IRS issues clarification on multifamily housing bonds used for veterans

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WASHINGTON -- The Internal Revenue Service issued a long-anticipated clarification Wednesday that provides a safe harbor for tax-exempt private activity bonds issued for multifamily housing that include a preference for military veterans or other specified groups.

The clarification allows dozens of otherwise stalled housing projects around the nation to move ahead with financing that includes a combination of tax exempt multifamily PABs and the 4% federal housing tax credit.

A more generous 9% federal housing tax credit already had explicit language that included veterans as a special needs population.

In 2008 Congress enacted a provision of the federal housing tax credit — Section 42G9 — that said preferences for specified groups under a federal or state program are permitted and not a violation of public use requirement.

But Congress has not explicitly cross-referenced the applicability of Section 42G9 to Section 142 dealing with tax-exempt facility bonds, which include multifamily housing.

The IRS announcement Wednesday said, "A qualified residential rental project (as defined in § 142(d)) does not fail to meet the general public use requirement applicable to exempt facilities solely because of occupancy restrictions or preferences that favor tenants described in § 42(g)(9)."

The new IRS revenue procedure also is retroactive.

States have been exhausting all of their 9% credits, which are capped nationally, and are increasingly using the 4% program in tandem with multifamily bonds.

The projects using 9% tax credits don’t include tax-exempt PABs as part of their financing.

There were 54,517 multifamily housing units either constructed, acquired or rehabilitated with tax exempt PABs in 2017, up from 36,485 units in 2014, according to the National Council of State Housing Agencies.

The new IRS revenue procedure allows projects with any preference specified under federal or state law to still meet the public use requirement for the tax exemption of the bonds in conjunction with the 4% federal housing tax credit.

Depending on the state where the project is being constructed, those preferences can include -- in addition to military veterans -- people with disabilities, farm workers, artists, victims of domestic abuse, first responders, people with AIDS or HIV, youths exiting foster care, the homeless or refugees, according to the National Council of State Housing Agencies.

Jennifer Schwartz, director of tax and housing advocacy for NCSHA, said her organization “is extremely pleased” the IRS acted.

“This change in direction allows to move forward development of many affordable properties currently in the pipeline that rely on multifamily bond and 4% housing credit financing,” Schwartz said in an email.

Six U.S. senators from California, Hawaii, Nevada and Texas recently sent a letter to IRS Commissioner Charles Rettig warning him the issue “is blocking the development of new affordable housing for veterans in our states.”

The letter, initiated by Sen. Dianne Feinstein, D-Calif., included one Republican, Sen. John Cornyn of Texas, and four other Democrats, Kamala Harris of California, Mazie Hirono of Hawaii, and both of Nevada’s senators, Catherine Cortez Masto and Jacky Rosen.

Their letter blamed the lack of clarity on this subject as the only impediment to breaking ground for a veteran housing project in Windsor, California.

“In addition, the future expansion and development plans of other veteran housing facilities — including in Texas, Hawaii, and Nevada — may be impaired without access to these tax-exempt bonds,” the letter said.

Two earlier letters from the National Association of Bond Lawyers sent to the IRS and the Treasury Department in December and January sought a similar clarification.

David A. Walton, a shareholder at Jones Hall in San Francisco who headed a comment project for the National Association of Bond Lawyers on this problem, said in an interview congressional lawmakers were considering whether to insert language into the next IRS appropriations bill to direct the IRS to issue the clarification.

“Hey, this is even better,” Walton said. “It’s published. It’s done. It’s good. And it’s exactly what we asked for. The wording is perfect. The wording is exactly what we asked for.”

The clarification enables public housing agencies and developers to broaden their financing package for a project to include grants by charities that require that the money be spent for housing for specified groups.

“That’s the reason people wanted this because they wanted access to these other sources of funding and grants,” Walton said. “These are low-income projects. They don’t produce a lot of income to pay for them. So the more sources of funding and grants that you have, the better. Supposedly more projects will be built or more units in a project will be built.”

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Private activity bonds Affordable housing bonds Tax-exempt bonds NABL IRS Washington DC