IRS, Treasury and CDFI Fund Representatives Share NMTC and LIHTC Insights

Published by Nicolo R. Pinoli on Friday, June 16, 2017 - 12:00am

Representatives from the Internal Revenue Service, Community Development Financial Institutions (CDFI) Fund and Treasury Department shared a number of insights regarding the new markets tax credit (NMTC) and low-income housing tax credit (LIHTC) in remarks made May 24at the American Bar Association (ABA) Forum on Affordable Housing and Community Development. It’s important to note that the representatives did not speak on behalf of their respective agencies, but rather provided personal observations and reflections. The speakers also repeatedly emphasized that, with respect to forthcoming guidance, the standard-setting process is often unpredictable and can result in changes up until the time such guidance is issued. That said, the many key insights they shared are worth noting.

New Markets Tax Credits – Timing of Next Award Announcement
David Meyer, former program manager for certification, compliance monitoring and evaluation with the CDFI Fund, said the next round of awards are expected to be announced in the winter of 2017-2018. When pressed on the specific timeline, Meyer noted that it is unlikely that the awards will be announced before the end of the year, and that the process is affected by some factors that are not entirely within the Fund’s control, such as staffing, whether the new Awards Management Information System (AMIS) affects their ability to timely process applications, and the possibility that newly ensconced officials from the current administration may choose to make changes to the process of making announcements including the clearance process.

Meyer also observed that there are relatively few changes to the application this year, but the CDFI Fund encourages applicants to carefully follow the instructions, and observed that the application this year will use the AMIS system, which could result in a learning curve for applicants. Meyer also recommended applicants arrange their affairs to complete the application a few days before the deadline.

New Markets Tax Credits – Adoption of AMIS
Meyer also reported that the CDFI Fund is in the process of migrating its systems over to AMIS, which is a cloud-based product offered by Salesforce. This year’s allocation application will be submitted through the AMIS system, and over time, additional programmatic elements will be migrated to AMIS, including the compliance monitoring system and the allocation tracking system. Meyer observed that the CDFI Fund hopes to migrate the compliance monitoring system to AMIS this fall, although he also observed that timeline could be pushed back if needed. Additionally, the community investment impact system will be migrated over to AMIS, likely to occur in a second phase next year. The goal of the new system is to reduce the reporting burden on participants, reduce the error rate, and increase back-office automation to free up CDFI Fund staff to perform more in-depth monitoring and provide technical assistance to the industry.

New Markets Tax Credits – Fee Disclosure Requirements
A few years ago, the CDFI Fund instituted a fee disclosure requirement, whereby CDEs are required to disclose fees and expenses to QALICBs. Meyer stated that this fee disclosure requirement was instituted to help manage QALICB expectations, enhance transparency, and keep the cost of capital as low as possible. The CDFI Fund has been interested to see the creativity involved, and is considering whether the form should be standardized or simplified. Additionally, the CDFI Fund is assessing whether some form of annual percentage rate similar to that used in other lending situations should be added to enhance reader understanding.

New Markets Tax Credits – Impact of the New Administration
Meyer observed that in some respects, newspapers may have over-sold the impact of the new administration. Meyer further indicated that it takes time to get new appointees into place, and we are still months away from new deputy assistant secretaries taking office. Until such time as new leadership is in place, the Fund continues business as usual, with no dramatic policy changes planned or expected.

New Markets Tax Credits – Monetization of Assets
Regarding the monetization of assets rules as outlined in the recently updated FAQs guidance, particularly numbers 44 through 46 (formerly numbered as FAQs 42-44), Meyer confirmed that the CDFI Fund is always looking for ways to update the policy, and has appreciated the industry’s participation in updating the FAQs over time to clarify various issues. Ultimately, the FAQs are intended to increase new investments in low-income communities, and to address activities that the Fund has determined are not programmatically desirable. Meyer also observed that the new administration may have input into the policy that could result in future changes to the FAQs.

Meyer also discussed the Fund’s interest in learning more about deals that may not work under the FAQs. When asked, Meyer said waivers of the policy for otherwise worthy projects would not be available. When pressed about the disproportionate effect of the FAQs on some projects, including those in certain jurisdictions and/or owned by nonprofits, Meyer confirmed that the Fund has long been evaluating the effect of the policy on these transactions, and that the Fund is interested in continuing the conversation about the FAQs. James Holmes from the IRS also shared his observations that the IRS has similarly received many comments about the disproportionate effect of the FAQs on nonprofits, but to date has not distinguished between the two, even though it is interesting to consider the philosophical differences between the two types of organizations and their contrasting missions.

Meyer also said that the CDFI Fund did not intend to require ongoing detailed reporting or submission of documents to support compliance with the FAQs, but CDEs should be retaining documentation of their compliance with the rules to substantiate compliance in the event of a desk audit by the CDFI Fund.

New Markets Tax Credits – Finalizing the Proposed Regs
Hannah Hawkins from Treasury’s Office of Tax Policy discussed the status of finalizing the proposed regulations originally issued over a decade ago. In the near term, Treasury hopes to finalize these rules, particularly as they relate to the issue of recapture. This issue is on the priority guidance plan, and Treasury is working through it, but the new administration and the current lack of appointments in main tax decision-making leadership roles could impact the rollout of the final regulations. Hawkins observed that the absence of those decision makers has stalled the flow of guidance and regulations. Finally, Treasury, like all executive branch departments has faced a regulatory freeze imposed by the new administration shortly after taking office. Moreover, the new administration has also issued a directive to re-evaluate all significant regulations issued since the beginning of 2016 to evaluate whether they are overly burdensome and should be modified to reduce the burden. Although the proposed regulations are not subject to these requirements since they do not fall within this window, finalizing the regulations could require additional consideration to evaluate compliance with these new directives.

The new administration has also proposed new rules that would require rescinding two existing regulations concurrent with the promulgation of any new one. In response to a question, Hawkins indicated that Treasury is currently uncertain as to the applicability to its regulations. However, should this rule apply, they would likely seek to rescind existing regulations that have become irrelevant over time, although also observing that these are not easy to find.

In terms of the details around the finalization of the proposed regulations, James Holmes from the IRS noted that they have received many comments, and the IRS continues to accept them. Moreover, although timing around issuing the final regulations is not currently known, Holmes reiterated that it is a very real priority to get them finalized.

New Markets Tax Credits – Sponsor Leverage
Holmes also confirmed that now-retired IRS staff had previously been very concerned about the nature and degree of relationship between the QALICB and the leverage lender. During the summer of 2015, the IRS received a large volume of feedback on this issue. While no resolutions have been reached to date, the IRS continues to study the issue and consider issuing guidance, including whether nonprofits should be treated differently than for-profits when it comes to leverage loans, and whether the applicable federal rate should be applied as a minimum interest rate.

Low-Income Housing Tax Credits – Right of First Refusal
James Rider, General Attorney (Tax) in the IRS Office of Chief Counsel, said that when considering the nonprofit right of first refusal under IRC 42(i)(7), an option to buy is different than a right of first refusal. He noted that as the statute was being drafted, the wording was initially stated to be an “option,” but later changed to use the term “right of first refusal.” This legislative history suggests that Congress intended for it to be a true right of first refusal, and not an option. Rider observed that under a right of first refusal, an owner must first choose to sell, whereas an option holder can compel a sale. However, Rider also observed that a 3rd party bona fide offer may not be required, as that doesn’t seem to have been Congressional intent. Moreover, Rider suggested that a plan to sell the property would not necessarily require all partners to agree to that sale.

Low-Income Housing Tax Credits – 10-Year Hold Rule
The long-awaited guidance related to the exception to the 10-year hold rule when the building is “substantially” federally assisted continues to be an exercise in patience, as the project has been added and subsequently removed from the priority guidance plan.

Low-Income Housing Tax Credits – Foreclosures
Based on some recent activity within the industry, ABA representatives expressed concern that bad actors could engage in a scheme to remove the extended use agreement through a foreclosure involving related party debt after the end of the initial 15-year compliance period. Novey observed that this situation is very troubling, and that the IRS has several options available to address the situation, including adding waiting periods and requiring these transactions be classified as listed transactions subject to additional disclosure requirements.

Again, it’s important to remember that while these remarks are interesting and informative, they are not official statements from the IRS, CDFI Fund or Treasury Department. Nonetheless, they are helpful guideposts along the way, as the tax credit community awaits release of official guidance on these subjects.

If you have questions in the meantime about how these topics affect your tax credit investments, contact a Novogradac & Company office near you.