Novogradac Report on Tax Credits Transcript: August 25, 2009

Transcription

1 Total Word Count: 1620 (Intro music) Hello! It s Tax Credit Tuesday and I m Michael Novogradac. You are listening to the Novogradac Report on Tax Credits, a weekly podcast presented by Novogradac & Company LLP. Today is Tuesday, August 25th, I am in Central America this week, and I apologize in advance if the audio recording quality is not as good as usual. Next week I am back in the United States and the audio quality should improve. This week we have several major topics to cover. First, we will discuss the most recent edition of the Joint Center for Housing Studies annual report on the state of the nation s housing. We ll also examine a recent law approved in Oregon that sunsets all but four of the state s tax credits. Then we will review the provisions of the Wind Energy Promotion Act. This measure was introduced in Congress last month and would make changes to the renewable energy production tax credit that would make more potential wind power projects financially feasible. 1

2 But first, I d like to remind listeners that there s still time to nominate a low-income housing tax credit project for the Developments of Distinction Awards. The deadline to submit nominations for the Novogradac Journal of Tax Credit Housing is September 1 st -- one week from today. The awards will recognize excellence and honor outstanding achievement in the development of affordable tax credit housing that was placed in service in 2008 and Nominations are open to all with knowledge of a deserving project. Practitioners from all sectors of the LIHTC industry are encouraged to submit nominations. We encourage developers, investors and lenders to submit developments for consideration, including projects that they are affiliated with. Winning developments and their project teams will be featured in the Journal of Tax Credit Housing. The JTCH Developments of Distinction awards will be presented December 3 rd at Novogradac & Company s Tax Credit Housing Finance Conference in Las Vegas, Nevada. We will present the first place award and honorable mentions in each category. For more information about the JTCH Developments of Distinction awards please visit or send an to JTCHawards@novoco.com. That s J-T-C-H-a-w-a-r-ds@novoco.com. Now, let s get started with the housing news. 2

3 Each year, the Joint Center for Housing Studies at Harvard University releases a report entitled State of the Nation s Housing. Not surprisingly, this year s report focuses on two issues, the economy and foreclosures, issues that continue to be at the forefront of housing discussions. The Joint Center reports that these two issues are creating a tug-of-war situation because the increase in single family home foreclosures creates new renters, but the economic recession is preventing renters from being able to make rent payments. The report also indicates that economic conditions are also forcing more families to double-up, while younger adults remain at home or in a roommate situation rather than forming new households. The Harvard housing report for 2009 suggests that while the housing market lies dormant, policymakers could this use opportunity to re-evaluate policies that historically have favored homeownership. The recent home ownership housing bust suggests that these policies need further refinement and balance. The report says quote, With new recognition of the risks that homeownership brings, policymakers now have a chance to develop better ways to place renters who want to buy homes on a secure path to that goal. end quote Despite rising vacancies in both the for-sale and for-rent markets, the Joint Center for Housing Studies finds little evidence so far of broad improvement in housing affordability. Part of the problem is that in recent years many families have become severely cost 3

4 burdened. As of 2007, 17.9 million households were paying 50 percent or more of their income toward rent, a 30 percent increase from Not surprisingly, this problem is more widespread among lower-income households. The good news for multifamily rental housing developers and investors is that basic demographic trends support the need for additional development in this market, especially over the long term. With the sharp decline in production, supply and demand are nearing equilibrium and the change in housing conditions has created an increase in renter households after decades of homeowner growth. The Joint Center for Housing Studies estimates that between 12.5 million and 14.8 million new households will form between 2010 and 2020, depending on the economy s rate of recovery. For a more detailed review of the State of the Nation s Housing report, I refer you to the August issue of the Novogradac Journal of Tax Credit Housing. To learn more about the Journal, simply go to slash products. To request a free sample copy please send an to CPAs@novoco.com. Now, let s talk about a new law in Oregon that will significantly affect all of the state s tax credits. On August 7th, Oregon Governor Ted Kulongoski signed House Bill 2067-B. The new law sunsets state income tax credit programs and increases legislative oversight for programs not required under federal law or the Oregon constitution. The law also 4

5 sets a schedule of sunset dates and program reviews by a state Revenue Committee. The new law will affect two state affordable housing tax credit programs -- the Oregon Affordable Housing Tax Credit and the Farmworker Housing Tax Credit. Oregon Housing and Community Services administers both programs. The affordable housing tax credit s previous sunset date was 2020; the farmworker tax credit did not have a sunset date. The new law sunsets both programs in Bob Gillespie, housing division administrator at Oregon Housing and Community Services, says the farmworker tax credit will be the first program in the state affected by the change. The farmworker tax credit is similar to the federal low-income housing tax credit. It provides a five-year tax credit for the production or improvement of farmworker housing. The housing finance agency can issue farmworker tax credits until 2014 but investors will only be able to use the credits through 2014, which means that any credits issued after 2009 would provide less than the full five-year benefit. Bob Gillespie says that the result is that the tax credit effectively loses 20 percent of its value each year. The state housing finance agency plans to petition the Oregon Legislature during its special session, requesting that the credits awarded between 2010 and 2014 remain five-year credits, rather than capping them in Developers will be able to use the Oregon affordable housing tax credit for its full 20-year term. This is because the affordable 5

6 housing tax credit is not a direct tax credit, but reduces loan interest rates so that developers can provide lower rents for tenants. Gillespie says he expects that the Affordable Housing Tax Credit will survive its sunset review and be continued. Moving on, we have a summary of the provisions of the Wind Energy Promotion Act. In July, Congressmen Collin Peterson and Tim Walz, both from Minnesota, introduced the Wind Energy Promotion Act. Supporters of the measure say the act would enable the Renewable Energy Production Tax Credit or PTC to become an even more potent driver for wind power development. Under current law, individuals can use the PTC to shelter passive activity income from tax liability. If adopted, the Wind Energy Promotion Act would allow the use of the PTC to shelter up to $40,000 of both passive and nonpassive income. Supporters say this change would increase the potency of the PTC because the act would enlarge the pool of investors who can efficiently use the PTC. Individuals typically have minimal passive activity income and therefore do not typically invest in PTCs. But by allowing the PTC to offset up to $40,000 of both passive and nonpassive income, there would be a new incentive for individuals to invest in wind power projects, and that might eventually mean that wind power projects would not be as highly dependent on the availability of a corporate tax investors. 6

7 In a summary of the measure published earlier this month, attorneys at Stoel Rives LLP said the proposed legislation reflects the potential for new development of wind energy in the United States. The American Wind Energy Association reported that in 2008, only 1.26 percent of the United States' electricity was generated by wind turbines. That compares to 20 percent in Denmark, 9 percent in Spain and 7 percent in Portugal and Germany. Reports indicate that the Wind Energy Promotion Act faces an uphill battle in Congress. First, the Act is competing for attention with headline issues such as health-care and financial regulatory reform. But more significantly, the bill would modify the passive activity rules and there is concern among lawmakers that this move could open a Pandora s box of potential changes requested by other constituencies. Our regular podcast listeners already know that efforts are already underway to modify the applicability of the passive activity rules to incent more S corporations and other pass-through entities to invest in low-income housing tax credits. A copy of the Wind Energy Promotion Act can be downloaded from To learn more about this and other pending energy legislation, I invite you to join Novogradac & Company on November 11 th and 12th in Washington, D.C. for the Financing Renewable Energy Conference. You can register online at slash events or by calling

8 Finally for today, I d like to remind listeners that if you missed the live broadcast of today s webinar on the Qualifying Advanced Energy Manufacturing Tax Credit, you will be able to download a recording of the session. The Webinar on Applying for the Advanced Energy Manufacturing Tax Credit presented today covers a number of topics related to the new tax credit, including an overview of the rules, eligible production uses, qualifying criteria, application details, a discussion of ownership structures and business arrangements and other tax and program considerations. The session is presented by Tony Grappone from Novogradac & Company s Boston office, and Forrest Milder a partner with Nixon Peabody. Instructions on how to access a replay of the webinar can be found online at slash events. Well, that brings us to the end of this week s report. Please join us again next week when we will discuss the latest news in the fields of affordable housing, renewable energy and community development. This is Michael Novogradac and I ll be back next Tuesday. Thanks for listening. (outro music) Editorial material in this transcript is for informational purposes only and should not be construed otherwise. Advice and 8

9 interpretation regarding tax credits or any other material covered in this transcript can only be obtained from your tax advisor. Novogradac & Company LLP, 2009 All rights reserved. Reproduction of this publication in whole or in part in any form without written permission from the publisher is prohibited by law. For reprint information, please send an to 9