguidelines and requirements for the two pro-grams, and taken steps to decide which partic-ular projects will receive aid.
“Some states are moving forward withmaking awards,” said Garth Rieman, of theNational Council of State Housing Agencies.“We know that there are exchange deals, inparticular, going forward in a handful of states.We think that there are some TCAP projectsthat are getting funded and underway now.”
He added, “I think we are really rampingus, and we’re getting to the point where theprocess is accelerating.” He anticipated thatthe flow of state funding awards to projects islikely to ramp up significantly “as we get intoSeptember.”
First State to CommitIn an interview on 7/16/09, HUD official
Cliff Taffet reported that the first TCAPfunding commitments for specific projects hadbeen entered into the Department’s account-ing and reporting system for the program, byRhode Island Housing, the state HCA. RhodeIsland committed some $10.2 million of its$11.9 million in total TCAP funds to fourprojects that will contain a total 259 units –two deals in Providence and one each inNewport and Kingston.
In a progress report, Taffet noted all 52eligible HCAs (the 50 states, District ofColumbia, and Puerto Rico) have submittedplans seeking to participate in the TCAP pro-
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gram. Of these 52 plans, HUD hasapproved 49, and executed grantagreements for 45. Of these 45agreements, 29 have been signed bystates and returned to HUD, andHUD has entered 16 of the 29 –representing $765 million in TCAPfunds – into the Department’saccounting and reporting system.With this step these state HCAs,like Rhode Island, now have accessto their TCAP funds and can disburse funds to individual hous-ing projects. These 16 states “havethe capacity to enter projects whenthey’re ready to,” said Taffet.
Meanwhile, HUD on 7/17/09issued the first of a series of addi-tional new guidance for the TCAP
projects that have received awardsof “GO Zone” or MidwesternDisaster Area low-income housingcredits.
Pending bills recently intro-duced in Congress (S. 1326,H.R. 2995) would modify the creditexchange program to permit statesto exchange unused GO Zone anddisaster area housing credits forcash grants from the U.S. Treasury,the same as they can do with “regular” housing credits.
Treasury Announcements,New Guidance
In other developments, Treasuryannounced the approval of an addi-tional $754 billion in creditexchange funds to 16 state HCAs,
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program. Among the first fewpieces was an updated Q&A docu-ment regarding the applicability offederal Davis-Bacon wage require-ments to TCAP-assisted projects.Taffet anticipated the release theadditional guidance within the nextweek. He said the new guidancewill include revised “Q&As” on a“number of topics,” as well as arevised version of the original May4th program notice by HUD.(TCAP documents are posted athttp://www.hud.gov/recovery)
The revised program notice willincorporate an amendment made tothe TCAP program by the FiscalYear 2009 supplemental appropria-tion act, signed by PresidentObama on 6/24/09 (H.R. 2346,P.L. 111-32). One provision extendseligibility for TCAP assistance to
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ments in developments wheneverpossible; tailor a response to theneeds of the current developmentpipeline; prioritize developmentsthat can proceed quickly to con-struction and spend federal fundswithin the programs’ prescribedtimeframes; maximize affordablehousing production; and limitawards based on financial feasibilityanalysis. n
tax credit equity is often usedupfront to help pay for land acquisi-tion costs for a project.
The new guidance also defineswhat constitutes a recapture eventunder the Section 1602 program,and provides two examples.
Other guidance and clarifica-tion by Treasury in the new FAQdocument includes that:
n Treasury will leave it to state HCAs to establish and imple-ment a process for determiningthat applicants have made agood-faith effort to find taxcredit equity investment.
n ARRA’s “Buy American”requirements don’t apply toSection 1602.
n Recipients of exchange fund assistance don’t have to tracethe use of these dollars in theirproject.
n Section 1602 funds may be provided to projects that aresubstantially completed but notyet placed in service.
n The state HCA and recipient must file IRS Form 8609 for abuilding even if it hasn’treceived an LIHTC allocation.
Set of PrinciplesMeanwhile, the National
Council of State Housing Agencies(NCSHA) in July adopted a set ofeight recommended principles forstate HCAs for their administrationof the TCAP and credit exchangeprograms. The principles, developedby an NCSHA task force, havebeen distributed to state HCAs.
Among these recommendedprinciples are for state HCAs to:retain housing credit equity invest-
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bringing the total funds approvedso far to more than $1 billion.
In addition, Treasury on 7/9/09released extensive additional guid-ance for the credit exchange pro-gram, in the form of an eight-pageFrequently Asked Questions(FAQ) document containing 34questions with answers. Much ofthe new guidance is in response toquestions about the program thatTreasury has received from HCAsand others. (New guidance:http://www.treas. gov/recovery/docs/FAQs.pdf )
One answer in the new guid-ance indicates that states may provide exchange funds to projectsin the form of loans. However, theguidance says that cash assistanceloans must be non-interest bearingand must be non-repayable (exceptin the event of noncompliance during the 15-year Section 1602compliance period).
Another question, the answerto which has stirred concern andconfusion among LIHTC programparticipants, asks which projectcosts can be paid for with Section1602 funds. The guidance saysSection 1602 funds “may pay fordevelopment costs” to the sameextent as allowed under theLIHTC program. “For example, theacquisition of land is ineligible…,”it notes. The answer suggests thatonly costs includible in LIHTC eli-gible basis may be funded withSection 1602 dollars. However,sources noted the guidance is at oddswith common industry practices inLIHTC projects. For example, theynoted that while credits can’t beclaimed for land acquisition costs,
Cabrillo,continued from page 1
has received national recognitionfrom the Affordable Housing TaxCredit Coalition. Recently, theFamily Commons developmentwon a 2009 Charles L. Edson TaxCredit Excellence Award in theSpecial Needs category.
Part of Larger DevelopmentFamily Commons is the third
phase of a larger developmentcalled Century Villages at Cabrillothat was begun a decade ago byCentury Housing Corporation(CHC), a Culver-based nonprofitcorporation.
“The Family Commons atCabrillo is just one component of amuch larger 26-acre campus that isentirely dedicated to the benefit ofthe homeless,” says CHC PresidentBrian D’Andrea. “Our goal is tobreak the cycle of homelessness.”
Family Commons providesaffordable permanent rental hous-ing for homeless families, adding toexisting housing options in thelarger development that includeemergency shelter for 182 individu-
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als plus 200 transitional housingunits for veterans.
“There’s a significant need inthe city of Long Beach to addressthe homeless issues,” saysD’Andrea. According to the city,roughly 4,000 people are homelesson any given night in Long Beach.
Preference for 40 of the 81units at Family Commons is givento homeless families that include amentally disabled individual.Roughly five families are assistedby federal tenant-based Section 8housing vouchers.
All of the one, two, three, andfour bedroom units at FamilyCommons are low-income housingtax credit-eligible apartments. Theunits have monthly rents rangingfrom $400 to more than $1,300,and are reserved for householdsearning 30% to 60% of the areamedian income (AMI).
D’Andrea said the averagehousehold income of current resi-dents is about 32.5% of AMI.
Equity, Other FundsThe multiple funding sources
for Family Commons included$19.2 million in housing creditequity provided by John HancockRealty Advisors, a Boston-basedcorporate investor. In return for itsequity investment, John Hancockwill receive federal and state hous-ing tax credits.
Sonya Prear, director of assetmanagement at John Hancock,
said her company was involved infinancing previous stages of CenturyVillage and views Century Housingas an excellent general partner.
The city’s Long Beach HousingDevelopment Company provided a zero-interest, 55-year loan of $11.8 million to the project. LosAngeles-based First Federal Bank of California made a zero-interest,15-year loan of $972,000, funded by federal Affordable HousingProgram dollars. Century HousingCorporation provided a $621,000loan, at 9% for 35 years. All threeloans are repayable from excess cash flow.
Extensive ServicesD’Andrea said that the level of
care provided to residents to helpthem break out of homelessness iswhat sets Family Commons apart.
PATH (People Assisting TheHomeless) Ventures, a Los Angeles-based community development corporation, will provide case man-agement, mental health counseling,
Family Commons at Cabrillo, Long Beach, California
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Family Commons at Cabrillo – Source and Uses Summary
SOURCESJohn Hancock – Tax Credit Equity..................................................$19,228,700Loan – Long Beach Housing Development Corp...........................$11,775,000Loan – Century Housing Corporation ..................................................$621,000Loan - Affordable Housing Program....................................................$972,000Total Sources ................................................................................$32,596,700
USESHard Construction Costs ................................................................$24,286,879Financing Costs................................................................................$3,168,070Professional Services .......................................................................$1,239,511Insurance, Tax, Legal...........................................................................$871,935Plan Check, Permits, Impact Fees ......................................................$626,268Developer Fee..................................................................................$1,400,000Other Costs......................................................................................$1,004,037Total Uses .....................................................................................$32,596,700
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Cabrillo,continued from page 29
and rental subsidies for residents, fund-ed by a $1 million grant. PATH hasfour full-time workers assigned to the80 resident families.
Residents suffering from psychological and physical trauma,post-traumatic stress, or new disabili-ties associated with military war servicereceive intensive case management.Services are also provided to addressdomestic violence and mental illnessexacerbated by poverty.
Other general, on-site servicesinclude health care, childcare, adult andafter-school education programs, recre-ation, nutrition, and job training pro-grams. Success in these programs willbe measured by the number of residentswho are employed, the number whoeventually move out, and continuedimprovement in grades and behaviors,D’Andrea said.
“We employ about 150 peopleacross all of the different nonprofitsthat operate programs on our campus,”he says, “and every resident is linked toa service provider. We provide a con-centration, a kind of wealth ofresources, to help families to make thatnext step and become independent.”
D’Andrea said Family Commonshas many green features, such as low-VOC paint, recycled content carpeting,and Energy Star appliances.Sustainability is boosted by elementsthat include bathroom floor drains,aluminum windows, and solid surfacecounters.
Long Beach Mayor Bob Fosterdescribes Family Commons at Cabrilloas a “spark of hope” for formerly home-less families, noting it will provide themwith a “glimpse of the opportunitiesthat their futures can hold.” n
– Stephen K. Cooper
Ohio Accepting Applications for StateHistoric Tax CreditsTHE OHIO DEPARTMENT of Development has begun acceptingapplications for $17.5 million in state historic tax credits in a newfunding round under its Ohio Historic Preservation TaxCredit program. This round reflects features new user-friendly amend-ments to the program.
Applications will be accepted through 9/30/09, with award recipientsannounced by year-end.
The third round will be followed by a fourth funding round thatwill offer $24.2 million available and accept applications during January1-June 10, 2010.
Among the changes made to the program are to provide for twosix-month application cycles per year rather than one. The programamendments were made by enacted state legislation that took effect in mid-2008.
Ohio’s program provides a tax credit against expenses incurred byowners in rehabilitating historically significant buildings. The creditamount is generally equal to 25% of qualified rehabilitation expendi-tures, subject to a per-project cap.
(Details: http://www.development.ohio.gov/UD/OHPTC/) n
New Harvard Report Cites Difficultiesin Multifamily Housing SectorPROBLEMS IN THE MULTIFAMILY rental housing sector, includingweakening demand, are likely to worsen at least for the short term,suggests the new annual housing report from the Joint Center forHousing Studies of Harvard University.
The new report, The State of the Nation’s Housing: 2009, focuses primarily on recent developments and trends and the future outlook forthe single-family homeownership market, which has been beaten downby rising mortgage delinquencies and foreclosures, rising unemploy-ment, and other forces.
But the report also talks about what has been happening and islikely ahead in the rental housing sector.
“With the recession taking its toll, vacancies increasing, and credittight, the financial performance of rental properties is likely to slidefurther in the short term,” the report says.
According to the report, the national rental vacancy rate rose to10% in 2008, just shy of the record of 10.2% set in 2004. For multi-family buildings with 10 or more apartments, the damage was even
Harvard,continued on page 32
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UPCOMING CONFERENCES
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Harvard,continued from page 30
greater, with the vacancy rate risingnearly a full point to 11.1%. Thereport suggests the increased supplyof vacancies in these larger buildingsmay be due in large part to increas-ing conversions of condominiums torental units.
During the same period, nomi-nal rents rose by 3.7% but realrents fell by 0.2%.
The report indicates that themultifamily rental sector has bene-fited from the fact that the vacancyrate for rented single-family homesrose just slightly in 2008, to 9.8%.However, it suggests that the con-tinued economic downturn maywell exacerbate rental vacancies anddepress rents in the near term.Rising unemployment will weakenrental demand because those mostvulnerable to job losses tend to beyounger persons who more oftenare renters. In addition, job lossescould foster more rentals of single-family homes that – together withother kinds of small rental proper-ties – are mostly owned by individ-uals and couples. Moreover, moreforeclosed homes could come backon the market.
The report also predicts a shiftin housing demand, pointing to asignificant growth in the number
loan performance to deterioratefurther since the economy is stillcontracting.
It notes that the real price ofmultifamily properties sold in 2008dropped for the first time in years asinvestors demand a higher return fortaking on greater risk. Falling valua-tions reduced the real volume of mul-tifamily transactions from $103 bil-lion in 2007 to $37 billion in 2008.
(Report: http://www.jchs.harvard.edu) n
of “echo boomers” – individualsnow entering the peak householdformation years of 25 to 44 – thatwill bolster the markets for rentalsand starter homes. It also saysdemand for retirement housing willrise as the leading edge of thebaby-boom generation reaches age65. Finally, the report predicts thateven with lower immigration levels,minorities will fuel 73% of house-hold growth during 2010-2020.
The report expects multifamily
