NH&RA member firm, Gallagher Evelius & Jones LLP, has drafted an excellent summary of notable 2011 affordable housing policy changes for the Maryland Affordable Housing Coalition. The memo summarizes a number of federal and local policy changes impacting the Low-Income Housing Tax Credit (LIHTC), compliance issues, the New Markets Tax Credit (NMTC), New Issue Bond Program (NIBP) as well as Maryland specific programs. The entire text of the memorandum is provided below.

M E M O R A N D U M

TO: Maryland Affordable Housing Coalition
FROM: Gallagher Evelius & Jones LLP
RE: Affordable Housing Highlights of 2011
DATE: January 6, 2012

Below we briefly describe many of the notable changes during 2011 affecting the affordable housing industry in Maryland. If you would like additional information about these changes, or any other issues relating to affordable housing, please feel free to contact Tom Lewis, Dave Raderman, Nita Schultz, Kevin Davidson, Ken Gross, Mike Henigan, Natalie Sherman, Kirsten Woelper, Jessica Weston, Ben Rubin or Alison Lambert.

I. Federal Highlights

A. Sunset of the Fixed 9% Credit
Currently, the credit percentage for new construction and qualifying rehabilitation expenses is fixed at 9%. Note that without this special, temporary rule, the credit percentage for projects placed in service in January 2012 would be 7.44%. The 9% fixed credit percentage only applies to buildings placed in service prior to December 31, 2013. The sunset of this provision will begin to have an impact on transactions in 2012 as investors become more concerned that projects could have issues in meeting this deadline. While extensions of this deadline have been introduced in Congress, at this point, there is no clear path to have this provision extended.

B. Survey of 2012 IRS Rulings
In Chief Counsel Memorandum 201136023, the IRS described how the low-income housing tax credit (“LIHTC”) recapture rules apply in relation to closed tax years. One determines LIHTC recapture by comparing qualified basis in the prior years. The taxpayer argued that there was no recapture because basis adjustments for the year at issue also applied to prior tax years that were closed from IRS review due to the statute of limitations. The IRS, citing a recent tax court case, said that the taxpayer was required to analyze recapture without applying the current year’s basis adjustment to the closed tax year. Therefore, there was a reduction in basis from one year to the next year and recapture occurred.
In Chief Counsel Memorandum 201146116, the IRS made clear that termination of an extended use agreement caused by foreclosure or a deed in lieu of foreclosure does not result in automatic recapture so long as the general rules for disposition are followed. Therefore, no recapture occurs on disposition if the building continues to be operated as a qualified low-income building for the remainder of the LIHTC compliance period.
General Counsel Memorandum 20114704 describes the income tax aspects of the sale of Massachusetts state tax credits. Note that Maryland historic tax credits could be subject to this analysis through the application of the controversial Virginia Historic Tax Credit Fund case that treated state credits as property for federal income tax purposes.
In Private Letter Ruling 201149011, the IRS ruled on the separate leasing of townhouse garages. The townhouse living space was rented separately from attached garages. There was no access to the garages unless the tenant separately rented the garage, and the garages had separately metered utilities. There was alternative parking available. The IRS ruled that the fees for renting the garages did not constitute rent for purposes of calculating maximum LIHTC rent, and the cost of the garages was not included in basis qualifying for the LIHTC.

C. IRS Compliance Guide
In January 2011, the IRS issued and updated the Guide for Completing Form 8823, Low-Income Housing Credit Agencies Report of Non-Compliance or Building Disposition. The biggest changes related to clarifications and additional examples relating to when units are considered out of compliance and then back in compliance based on issues relating to rent restrictions and utility allowances. In addition to other changes, there are also changes and clarifications in relation to reporting correction of non-compliance and calculating household income.

D. New Markets Tax Credits
The New Markets Tax Credit Compliance and Monitoring Frequently Asked Questions (FAQ) was updated in September 2011. While the NMTC cannot be used in conjunction with the LIHTC, there are many NMTC mixed-use projects that include an affordable housing component. The updated FAQ clarifies how to calculate tenant income and the requirements relating to income certifications.

II. Maryland Highlights

A. 2011 Maryland Qualified Allocation Plan and Multifamily Rental Financing Program Guide
Governor Martin O’Malley signed the 2011 Maryland Qualified Allocation Plan (the “QAP”) and the 2011 Multifamily Rental Financing Program Guide (the “Guide”) on January 24, 2011. All applications submitted after that date must comply with the 2011 QAP and Guide.
The 2011 QAP did not make significant changes to the prior QAP. Among other changes, the application fee increased to $1,500 ($2,000 for combined credit and multifamily rental housing funds applications) from $1,000, and the compliance monitoring fee increased to $30.00 per unit from $25.00 per unit.
The 2011 Guide included changes to the 2008 Guide affecting both threshold and scoring criteria. Total points were reduced from 325 to 315. (As we described in last year’s update, a November 2010 draft of the 2011 Guide would have used a 320 point scale. Under the category of “Project Location and Marketability,” the November 2010 draft Guide would have awarded up to 10 points for projects in “Communities with Indicators above Statewide or County-wide Averages.” The final 2011 Guide narrowed this category to cover only projects in “Communities with Indicators above Statewide Averages” and awarded only 5 points for such projects.)
The scoring changes from the 2008 Guide included increased emphasis on development team financial capacity and reduced emphasis on income targeting and tenant services (though additional tenant services provisions have been added to the threshold requirements). The 2011 Guide also increased the maximum loan amount to $2.0 million from $1.5 million (though applicants previously could request an increase to $2.0 million); clarified the definition of elderly housing to make clear that a waiver is required if any unit would be rented to a household in which no member is at least 62; added an income restriction of 50% of AMI for the housing for individuals with disabilities incentive; and capped certain fees (e.g., builder and civil engineer fees). In addition, the annual investor services fee that can be paid prior to payment of any Maryland Department of Housing and Community Development (the “Department” or “DHCD”)) loan payment was increased from $2,500 in the 2008 Guide to $3,000 in the 2011 Guide. The 2011 Guide also required, with certain exceptions, energy audits to be conducted and submitted for projects seeking funding.
The 2011 QAP and the Guide are available as attachments to DHCD Notice 11-02 at www.dhcd.maryland.gov/Website/programs/rhf/archives.aspx.

B. Calendar Year 2012 LIHTC Competitive Funding Round Deadline
On December 9, 2011, the Department announced that, in connection with making its Fall 2011 competitive funding round awards, it has forward reserved all of its calendar year 2012 Federal Low Income Housing Tax Credits. The Department will therefore wait until Fall 2012 to hold its next competitive funding round, at which time calendar year 2013 LIHTC and fiscal year 2013 Rental Housing Funds (“RHF”) will be made available. The application due date for the Fall 2012 competitive funding round is Tuesday, September 11, 2012. See above, Section I.A., for the current sunset of the 9% credit.

C. Sustainable Communities Tax Credit
In 2010, Maryland renewed and expanded its historic tax credit program in the form of the Sustainable Communities Tax Credit (“SCTC”). Md. Code Ann., State Fin. & Proc. § 5A-303. As under the prior version of the program, a taxpayer can claim a refundable tax credit in the year a certified rehabilitation is completed equal to 20% of the qualified rehabilitation expenditures on a certified historic structure. Under the 2010 expansion, the credit percentage increased to 25% if the certified historic structure attained a LEED gold rating or a comparable rating under a nationally recognized system. In addition, a substantial rehabilitation of a non historic building can qualify for a 10% credit under the expanded SCTC program if (1) the building is located in a designated “Main Street Maryland Community,” or, beginning in 2012, the building is located in a “Sustainable Community,” which are certain designated areas of the State either intended for BRAC development or transit-oriented development or conforming with the Maryland’s “smart growth” policies, and (2) certain requirements with respect to retention of exterior and interior walls are satisfied. On November 7, 2011, the Department and the Maryland Department of Planning announced the designation of Aberdeen, Cumberland, Hyattsville, Laurel and Westminster as Sustainable Communities.
Aside from those designations, there were a few other minor changes made to the SCTC program in 2011. Effective July 1, 2011, the SCTC statute was amended to increase the maximum fee that can be charged by the Maryland Historical Trust (“MHT”), which administers the program, for certifying qualifying rehabilitations. Md. Ch. 383 (2011); Md. Code Ann., State Fin. & Proc. § 5A-303(b)(6)(iii). Under this authority, MHT now charges 3% (up from 1%) of the amount of the anticipated credit for the initial certification of a qualifying commercial rehabilitation, and 3% (up from 1%) of the amount of the greater of the final or initially estimated credit for the final certification of a non-commercial rehabilitation. The SCTC statute was also amended effective July 1, 2011, to allow applicants to obtain the SCTC for commercial projects for which a substantial part of the proposed rehabilitation begins prior to the initial application being submitted to MHT so long as the rehabilitation work has been approved under the Federal Historic Tax Credit program. Md. Ch. 133 (2011); Md. Code Ann., State Fin. & Proc. § 5A-303(b)(4)(ii). Prior to this change, the SCTC was not available for commercial projects if a substantial part of the proposed rehabilitation work began before the initial application was submitted.
Finally, a legislative proposal in 2011 to permit the owners of an entity receiving the SCTC to divide the credit among themselves pursuant to the entity’s partnership agreement, operating agreement, or other similar agreement was defeated. Instead, the credit continues to have to be allocated among the owners in accordance with their respective profits interests, in the same manner that the Federal Historic Tax Credit is allocated.

D. Extension of New Issue Bond Program; Maryland Has Utilized Full Capacity
The New Issue Bond Program (“NIBP”) was established by the Housing and Economic Recovery Act of 2008 to provide low-cost tax-exempt bond financing for affordable housing projects. The United States Treasury (“Treasury”), which administers the program, originally awarded the Department approximately $90 million in NIBP capacity, and subsequently increased the allocation. DHCD Loans funded under the program have favorable terms: a 40-year term, an interest only period of up to 24 months for new construction or substantial rehabilitation projects, and a fixed interest rate in the mid-4% range. The bonds must be credit enhanced or guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration.
Treasury originally required all NIBP bonds to be issued in a maximum of three closings to be completed by the end of 2010, but in late 2010 Treasury increased the number of closings that could occur to six and granted an extension for the closings until December 31, 2011. On November 23, 2011, Treasury announced a further extension of the program through December 31, 2012. The Department confirmed that by the end of 2011 it utilized its full allocation of NIBP capacity to provide this favorable financing. The program may, however, be available in other states of interest to MAHC members.

E. Be SMART Program
In March 2011, the Department announced the Be SMART (Save Money and Resources Today) Multifamily Program. Under the program, the Department provides direct loans to applicants for energy efficiency retrofits of existing affordable rental housing developments in Maryland. Program funds can also be used to establish loan loss reserves to induce private sector lenders to make loans for the same purpose. Funding for the program is provided through the U.S. Department of Energy’s Better Buildings Program, which awarded Maryland $20 million in funding for the Be SMART Multifamily, Be SMART Home, and Be SMART Business initiatives to fund energy efficiency improvements. To date, the Department has loaned a total of approximately $1 million to three affordable rental housing projects under the Be SMART Multifamily program.
More information on the Be SMART Multifamily program — including program terms and requirements, and links to application materials — is available at www.mdhousing.org/website/programs/besmart/multifamily.aspx.

Gallagher Evelius & Jones LLP has been involved in cutting-edge affordable housing transactions for more than 40 years, serving as counsel for developers, syndicators, and investors in more than 1,000 low-income housing tax credit projects nationwide. Gallagher also assists clients with compliance and property management issues. For more information on our firm and our affordable housing practice, our website is www.gejlaw.com.

THIS MEMORANDUM IS INTENDED FOR INFORMATION PURPOSES ONLY AND IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS MEMORANDUM.