California Seeks Input as it Considers Hybrid LIHTC Structure

Published by James R. Kroger, Michael Novogradac, Molly O´Dell on Thursday, January 26, 2017 - 12:00am

Update: CTCAC revised its proposal Feb. 3 to focus on 2016 second-round awardees and then issued another revision Feb. 10. See bottom for details.

Original post:

The California Tax Credit Allocation Committee (TCAC) is responding to the current disruption in the low-income housing tax credit (LIHTC) equity market by exploring strategies with stakeholders to help projects close and move forward. On Jan. 24, in an email sent to the TCAC stakeholder community, TCAC Executive Director Mark Stivers acknowledged potential financing gaps due to lower tax credit equity pricing and rising interest rates. TCAC offered to explore a possible hybrid 9 percent/4 percent structure for 2016 LIHTC awardees who voluntarily excluded eligible tax credit basis in their original 9 percent applications, as long as the aggregate development (both the original 9 percent project and the proposed new 4 percent project) maintains the original scoring, unit mix, public funds and developer fee as stated in the 9 percent reservation letter and staff report.

The hybrid 9 percent/4 percent structure being considered would involve carving out a portion of the original 9 percent project into a separate 4 percent tax-exempt bond financed project. The second project would have a cost comparable to the voluntary exclusion amount, would have separate ownership, and would apply for tax-exempt bonds and 4 percent LITHCs. This would allow the eligible basis voluntarily excluded from the 9 percent application to generate 4 percent tax credits, thus creating additional investor equity to assist in closing financing gaps.

The hybrid 9 percent/4 percent structure would need to be carefully structured to prevent the tax-exempt bonds from tainting the 9 percent credits. Section 42(i)(2)(A) provides that a new building shall be treated as federally subsidized for any taxable year if, at any time during such taxable year or any prior taxable year, there is or was outstanding any obligation the interest of which is exempt from tax under Section 103, the proceeds of which are or were used (directly or indirectly) with respect to such building or the operation thereof. A federally subsidized tax-exempt bond project is generally only eligible for the 4 percent LIHTC (See PLR 200035016). For the 9 percent project to avoid being tainted by this rule, several conditions would need to be satisfied, including that the tax-exempt bond proceeds only fund the 4 percent project and the bonds are only secured by the 4 percent project.

To be financeable, the hybrid 9 percent/4 percent structure would most likely involve each of the two projects being separate condominiums.

The challenges involved in this approach include the higher transaction costs for a separate 4 percent project (e.g., bond issuance costs and bond and tax credit application preparation costs); keeping the bond proceeds separate to specifically fund only the 4 percent project; identifying specific costs and allocating them between each project (e.g., architect, engineering, site work, legal and transactional costs); and renegotiating ground leases or other financing to be split between the two projects.

Mark Stivers is gathering feedback through January 31 via email at [email protected]

Feb. 3 Update

CTCAC Executive Director Mark Stivers proposed Feb. 3 that 2016 LIHTC second-round awardees be allowed to seek permission for a 9 percent/4 percent hybrid structure, indicating that almost all first-round awardees had already closed and insufficient time remained for restructuring for the few that hadn’t closed yet.

CTCAC issued proposed emergency regulations changes for public comment and will ask the committee to adopt the regulation changes at its March 15 meeting. Awardees seeking to restructure are required to submit a revised 9 percent application and a new 4 percent application to TCAC and a new bond allocation application to the California Debt Limit Allocation Committee by March 13.

CTCAC also extended the readiness closing deadline for all 2016 second-round projects to the later of the date two months after the readiness closing deadline in the project’s reservation letter or June 30.  CTCAC will also allow sponsors that are unable to close by the extended deadline to return 2016 credit reservations without negative points and reapply for 9 percent credits at a higher amount.

Feb. 10 Update

Stivers further updated the proposal Feb. 10, revising the proposed changes in three ways.

First is to expand the authority to pursue the hybrid structure to any first-round 2016 awardees whose projects have not closed construction financing.

Second, that all 2016 second-round 9 percent properties, in addition to any seeking the hybrid structure, can reset their credit year to 2017. That will extend their placed-in-service deadline.

Third, that any project resetting its 2016 federal credits also reset its state credits in order to “certificate” the state credits.

The target date for adopting the regulation change remains March 15, although Stivers said it is possible a special meeting could be called before that. Comments remain due to [email protected] by 5 p.m. Feb. 17.