1. 2008 REAL ESTATE UPDATE December 10-12, 2008 San Juan, Puerto Rico REVIEW OF THE RECENT HOUSING AND ECONOMIC RECOVERY ACT OF 2008 Monica Hilton Sussman, Esq.

2. 2 Background Signed by President Bush on July 30th, which becomes the Date of Enactment for certain provisions The Housing Credit provisions are the most significant changes to the program in almost 20 years The Act provides additional flexibility and simplification that will make more properties financially feasible The changes are expected to stimulate investment in Housing Credit properties

3. 3 HUD and LIHTC Program Coordination HUD given 6 months to implement the law Objective is to improve efficiency, simplify and establish time deadlines, and request additional funding for staff, if needed Required to consult with IRS as well as industry and provide a report to Congress within 9 months

4. 4 FHA Mortgage Insurance and LIHTC Elimination of the subsidy layering process for projects with FHA insurance Exempt FHA projects with LIHTCs from HUD cost certification, if at the time of firm commitment the loan-to-cost ratio is below 80% HUD issued a memo in July addressing the need for escrowing LIHTC equity The law eliminates the requirement for escrow and/or letter of credit altogether.

5. 5 FHA Mortgage Insurance and LIHTC (continued) Exempts FHA-insured projects if tax credit agency is doing inspections (presumably from REACS). As to other compliance monitoring, if HUD determines the HFA monitoring is sufficient to ensure compliance with HUDs requirements, then it too need not be performed (for MORS ?) Pilot for streamlined reviews for FHA loans where LIHTCS are being used (instructions to be issued within 180 days of enactment)

6. 6 Project Based Vouchers (PBV) Increases the term of a PBV contract from 10 to 15 years and allows public housing agencies (PHAs) to commit to unlimited renewals The PBV per-building limitation (no more than 25% of the units unless it is elderly or there are family self-sufficiency services provided) is now calculated on a project-wide basis PBVs are permitted for elevator and coop buildings

7. 7 Project Based Vouchers (PBV) (continued) Subsidy layering is not required for existing building or if the HFA has conducted SLR Environmental review is not required before PHA enters into a HAP for existing buildings, unless otherwise required by law or regulation

8. 8 Project Based Vouchers (PBV) (continued) Rent floor is established Rents for units in LIHTC projects need not go through rent reasonableness test if the PBV rent does not exceed the LIHTC unit rents, but also is not in excess of the PHA payment standard for the unit size The law codifies HUD policy that for determining rent reasonableness voucher rents are to be compared with the private, unassisted market, up to the greater of the tax credit rents for comparable units or the housing authority –established payment standard. (Seems not to apply to PBVs)

9. 9 Section 202 Provides for delegated processing to state or local agencies with underwriting experience (not limited to LIHTC mixed finance transactions) HUD retains approval on rents and development costs and will issue commitment within 60 days of receipt of commitment from delegated agency

10. 10 Rural Housing No clear implementation date RHS and IRS have a mandate to coordinate the Section 515 policies with IRS policies when using LIHTCs. RHS shall facilitate timely approval of transfer requests (this is not the same as the pending 515 transfer legislation, but should help move application along) RHS to outreach to industry in implementation

11. 11 Federally Subsidized and Below Market Federal Loans The Act eliminates the unfavorable treatment for below market federal loans As a result, new construction and substantial rehabilita- tion expenditures will qualify for 9% credits even if the project receives a below market federal loan -- a loan of federal funds with an interest rate below the applicable Federal rate Effective for PIS after 7-30-08

12. 12 Definition of Federally Subsidized Building Tax-exempt bond financed projects are still federally subsidized and therefore will only be eligible for the 4% credit The provision prohibiting the 30 percent basis boost for below market HOME loans receiving 9% credits is repealed Huge opportunities here to greatly reduce back-end residual value issues But, it may be difficult to restructure already funded loans because of debt cancellation rules

13. 13 Treatment of Federal Grants and Subsidies Rental, operating, and interest reduction payments are not considered federal grants requiring a basis reduction Loans made from the proceeds of federal grants are also okay. E.g., loans provided through exempt organizations

14. 14 Treatment of Operating Subsidies Treasury is directed to amend its regulations so that the following are not considered federal grants: –(1) Sec. 521 of the Housing Act of 1949 –(2) 538(f)(5) of the Housing Act of 1949 –(3) Section 236 IRPs –(4) section 202 of the Housing Act of 1959 –(5) section 811 of the Cranston-Gonzalez National Affordable Housing Act –(6) modernization, operating, and rental assistance pursuant to section 202 of the Native American Housing Assistance and Self-Determination Act of 1996 –(7) title IV of the McKinney Homeless Assistance Act –(8) section 212 of the Cranston-Gonzalez National Affordable Housing Act (continued on next slide)

15. 15 Treatment of Operating Subsidies -- 2 –(9) AIDS Housing Opportunity Act –(10) per diem payments under section 2012 of title 38 –(11) rent supplements under section 101 of the Housing and Urban Development Act of 1965 –(12) assistance under section 542 of the Housing Act of 1949 and –(13) any other ongoing payment used to enable the property to be rented to low-income tenants. Effective Date is PIS after 7/30/08, but this is not intended to create any inference with respect to pre-Act treatment. What does this mean?

16. 16 Modification to 10-Year Placed-In-Service Rule The Act creates a new exception to the ten year rule – the ten year rule does not apply to projects substantially assisted, financed or operated under many federal or state housing programs similar in purposes to the federal programs. (discussed more on next slide) This new exception replaces the Treasury waiver provisions regarding HUD and RHS properties The 15-year Prior Compliance Period Rule for acquisition credits still applies to existing Section 42 projects

17. 17 Substantially Financed, Assisted, or Operated The new rule impacts properties substantially financed, assisted, or operated under: –Section 8 of the United States Housing Act of 1937; –Sections 221(d)(3), 221(d)(4), or 236 of the National Housing Act; –Section 515 of the Housing Act of 1949; –any other housing program administered by HUD or the Rural Housing Service; –or any other similar state housing programs What does substantially mean? Is there an old and cold requirement?

18. 18 Miscellaneous Provisions The Act repeals the prohibition on the use of Housing Credits with properties that were assisted under the Section 8 Moderate Rehabilitation program The period for satisfying the 10 percent test for carryover allocations is lengthened to one year after the date of the carryover allocation. Remember: states can still have their own rules.

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