States Agencies Take Steps to Activate TCAP, Exchange Programs
By Caitlin Jones
8 min read
Tax Credit Advisor, June 2009: State agencies could make the first awards of stimulus act funds to stalled low-income housing tax credit (LIHTC) projects as soon as this month, according to sources.
Since the May 4th issuance of critical initial federal guidance for the new “TCAP” and credit exchange programs, state housing credit agencies (HCAs) have been busy taking the steps necessary to access the new dollars and to finalize plans for their use.
In many respects, LIHTC industry participants are having to learn about, ramp up, and figure out how to use a brand new housing program – actually two – right from scratch. And these new programs impose tight time frames.
“We’re right back in 1987,” said Washington, DC attorney Anthony Freedman, a partner in Holland & Knight LLP, referring to the first year of the LIHTC program.
The two new programs authorized by the American Recovery and Reinvestment Act (ARRA) are the Tax Credit Assistance Program (TCAP) and the credit exchange (“Section 1602″) program.
ARRA allocates $2.25 billion for the TCAP program to 52 state HCAs to make competitive awards of financial assistance to projects with LIHTC awards (9% or 4%) received during the three-year period ending 9/30/09.
Under the exchange program, 56 state HCAs can turn in unused housing credits to the U.S. Treasury for cash grants, to make “sub-awards” of funds to stalled new construction or acquisition/ rehabilitation projects – with or without a credit award – that have a funding gap. States can exchange up to 100% of their 2009 per capita and national pool credits, and up to 100% of unused 2008 housing credits and of credits returned in 2009.
On May 4, initial written guidance, requirements, and forms were issued by HUD for the TCAP program and by Treasury for credit exchange. On May 6, both agencies took part in an explanatory Webcast where new details came out. The officials also announced email addresses where people can send in questions about the two programs (TCAP@hud.gov; 1602Questions@do.treas.gov), and said their agencies will be posting the answers on their Web sites. These would be in addition to Q&As posted by HUD on May 4. (A special report on the new guidance, distributed on May 6 to Tax Credit Advisor subscribers, is posted at http://www.housingonline.com/ Documents/TCA Issues/guidance.pdf)
Freedman described the initial HUD and Treasury guidance as “good, intelligent, and flexible.”
State HCAs must apply to HUD by 6/3/09 to participate in the TCAP program and access their allocated funds. Virtually all are expected to participate. The state participation rate for the exchange program is unclear. State HCAs can apply anytime to Treasury to participate, and have through 2010 to submit one or more requests to exchange credits.
States’ Implementation
State HCAs are at different stages in their implementation of the two programs.
Freedman, outside counsel to some HCAs, said, “Some of them are inviting applications. But most of them are putting together the application to Treasury under the Treasury guidance, and the plan for HUD under the TCAP notice.” Before submitting their TCAP application, HCAs must hold a five-day public comment period on their proposed competitive project selection criteria for TCAP awards.
The Ohio Housing Finance Agency (OHFA) submitted separate applications to HUD for TCAP and to Treasury for credit exchange within days after the initial federal guidance. OHFA Housing Credit Allocation Manager Kevin Clark, interviewed on 5/20/09, said his agency received HUD verbal approval in about a week, and is awaiting Treasury’s response. “Right now our plan is to exchange 10 percent of our 2009 allocation,” says Clark, “That’ll give us about $21 million of [credit exchange] cash grants to use to start off with. And then, as we go further into the year, we may decide to exchange more.”
He noted, “Hopefully we can start taking applications [for the ARRA funds] at the beginning of June, and then hopefully by the end of June we’ll be able to have our first awards.”
Garth Rieman, of the National Council of State Housing Agencies, anticipated some states will begin awarding the ARRA funds to projects early this summer. “I think many of the states will have TCAP funds and exchange funds under their control in June,” he noted. Rieman indicated some states may take longer than others to start making awards because of extra time needed to determine which projects to assist, or because their selection/ approval process is lengthier. He said many states now are “getting their proposed [implementation] plans out for public comment.”
Clark said OHFA will likely award TCAP funds to projects as low-interest loans, and will award exchange funds as grants. He added, “We’re open to mixing them, if need be.”
OHFA has finalized its implementation plan on how it will use TCAP and credit exchange funds, and has held its public comment period.
Clark said the plan’s first priority for awards is 9% deals with 2007 and 2008 housing credit reservations that haven’t yet closed on tax credit equity with a syndicator or investor.
He said OHFA has 48 of these projects. Clark said OHFA is determining, one-by-one, exactly where each project is in the development process. This includes whether or not the sponsor has firm commitments for equity and for construction or permanent financing, and a completed appraisal and surveys. “Those that are the furthest along are the ones we’ll look at first for the TCAP and credit exchange [dollars], to get those going,” said Clark.
He said OHFA has fielded expressions of interest for ARRA funds from sponsors of a few 4% bond deals – another plan priority.
Clark said OHFA by 7/2/09 will select projects for 2009 LIHTC credits in its current funding round. He expected TCAP funds will be the source of funds for awards to 2009 deals that have gaps.
Clark said OHFA wants to set aside some credit exchange funds for awards to projects that have awards both of credits and state housing trust fund dollars. He explained that these projects, because of the trust funds, have already gone through a state environmental review, so OHFA wants to avoid putting them through a second, federal environmental review – a requirement for TCAP but not credit exchange funds.
Clark said OHFA will be contracting out the asset management functions mandated by ARRA for both programs, and already has consultants working with in-house staff to craft the more intensive underwriting that will be used in reviewing projects seeking assistance.
Surprises, New Information
The initial federal guidance for TCAP and credit exchange contained surprises for some LIHTC industry participants. These included that:
- Exchange program funds can’t be provided as loans – only grants. State HCAs, on the other hand, can award TCAP funds as grants or loans.
- Exchange program funds can’t be “disbursed” after 12/31/10 by HCAs to projects to pay for expended eligible costs. Some had believed 12/31/10 would be the deadline just for committing funds to a project.
Washington, DC attorney Richard Goldstein, a partner in Nixon Peabody LLP, said one piece of “good news” was clarification that federal cross-cutting requirements like Davis-Bacon and mandatory federal environmental reviews won’t apply to the credit exchange program. These do apply to TCAP.
New information and clarifications include that:
- Projects must have at least a “nominal” amount of housing credits in them to be eligible for TCAP funds. Projects aren’t eligible if they had credits but returned them. HUD hasn’t defined nominal, but rather is leaving this up to states.
- TCAP funds can be provided to projects that receive advance awards of 2010 credits by 9/30/09.
- ARRA’s “Buy America” provisions don’t apply to TCAP or credit exchange.
The IRS is expected to issue, possibly in June, additional guidance to clarify some of the rules for the credit exchange program. The Service is said to be mulling requests for formal guidance to explicitly state that an award of credit exchange funds won’t reduce a project’s eligible or depreciable basis, and that a grant of credit exchange funds won’t create taxable income for the recipient for federal income tax purposes. Another is guidance to states on how to reduce their 2009 housing credit ceiling amount for credit exchanges. Another area of possible guidance is about recapture.
Practitioners cited a couple of issues. San Francisco CPA Michael Novogradac, of Novogradac & Company LLP, said exchange funds provided as grants could create state taxable income for recipients in some states. He cited a risk in states that don’t use federal adjusted gross income as the starting point for determining state income tax liability.
Goldstein pointed out that TCAP funds can’t be used to purchase land, a normal starting point in an LIHTC project, since the guidance limits the use of these dollars to costs includible in eligible basis.
