One of several uncertainties facing developers and their financial partners in LIHTC transactions is the precise equity that can be generated by each dollar in federal low income tax credits. Of course, some of this uncertainty is a result of basic market forces, including the demand by CRA investors. However, there is another risk which the federal government could eliminate: the floor or minimum tax credit rate to investors. The value of the tax credits are determined for 70% (commonly known as 9% credit) and 30% present value (4% credit) and these values float based on the formula that fluctuates with federal borrowing rates. As a result of reductions in the federal borrowing rates over the past several years, the credit rates have declined. Now actual credit rates are about 7.5% for “9%” credits and 3.2% for “4%” credits. This year congress could fix a permanent floor for the value of the credits so that those who are awarded the credit can depend on it being worth the full 9% or 4% of eligible basis in a project. On August 5th, the Senate Finance Committee reported out a bill that included both the 9% and 4% floors as well as a slew of other provisions that could add extra value for investors. These included 50% first year bonus depreciation, a Section 45L energy tax credit, an option to elect to claim the Investment Tax Credit (ITC) rather than the Production Tax Credit (PTC) and a renewable energy production tax credit. The Section 45L energy tax credit could be worth $2000 per unit and accounting firm founder, Michael Novogradac, estimates that the bonus depreciation could add an extra 0.5 to 1.5 cents per dollar for each housing tax credit. These provisions have the potential to add equity to a deal, which may become even more important if interest rates rise as expected, increasing the amount of equity that must be in the deal. The House of Representatives Ways and Means Committee did not consider a companion bill. Separately, they approved a bill that would make a 50% bonus depreciation permanent. But soon – as soon as this week – both the House and Senate may agree on a tax bill that addresses these issues. The vehicle that may drive these is the so called “extenders” bill, which temporarily renews 52 expiring tax provisions.
This year House Republicans are pushing to make many of these tax provisions permanent. In an offer made to the Senate, the House has included the extension of the minimum 9% floor. Republicans in both the House and the Senate are pushing hard for an expanded bill that would make a number of temporary provisions permanent, including the Research and Development Tax Credit, which has been “temporary” and renewed for over 30 years! If the respective bodies and leaders can agree on this larger tax package, there is a reasonable chance that the 9% and 4% floors could be made permanent. Given the late date and the differences over family tax credits however, it looks more likely that we will end up with an bill that extends the credits for two years. In this scenario, it seems probable that the 9% floor receives the same two year extension.
There is a reasonable chance that the extension includes the 4% credit as well. The bill could be on the floor for a vote as early as December 11th. It’s important that all of us who value the certainty of a LIHTC floor that we each reach out to our Senators and House Members to ask them to weigh in. The two year extension would simply take us through 2016 (the 2015 year “extension” would be retroactive). So get ready to advocate for permanence again next year if we end up with the expected temporary extension. The good news is that we have the floor language in play as a result of good industry advocacy. Your advocacy here can make a difference.