The Internal Revenue Service is providing temporary relief for victims of Hurricane Sandy by suspending certain requirements for bond-financed qualified residential rental projects that are used to provide emergency housing for displaced persons.

This is the first time the IRS is relaxing rules on bond-financed residential rental projects that were affected by a federally declared natural disaster area. Typically the IRS has been lenient with providing relief for low-income housing tax credit projects but not for projects financed with tax-exempt bonds, a bond lawyer said.

“Because of the widespread damage to housing caused by Hurricane Sandy, the Service has determined that issuers can approve the use of qualified residential rental projects described in Section 142(d) to temporarily house displaced individuals, regardless of their income, in accordance with this notice,” the IRS wrote in a nine-page notice issued Wednesday afternoon.

Linda Schakel, partner with Ballard Spahr, said the notice is great news for the industry.

“By having issued this notice, the IRS says whether it was only financed with bonds or a tax credit-bond combo, either way you get the relief and ultimately that gives the displaced persons a lot more potential housing units,” Schakel said.

The vast majority of low-income housing tax credit projects are financed with both tax-exempt bonds and tax credits, Schakel said. Issuers tend to take advantage of the tax law that says if more than 50% of a project costs are financed with tax-exempt bonds they can also receive a low-income housing tax credit.

The IRS also said in the notice that “the projects to which this approval may be given can be located in any state, regardless of whether a major disaster declaration with individual assistance has been issued for that state.”

The notice is retroactively effective as of Oct. 22, 2012, the IRS said.

The Service said that for projects with low income housing tax credits, this notice should be read in tandem with Notice 2012-68, which suspended certain low-income requirements associated with LIHTC projects to provide emergency housing.

“Once Notice 2012-68 went out, we were getting questions about projects financed with low-income housing tax credits and bonds and if we were going to provide parallel relief for those projects,” said Vicky Tsilas, associate tax legislative counsel with the Treasury Department’s Office of Tax Policy. “This notice is a response to that.”

Sen. Frank Lautenberg, D-N.J., and Fred Goldberg, a former IRS Commissioner and current partner at Skadden, Arps, Slate, Meagher & Flom LLP both sent letters to the Treasury in the past few months requesting guidance on the availability of financing for rehabilitating affordable housing units damaged or destroyed by Hurricane Sandy.

Lautenberg’s office did not respond to a request for comment regarding the new IRS notice.

Wednesday’s notice defined the term “displaced individual” as an one “who resided in a jurisdiction designated” by the Federal Emergency Management Agency “for individual assistance and who has been displaced because his or her residence was destroyed or damaged as a result of the devastation caused by Hurricane Sandy.”

If an tax-exempt bond issuer wants to allow the use of a project to temporarily house displaced individuals, the issuer must determine an appropriate period for the temporary housing that does not extend beyond Nov. 30, 2013, the notice said.

Existing tenants in a building whose income is at or below an income limitation under federal tax law can’t be evicted or have their tenancy terminated as a result of efforts to provide temporary housing for displaced individuals.

Once the temporary housing period ends, the status of the displaced individual remaining in the building will be disregarded and re-evaluated.

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.

The notice comes 100 days after Hurricane Sandy pummeled the Atlantic coast leaving thousands of residents homeless. It also comes as Congress plans to release the first installment of nearly $51 billion of aid to victims of Hurricane Sandy.

The installment totals $5.4 billion, with New York City receiving $1.77 billion, New York state with $1.7 billion, New Jersey with $1.8 billion and splitting the remaining amount among Connecticut, Rhode Island and Maryland.

Congress also approved a $9 billion measure to pay out flood insurance claims from Sandy victims.

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