EDITOR’S NOTE: ‘TCAP’ and ‘Exchange Funds’ Explained

By Keat Foong, Executive Editor Among the multifarious areas to which the government will direct money under President Obama’s economic stimulus package (The American Recovery and Reinvestment Act of 2009) is tax credit housing. The Low Income Housing Tax Credit (LIHTC) program has been suffering from a fall-off in investor equity owing in part to the fact that financial companies no longer needed tax credits now that they were experiencing losses in the midst of the financial crisis. This is where the two programs under the Act—the Tax Credit Assistance Program (“TCAP”) and the Low Income Housing Tax Credit Exchange program (“the Exchange program”)—will help. They are intended to supply badly needed capital to the LIHTC industry to help compensate, at least in part, for the equity shortfall faced by LIHTC developers (as well as stimulate the economy). The National Association of Home Builders (NAHB) recently held an hour-long webinar entitled “Leveraging Your LIHTC Deal with TCAP and Exchange Funds” that clearly and comprehensively explained, and updated attendees on, the two programs. The speakers at NAHB’s event were Anthony Freedman, partner in the Syndication Practice Group of Holland & Knight LLP; Jeanne Peterson, principal at the Reznick Group; and Cara Wallo, tax credit allocation officer at the Virginia Housing Development Agency. The TCAP, administered by HUD, provides grants to state housing finance agencies for use in LIHTC developments. The Exchange program, administered by the Treasury Department, on the other hand, allows states to exchange unused LIHTCs for cash that they can then use to disburse for LIHTC acquisition and rehabilitation. The bottom line is this: The Exchange program, for transactions that cannot adequately attract equity through the sale of LIHTCs, will provide capital in place of LIHTC equity. The TCAP program, in contrast, provides gap financing capital for projects that already have or will have LIHTC equity. Developers do not apply directly for Exchange program funds, through the state finance agencies. They cannot say “my transaction is not moving forward, I cannot find the equity for it, here is my tax credit allocation back, and may I exchange it for cash.” Nevertheless, states can exchange for cash LIHTCs that have already been allocated in 2007 and 2008 (not applicable to LIHTCs allocated in 2009). “That makes those old allocations particularly valuable,” said Freedman. The Exchange program funds are supposed to be made as grants, though the Treasury may be reconsidering that based on feedback it is getting. The TCAP funds, on the other hand, will be awarded to developers based on QAP. They will be used more as gap financing for developers who have already received, or since received, a LIHTC allocation in FY2007, FY2008 and FY2009. TCAP funds may be structured as grants or loans. Users of TCAP have to comply with Davis Bacon labor laws and NEPA environmental standards. Users of Exchange funds are not subject to these requirements. The Exchange program funds have to be expended by 2010. For the TCAp funds, 75 percent of the TCAP funds have to be expended by Feb. 17, 2011 and 100 percent by Feb. 17, 2012.  “[TCAP funds] work well as a gap filler in projects that already have LIHTC equity,” said Freedman. “Once you move into the Exchange program, where Treasury funds effectively replace equity,” states have “a lot more freedom” but there are also a lot more unanswered questions, he explained. Look out for more details on this webinar in upcoming Multi-Housing News e-newsletters.