During any given week, I field many questions from clients and colleagues. Even after, ahem, years on the job, it never gets boring, and there are always new issues or situations to analyze.
While that is the case during “normal” market conditions, it is even more so these days. COVID-19 is unavoidable. Following a conversation with colleagues, I thought it valuable to share some questions I am getting and, at the same time, ask for your input on some questions we have.
When we did the affordable housing leaders roundtable webinar at the end of April, we had some interesting responses, and that also sparked the desire to find out more from you. We have developed a five-question survey focused on greatest concerns for deals, from those in pre-development to existing to under construction. And, we welcome questions from you at the end of the survey. We will be sharing the results in the June issue of Affordable Housing News and Views.
For the questions I have been getting lately, here are four that you may find helpful.
Q: How will additional COVID-19-related costs during construction be treated by state agencies?
A: Each state agency has its own approach, so the answer is, it depends. The sponsor’s concern in this situation is that there will be cost overruns related to the additional construction timeline needed to keep employees appropriately distanced on the job site. Also, there are likely to be additional costs related to cleaning and protective gear that will be part of general conditions. Most states have limits on how much can be paid for general conditions, overhead, and builders’ profit. Some states also have overall per unit cost limits that might be exceeded due to COVID-19-related delays. If you are an owner that is facing these types of cost limitations, I suggest that you contact your state agency to discuss options. This issue is likely to be one that the agency has not yet considered.
Q: How is interest capitalized if I have to temporarily suspend construction?
A: Interest is generally capitalized under the provisions of Internal Revenue Code Section 263A. The regulations do allow for the suspension of capitalization if no production activity occurs for 120 consecutive days for reasons outside the normal course of construction (i.e., weather delays would not qualify). Outside of the affordable housing industry, most owners would like to maximize the amount of interest deducted, so this is intended to be a relief provision. Affordable housing owners who are looking to maximize interest capitalization can take comfort in the statement that the taxpayer “may suspend the capitalization of interest” but perhaps is not required to stop capitalization. The rules for interest capitalization are complicated, so consult your CohnReznick service team to discuss your transaction.
Q: I’m worried about my 50% test because I have cost overruns. What can I do now?
A: Planning to meet the 50% is very important on every tax-exempt bond deal. This has become more important as bond issuers looking to preserve volume cap bonds issue barely more than the necessary 50%. In a situation where it appears that cost overruns will cause the 50% test not to be met, it may be possible to obtain additional volume cap bonds from the issuer. Meeting the test is of primary importance, so reduction of costs including related party fees may also be necessary. Owners should monitor the situation and develop a strategy so the 50% test is met by the end of the first year of the credit period.
Q: I’m doing a multiphase development. How can infrastructure costs be allocated among phases?
A: The IRS allows for the use of any reasonable method to allocate costs of development that will be shared among phases. This same approach applies in a condo scenario where there may be commercial and residential condos. Appropriate methods to allocate hard and soft costs could include specific identification or direct tracing of costs and allocation based on number of units or square footage. Determining how the costs will be paid and timing of payment is also very important. The approach should be documented so all owners agree on what is to be done, what costs will be in depreciable basis, and what costs will be borne by each entity involved.
As always, if you have questions, feel free to reach out to me or any of us on the CohnReznick Affordable Housing team. From COVID-related impacts to traditional deal questions to the less common, we are here to help.
Coronavirus Resource Center
Affordable Housing News & Views