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Electronically Submitted

Internal Revenue Service

Department of the Treasury

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

Room 5203

P.O.Box 7604

Ben Franklin Station

Washington, D.C. 20044

**Dear Treasury Department:**

On behalf of the undersigned organizations, the National Housing Law
Project submits the following comments on the Department's proposed
changes to the regulations governing the qualified contract process for
the Low Income Housing Tax Credit program. 72 Fed. Reg. 33706 (June 19,
2007), adopting a new 26 C.F.R. § 1.42-18.

NHLP is a national housing and legal advocacy center established to
advance housing justice for low-income people by increasing and
preserving the supply of decent, affordable housing; by improving
existing housing conditions; by expanding and enforcing low-income
tenants\' and homeowners\' rights; and by increasing housing
opportunities for racial and ethnic minorities. The Housing Justice
Network is a unique nationwide organization of more than 500 public
interest housing attorneys, paralegals and tenant leaders formed in 1977
that works on issues such as affordable housing preservation.

The undersigned organizations are a diverse array of nonprofit
organizations, including national, statewide, regional and local
nonprofit organizations working to preserve affordable housing or to
directly represent tenants facing the loss of their homes.

Our comments focus on the effectiveness of the proposed rules to
implement Section 42 of the Internal Revenue Code governing the Low
Income Housing Tax Credit program, in carrying out Congress' intent to
preserve affordable housing.

***Proposed Requirements for Fair Market Valuation Of Qualified Contract
Property, Including the Restrictions on Low-Income Portions of the
Building (Sec. 1.42-18)***

Noting that "the intent of the extended-long term commitment is the
continued use of the low-income portion of the building as low-income
housing," the proposed Section 1.42-18 would calculate the fair market
value of the qualified contract property by taking into account the
"existing and continuing requirements contained in the commitment for
the building."

This position on the valuation of the property is both logical and in
furtherance of the policy that Congress intended when adopting the
statute. Economically, the actual value of any property is affected by
legal constraints on what an owner may do with that property, especially
the amount of income potentially available. Because under the extended
use agreement the low-income portions of a building reduce the income
available from those units, the fair market value must take into account
such requirements.

As the Service has noted, the continued use of the low-income portions
of a building in that capacity should, where feasible, be encouraged.
According to the Joint Center for Housing Studies, the supply of
low-cost rentals in the United States is rapidly dwindling. For example,
from 1993-2003, the number of units renting for less than \$400 fell by
13%, or over 1.2 million units. By taking existing conditions that
affect the market value of a property into account, a potential
preservation purchaser is significantly more likely to gather the
resources required to preserve the preserve the property as part of the
nation's affordable housing supply. Thus, in order to implement
Congress' intent to preserve low-income units under this program, the
fair market valuation of property should properly consider the impact of
any restrictions on the use of or economic gain derivable from the
low-income portions of a building.

***Proposed requirements to limit outstanding indebtedness in excess of
the original qualified basis for the building and to discount
below-market debt***

Another part of the proposed qualified contract formula requires a
calculation of the outstanding indebtedness, which is the "outstanding
principal balance, at the time of sale, of any indebtedness or loan that
is secured by, or with respect to, the building, and that does not
exceed the amount of qualifying building costs." The agency's proposed
rules, at Sec. 1.42-18(c)(3) exclude from outstanding indebtedness, for
purposes of Section 42(h)(6)(F), any proceeds from refinancing
indebtedness or additional mortgages in excess of qualifying building
costs. The proposed rules also discount the outstanding indebtedness
bearing an interest rate below the applicable Federal rate at the time
of issuance in order to obtain an imputed principal amount. This
calculation of outstanding indebtedness helps further the intent of the
qualified contract process -- the concept that qualified purchasers
would pay a reasonable price for the property, provide the investors a
fair rate of return, and keep the property in the affordable housing
stock wherever possible.

***Inclusion of the land value in the fair market valuation, as well as
the impact of the presence of the low-income portion of a building***

The proposed regulations intend to include the value of the land
underlying a subject building. The agency reasons that because a
building would rarely be sold without its underlying land, that "it is
necessary to include the underlying land in the computation of the
qualified contract formula." It further concludes that the non
low-income portions of the building should include the fair market value
of both the non low-income and low-income portions of the land
underlying the building, even if the entire building is low-income
units. This regulation is inconsistent with the Congressional statute,
as well as with the other proposed regulations.

Section 42(h)(6) of the Internal Revenue Code makes no mention of the
underlying land in relationship to qualified contract property. The
statute consistently refers to the qualified contract property as the
building in question and not the underlying land. To assume that
Congress intended for the property to include the underlying land in
only one instance, without specifically stating so, would be
inconsistent with this pattern. Thus, the Service's authority to include
land value in qualified contract valuations appears beyond the scope of
the statute.

Additionally, even if including underlying land in the fair market value
of a qualified contract property were not inconsistent with the statute,
any value should take into account both the restrictions on the
low-income portion of the building (for the remaining term of the
extended use commitment), as well as the impact of the presence of a
restricted portion on the value of the remaining property. At the very
least, the land allocable to the low-income portion of the property
(prorated by some reasonable formula taking into account the number of
low-income units compared to the project as a whole) should be valued
with all of its remaining restrictions. Even beyond that, there is no
doubt that the value of the entire property, including the land, is
reduced when a portion of the building is restricted to low-income use.
During the extended use period, the buyer cannot develop the underlying
land allocable to the non low-income portion to its highest economic
value. That fact must be reflected in the valuation if land is included
in the calculation.

Furthermore, as long as the extended commitment remains, development of
any open portion of the land where no building is situated is also
restricted as a practical matter. Without any extended commitment, that
undeveloped land would be free of any constraints. However, during the
extended use period, both the housing credit agency and the owners would
have to approve any further development of the land, and that
restriction further diminishes the value of the land.

The Code considers the qualified contract property to be only the
building and not the underlying land, raising doubts as to the Service's
authority to include the land in its valuation of the property. Thus,
even if the Service could include the value of the underlying land in
the qualified contract formula, the valuation should at least require
consideration of both the proportion of the building that is low-income
and the diminished value of the undeveloped land. If these factors are
not taken into account, the regulations would be internally inconsistent
with regard to how the building itself is valued, as well as inaccurate
as to the true fair market value.

***Standards for Appraisal Methodology and Qualification***

Currently, the proposed rules do not suggest any uniform standards for
appraisal methodology and qualification. Creating such standards is
necessary to achieve the most efficient, uniform, and fair results.
Because the valuation of restricted property is complicated, appraisers
should have to meet standards established by the regulations or by the
Agency. They should not have been barred by other governmental agencies,
and possess licenses and training sufficient to qualify them for this
complex task. The methodology must require appraisers to take into
account all applicable restrictions in the title, recorded agreements or
other contracts, as well as any and all restrictions imposed by other
subsidy sources or land use and zoning requirements.

We recommend that the State Housing Finance Agency and owner each select
an independent qualified appraiser. If the two parties disagree
significantly on the valuation, the parties could agree to average the
valuation between the two appraisals. (A similar system was used under
the Low-Income Housing Preservation and Resident Homeownership Act of
1990 (12 U.S.C. §4101 *et seq.*) to determine fair market valuations for
owners seeking to refinance or sell their low-income properties at the
end of their restricted use periods.) Otherwise, then the two appraisers
could appoint a third appraiser, whose determination of the final fair
market value (between the two figures) would be binding for both
parties.

***The Valuation of the Low-Income Portion of the Property Should Not
Exceed Fair Market Value***

The Service observes that the formula value for a qualified contract
property could often exceed the fair market value of a property.
However, permitting this result would be directly contrary to intent of
the statute -- to preserve affordable housing when feasible. In order to
effectuate Congressional intent in creating this program, the rules
should place a cap on the low-income portion of the property, not
allowing the value to exceed the fair market value for that portion. To
do so would be consistent with the intent of Congress to ensure that
low-income housing would be preserved. By capping the value of the
low-income portion of a building at fair market value, an owner could
sell his or her property at a fair price to a purchaser that will
continue the low-income use of that property and would prevent the loss
of affordable units. Permitting unrealistically high and financially
infeasible sale prices under the qualified contract formula would
produce the anomalous result of permitting some owners to dispose of
properties (thus converting them to market-rate use) for the very same
fair market value that a preservation purchaser would have no right to
match.

***Deferred Developer Fees Should be Included in "Cash Distribution from
(or available for distribution from) the project" (Section
1.42-18(c)(6))***

The qualified contract formula requires that the sum of the outstanding
indebtedness, adjusted investor equity, and other capital contributions
be reduced by cash distributions from or available for distribution from
the project. While the proposed regulations already include all
distributions to owners or related parties and all cash and cash
equivalents, the definition should be expanded to include deferred
developers fees. At minimum, the definition of cash distributions should
include the following four types of income: 1) all cash payments and
distributions from net operating income; 2) amounts paid to partners or
affiliates as fees from operations, including investor fees, partnership
management fees, refinancing proceeds, etc.; 3) deferred developer fees
and; 4) cash in partnership reserves and other accounts. The inclusion
of deferred developer fees is necessary to provide a fair and accurate
assessment of the amount of cash distribution from the project.

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Thank you for considering these comments. Please feel free to contact
James Grow, NHLP Staff Attorney, at 510-251-9400x104 or
\<jgrow@nhlp.org\> if you have any further questions.

> For the undersigned organizations,
>
> James R. Grow
>
> Senior Attorney
>
> National Housing Law Project
>
> National Housing Law Project (Oakland, CA)
>
> National Housing Trust (Washington, DC)
>
> Texas RioGrande Legal Aid (Austin, TX)
>
> Empire Justice Center (Rochester, NY)
>
> Florida Rural Legal Services (Fort Myers, FL)
>
> Oregon Law Center (Portland, OR)
>
> California Housing Partnership Corporation (San Francisco)
>
> National Law Center on Homelessness and Poverty (Washington, DC)
>
> Sargent Shriver National Center on Poverty Law (Chicago, IL)
>
> Community Alliance of Tenants (Portland, OR)
>
> Legal Services of Northern California (Sacramento, CA)
>
> Housing Preservation Project (St. Paul, MN)
>
> California Rural Legal Assistance (San Francisco, CA)