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CDFA Spotlight:
Qualified Residential Rental Projects
By Stan Provus |
Preview
This article examines multifamily housing bonds. A number of CDFA members issue multifamily housing bonds and many local IDA’s are interested in them.
Body
Multifamily housing bonds are intended to provide more affordable rental housing for low and moderate-income families. The Internal Revenue Code (IRC) limits the use of tax-exempt bond proceeds to complete living units rather than sleeping facilities for transients. Hotels, motels, dormitories, rooming houses, nursing homes and trailer parks, among other types of facilities are considered to be used on a transient basis and are NOT residential rental property. All units must have separate cooking and sanitary facilities.
Basic Rules
There are many IRC rules governing the issuance of tax-exempt multi-family housing bonds under section 142. These include:
- A number of the rules applicable to all types of private activity bonds including taking official action (bond proceeds may not be used to merely refinance an existing facility); the 95% test—95% of net bond proceeds must be used to provide a residential rental project; no more than 25% of bond proceeds may be used to purchase land; 15% of bond proceeds, excluding land costs, must be spent for rehabilitation when acquiring existing properties; and the project must receive an allocation from the states private activity bond volume cap.
- Low or Moderate Income Occupancy Rule. For a residential rental project to qualify under IRC section 142(d), it must meet one of two income occupancy tests. Either 20% or more of the units must be occupied by individuals whose gross family incomes is 50% or less of the area median gross income (the “20-50” test), or 40% or more of the units must be occupied by individuals whose gross family incomes is 60% or less of area median income (the “40-60” test). The income requirements are commonly referred to as “set-aside” requirements. Once 10% of the units in a project are occupied, 20%-40% of the units must be occupied by individuals or families of low and moderate income as elected by the issuer. The set-aside requirements, plus a continuous rental agreement, must be maintained for at least 15 years after 50% of the units are occupied, the duration of any Section 8 assistance, or as long as the bonds which financed the project are outstanding. Project owners must certify annually to the IRS that the income requirements for the project are satisfied.
- Functionally related and subordinate property to a residential rental project is permitted for such purposes as parking spaces and tenant recreation.
501(c)(3) Projects
Many of the restrictions and rules do not apply to multifamily properties owned by governmental agencies and 501(c)(3) organizations. For example, these owners are not limited by the land acquisition and existing property limitations. Therefore, existing properties may be acquired without performing any rehabilitation. However, if the project is not new construction and the 501(c)(3) borrower does not undertake substantial rehabilitation (generally equal to the cost of the property), then the set-aside requirements described above (section 142 requirements) must be met. New construction or substantial rehabilitation eliminates this requirement although other set-aside requirements may be required (see below).
The IRS has provided a safe harbor for new construction and substantial rehabilitation projects that meet the following test: 75% of the units must be set-aside for low and moderate income families ( 80% or less of the area medium income) and 25% may be unrestricted with respect to tenant incomes. A portion of the 75% of the units that must be set-aside must meet one of the two section 142 income restrictions-- either 20% or more of the residents must have gross family incomes of 50% or less of the area median gross income (the “20-50” test), or 40% or more of the residents must have gross family incomes of 60% or less of area median income (the “40-60” test). For example:
100-unit new construction project
75 units must be set-aside for low to moderate-income families
40 units could be set-aside for tenants with incomes at 60% of the area medium income
35 units would have to be set-aside for tenants at 80% or less of the area medium income
25 units would be available without any income restrictions
In addition, if an issuer/project owner elects not to use the safe harbor, they may make application to the IRS for a different tenant income mix under one of five categories such as the elderly and physically handicapped category. The IRS will review the facts and circumstances of the proposal and project, including the non-profit’s public purpose for the project or the relationship of the multifamily development to the tax-exempt purpose of the 501(c)(3) organization. Based on this review, the IRS may approve a less restrictive tenant income plan.
The financing of multifamily properties, that are owned by governmental or 501(c)(3) organizations are not subject to a state’s private activity volume cap.
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
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