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A project financed with tax exempt bonds typically qualifies for the 4% new construction/ rehab tax credit. This is because tax exempt bonds are a kind of federally subsidized financing, and the 9% credit may not be used in such cases. If the project is located in a Qualified Census Tract or a Difficult to Develop Area, it is able to use the 130% basis Boost. (Like any other project, it also qualifies for the 4% acquisition credit if it meets the standard acquisition tax credit criteria.)
One important advantage to using tax credit bond financing is the fact that the project does not need to compete for its tax credits. They are allocated to the project “as-of-right” once bond financing is awarded to the project.
However, the full amount of the project’s tax credits will be awarded only if certain very specific criteria are met:
• At least 50% of the cost of each building in the project is financed with tax-exempt bonds. The bond amount for each building must be 50% of depreciable basis plus land (the “50% test”).
• The 50% test must be met at construction completion.
• If the project has a cost overrun, the test will include any additional depreciable costs. Therefore, it is prudent to have a substantial financing cushion when structuring the bonds.
• If the 50% test is missed, the tax credits are reduced to an amount equal to the bonds’ percentage of total sources of funds. If the bonds represent only 45% of the depreciable cost-plus land, the project gets only 45% of the maximum possible tax credits.
• The state agency granting the bonds must provide a signoff that the project qualifies for tax credits under the state’s Qualified Allocation Plan.
• The issuer of the bonds must provide a signoff that the bonds are subject to the state’s volume cap and that the project qualifies for tax credits.