HUD has revised its subsidy layering guidelines which are designed to avoid excess subsidies to projects combining low-income housing tax credits with assistance from the department's Office of Housing, such as an FHA-insured mortgage.
Under the guidelines, subsidy layering reviews may be conducted by the state agencies which allocate the tax credits, or they may be conducted by HUD.
Substantive changes in the guidelineswith the net proceeds of tax credit syndications, syndication expenses, and allowable builder's profit and sponsor/developer's fee.
HUD has dropped provisions exempting from subsidy layering review any project in which net syndication proceeds exceed 51 cents per dollar of the 10-year tax credit allocation and setting a floor on syndication proceeds of 42 cents per tax credit dollar.
Instead, the revised guidelines will require reviews of all projects and will use a capitalization method based on market pricing to determine the maximum allowable tax credit allocation.
Under this method, HUD or the housing credit agency will determine an appropriate market price for the project syndication, based on market conditions, investment risks and types of assistance. The amount needed to fill the equity gap for the project will then be capitalized by the market price to determine the maximum credit allocation. If the sponsor will retain more than 5%, but not more than 50%, of the project ownership, the market price must be increased by 10 cents, reducing the allowable credit allocation. If the sponsor retains more than 50% of the project, the price must be increased by 20 cents.
The floor on syndication proceeds has been eliminated, on the assumption that heavy demand for tax credits will keep market prices at reasonable levels.
The revised standards for builder's profit and sponsor/developer's fee are intended to eliminate confusion. Where there is an identity interest between the builder and sponsor/developer, HUD's builder's and sponsor's profit and risk allowance (BSPRA) will serve as a combination ceiling on builder's profit and safe harbor standard for sponsor/developer's fee. Where there is no identity of interest, the sponsor's profit and risk allowance (SPRA) will be a safe harbor for the sponsor/developer's fee, and the builder's profit will be limited to the amount estimated by HUD on the project income analysis and appraisal (Form HUD-92264) or, for lump-sum contracts, the project cost breakdown (Form FHA-2238).
As an alternative to the BSPRA/SPRA calculations for builder's profit, a credit agency may allow up to 6% ofcosts for builder's profit, 2% for builder's overhead, and 6% for general builder requirements. Under this alternative, the safe harbor for the sponsor/developer's fee will be 10% of total development costs, and the ceiling will be 15%.
For syndication expenses, the safe harbors will be 10% of gross syndication proceeds for private placements and 15% for public offerings, and the ceilings will be 15% and 24%. Private placements marketed under Securities and Exchange Commission Regulation D will be subject to the same limitations as public offerings.
The guidelines will allow housing credit agencies to provide a limited number of exceptions from the standards for builder's profit, sponsor/developer's fee, and syndication expenses because of "extraordinary circumstances" related to market conditions or investment risk. The exceptions in any calendar year will be limited to the greater of five projects or 10% of the total number of projects reviewed.