On July 30, 2008, President Bush signed the Housing and Economic Recovery Act of 2008 (the “Act”) into law. The Act contains a number of provisions relevant to issuers and borrowers of tax-exempt bonds. In particular, the Act provides for the following:
Repeal of AMT for Multifamily Housing Bonds, Single Family Mortgage Revenue Bonds and Qualified Veterans’ Mortgage Bonds. Under the Internal Revenue Code (the “Code”), interest on most qualified private activity bonds is subject to the alternative minimum tax (the “AMT”). Because holders of bonds subject to the AMT must report interest on the bonds in calculating their federal tax liability under the AMT, the interest rate paid by borrowers on such bonds is generally higher than that borne by bonds not subject to the AMT. The Act exempts interest on multifamily housing bonds, single family mortgage revenue bonds and qualified veterans’ mortgage bonds issued on or after July 30, 2008 from the AMT. Notably, this provision does not apply to interest on refunding bonds unless interest on the refunded bond (or the original bond, in a series of refundings) was not subject to the AMT. The Act also provides that interest on multifamily housing bonds, single family mortgage revenue bonds and qualified veterans’ mortgage bonds is not required to be taken into account by corporations in calculating adjusted current earnings under the AMT.
Increase in Volume Cap Authority For Multifamily Housing Bonds and Single Family Mortgage Revenue Bonds. The Act authorizes an additional $11 billion of volume cap issuance authority in 2008 for the issuance of multifamily housing bonds and single family mortgage revenue bonds the proceeds of which are used to finance (or, in limited circumstances, refinance – see below) owner-occupied residences. For these purposes, the additional volume cap authority is allocated to the states on the basis of the following formula:
$11,000,000,000 x volume cap for the state
sum of volume cap for all states
The additional volume cap authority authorized by the Act may be carried forward through the year 2010, but may not be used for any bond other than multifamily housing bonds or single family mortgage revenue bonds.
Refunding Treatment For Volume Cap Authority Used to Finance Multifamily Housing Bonds. Under Section 146 of the Code, assuming certain other requirements are satisfied, volume cap authority is not required for the issuance of bonds to refund qualified private activity bonds subject to the volume cap limitation. The Act adds a new rule to Section 146, which provides that, if, during the 6-month period beginning on the date of repayment of a loan the proceeds of which were used to finance a qualified multifamily housing facility, such repayment is used to finance a new qualified multifamily housing facility, any bond issued to refinance such issue shall be treated as a refunding issue so long as the principal amount of the new issue does not exceed the principal amount of the refunded issue. Thus, the bonds issued to finance the new multifamily housing facility will not require volume cap authority and shall, notwithstanding the fact there are different obligors on the two loans, be treated as a refunding of the prior issue. This new rule applies only to one new issue, and only if (1) the new issue is issued no later than 4 years after the date of issue of the original issue, (2) the latest maturity date of any bond of the new issue is not later than 34 years after the date on which the original issue was issued, and (3) the new issue is approved in accordance with Section 147(f) of the Code (i.e., the issuer undertakes a “TEFRA approval”). Refunding treatment is afforded only to repayments of loans received after July 30, 2008.
Exception to the New Mortgage Requirement For Single Family Mortgage Revenue Bonds. In general, tax-exempt single family mortgage revenue bonds may only finance mortgages for homebuyers who did not have an ownership interest in a principal residence in the 3 years preceding the execution of the tax-exempt financed mortgage, and may not be used to refinance mortgages or acquire existing mortgages. The Act creates an exception to these rules for bonds issued to refinance “qualified subprime loans.” “Qualified subprime loans” include adjustable rate single-family residential mortgage loans made after December 31, 2001 and before January 1, 2008 that the issuer determines would be reasonably likely to cause financial hardship to the borrower if the loan were not refinanced.
Coordination of Rules Applicable to Low-Income Housing Tax Credits and Multifamily Housing Bonds. The Act makes several changes to the rules applicable to multifamily housing bonds to conform them to the rules applicable to low-income housing tax credits. The amendments made by the Act set forth below apply to determinations of the status of qualified multifamily housing facilities for periods beginning after July 30, 2008, with respect to bonds issued before, on, or after such date. The Act conforms the following rules:
- The “next available unit” rule for multifamily housing bonds for which the low-income housing tax credit is allowed is amended to provide that the next available unit of the building (as opposed to “the project” under prior law) must be occupied by a new resident who satisfies the income and rent-restriction requirements.
- The eligibility requirement for full-time students in multifamily housing facilities is amended to provide that a residential unit occupied entirely by full-time students will not satisfy the income tests unless (1) the students are comprised entirely of single parents and their children, or (2) the students are married and file a joint return.
- Prior to the Act, a residential rental unit within a qualified multifamily housing project could not house individuals on a transient basis. Under the Treasury Regulations, a residential unit was not treated as used on a transient basis if the unit contained complete facilities for living, sleeping, eating, cooking and sanitation. The Act amends this rule to comport with the rule for facilities eligible for the low-income housing tax credit. Under the new rules applicable to multifamily housing bonds, certain single-room occupancy housing may qualify for tax-exempt financing, even though the unit provides for shared eating, cooking and sanitation facilities.
Hold Harmless For Reductions in Area Median Gross Income. A multifamily housing facility may be eligible for tax-exempt financing if either (1) 20% or more of the residential units in such project are occupied by individuals whose income is 50% or less of the area median gross income, or (2) 40% or more of the residential units in such project are occupied by individuals whose income is 60% or less of the area median gross income. Both income limitations are adjusted for family size. Area median gross income for these purposes is determined by the Treasury Department consistent with determinations of low-income families and area median gross income made by the Department of Housing and Urban Development (“HUD”). Under the Act, any determination of area median gross income for years after 2008 shall not be less than gross income determined for the prior year. In addition, the Act provides a special rule for projects already subject to HUD’s existing hold harmless policy.
Exception From Annual Recertification Requirement For Certain Multifamily Housing Projects. Prior to the Act, the Code provided that the operator of a qualified multifamily housing facility was required to submit to the Treasury Department an annual certification that the project continues to comply with the limitations imposed on multifamily housing facilities. The Act liberalizes this standard, providing that no annual certification is required with respect to a project for any year if during such year no residential unit in the project is occupied by a new resident whose income exceeds the applicable low-income limit. This provision applies for years ending after July 30, 2008.
Bonds Guaranteed by Federal Home Loan Banks Not Federally Guaranteed. Generally, state and local bonds do not qualify for federal tax exemption under the Code if the interest on such bonds is federally guaranteed. The Act adds to the exceptions to this rule for guarantees of bonds by federal home loan banks meeting applicable safety and soundness requirements made in connection with the original issuance of a bond during the period beginning July 30, 2008 and ending December 31, 2010. This exception also covers renewals or extensions of guarantees described in the preceding sentence.