A Senator and former Internal Revenue Service Commissioner have twice requested guidance from the Treasury Department to increase the availability of financing for rehabilitating affordable housing units damaged or destroyed by Hurricane Sandy.
Sen. Frank Lautenberg, D-N.J. sent a letter to Treasury Secretary Timothy Geithner on Jan. 3 after there was no response to the Dec. 7 letter sent to Treasury Deputy Tax Legislative Counsel Jessica Hauser by Fred Goldberg, a former IRS Commissioner and current partner at Skadden, Arps, Slate, Meagher & Flom LLP.
“Absent timely guidance, existing owners will, as a practical matter, be precluded from selling their existing projects to new purchasers in circumstances where prospective new purchasers have been allocated tax-exempt financing to help cover the rehabilitation costs,” Goldberg wrote. “This result is not defensible on technical or policy grounds, creates artificial market distortions and impedes recovery efforts for Hurricane Sandy’s victims residing in low-income housing damaged by the storm.”
At issue is whether a taxpayer who purchases a qualified low-income housing project and uses tax-exempt bonds for rehabilitation costs necessitated by a federally declared disaster will cause the project to lose its pre-casualty tax credit of 9%.
Goldberg said clarification is needed as to whether the buyer is entitled to a project’s pre-casualty tax credit allocation of 9% or whether the tax credit be reduced to 4% under the “direct or indirect federally subsidized funds” rule in Section 42 of the Internal Revenue Code.
“This probably wouldn’t make any difference to us [bond counsel] in giving our opinion, but it makes all the difference in the world to the investor holding the project, who might get 4% instead of the 9%,” said Linda Schakel, partner with Ballard Spahr LLP.
Approximately 300,000 housing units were damaged or destroyed in New Jersey alone by the storm at the end of October.
Lautenberg, who represents one of the states hardest hit by Sandy, said clarification on this aspect of the Low Income Housing Tax Credit program could help expand all financial options for rehabilitating damaged housing units.
He attached Goldberg’s letter to the Treasury Department to the one he sent to Geithner.
A Treasury spokesperson said the agency is aware of the letter and working on the issue.
“In general, you could go in for a private-letter ruling but that could take a very long time,” Schakel said. “Disaster relief typically comes out relatively quickly.”
The letter comes after Congress approved the first installment of Hurricane Sandy supplemental aid to increase the National Flood Insurance program’s borrowing authority by $9.7 billion last week.
Congress enacted the LIHTC in 1986 to provide the private market with an incentive to invest in affordable rental housing.
States receive a limited allocation of tax credits based on population that they have sole discretion to award to qualified projects. Both new and rehabilitated projects in a state that satisfy the applicable statutory requirements may be eligible for an allocation of tax credits.
However, tax-exempt financing used to fund rehabilitation required as a result of a natural disaster cannot be part of a “direct or indirect” subsidy of an existing project.
“We believe that timely clarifying guidance would remove this uncertainty and measurably accelerate low-income housing recovery efforts,” Goldberg wrote.