On April 3, the IRS issued Revenue Procedure 2019-17 (Rev. Proc.), offering additional guidance on the public use requirement applicable to multifamily housing bonds under Section 142(d) of the Internal Revenue Code. This new guidance provides that a qualified residential rental project will satisfy the public use requirement, and thus qualify for tax-exempt financing, even if the project contains units that are reserved for, or are prioritized for, certain specified groups, such as veterans and artists.
The Rev. Proc. harmonizes the public use requirements applicable to housing bonds, with those applicable to low-income housing tax credits under Section 42 of the IRS code. Consequently, housing developments that give preference to veterans, to other members of a specified group under a federal or state program or policy that supports housing for such a specified group, or to artists may qualify for both low-income housing tax credits and tax-exempt financing using housing bonds.
Housing bonds are bonds issued by a state or local government to raise money for affordable housing development. Typically, the proceeds of housing bonds are loaned to a developer to finance the costs of constructing or rehabilitating low-income multifamily and senior housing projects. The IRS code imposes various requirements that a developer must satisfy for interest on the housing bonds to be and remain excludable from gross income for federal tax purposes.
Pursuant to Section 142(d) of the IRS code, a developer may use the proceeds of housing bonds to finance the costs of developing a “residential rental project” that, at all times during the qualified project period, meets certain tenant income guidelines. A residential rental project is defined as a building or structure that contains one or more similarly constructed units that are used for other than a transient basis and are available to the “general public.” Section 1.103-8(a)(2) of the Treasury regulations provides that units are not available to the general public if they are provided only for members of a social organization or a particular group. For example, an apartment building for which employees of an adjacent factory are given preference over other potential tenants is not available for use by the general public.
Low-income housing tax credits are financial incentives to encourage developers to create affordable housing. Section 42 of the IRS code provides for a low-income housing tax credit in an amount equal to the applicable percentage of the qualified basis of certain buildings within a qualified low-income housing project. A project that is not for use by the general public is not eligible for low-income housing tax credits. Section 42(g)(9), however, clarifies the application of the public use requirement to certain groups. A project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants (A) with special needs, (B) who are members of a specified group under a federal or state program or policy that supports housing for such a specified group, or (C) who are involved in artistic or literary activities. The Rev. Proc. notes that certain federal or state programs support housing for military veterans. Section 142(d) does not contain a similar provision applicable to housing bonds, and this discrepancy has led to some confusion among practitioners and market participants.
The Rev. Proc. clarifies matters by providing that a “qualified residential rental project” under Section 142(d) (meaning, a project financed with housing bonds) does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants described in Section 42(g)(9) (for example, certain housing preferences for military veterans, artists, etc.). In essence, the Rev. Proc. extends the applicability of Section 42(g)(9) to housing bonds. The result is that low-income housing tax credits and housing bonds may be used together to finance residential rental projects that provide preferences to veterans, artists and other groups identified under a federal or state program or policy. This combination facilitates the development of affordable housing for lower-income families in these targeted groups.