The Treasury Department has extended a program that allows housing agencies to exchange low-income tax credits for federal cash grants by another year through 2011, provided the projects funded by the grants are significantly underway by the end of 2010.

The Treasury said in an announcement this week that the original expiration date was "overly restrictive and may preclude funding of otherwise eligible projects that may not reach final completion by the end of 2010."

Under the extension, projects that are at least 30% complete by Dec. 31, 2010 - the original expiration date of the program - can continue to be funded via the grants, as long as the state housing credit agencies have already made "sub-awards" toward those projects. Any funds not sub-awarded to specific projects by the end of 2010 must be returned to the Treasury for reallocation. The original program required agencies to return any funds that had not been disbursed by the end of 2010, even if they had been sub-awarded.

State housing finance agencies were given the authority to "monetize" tax credits under the American Recovery and Reinvestment Act in an attempt to alleviate the lack of investors in the tax-credit market due to the credit crisis. The grants can then be sub-awarded to developers to finance the construction or acquisition and rehabilitation of low-income buildings.

The provision allows state HFAs to trade in up to 40% of their 2009 low-income housing tax credit authority and up to 100% of any unused or returned 2008 credits, for 85 cents on the dollar, to fill funding gaps in otherwise ready-to-go projects.

Developers typically sell the LIHTCs to increase equity in the development, which reduces the amount of bonds needed, the cost of debt service, and as a result, the rents.

Meanwhile, housing groups are still struggling to get authority to exchange for cash special disaster LIHTCs in areas affected by Midwestern flooding and Gulf Coast hurricane.

A number of national and regional housing groups, including the National Council of State Housing Agencies and the Louisiana Housing Finance Agency, have been pressing the Obama administration and Congress for months to allow the disaster credits to be exchanged for cash. The groups began pushing for legislation after the Treasury ruled in May that the credits are ineligible for the program since they are outlined in a separate section of the tax code than the one authorizing plain-vanilla LIHTCs.

Currently, bills that would make explicit that disaster credits can be used under the program are pending in both the House and Senate. Housing sources said yesterday that the ultimate goal is to get the provision included in the so-called extenders legislation, which is an annual piece of legislation typically introduced in the fall by lawmakers on the tax committees that extends several expiring tax provisions.

The Senate version of the disaster credit legislation currently has 12 co-sponsors, while 11 have signed on to the House measure. All the sponsors have home districts in either hurricane or flood-affected areas.

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