Washington Wire: Non-Legislative Developments to Watch in 2013

Published by Michael Novogradac on Friday, March 1, 2013
Journal thumb March 2013

In recent months a lot of attention has been paid to the deliberations and maneuverings in Congress and how they will affect the future of affordable housing, community development, historic preservation and renewable energy. As 2013 unfolds, much of the focus will remain on deficit reduction and tax reform. However, a number of potential regulatory changes may also have important consequences for the tax credit community.

Tax Credit Accounting
An effort to change accounting rules for tax credit investments made important progress recently when the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) agreed to put the accounting for low-income housing tax credit (LIHTC) investments on its agenda for consideration at its March 14 meeting. The EITF decision to add this item to its agenda is the culmination of a yearslong effort of a group of industry stakeholders who are seeking a change in the current equity method of accounting for the LIHTC. These industry stakeholders believe the current equity method presentation distorts investment performance by reporting pretax losses on otherwise profitable investments, and makes investment performance difficult to understand.

The group, of which Novogradac & Company is a member, originally formed in 2010 to advocate for expanding the effective yield method. Last year, the group drafted a white paper that addresses issues related to the accounting methods that the FASB currently requires be applied to tax credit investments. The white paper, “Significant Changes Needed in Accounting for Affordable Housing and Other Tax Credit Investments,” describes the need for a more principles‐based approach to accounting rules that reflects the unique nature of tax credit investments.

At its meeting this month the EITF will consider this proposal to develop a new, principles-based accounting method that could be applied to tax credit investments that share similar characteristics: the tax credit investment method. Under this method, qualifying investments would be accounted for as purchases of tax benefits or, at a minimum, tax benefits would be treated as a tax‐exempt component of pretax earnings. Under the proposed method, a proportionate amount of the cost of the investment would be amortized against the related tax credits and reported as a component of the tax credit investor’s income tax provision. The group suggests the amount of investment amortization recognized as a cost in each reporting period would be calculated as a percentage of the original investment based on the portion of tax credits received during the reporting period in comparison to the total tax credits expected to be received. In other words, investment costs would be recognized on a pro rata basis with the tax credits actually received.

It’s important to note that while the white paper addresses the need for this accounting change for all kinds of tax credit investments, the EITF has indicated that it will focus primarily on LIHTC investments.

Historic Tax Credit Review
Another potentially positive development is underway, this time related specifically to the historic tax credit (HTC). In January, Interior Secretary Ken Salazar asked the National Park Service (NPS) to conduct an internal review of the historic preservation tax incentives program to ensure that it is maximizing opportunities to use historic preservation to promote economic development and revitalization of communities, especially in urban areas.

“Preserving and restoring historic buildings has the potential to breathe life into local communities and their economies,” Salazar said on January 25 at a meeting in Detroit, Mich. that included economic development, real estate and design professionals and other stakeholders. “The Federal Historic Preservation Tax Incentives Program is the largest and most effective federal program specifically supporting historic preservation, and we want to make sure that we are doing everything we can to work in partnership with local communities, developers and other stakeholders to provide guidance and promote restoration efforts,” Salazar said.

Salazar asked NPS Director Jonathan B. Jarvis and Associate Director of Cultural Resources Dr. Stephanie Toothman to examine the program with a view to strengthen partnerships with local communities and State Historic Preservation Offices. The review will also look at ways the NPS can better promote the program to broaden the public’s understanding of its benefits and eligibility requirements. A representative for the Interior Department would not comment on the specifics of the review but did confirm that the internal review was due March 1.

Community Reinvestment Act Regulations
Meanwhile, progress also continues on changes that could potentially enhance banks’ interest in tax credit investments in the form of changes to the Community Reinvestment Act (CRA) regulations. The CRA is often cited as a primary factor in determining where and how banks provide community development financing. However, concerns grew in recent years about the CRA’s effectiveness in encouraging community development.

One key concern is that CRA, as currently implemented, contributes to a geographically imbalanced tax credit investment market. Under current rules, the tax credit equity market has been split into two tiers, one with high credit prices in high-demand CRA assessment areas and a second with lower demand in non-CRA assessment areas. Moreover, current CRA rules do not fully address the growing segment of banks whose business models do not involve traditional branch networks, including Internet-based banks and investment banks.

In 2010, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision held four public hearings on modernizing CRA regulations. Public comments were accepted through August 31, 2010. More than 1,600 comment letters were submitted and more than 100 witnesses provided testimony during the four public hearings. The tax credit community proposed a number of suggestions to address the concerns about geographic imbalances. Among other things, the tax credit community urged regulatory agencies to delineate a much smaller number of assessment areas.

Because of the sheer volume of comments, the process of reviewing and considering the public’s response has taken a considerable amount of time. Nonetheless, Barry Wides, the OCC’s deputy comptroller for community affairs, told the Journal of Tax Credits last month that regulators in the interagency working group have continued to meet to review and discuss the feedback since it was gathered. He could not speak to a specific timeline for modernizing regulations other than to say he is hopeful that regulators will begin putting proposals out for comment relatively soon.

Basel III
The status of another development that would likely affect tax credit investment is unclear. The implementation of Basel III capital requirements wouldn’t directly affect tax credits but would have ripple effects because of their significance to banks, which continue to dominate the pool of tax credit investors. Larger banks that have been designated as systemically important will face higher Basel III capital charges, but it’s too soon to tell how significantly this will affect tax credit investment because the changes will be phased in over the course of several years and will affect individual banks differently. In addition, the implementation of the Basel III capital charges was delayed in late 2012; at the time of this writing, a new target effective date hadn’t been set.

Originally the new charges were slated to be effective on Jan. 1, 2013. But according to a statement the Federal Reserve, FDIC and OCC released jointly in November, many industry participants expressed concern that they would be subject to the rule without sufficient time to understand the rule or to make necessary systems changes, and so the regulators announced they would delay implementation until an unspecified date, citing the volume of comments received and the wide range of views expressed during the comment period.

Volcker Rule
Another major development for banks this year will likely be the implementation of the so-called Volcker Rule. Regular readers may recall that regulators have been working since 2010 to implement the rule, which is set out in Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule is particularly relevant to the tax credit community because it generally limits banks’ ability to make (and sponsor) equity investments, with certain exceptions. Because of the potential impact of the rule, regulators were inundated with comments and responses from industry stakeholders. On Feb. 14, in testimony before the Senate Banking Committee, Comptroller of the Currency Thomas Curry said, “I am committed to completing these rulemakings as quickly as possible while recognizing the need to carefully consider and address the important issues that commenters have raised with the proposals.” With that, the tax credit community awaits release of the final Volcker rule, and braces itself for its potential implications.

The months ahead promise to be a busy and significant time for the tax credit community. As such it will be important for the tax credit community to remain engaged and informed, to ensure the best possible results.