Introduction:
For an affordable multifamily housing project to qualify for the maximum allowable amount of four percent Low Income Housing Tax Credits (LIHTCs), at least 50 percent of the project’s aggregate basis (consisting of eligible basis plus land) must be financed with the proceeds of tax-exempt bonds issued pursuant to an allocation of private activity bond volume cap by a state housing authority or another municipal issuer (the 50 percent test).
In recent years, due to increases in development costs and construction delays resulting in cost overruns, projects have found themselves in a position in which the bonds initially issued to meet the 50 percent test were no longer sufficient for that purpose. The failure to meet the 50 percent test significantly reduces the LIHTCs available to a project and generally renders the project unviable, as the equity contributed by investors in exchange for the LIHTCs represents a substantial portion of the overall capital stack.
Typically, to address this concern, additional bonds are issued in an amount necessary to meet the 50 percent test and maintain the project’s access to the full LIHTC allocation. However, Internal Revenue Service guidance allows for certain investment earnings on bond proceeds to be taken into account in determining whether the numerator in the 50 percent test (i.e., bond proceeds spent on qualified project costs) equals or exceeds 50 percent of the denominator in the 50 percent test (i.e., total aggregate basis), which potentially reduces the amount of additional bonds that would need to be issued (or eliminates the need for a supplemental issuance entirely). The implications of such guidance will be the focus of this article.
