The IRS has issued guidance (Revenue Procedure 2019-17) that coordinates general public use requirements for qualified residential rental projects financed with tax-exempt bonds under Section 142(d) with Section 42(g)(9), which provides that a project does not fail the general public use requirement solely because it imposes occupancy restrictions or preferences that favor certain categories of tenants.

Background

State and local governments may finance "exempt facilities" by issuing tax-exempt bonds under Section 103. A qualified residential rental project, defined under Section 142(d), represents one category of exempt facilities. To qualify under Section 142(d), a project must reserve a portion of its units to serve individuals with qualifying incomes: (1) at least 20% of the units must be occupied by individuals with income 50% or less of area median income, or (2) at least 40% of units must be occupied by individuals with income 60% or less of area median income.

The regulations under Section 103 require that an exempt facility serve or be available on a regular basis for general public use, or be part of a facility used in this way (Reg. Section 1.103-8(a)(2)). A residential rental unit is considered for use by the general public if it (1) is rented in a non-discriminatory manner (Reg. Section 1.42-9(a)) and (2) is not provided only for a member of a social organization or provided by an employer for employees (Reg. Section 1.42-9(b)).

A low-income housing tax credit is available under Section 42, equal to the portion of the qualified basis (Section 42(c)(1)) of each qualified low-income building (Section 42(c)(2)) that is part of a qualified low-income housing project (Section 42(g)). Section 42(g)(9) expressly provides that a project does not fail the public use requirement solely because it restricts rentals to, or has preferences for tenants: (1) with special needs; (2) who are members of a group under a federal or state program or policy that supports housing for the group (e.g., housing for military veterans); or (3) who are involved in artistic or literary activities. Section 142(d) does not include a similar provision.

Because Section 42 low-income housing credits and Section 142(d) exempt-facility bonds "are often used together to finance residential rental projects," the IRS explains that it has received questions regarding "whether a project that is treated as not failing the general public use requirement solely based on the restrictions or preferences provided under [Section] 42(g)(9) for purposes of the low-income housing credit under [Section] 42 may be treated as not failing the general public use requirement applicable to tax-exempt financing of qualified residential rental projects under [Section] 142(d)."

Revenue Procedure 2019-17

The guidance provided in Revenue Procedure 2019-17 is straightforward and limited: a qualified residential rental project, defined in Section 142(d), will not fail to meet the general public use requirement for exempt facilities simply because the project imposes occupancy restrictions or preferences favoring tenants described in Section 42(g). This guidance "applies to bonds sold before, on, or after April 3, 2019," the IRS states.

The IRS notes that Revenue Procedure 2019-17 applies strictly to exempt facility bonds financing qualified residential rental projects under Section 142(d). Rules for financing other exempt facilities may generally be found under Reg. Section 1.103-8, the IRS explains.

Implications

This revenue procedure provides much-needed clarity to tax-exempt bond issuers that have issued or are considering issuing bonds to finance qualified residential rental projects. Although the Internal Revenue Code has been very clear that projects for tenants that fall within specified groups qualify for use of tax credits, the tax-exempt bond world has been left without such certainty. Bond issuers, conduit borrowers, developers and management companies can now continue to fund and/or expand qualified residential rental projects that restrict rental to tenants classified under Section 42(g)(9) while also meeting the general public use requirement of Section 142(d).

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