Federal Banking Regulators Update CRA Guidance for CDFIs and Historic Tax Credits

by Neal C. Wise

The OCC, Federal Reserve and FDIC recently adopted final revisions to the Interagency Questions and Answers Regarding Community Reinvestment (Q&A) based on proposals the agencies issued September 10, 2014. The revisions – which clarify nine Q&As, revise four Q&As and adopt two new Q&As – provide guidance as to how banks may receive credit under the Community Reinvestment Act (CRA) towards their obligation of meeting the credit needs of their communities.

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Team Member Toni Jackson Serves as Panelist at ABA Annual Meeting

JW 105 BIO rd8.inddAntoinette M. Jackson, a partner in the firm’s Affordable Housing Practice Group in the Houston office, will serve on the panel, “Ferguson’s Fault Lines: Reflecting on Ferguson and the Lawyers’ Role in Restoring Justice,” at the American Bar Association’s Annual Meeting in San Francisco, California, on August 5, 2016. Ms. Jackson will discuss how historical housing decisions have impacted some of the events that led to the explosion witnessed in Ferguson and how housing choices and the recent Supreme Court decision can work to help restore justice in communities nationwide.

Raising the Roof at the Presidential Convention

United States Supreme Court BuildingI was a guest on CNBC’s Squawk Box this morning with former Governor Howard Dean discussing the just completed Republican and Democratic presidential convention. I attended the Republican convention and co-hosted a fundraising event and concert which was intended to raise awareness about the growing affordable housing crisis in the United States. Aided by award winning Country Music Band Big and Rich, 1500 attended including a number of House and Senate members. Housing advocate Representative Pat Tiberi was there and Ohio Senator Rob Portman spoke about the growing need for and importance of healthy, decent, affordable housing. I spoke about the relationship between housing and health, work and learning. Measured by the turnout and the buzz it was a rousing success. The beneficiary of the fundraiser was Make Room, a collaboration lead by Enterprise Community Partners. Make Room is a national campaign to publicize the hardship caused by the silent rental affordability crisis.  HousingWire Article

Advocates had a huge win in both parties’ 2016 Platforms.  The Republican Party Platform stressed that homeownership and rental needs both must be addressed in housing policy.  It states: “More than six million households had to move from homeownership to renting [as a result of the Great Recession]. Rental costs escalated so that today nearly 12 million families spend more than 50% of their incomes just on rent.” The platform then directly links the declining national homeownership rate with rising rents: “The national homeownership rate has sharply fallen and the rate for minority households and young adults has plummeted. So many remain unemployed or underemployed, and for the lucky ones with jobs, rising rents make it harder to save for a mortgage.”  Republican Platform

The Democratic Party Platform also addressed affordable housing: “We will increase the supply of affordable rental housing by expanding incentives and easing local barriers to building new affordable rental housing developments in areas of economic opportunity. We will substantially increase funding for the National Housing Trust Fund to construct, preserve, and rehabilitate millions of affordable housing rental units….We will reinvigorate housing production programs, repair public housing, and increase funding for the housing choice voucher program and other rental assistance programs.”  Democratic Platform

There is plenty of common ground. Now it’s up to us to amplify and spread the message. And perhaps encourage the next President and lawmakers to have the political will to find a meaningful bipartisan solution.

IRS Clarifies Income Inclusion Rules in Section 50(d)(5) for Partnerships and S Corporations

On July 21, 2016, the IRS released temporary and proposed regulations that address income inclusion with respect to lessees of investment tax credit property when owners treat the lessees as having acquired the property for investment tax credit purposes. The rules apply when a partnership or an S corporation1 leases property from the owner and the owner passes the credit through to the lessee. These regulations are particularly noteworthy with respect to historic rehabilitation tax credits.

Under current rules, if an owner makes an election to pass the credits through to the lessee, the lessee is entitled to the credits. However, instead of reducing the basis of the property, which would be the case if the owner retained the investment credits, the lessee is required to ratably include over the life of the investment credit property an amount equal to, or one-half of, the credits as gross income.There was, however, uncertainty surrounding the income inclusion that the regulations clarify in two notable ways.

First, the regulations clarify that the investment credits and related limitations should be determined at the partner level rather than at the partnership level. This conclusion has the following consequences:

  • Each partner that is the “ultimate credit claimant” must include in gross income their pro rata portion of the historic rehabilitation credit (or 50% of the energy tax credit) claimed.3
  •  Since the income is not earned by the partnership and allocated to the partners, the partners are not entitled to increase their outside basis in their partnership interests under § 705(a) as a result of the purported allocation of § 50(d) income. Similarly, the partners are not entitled to increase their capital accounts per § 704(b).

Many partnerships previously took the position that the § 50(d) income inclusion was a partnership item and entitled the partners to increase their bases in their partnership interest and to increase their capital accounts by the amount of the § 50(d) income allocated to each partner. The IRS notes that such basis increases are inconsistent with Congressional intent and thwart the purpose of the § 50(d) income inclusion requirements.

Second, the regulations provide that a tax credit claimant may elect to accelerate the § 50(d) income inclusion when a lease termination occurs outside the tax credit recapture period.4 The regulations provide that a lease termination is deemed to have occurred in the taxable year in which the ultimate credit claimant terminates its direct or indirect interest in the lessee of investment credit property. Accordingly, the ultimate credit claimant may make an irrevocable election to include in gross income any of the remaining income required to be taken into account under § 50(d) when the ultimate credit claimant terminates its direct or indirect interest in the lessee.

The temporary and proposed regulations were released and became effective on July 22, 2016, upon publication in the Federal Register, and will apply to property placed in service on or after September 19, 2016. Taxpayers are permitted to submit written comments on the temporary regulations by October 20, 2016.

  1. The temporary and proposed regulations apply rules to S corporations and their shareholders similar to those discussed herein for partnerships and their partners. The following is written with a focus on partnerships considering the prevalence of partnership structures in this arena. 
  2.  For example, with respect to historic rehabilitation tax credits, the income inclusion is 100% of the amount of the credits. With respect to the renewable energy tax credits, the income inclusion is 50% of the amount of the credits. 
  3. The “ultimate credit claimant” is any partner or S corporation shareholder who ultimately claims the credits (i.e., the taxpayer that files Form 3468 – Investment Credit).   
  4. The election to accelerate the § 50(d) income inclusion is not available when § 1.50-1T(b)(2) requires the “ultimate credit claimant” to include ratably in gross income with respect to property that is subject to § 168 depreciation rules (the modified accelerate cost recovery system, also known as MACRS). In such cases, the “ultimate credit claimant” must include in gross income the amount equal to the credit determined under § 46 over the shortest applicable recovery period pursuant to § 168.

For more information, please contact Jonathan R. Katz or Ravinder P. Khinda.

Raising the Volume on America’s Rental Affordability Crisis

Rick A. Lazio, a partner on the firm’s Affordable Housing Team in the firm’s New York office, recently co-authored the article “We need to raise the volume on America’s rental affordability crisis” in HousingWire magazine. The article discusses the need to bring attention to the rental affordability crisis at the local and national level. Rick Lazio, along with co-author, former Oklahoma Governor Frank Keating, will attend the 2016 Republican National Convention in Cleveland to draw national attention to the rental affordability crisis. “Together, we hope to deliver a forceful message that inaction and indifference are not acceptable responses to the crisis in rental housing,” said Lazio and Keating. “We will be doing our best to raise the volume on America’s rental affordability crisis. If we keep the drumbeat going long enough, we are confident our message will finally get through.”

Rick Lazio Publishes RAD Article in Commercial Observer

money for a new homeIn this article, I make the case that the Rental Demonstration Program is gaining in acceptance and is an indispensable tool for bridging the huge shortfall in the capital needs of public housing across the nation. Even in New York City, where the nation’s largest housing authority and their supporters have long been skeptical of private capital, change is underway. Though the economics of the program don’t work in every situation, it is the most dynamic opportunity for private affordable housing developers and investors.

Commercial Observer Article – A RAD Idea

Affordable Housing Team Member Toni Jackson Moderates Panel on Workforce Housing

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Antoinette M. Jackson, a partner in the firm’s Affordable Housing Practice Group in the Houston office, moderated the panel, “Debunking the Myths on Workforce Housing,” for the Houston Association of Realtors on June 23, 2016. The discussion addressed misunderstandings surrounding the topic of workforce housing and educated on what available resources these respective entities provide. For more information on this topic, please contact Ms. Jackson.

Affordable Housing Takes Front Seat at New Orleans Mayor’s 2016 State of the City

In his 2016 StateIMG_4189 of the City, New Orleans Mayor Mitchell J. Landrieu unveiled an ambitious 5 year affordable housing plan which calls for the development and preservation of 7500 affordable housing units, supports mixed income developments and commits $17 million per year in resources to support the plan.

In coordination with the Mayor’s announcement, the New Orleans Redevelopment Authority released its Housing Resiliency Strategy which contains an in depth analysis of the current rental market in New Orleans and a blueprint for a strategy to encourage the development badly needed of affordable housing.

On the same day, the Mayor participated in the ground breaking for the innovative affordable housing development in Gentilly which will provide affordable housing and services to returning wounded veterans and their families. This unique housing initiative is being developed by Bastion and Renaissance Property Group. Jones Walker LLP was proud to represent the development team and assisted with securing funding for the project.

The Mayor’s plan will be another success story for the City of New Orleans and Jones Walker looks forward to being part of implementing this initiative.

Interim Hearing of the Texas House Committee of Urban Affairs

Pic from  testimony

On May 23, 2016, the Texas House Committee of Urban Affairs held a hearing to hear invited testimony on several of its interim charges. I was invited to provide testimony at this hearing. These interim hearings are very important as they inform our legislators on issues within the mission of the committee as well as begins to shape potential legislation for the upcoming session.

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