Richard Michael Price, Esq.
Counsel to CARH
Nixon Peabody LLP
202.585.8716
News from Washington
I think the underlying theme you’re hearing today is that there is renewed interest in Rural Housing. That is very important. There was a period of time a few years back when it was more difficult than present to get folks on Capitol Hill to pay attention.
I think Housing in some respects is a victim of its own success because we’ve solved a lot of problems over the last 50 years. You know that if you’re not in crisis, you don’t get the same measure of attention. That all being said, there was a period of time, about ten years, when Congress didn’t have any hearings about Rural Housing. That has changed over the last couple of years; I think it has changed because of the hard work of the Ray James, Colleen Fisher, and everybody here in this room. Keep it up.
Renewed Focus on Rural Housing
It is important to communicate these issues to your Members of Congress and your Senators. It is interesting, and it may be in part, that some of the Chairmen are from rural areas, but they are also listening and staff are sensitive to it. I think we have the opportunity to get some additional benefits for Rural Housing.
Also, there is a need. It is being characterized by some folks in the Administration as an emergency; I think that is kind of necessary. The 515 portfolio is aging; there needs to be some restructuring, which has been the topic of the Comprehensive Physical Assessment (CPA) and it has been the topic of discussion at least in the latter stages of the publication of the 3560 regulations.
The litigation, both Franconia and Kimberly, has been one way of getting attention to the program. Franconia was filed about a decade ago. One notion was that there could be a collateral benefit to these kinds of suits. There has been on the HUD side and on the Rural Housing side because when Congress won’t act, Courts sometimes will, and they have in those cases. While it has been helpful and beneficial to the litigants, it is also beneficial to raise the awareness, the interest and the concern, if need be, of the folks in the Administration. Rural Housing Service Administrator Russ Davis has mentioned in a couple of speeches that he is concerned about the lawsuits, and most recently concerned about the Kimberly lawsuit because that is likely to grow and essentially strip him of the ability to enforce the prepayment prohibition.
Positive Energy in Administration
I think what we also have is sort of a change in temperament. I don’t know if this is luck or happenstance or anything of that nature, but the folks we have now at Rural Housing I think for a while have been focussing on what’s needed for the portfolio. Now we have folks that are educated and trying to get more educated in restructuring and essentially being market participants. I think that Jack Gleason said to us at one point that we want you to make money because we want to make money with you. For a Government official to say something like that, that is a wonderful thing to hear because these are businesses, these are bricks and mortar, and if it is not generating income, you can’t take care of the residents. It is just that simple.
So there is a lot of positive energy out there within the Administration, however they may have bitten off a little more than they can chew right away. I think that is reflected in the fact, much to my disappointment, that there really wasn’t any firm legislation coming from the Administration to the Hill in what folks inside the Beltway would view as timely. That is a bit of a concern; it also gives me a little bit of concern because the 3560 and the 3565 regulations, 515 and 538, are for Interim for Effect and we don’t really have an idea as to when the fixes that need to be made, will be made, and will be implemented.
The slower the legislation goes, the less attention the staff will have for these important details such as setting management fees. So one things slows up another. As slow as it has gotten, it is not as slow as it could be or as slow as it perhaps was in the past. There has been a lot of energy and effort that should be continued.
The fact is that from the White House down, folks care enough to send a letter from President Bush to this meeting. I kid a lot about this stuff, but if those folks are able to care enough about us to essentially communicate with us at some level — let them throw home ownership in there — it really showed a tremendous amount of progress and positive communication. Maybe ten years ago, the folks in the White House may not have been as interested to know about us.
I remember when I did some work on the Clinton campaign back in 1992 I had to spend a lot of time explaining to the people within that campaign, who in theory were pro-Housing, what we do in this industry. So the fact they are already sensitive that we are out there working hard, and we’re on the same team does bridge a lot of that communication gap.
Better Than at HUD
What’s happening in rural Housing is actually a lot better than what is happening in the larger Housing industry. I think from an administrative point the attitude of the folks at HUD, the sort of off-the-record conversations with HUD staff — they are very dark. Maybe because many of them are reaching retirement age, maybe because some of the third rail of housing programs are being touched such as the restructuring of the Voucher program. Even the darkest discussions with the Rural Housing Service are far brighter than the average discussions with HUD these days.
We had a short period of time around 2000 and 2001 where some of those conversations at HUD lightened, but it’s gotten kind of difficult again. We keep plugging away. When the Administration proposed moving CDBG from HUD to Commerce, there were a lot of people at HUD we spoke to, even folks within the Administration, they just didn’t want to get up in the morning. They were far more negative than we were and they were inside the Administration. Things do have a way of balancing themselves out.
The Affordable Housing industry right now is geared a bit more toward rural housing than I think any other category. Indeed, the majority of QAPs (Qualified Allocation Plans) issued by the Housing Finance Agencies in the Tax Credit program favor rural areas. This wasn’t the case a few years ago. Between additional weighting, additional points for regional set-asides (I think Nevada actually has a Rural Development set-aside), this is a level of focus and emphasis we didn’t have a number of years ago.
Year 15 Properties
Sort of the collateral emphasis is on the Year 15 Tax Credit properties. A few years back, about three or four years, most Tax Credit agencies did not want to talk about, did not want to spend additional resources, resyndicating existing Tax Credit developments. That has now become a very important topic; a couple of states have issued Year 15 plus compliance rules for properties after the 15th year that have an extended use agreement.
A couple of states have also issued regulations regarding the 15 year, I’ll call it right of first refusal under the Tax Credit program; once you reach your 15th year, you have the ability to essentially ask the HFA to find a nonprofit to purchase your property. That has gotten them thinking about recycling and resyndicating old Tax Credit projects. Now that’s important to know because many folks in this room have Tax Credit projects, many of them 515s in tandem with Tax Credits. That also gives a double whammy of interest and movement.
At the same time we have a kind of frothiness in the Tax Credit industry with important stories of 100 cents on the dollar Tax Credit valuation. Some syndicators are setting up programs to help educate the developers on underwriting and help give them additional capacity for underwriting. That’s tremendous competition; that’s wonderful; that helps us do things as an industry: like support and lobby for legislation that was put into place that’s been proposed mainly by Congressman Rangel (D-NY) and Congressman Johnson (R-CT) for an increase in the Volume Cap to a whopping $3.70. I saw that and could only hope. You don’t ask, you don’t get. The fact that a few years ago folks in some states didn’t know what to do with the Volume Cap increase when it went from $1.25 to $1.75, and the fact that we’re talking about that again in a particularly tight budgetary climate is a positive on the Tax Credit side.
Also, interestingly, the legislation looks to change the name of the Low Income Housing Tax Credit program to the Affordable Housing Tax Credit. Long ago we decided to change the name anyway which is why the Affordable Housing Tax Credit Coalition is the Affordable Housing Tax Credit Coalition. There is something to be said for optics: low income people? not so much; affordable? affordable is good.
Reportable Transaction?
I was always stunned — over the years you’ll see statistical reports of people interviewed about low income, moderate income and middle class and questions will be asked about people’s perceptions. You’ll see that people in the middle 60% of the income range, the bottom of which dips all the way down into just the top of the poverty line, and it always fascinates me that people in that group who are clearly not middle class, how they conceive of themselves as middle class. They’re not poor — there would be a certain negativity that people don’t want to admit to themselves. Low Income Housing Tax Credit doesn’t imply Affordable. We can all get into an Affordable Housing Tax Credit. Everyone’s housing can be Affordable. The fact that some folks are spending time on that is a positive.
In the Tax Credit field now, as a technician, I think there are two things that are of interest. On the Low Income Housing Tax Credit side we have a bit of frenzy about Reportable Transactions; I’m not entirely sure what I mean by that, so I can’t really tell you. This also is a lesson to read the fine print in any kind of legislation; the American Jobs Creation Act which came out October 22, 2004 did a couple of things which were very beneficial and probably everyone in the room benefitted just a little bit. But, one of the things it did, is it stiffened the requirement for reportable tax shelters; Low Income Housing Tax Credits could be a tax shelter. Very likely it was not a Reportable Transaction up until that time, but now it is.
There is an industry effort that is under way to get clarification from the IRS as to what that means. Essentially Tax Credits should not mean the kind of Reportable Transaction Congress that is looking for. This is essentially to get rid of the kinds of problems with Enron; including people pounding the street and saying they have a neat tax dohicky: if you buy insurance in Mozambique and you sell your property in Dubuque and you do it at the same time, it won’t cost you any tax dollars — I don’t understand it either. But there were these kinds of invented schemes.
Burden of Reportable Transaction
Low Income Housing Tax Credits, Historic Preservation Tax Credits and New Markets Tax Credits are not those kinds of things. These are very plain vanilla in many respects, they are complicated but they are right down the middle. There’s clear statutory language; where it’s not clear folks usually spend a lot of time with the compliance offices over at the IRS.
Still, people are very literal over at the IRS. And so we have to be a bit careful. For the time being, if you have a Tax Credit syndication which basically requires certain contractual guarantees and whatnot, you are arguably in a Reportable Transaction. If you are a Material Adviser, and this is where it gets very tricky, you have to file a Reporting Statement, Form 8264; if you have to file an 8264 you have to file an 8999 with your tax return. These Forms themselves are still in process — that they exist, that they are being changed literally as we speak.
So there’s a lot of confusion; even if you’re just a developer and you say I’m not really marketing these Tax Shelters, what you want to do is the next time you get to closing, talk to your accountant or attorney because you probably do need to report something at least for the next few months or so until there are additional clarifications.
New Markets Tax Credit Sunset
The other thing I think is sort of a hidden issue, that I hope remains something of a non-issue, that you don’t normally hear too much, is the Sunset of the New Markets Tax Credits. We just had the third funding on New Markets Tax Credits, another rousing success with far more applications than money. This is a good thing. There was about $2 Billion given out to 41 community development organizations.
But it is going to be time very soon with a 2007 Sunset to start the process of reminding Congress that New Markets need to be renewed; it is only 2005, but these things take time. So we’re probably going to have a little bit of a battle, just because of budgets and whatnot, to tell our story of success on New Markets Tax Credits. For those folks that are thinking of using it and using it, now is the time as people are starting deals now or in the next 12 months, those will be the success stories by the time 2007 rolls around.
One more thing is that a couple of groups have gotten together for something called ÒThe Campaign for Affordable Housing.Ó It is a very good marketing effort and is one you should think about; I think we have an excellent story to tell and the more we can work together to tell that, the more we can generate the additional support we would like and need. Nixon Peabody is providing some pro bono to it, but basically it’s the kind of thing that builds on a group like CARH.
CARH itself has been amazingly active in basically all these efforts. Because of the focus of Rural Housing it is an interesting dynamic to see. Whereas maybe a couple of years ago some other groups might have taken the lead, you now have the groups bringing issues to CARH in a way they didn’t used to. I think that’s to everyone’s credit.
Exit Tax Relief
Exit Tax Relief. There’s always something else to talk about. This is something that’s on everyone’s mind. Basically CARH has been working with a number of other groups to provide a rational voice, leadership and some focus on the notion of exit tax. Mainly for properties that were developed before the 1986 change to the IRS Code (which added Tax Credits) but really for any property. The change in the Passive Loss rules is such that when people go to sell their apartment complexes, they find there is a large negative capital account. Well, you sell the project, that turns into money on some level; in other words, you’ve been taking tax benefits for many years and at some point the cash and taxes have to catch up to that tax benefit.
These are tax shelters, not tax exemptions; these are income tax deferrals. As the properties have aged, there is a desire to sell some of them. Folks want to retire, folks want to cash in, folks want to do a bunch of different things. But you really can’t do that because of the change in the tax rules as well as the mounting tax burden.
There has been an effort under way to remove some of these exit taxes. Really what they are is sort of a phantom income tax — capital gains or ordinary income tax — when you don’t have any cash to pay those taxes with because, again, these are accounting devices that accrued over the years. There was a piece of legislation introduced in the last Congress by Congressmen Ramstad (R-MN) and Cardin (D-MD) that tackled a good chunk of the issue, but it sort of got out ahead of the industry and left out a few important points. The industry got together, had a series of meetings, and cobbled together a piece of suggested legislation to basically guide the staff in Congressmen Ramstad and Cardin’s offices as well as others as to what we need in the industry. That is a positive effort for when we have a Tax vehicle that starts really moving. There is a lot of support in trade groups. There isn’t complete unanimity.
We’ll see how it goes this year, but these things are multiyear efforts. If not this year then maybe next.
Thank you.
Next: News From Washington cont’d