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Federal Tax Law Requirements for Housing Bond Issues

For the interest on bonds to be tax-exempt, they must be issued by a state or political subdivision, they must also comply with a myriad of general rules, arbitrage restrictions (to make sure the Issuer does not make too much money on the financing) and an additional group of rules if the project owner is a private party (whether nonprofit or for-profit). These rules are found in Sections 103 and 141-150 of the Internal Revenue Code.

General Rules

Prior to bond issuance, there must be a public hearing with at least 14 days advance public notice. Subsequently, the highest elected public official of the Issuer (or its political subdivision) must approve the bond issue.

If the project owner is a private for-profit entity the Issuer must have an allocation of state "private activity bond" cap. This cap limit does not apply to "refunding" bonds, to 501-(3) nonprofit user bonds or governmentally owned and operated project bonds.

There is a 2% limit on the costs of issuance that can be funded with bond proceeds.

Program Rules for Private-Owner Projects

All units must be residential rental units with kitchen and bathroom facilities ("complete living units") and cannot be transient housing or student housing, except for certain conditions in which the housing is owned by a 501-(3) nonprofit corporation.

The project must be maintained as a rental project for the longer of the qualified project period or as long as the bonds are outstanding. The qualified project period begins when 10% of rental units are occupied, and ends at 15 years after 50% occupancy or termination of any Section 8 subsidy.

At least 20% of the tenants must have income of 50% or less of the area median income, or 40% must have income of 60% or less, but this is not applicable if the owner is a political subdivision or a nonprofit 501-(3) entity, although, in the latter case, the nonprofit must satisfy certain comparable federal tax law charitable use tests.

Income limits are adjusted for family size and low-income tenants are deemed to be low-income until their income exceeds 140% of the area median income.

At least 95% of the net bond proceeds must be used to fiance land or depreciable property constituting residential rental housing (called "good costs"); for this purpose net proceeds are reduced by the costs of issuance. No more than 25% of the bond proceeds may be used to finance land.

The average bond maturity may not exceed 120% of the useful life of the project. Bond proceeds can only finance costs incurred by the developer after the Issuer has adopted some action indicating its intention to finance the project in question (or within 60 days prior to such action).

Copyright 1997, 1997, 1999, 2000
Affordable Housing and HOME
National Association of Housing and Redevelopment Officials (NAHRO)
630 Eye Street, NW
Washington, DC 20001-3736
Telephone: (202) 289-3500
Fax: (202) 289-4949