July 31, 2008
Bush Signs 2008 Housing Act, Providing Relief to Housing Finance Markets
On July 30, 2008, President Bush signed into law the provisions of the Housing and Economic Recovery Act of 2008 (the “2008 Housing Act”). The legislation contains sweeping provisions to safeguard Fannie Mae and Freddie Mac, to assist struggling homeowners at risk of losing their homes, and to generally support the housing finance markets.
This advisory focuses on the provisions relating primarily to multifamily residential developments financed with tax-exempt bonds under Section 142(a)(7) of the Internal Revenue Code of 1986, as amended (the “Code”). However, as noted below, some of these changes will also benefit qualified mortgage bond and qualified veterans’ mortgage bond financings under Section 143 of the Code.
Repeal of Alternative Minimum Tax Limitations on Tax-Exempt Housing Bonds
Since 1986, interest on private activity bonds has generally been treated as a preference item in the calculation of alternative minimum taxes imposed on individuals and corporations under Section 57 of the Code. Section 57 of the Code is amended by the 2008 Housing Act to exclude bonds for qualified residential rental projects, qualified mortgage bonds, and qualified veterans’ mortgage bonds. In addition, Section 56 of the Code is amended to prevent interest on such bonds from being included in the calculation of adjusted current earnings for purposes of determining the alternative minimum tax (AMT) liability of certain corporations providing these bonds better treatment than other non-AMT bonds. The repeal applies only to bonds originally issued after enactment of the 2008 Housing Act and to refundings of such bonds.
Volume Cap
The 2008 Housing Act amends Section 146(d) of the Code to increase the volume cap for 2008 by $10 billion nationwide. This additional volume cap is required to be allocated among the states based upon population and must be used for qualified housing issues, which include financings for qualified residential rental projects under Section 142 of the Code and qualified mortgage issues under Section 143(a) of the Code with a shortened origination period. Such additional volume cap may be carried forward until 2010 for qualified housing issues.
Coordination of Certain Low-Income Housing Credit and Qualified Residential Rental Project Exempt Facility Bond Rules
Under the 2008 Housing Act, certain rules under Section 142 of the Code for bond-financed developments have been modified to conform to similar requirements under Section 42 of the Code for tax-credit developments. The rules with respect to students and single-room occupancy units under Section 142(d) of the Code have been amended to track the requirements of Section 42 of the Code. In addition, the determination of “next available unit” under Section 142(d) of the Code is now required to be done on a building-by-building basis rather than over an entire project. These changes will apply to determinations of qualified status for periods beginning after the date of enactment of the 2008 Housing Act, with respect to bonds issued before, on, or after such date.
Recycling of Tax-Exempt Bond Proceeds
to Finance Residential
Rental Projects
The 2008 Housing Act amends Sections 146 and 42 of the Code to explicitly authorize the recycling of bond proceeds used to fund construction of a residential rental project receiving tax credits to fund another residential rental project, without the need to obtain new volume cap. The basic requirements for such recycling are:
- the second loan must be funded, and refunding bonds issued, within six months of the date of repayment of the first loan;
- the refunding bonds must be issued within four years of the date of issuance of the original bonds;
- the refunding bonds may not mature later than 34 years after the date of issuance of the original bonds;
- the refunding bonds shall not be entitled to any as-of-right tax credits; and
- the refunding bonds, and the second project, shall be subject to TEFRA approval prior to the issuance of the refunding bonds. The recycling provisions apply to any loan repayments made after the date of enactment of the 2008 Housing Act.
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