HOME funds can be incorporated into a LIHTC project in a variety of ways, the most common of which are discussed below. Practitioners are encouraged to consult with LIHTC experts to determine the optimum way to structure HOME funds in a particular LIHTC project.
The eligible basis is the sum of a project's total development costs that may be included in the calculation of tax credits. The qualified basis is the portion of eligible basis attributable to the rent restricted units.
- HOME Grant With Reduced Eligible Basis. Although HOME funds may be provided as a grant, LIHTC program rules require that eligible basis be reduced whenever grant funds are used in the project -- and that, in turn, reduces housing tax credits to which the project owner would otherwise be entitled. Because of this, developers typically prefer that HOME funds be a loan rather than a grant.
- Deferred payment loans are generally allowed, provided the unpaid interest accrues and there is a reasonable expectation that the loan can be repaid.
- Below Market Interest Rate HOME Loan with 4 Percent Tax Credit Rate. Some projects may only qualify for a 4 percent tax credit regardless of the way HOME funds are invested in the project. For example, a project with other Federal or tax-exempt mortgage revenue bond funds included in the basis is only eligible for the 4 percent credit under any circumstances. This means that HOME funds can be lent at any below market interest rate, without affecting the tax credit calculation.
- Below Market Interest Rate HOME Loan with 9 Percent Tax Credit Rate But No "Basis Boost". HOME funds can be provided at an interest rate below the Applicable Federal Rate and be counted in the eligible basis - and the project can receive a 9 percent credit rate - IF the project meets stricter occupancy requirements of:
- Market Interest Rate HOME Loan with 9 Percent Tax Credit Rate. If the HOME funds are provided as a loan with an interest rate at or above the Applicable Federal Rate then the funds are not treated as "Federal funds" for LIHTC purposes. These projects can qualify for the 9 percent credit rate.
- These projects also can qualify for the "basis boost" for projects in QCTs or DDAs.
There are other ways to provide HOME funds to a LIHTC project (for example, as a loan guarantee), but the four ways described above are the most commonly used approaches.