Financing Affordable Assisted Living With Tax Credits

Financing assisted-living projects with low-income housing tax credits offers exciting opportunities for cooperation between the health care industry and the

affordable housing industry to develop effective solutions to meet the needs of

low-income elders. The two industries share a common goal of finding

cost-effective ways to permit low-income seniors to age with dignity and to

provide the support they need for maximum independence. The low-income housing

tax credit (the Tax Credit) provides an attractive source of equity financing

for affordable assisted living projects. The intersection of the housing and

health care industries in this cooperative effort, however, creates numerous

structuring issues, most of which arise from the ambiguous nature of the

assisted living concept itself.

Assisted living facilities have both housing and service components. From the

perspective of the Tax Credit Program, it is important that assisted living

projects be structured and characterized as housing. The service component of

these projects, however, can complicate the housing characterization by invoking

a regulatory overlay that smacks of health care and necessitates use of health

care funding sources such as Medicaid.

Qualification of an Assisted Living Facility as Residential

Rental Property for Purposes of the Tax Credit Program

For purposes of the Tax Credit, in order to be a "qualified low income

housing project" a project must be "residential rental property."

Residential rental property" for purposes of the Tax Credit program has the

same meaning as "residential rental property" for the purposes of the

tax-exempt private activity bond rules. Tax-exempt bonds are another source of

financing for affordable assisted living projects.

Although a project must be "residential rental property" to qualify

for the Tax Credit, regulations under the Tax Credit program provide that

"the furnishing to tenants of services other than housing (whether or not

the services are significant) does not prevent the units occupied by the tenants

from qualifying as residential rental property eligible for credit." If

non-housing related services are provided, however, charges for services that

are not optional generally must be included in gross rent for purposes of

determining whether the rents charged meet the low-income rent restrictions

imposed by the Tax Credit program. The Tax Credit regulations provide that

"a service is optional if payment for the service is not required as a

condition of occupancy. For example, for a qualified low-income building with a

common dining facility, the cost of meals is not included in gross rent for

purposes of [the Tax Credit Program] if payment for the meals in the facility is

not required as a condition of occupancy and a practical alternative exists for

tenants to obtain meals other than from the dining facility."

The Tax Credit regulations also provide that if continual or frequent

nursing, medical or psychiatric services are provided, it is presumed that the

services are not optional and the building is ineligible for the credit, as is

the case with a hospital, nursing home, sanitarium, life-care facility or

intermediate care facility for the mentally and physically handicapped.

Accordingly, although it is clear that significant services other than housing

may be provided to Tax Credit projects, without disqualifying the facility as a

qualified low income housing project, continual or frequent nursing, medical or

psychiatric services are prohibited.

Revenue Ruling 98-47

In 1997, the Service issued Private Letter Ruling 974007, which concluded

that an assisted-living facility did not qualify as residential rental property

for purposes of the tax-exempt bond financing rules. The ruling appeared

inconsistent with the authority under the Tax Credit program regarding

characterization of an assisted living facility as residential rental property

and caused consternation in the assisted-living industry. The ruling addressed

whether an assisted living project was a "qualified residential rental

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