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September 17, 2007

CC:PA:LPD:PR (REG--114084--04)

Room 5203

Internal Revenue Service

P.O. Box 7604

Ben Franklin Station

Washington, DC 20044

RE: Section 42 Qualified Contract Provisions, RIN 1545-BC20

To Whom It May Concern:

Thank you for the opportunity to comment on the proposed qualified
contract process regulations. The National Council of State Housing
Agencies (NCSHA) represents the Housing Finance Agencies (HFAs) of the
50 states, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and
the District of Columbia. HFAs allocate Low Income Housing Tax Credit
authority (Housing Credit) for the construction and rehabilitation of
affordable apartments for low-income families. Over the past two
decades, the Housing Credit has been responsible for about 2 million
affordable apartments, and each year the Housing Credit induces several
billion dollars of private investment to produce about 130,000 units for
low-income families, the elderly, and other special needs populations.

NCSHA strongly supports the administrative discretion the proposed
regulations give state HFAs to administer the qualified contract
process. Such flexibility is key to the success of the program. Specific
comments about particular aspects of the regulations follow.

**Response to Request for Comments**

The following points respond to the Service's request for comments on
several particular issues.

**Whether low-income buildings are ever sold without the underlying
land.**

We are not aware of any such transactions. However, there have been
relatively few Credit property sales as a percent of the total number of
Housing Credit developments.

**The appropriate treatment of leased land and the prevalence of leased
land in low-income housing credit transactions.**

With the exception of Housing Credit-assisted properties in tribal
areas, ground leases are used infrequently in Housing Credit
transactions. Other examples include land owned by churches or public
housing authorities. In these circumstances there is a very low
probability of, and little or no incentive for, owners to request a
qualified contract.

**Examples of forms of cash distributions from or available for
distribution from the project that should or should not be included in
the regulatory definition.**

NCSHA agrees with how the proposed regulations define cash distributions
to help determine qualified contract price. Providing exclusions from
what counts as cash distributions may inappropriately increase the
qualified contract price, create unnecessary complexity, and make such
exclusions subject to arbitrary or inconsistent interpretations.

**Whether low-income housing is owned by other than a corporation or
partnership.**

Such forms of ownership are extremely rare and mostly limited to very
small properties (less than five units).

**The extent of HFA and state authority in providing more stringent
requirements than the provisions contained in section 42(h)(6)(F).**

Owners in many states have voluntarily waived their right to request a
qualified contract. HFAs have also used their general program
administration authority to encourage owners to lengthen extended use
periods and delay the date for submitting a qualified contract request.
The regulations should acknowledge that HFAs have authority to encourage
owners to enter into such agreements.

**Specifically, the authority of HFA or state regulators to require in
agreements a fair market value cap that would restrict any qualified
contract price to fair market value.**

No HFAs report having such a policy. Several HFAs would like the Service
to establish such a cap in the final regulations or explicitly allow
HFAs to do so. It does not appear that HFAs have clear authority to
establish such a cap on their own.

We encourage the Service to consider whether owners should be entitled
to a sales price greater than fair market value. Without a regulatory
fair market value cap, qualified contract prices often will be well in
excess of fair market value. In such cases, the property either will
lose its affordability restrictions or preservation-oriented buyers will
have to offer more than market value, giving owners windfall profits. It
is not clear Congress intended such a result.

**Additional Comments**

NCSHA's additional comments are separated into two main categories,
price calculation and processing requests.

**Calculation of the Qualified Contract Price**

[Land]{.underline}

NCSHA does not believe including land valuation in the qualified
contract price determination process is necessary. Land value is already
incorporated in the total of debt, equity, and other capital
contributions. If land is valued and added to the qualified contract
price, a reasonable portion of that value should be deducted from debt
and equity. Otherwise, land would be counted twice.

NCSHA strongly agrees with the proposed regulations' position that fair
market value must reflect the restrictions on the use of the low-income
portion of Credit buildings. NCSHA also supports similarly requiring
that low-income use restrictions be taken into account when valuing
land.

[Refinancing]{.underline}

We understand some interested parties argue that the proposed
regulations should include all refinancing debt in the valuation of
outstanding indebtedness for purposes of establishing the contract sales
price. We support limiting such debt to the amount of costs included in
original eligible basis established at the end of the first year of the
Credit period, as the regulations propose.

However, NCSHA believes that, in some cases, some additional refinancing
debt should be included in the contract sales price. NCSHA would support
allowing HFAs to include such amounts in outstanding indebtedness or not
count these proceeds as cash distributions if the HFA determines that
the owner's actions were not taken to increase the qualified contract
price and otherwise were for the benefit of the property. An example
would be paying off a loan with debt that carried a lower interest rate
or longer amortization period, and using any proceeds to make repairs.

[Closing Date]{.underline}

The proposed regulations state the HFA must adjust the qualified
contract amount between the time the qualified contract is determined
and the project's actual closing date to reflect mortgage payments that
reduce outstanding indebtedness and changes in market value "after a
reasonable period of time" within the one-year offer of sale period.
NCSHA is concerned that these additional steps are unnecessary and would
pose an unreasonable burden on HFAs. NCSHA recommends the final
regulations direct buyers and sellers to handle such modifications
during final transaction negotiations.

If the final regulations permit modifications to the original qualified
contract price after it is determined, they should clarify that HFAs do
not have to participate. Under section 42(h)(6)(E)(i)(II), an HFA's
statutorily mandated role ends with the presentation of a qualified
contract. Any subsequent negotiations are between the buyer and seller.

**Processing Qualified Contract Requests**

The proposed regulations properly reflect the fact that HFA
administrative discretion will be essential in handling qualified
contract requests.

[Eligible Projects]{.underline}

NCSHA recommends the final regulations authorize HFAs to prohibit owners
who are not in compliance with applicable program requirements from
requesting a qualified contract. NCSHA also recommends the final
regulations authorize HFAs to require owners to secure a waiver of an
existing right of first refusal under section 42(i)(7). Otherwise, the
effort devoted to calculating the qualified contract price may be
undone. While NCSHA believes the authority for both of these limitations
is included in section 1.42-81(d)(1)(vi), an explicit statement would
preclude questions of interpretation.

[Required Submissions and Inadequate Documentation]{.underline}

NCSHA supports the authority the proposed regulations give HFAs in
different states to establish different submission requirements for
owners requesting qualified contracts. Such variation makes sense based
on differences across the country in state laws, documents,
administrative procedures, and real estate markets.

We understand some owners may object to providing full documentation to
justify the qualified contract price on the grounds they have not
retained sufficient records to meet HFA submission requirements.
However, if owners know they will not be required to provide full
documentation, a small number of them may decide to be advantageously
selective. For example, if owners only need to submit 10 of 15 years'
worth of financial records, they might hold back the five years with the
greatest cash distributions. HFAs have no ability to investigate such
behavior.

The proposed regulations resolve this potential concern, by allowing
HFAs the ability to deny a request, require substantiation, and suspend
the one year period. NCSHA strongly supports this authority and urges
the Service to include it in the final regulations. Owners expecting to
take advantage of the qualified contract option had a corresponding duty
to keep adequate documentation.

[HFAs Presenting a Qualified Contract]{.underline}

NCSHA believes the proposed regulations are correct to insist that
presenting a qualified contract prevents termination of the extended use
restrictions. The Housing Credit statute is clear on this point. Owners
do not have to accept the offer, but refusing to accept does not allow
termination of the extended use restrictions. The Credit statute also
provides no relief if the transaction does not close, even if that
outcome is due to the buyer's default.

NCSHA understands this is a harsh result. There is also the theoretical
possibility of attempts to offer contracts simply to preserve
affordability. In such a hypothetical situation, either the offer itself
may be unreasonable or the buyer may back out.

Owners' protection against the first is the requirement of a "bona fide"
contract. Some commenters may claim that it cannot be defined at all.
While the term may have varying definitions in different contexts, its
use in the Code requires those involved in a qualified contract request
to give it meaning. If the regulation itself will define what
constitutes a bona fide offer, the following are suggestions for what
could be the components:

> 1\. Offer is made in good faith;
>
> 2\. Offer is legally binding on buyer;
>
> 3\. Buyer has full capacity to close, financially, legally, and
> otherwise;
>
> 4\. Other reasonable terms and conditions, including:
>
> a\. Due diligence documentation,
>
> b\. Time period to review,
>
> c\. Date of closing,
>
> d\. Manner of payment,
>
> e\. Earnest money, and
>
> f\. Nothing else outside the ordinary course of business for such real
> estate transactions (e.g., seller financing or guarantees of certain
> financial outcomes).

Determining what constitutes reasonable terms and conditions will vary
for at least two reasons. First is the wide variety of properties.
Buyers will ask for less time and documentation for a 16 year-old,
48-unit property in a residential setting than a 40 year-old, 200-unit
property next to industrial uses. A buyer should not be able to demand a
standard of due diligence for the latter when considering the former.
Another reason is that buyers paying a qualified contract price that is
above fair market value will want to correspondingly reduce risk. In
such cases, expecting the seller to guarantee aspects of the cash flow
may be reasonable. Because of these considerations and other unknown
variables, NCSHA believes the best alternative is to leave the question
of what is a bona fide offer up to the administrative and legal process
of the state where the property is located.

Another question is what happens in circumstances where an owner accepts
the presented qualified contract but the transaction does not close. If
a buyer backs out of a bona fide contract in a manner that amounts to a
breach, the seller will have remedies as a matter of contract. The
compensation may include the financial consequences of the inability to
terminate the extended use restrictions. However, such disputes would
occur after the HFA has met its statutory expectation of presenting a
qualified contract, and thus should not allow an owner to terminate the
use restrictions or seek relief from the HFA.

One option may be to recognize in the final regulations that owners have
not lost the ability to submit another request for a qualified contract
if there is an administrative or legal ruling that there was never a
bona fide offer. The owner should not be allowed, in the case of such a
ruling, to waive the extended use restrictions without submitting
another qualified contract request.

[Offer of Sale]{.underline}

NCSHA supports the proposed regulations' allowing HFAs to identify
willing buyers as an alternative to soliciting offers from the general
public. Many HFAs may need to do so based on state administrative
procedure requirements and laws regarding real estate brokerage.
Furthermore, we recommend the final regulations clarify that this
allowance also applies to all other references to an offer of sale.

[Dispute Resolution]{.underline}

We understand that HFAs and program participants will have disagreements
over price and process, possibly leading to requests for binding
arbitration. NCSHA does not think it is appropriate to require binding
arbitration in the final regulations. We believe the Code only addresses
outcomes of the qualified contract process, not how the participants
arrived at them. The possibilities of negotiation, arbitration, or
litigation will need to be determined based on state law.

Thank you for the opportunity to share our comments.

Sincerely,

Barbara J. Thompson

Executive Director