The COVID-19 relief legislation that was recently signed into law included a provision fixing the four percent LIHTC at an actual four percent rate. This floor applies both to properties with tax-exempt bonds and acquisition credits. However, there are transition rules and some properties that are in development and under construction will not be able to use the 4% floor.
In order to use the 4% fixed-credit, a building has to:
- Be placed in service after 2020, and – if the building has tax-exempt bonds
- The bonds must be issued after December 31, 2020.
One issue is whether a project with bonds issued in 2020 but not fully disbursed until 2021 can use the 4% floor. The truest answer is we don’t know. Guidance from the IRS or a Congressional Committee would be helpful in this area. Until such guidance is received, using the 4% credit for 2020 bond issues that have not been fully used until 2021 is risky.
Some tax attorneys may be willing to provide a legal opinion stating that the 4% floor may be used when a project has 2020 bonds, but some or all of the bond proceeds are not used until after 2020. This is an aggressive position, but some years ago the IRS took the position that they would define “issuance” as the date when the proceeds are drawn down. However, many tax professionals believe the IRS took this position to prevent taxpayers from avoiding new tax rules relating to bonds issued after a certain date. There is no way of knowing whether the Service will take the same position with regard to the 4% floor. In other words, will the IRS permit the date the bond funds are drawn-down to be considered the “issue” date? It is very possible that the IRS will apply a traditional reading (i.e., literal) of the law and apply the fixed rate only to bonds actually “issued” after December 31, 2020. Ultimately, investors will have to make the choice with regard to the risk level to be accepted. At this point, I am not advising my clients to use the 4% floor unless the bonds are actually issued after 2020. However, I am not a tax attorney, and I recommend reliance on opinions from tax counsel in these cases.
One other element to keep in mind is that Housing Finance Agencies (HFAs) may only allocate the amount of credit necessary for deal feasibility. If a deal is closed with an applicable percentage of less than 4% – and the deal works – claiming a 4% floor would very likely result in some deal adjustments. The agency could require additional amenities, reject some secondary (“soft”) financing source, earlier payoff off a deferred developer fee, etc. My recommendation in this area is that if a deal works at the “floating 4% level,” just stick with it and don’t get too adventurous.
Another scenario is a “split” bond issue – where some bonds are issued in 2020 and there is another issue in 2021. In this case, because the project has bonds issued after 2020, it seems clear that the 4% floor may be used. My confidence here is based on the wording in the Code. The rule applies to any building if any portion is financed by tax-exempt bonds, provided any such building is financed by any such obligation issued after 2020. This language indicates that as long as any bonds are issued after 2020 for a project, the taxpayer is entitled to use the 4% floor. Be aware though that this applies only to an “issuance” of bonds – not a “refunding” of bonds. In other words, this would have to be a fresh bond issue, in addition to the amount received under a 2020 issue.
The most interesting aspect of this 2020/2021 concept relates to acquisition/rehab projects. If a project was acquired in 2020 and the buildings were either occupied or occupiable as of the date of acquisition, the acquisition date is the placed-in-service date and even if bonds are issued for the project in 2021, the acquisition credit would have to be a floating credit (the building fails the first test noted above by not being placed in service after 2020). However, for purposes of Section 42, the rehab expenditures are treated as a separate new building. Therefore, assuming the bonds are issued in 2021, and the rehab is completed in 2021 (i.e., the rehab expenditure placed-in-service date would be in 2021), the rehab credit may be based on the 4% floor.
In summary, until and unless favorable guidance is forthcoming either from Congress or the IRS, I recommend a conservative approach to using the 4% floor with tax-exempt bonds. In other words, unless a building is placed in service after 2020 and the bond issue is also after 2020, the 4% floor should not be used.