Acq/Rehab Compliance. Jen Brewerton. Charles A. Rhuda III. Emily Bias. Stephanie Naquin. Matthew Rooney. Pillsbury Winthrop Shaw Pittman LLP

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2 Acq/Rehab Compliance MODERATOR Charles A. Rhuda III Novogradac & Company LLP PANELISTS Emily Bias Pillsbury Winthrop Shaw Pittman LLP Stephanie Naquin Novogradac & Company LLP Jen Brewerton Dominium Matthew Rooney MDG Design + Construction

3 Basics: Acquisition and Rehab Credits Rehabilitation Credits No federal subsidy 9% of rehabilitation costs Federal subsidy 4% of rehabilitation costs Acquisition Credits 4% of acquisition costs To receive acquisition credits, the Building must have eligible basis of more than $0

4 Conditions Qualifying for Acquisition Credits: Section 42 Rules 1. Acquired by Purchase

5 Rule #1: Building Must be Acquired by Purchase Purchase if the purchaser is not related to the seller at the time of purchase Relatedness is based on more than 50% of common capital or profit interest If the buyer is more than 50% related to the seller at the time of purchase, then NO ACQUISITION CREDITS

6 Example Seller Buyer 100% A Co. 60% A Co. 40% B Co.

7 Example Seller Buyer Acquisition 100% A Co. Credits 60% A Co. 40% B Co.

8 Example Seller Buyer 33.3% A Co. 33.3% B Co. 33.3% C Co. 45% A Co. 30% B Co. 25% X Co. A Co. + B Co. = 66.66% A Co. + B Co. = 75%

9 Example Seller Buyer Acquisition Credits 33.3% A Co. 33.3% B Co. 33.3% C Co. 45% A Co. 30% B Co. 25% X Co. A Co. + B Co. = 66.66% A Co. + B Co. = 75%

10 Example Seller Buyer.01% A Co % Fund A.01% A Co % Fund B 25% Investor A 25% Investor B 25% Investor C 25% Investor D 10% Investor A 45% Investor B 25% Investor X 20% Investor Y

11 Example Seller Buyer Acquisition.01% A Co % Credits Fund A.01% A Co % Fund B 25% Investor A 25% Investor B 25% Investor C 25% Investor D 10% Investor A 45% Investor B 25% Investor X 20% Investor Y

12 Example Seller Buyer 100% A Co..01% A Co % Investor

13 Seller Example Eligible for Buyer Acquisition 100% A. Co.01% Credits, A. Co But 99.99% Investor

14 Caveats: Even if buyer is 50% or less related to the seller based on entity ownership (i.e., capital), analyze profit interest General rule: the related party s allocations, distributions, percentage based fees, etc. should be less than 50%.

15 Example Seller Buyer 100% A Co..01% A Co % Investor 90% Incentive Management Fee

16 Example Seller Buyer Acquisition 100% A Co..01% Credits A Co % Investor 90% Incentive Management Fee

17 Conditions Qualifying for Acquisition Credits: Section 42 Rules 1. Acquired by Purchase years between acquisition and last PIS

18 Rule #2: 10 Years Since Last Placement in Service To qualify for acquisition credits, there must be at least 10 years between the date of acquisition and the last PIS A property is placed in service when it is ready and available for its intended purpose

19 Exceptions to 10-Year Rule 5 transfers that do not start a new 10-year period: 1. Transfer by gift 2. Transfer by death 3. Transfer of an owner-occupied single family residence 4. Transfer via foreclsoure** 5. Transfer to a nonprofit or government unit**

20 Example No PIS: Does not restart clock Original PIS Transfer by Gift Purchase

21 Example No PIS: Does not restart clock OK for Original PIS Credits Transfer by Gift Purchase

22 Example Acquisition Credits OK for Credits Original PIS Transfer to Non-Profit Yes PIS Purchase Purchase Less than 10 years Exception does not apply

23 Example OK for Credits Original PIS Sale to Non-Profit No PIS Purchase years Exception applies

(with IRS approval) In those instances, a transfer does not start a new 10-year period and

24 Super -Exceptions to the 10-Year Rule The 10-year rule does not apply to: Federally- or State-assisted Buildings Buildings acquired from insured depository institutions in default (with IRS approval) In those instances, a transfer does not start a new 10-year period and the Building is eligible for acquisition credits, even if the prior 10 year period has not expired

25 Example: Building with HAP Contract Original PIS Purchase OK for Credits

26 Qualifying for Acquisition Credits: Section 42 Rules 1. Acquired by Purchase years between acquisition and last PIS 3. No prior PIS by a related party

27 Rule #3: No Prior Placement in Service by a Related Party To qualify for acquisition credits, no prior PIS by the tax payer or any related entity Timing: Whether a party is related is tested at the last placement in service date If the acquiring entity was not formed at the time of the last PIS, it cannot be related Transfers to nonprofits are not exempt from this rule!

28 Qualifying for Acquisition Credits: Section 42 Rules 1. Acquired by Purchase years between acquisition and last PIS 3. No prior PIS by a related party 4. Must be eligible for rehabilitation credits

29 Rule #4: Eligible for Rehabilitation Credits Expenditures must benefit 1 or more low-income units Amount of expenditures over 24-month period is at least equal to the greater of: 20% of the adjusted basis of the Building; or $6,000 per unit (adjusted for inflation)

30 Special Rules for Resyndications If LIHTC previously allocated to a Building, then no acquisition credits until the end of the Compliance Period If the investor wants out prior to the end of the Compliance Period, sell their interest and not the Building

31 Other Considerations Expanded due diligence and costs (reviewing ownership chain, relevant organizational documents, etc. to determine compliance with Section 42) Compliance with tenant relocation statutes and regulations Zoning considerations (grandfathering) Tenant Opportunity to Purchase Act (currently in DC, contemplated in other jurisdictions)

32 Emily Bias Counsel Real Estate

33 Acq/Rehab Compliance MODERATOR Charles A. Rhuda III Novogradac & Company LLP PANELISTS Emily Bias Pillsbury Winthrop Shaw Pittman LLP Stephanie Naquin Novogradac & Company LLP Jen Brewerton Dominium Matthew Rooney MDG Design + Construction

Maximizing Credits in Year 1

Maximizing Credits in Year 1 George F. Littlejohn, CPA, HCCP Novogradac & Company LLP george.littlejohn@novoco.com Let s go over Basic Concepts Multiple Building Election Minimum Set-Aside PIS Date (When