September 7, 2007
VHDA Plans Could Severely Impact the Use of 40% Tax Credits
The Virginia Housing Development Authority (VHDA) is planning to recommend to its Board in November that 4% low income housing tax credits not be awarded to projects that include permanent and construction tax-exempt bond financing where the construction bond financing is greater than the permanent bond financing. The tax credit program requires that, in order to be eligible for tax credits, the costs financed through tax-exempt bonds must be at least 50% of the total eligible basis and land costs. Since many projects can not support that much debt, a common financing structure is to use tax-exempt bonds for the construction of the project and then pay down the bonds using other sources of funds so that the permanent bond financing is supportable by the revenue of the project. This method is called "bond burning" because once the bonds have been allocated to the project, the portion that has been paid off cannot be allocated to another project. If the VHDA Board approves the recommendation that 4% tax credits not be awarded to projects that are financed using this structure, many projects would be impacted and would very likely not go forward. This has been a necessary and common structure used frequently by non-profits, for-profits and the FCRHA in preserving affordable housing. HCD and many other developers in Northern Virginia are seriously concerned and have expressed this to VHDA.