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The Hope of Spring

5 min read

Spring has sprung in Washington, DC. The first buds of the early-blooming cherry blossoms are beginning to transfix the District with the promise of many more to come and then dazzle us as they transform from white to pale pink to their final, iconic deep pink color. (In case you couldn’t tell, I’m a big fan of cherry blossom season.)

Recent good news has me feeling like the affordable housing industry is awakening from a bleak winter into a springtime blossoming with federal action that will make it easier to build and preserve affordable housing.

USDA RD Sections 515 & 521 Decoupling
A pilot program to decouple 1,000 units of Section 521 Rental Assistance from Section 515 Loans was tucked into the recently enacted fiscal year 2024 appropriations bill for the U.S. Department of Agriculture (UDSA) Rural Development (RD) programs.

“Provided, that amounts made available under this heading shall be available for renewal of rental assistance agreements for a maximum of 1,000 units where the Secretary determines that a maturing loan for a project cannot reasonably be restructured with another USDA loan or modification and the project was operating with rental assistance under section 521 of the Housing Act of 1949”

Of the 389,000 units nationwide with a Section 515 mortgage, approximately two-thirds serve seniors or individuals with a disability in rural areas. The average age of a Section 515 property is 36 years old, and the portfolio faces a dual crisis of a coming tsunami of maturing mortgages and critical rehabilitation needs.

Absent the pilot program, when the Section 515 mortgages mature, they lose the accompanying Section 521 rental assistance. The pilot program will allow 1,000 units to decouple the rental assistance from the mortgage so that the borrower can pay off the mortgage, while continuing to provide rental assistance to the residents. National Housing & Rehabilitation Association and many others are deeply invested in the success of this pilot program and hope to see it further expanded to meet the urgent housing needs of rural communities across the country.

23rd Chelsea Associates v IRS
In the case 23rd Chelsea Associates v IRS, the U.S. Tax Court ruled that an appropriate share of financing costs attributable to the construction period of the affordable housing part of a project can be included in tax credit basis. Translated into English, that means developers may be able to include financing costs in eligible basis. Emphasis on “may” as the affordable housing community digests the case and coalesces on how to respond. Notably, the IRS still retains the opportunity to appeal the case, and further yet, will need to decide its applicability beyond the petitioners to the industry writ large. In any case, the costs are still subject to approval by accountants, investors and housing finance agencies, many of whom may be wary of acting ahead of clear guidance from the IRS.

Of the $110 million in bonds awarded in 2000, 23rd Chelsea Associates spent $107.4 million, including $5.7 million in financing costs stemming from the bond issuances. Only $1.2 million of the $5.7 million in financing costs had been included in eligible basis – a number calculated based on a) the portion of the building eligible to receive tax credits and b) the portion of the fees incurred during the construction period. The Tax Court notably wrote:

“We hold that at least $1,218,320 of the financing costs (which included bond fees) were a but-for cause of the Tate’s construction, given 23rd Chelsea’s decision to finance construction by borrowing from the HFA. Specifically, all amounts of the financing costs that 23rd Chelsea included in its computation of eligible basis were necessary to induce the HFA to initiate and/or maintain the $110 million loan used for construction of the Tate.” (Emphasis added.) NH&RA is hopeful that this long-awaited (20 years in the making) ruling will prove beneficial, allowing deals to pencil and providing additional tax credits for costs that, to paraphrase the Tax Court, are necessary to induce the issuance of bonds.

Extended, Updated Treasury Programs
There’s more good news from Washington – the indefinite extension of the Federal Financing Bank/Housing Finance Agency Risk-Share program and updates to two COVID-era programs that should make them easier for the industry to leverage. First, the Emergency Rental Assistance program expanded the list of eligible uses to include the acquisition of real property and predevelopment activities. And separately, the State and Local Fiscal Recovery Fund expanded the universe of properties that are presumptively eligible to receive funding to include:

  • Project-Based Vouchers;
  • Choice Neighborhoods;
  • Section 108 Loan Guarantees;
  • U.S. Department of Agriculture rural housing programs;
  • Any project that houses families earning up to 120 percent of area median income, as long as the project remains
    affordable to those households for at least 20 years; and
  • Properties supported by Fannie Mae or Freddie Mac and meet the needs of workers priced out of certain housing markets.

My springtime wish is that all this recent good news, like the cherry blossoms, is the first of much more to come. While not much has changed on the federal legislative front since I wrote my February column, I’ll remind readers to water their gardens: contact your Senators on the importance of the Tax Relief for American Families and Workers Act. This might be an even more bountiful spring yet.

Kaitlyn Snyder is managing director of National Housing & Rehabilitation Association.