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LIHTC Agencies Can Use Existing Guidance to Extend 10 Percent Test and Placed-in-Service Deadlines
The COVID-19 crisis has started to create what will be widespread, consequential disruptions in real estate transactions and construction. In response, many associations and organizations are advocating for federal relief from low-income housing tax credit (LIHTC) requirements that are becoming more difficult or impossible to meet. The outcome of these efforts remains uncertain.
IRS Allowances for Disasters
Fortunately, LIHTC allocating agencies already have an effective way to deal with some of the most pressing concerns. To help address challenges from different kinds of events (e.g., hurricanes), years ago the Internal Revenue Service (IRS) issued Revenue Procedure 2014-49. The guidance authorizes program deadline extensions for LIHTC properties in Major Disaster Areas, regardless of the reason for the designation.
As of the date of this post, essentially the entire nation has a COVID-19 presidential Major Disaster declaration. (These designations are in addition to the national emergency declared March 13.) In a March 31 email, the National Council of State Housing Agencies said the IRS informed them that the relief outlined in the procedure is available in jurisdictions with these declarations.
This post explains how two aspects of Revenue Procedure 2014-49 relating to construction deadlines work when applied in this different, unanticipated context. The agency in Indiana was the first to act on these components of the existing guidance (April 6), but very likely won’t be the last.
Other provisions in Rev. Proc. 2014-49, which won’t be discussed in this post, cover recapture for casualty losses, compliance monitoring, rehabilitation expenditures, and emergency housing. Some of these provisions also may be relevant to a COVID-19 response.
Ten Percent Test Extension
Under Internal Revenue Code Section 42(h)(1)(E), LIHTC property owners must expend 10 percent of the property’s reasonably expected basis within 12 months of the date of the carryover allocation. Not surprisingly, the first requirement to receive more time is the 12-month period has not already expired. An agency cannot extend a deadline that has passed.
Conversely, Rev. Proc. 2014-49 does not specify a point at which the authority ends. Agencies may provide extensions for LIHTC developments that are underway and those to be awarded later on. This ability makes sense considering the original context of the procedure: LIHTCs are often a way to respond to the destruction of floods and fires; allocations in those areas could take longer to satisfy the 10 percent test because of the damage.
The other requirement is an agency must conclude that owners cannot reasonably satisfy the 10 percent test within 12 months because of the COVID-19 disaster. Agencies may make this determination for specific properties or a group. Unlike the geographic focus of a weather event, the universal effects of the current public health crisis means overall relief makes more sense.
Once decided and approved, the longest amount of time allowed is an additional six months from the original deadline (for a total of 18 months from allocation). An agency could set a shorter period.
While the specifics from state to state vary (i.e., some due dates passed earlier this year), in general the need is clear. An example is purchasing real estate, which is a common way to meet the 10 percent test. Sometimes doing so requires approval by a federal agency or a local government subdividing a larger tract; these and other tasks now take much longer.
Placed In Service Deadline
Normally the deadline for owners to place buildings in service is Dec. 31 of the second year after the carryover allocation date. For instance, LIHTC developments with 2018 carryovers must place in service by the end of 2020. Note what matters is not the award announcement or reservation letter, but when the property owner and agency entered into the carryover allocation agreement itself (usually these all happen in the same year, but not always).
Under the procedure, if the incident period for the Major Disaster occurs on or after the carryover allocation, an agency may grant an extension. Only LIHTC properties with agreements effective before Jan. 20 are eligible, since that is when all of the incident periods began.
Like with the 10 percent test, agencies must conclude that LIHTC property owners cannot reasonably satisfy the requirement to place in service because of the current disaster. Agencies may make this determination on a case-by-case basis or overall.
The need is even more evident than with the 10 percent test. Constructing multifamily housing involves meeting certain milestones by particular dates, and failure to do so can lead to compounding delays. Hitting these benchmarks is substantially more difficult now, and in some cases impossible. Despite having 38 weeks left, some buildings may be behind schedule already.
Once decided and approved, the longest amount of time allowed is an additional year: Properties with a carryover agreement from 2018 may receive an extension to Dec. 31, 2021. Some LIHTC developments with a 2019 carryover may have construction schedules of more than 18 months, and if so also would benefit from an extension. Agencies can set a shorter period.
Missing the Deadlines and Program Administration
If an LIHTC property owner does not meet an extended deadline, the IRS will treat the carryover allocation as returned to the agency on the day following the end of the extension period. An alternative could be the agency agreeing to recycle the allocation, although doing so is not always possible.
Agencies that choose to approve the relief will need to inform the IRS when filing the Form 8610, which is the annual report covering LIHTC activity in the preceding calendar year.
There is a possibility the above may be overruled by future IRS guidance or enacted law, such as granting more time to all LIHTC properties regardless of agency action. Until then, Revenue Procedure 2014-49 is the only alternative to address ever-worsening challenges.