Contents CHAPTER 1 Low-Income Housing Tax Credits and Year 15 17 1.01 Introduction 17 1.02 Overview of the LIHTC Program 18 [1] Land Use Restriction Agreement (LURA) 20 [2] Extended-Use Period 21 1.03 Number of LIHTC Properties Reaching Year 15 23 1.04 Year 15 Trends 25 1.05 Key Points for Year 15 26 [1] Know Your Deal 26 [2] Know the Key Players 27 [3] Know Your Documents 29 [4] Know When You Can Exit 30 [5] Know Your Exit Strategy Options 31 CHAPTER 2 Market Analysis: An Aid to Making Year 15 Decisions 33 2.01 Overview 33 2.02 Legal Considerations 33 2.03 Market Considerations 33 2.04 Repositioning in the Market 35 CHAPTER 3 Exit Strategy Options 36 3.01 Overview 36 3.02 Sale of the Property Continued Compliance 36 3.03 Qualified Contracts 37 [1] Qualified contract 38 [2] Qualified contract price 39 [3] Qualified Contract Example 41 3.04 Sale of a Partnership Interest 42 [1] General Partner Option to Purchase 42 [2] Nonprofit General Partner Right of First Refusal 43 [3] Investor put option 44 10
[4] Historic Boardwalk Hall Case s Applicability to LIHTC Exits 45 3.05 Resyndication 46 [1] Closing the Financing Gap 48 [2] Compliance Issues 50 3.06 Foreclosure 51 3.07 Bargain Sale (Donation) to a Nonprofit 52 3.08 Like-Kind Exchange Section 1031 53 3.09 Tenants Right of First Refusal 54 [1] Lease Purchase Conversion to Owned Units 54 CHAPTER 4 Potential Tax Consequences at Year 15 55 4.01 Overview 55 4.02 Sale of Property 55 4.03 Sale of Partnership Interest 57 4.04 Exit Taxes 58 [1] How to Calculate Exit Taxes 59 [2] How to Mitigate Exit Taxes 59 4.05 Transfer Taxes 60 CHAPTER 5 General Partner s Year 15 Concerns and Options 61 5.01 Overview 61 5.02 General Partner s Goals 61 5.03 General Partner s Concerns 62 5.04 General Partner Call/Buyout Right 63 [1] General Partner Call/Buyout Example 63 [2] General Partner Purchase Option Sample Provision 64 5.05 Early Buyout of the Limited Partner 65 5.06 Nonprofit General Partner s Right of First Refusal 66 [1] Nonprofit Right of First Refusal Sample Provision 67 CHAPTER 6 Limited Partner s Year 15 Concerns and Options 68 6.01 Overview 68 6.02 Limited Partner s Goals and Concerns 68 6.03 Limited Partner Put Option 69 6.04 Limited Partner Exit Prior to Year 15 70 6.05 Post-2008 Early Exits No Bond Posting Requirement 71 11
CHAPTER 7 Syndicator s Year 15 Concerns and Options 72 7.01 Overview 72 7.02 Forms of Syndication 72 7.03 Syndicator s Goals and Concerns 73 7.04 Syndicator s Loss of Investment to Foreclosure 75 [1] Pre-Year 11 Foreclosure 75 [2] Post-Year 10, Pre-Year 15 Foreclosure 75 [3] Post-Year 15 Foreclosure 76 7.05 Tax Issues 76 [1] Tax Credit Recapture 76 [2] Income or Loss on Disposition of Partnership Interest 76 [3] Puts, Calls and Abandonments of a Partnership Interest 77 7.06 Unpaid Fees and Costs of Disposition 78 [1] Unpaid Acquisition and Asset Management Fees 78 [2] Loans Made to the Operating Partnership 78 7.07 Removal of General Partner 78 [1] Removal for Cause 78 [2] Fees Payable to the General Partner 79 CHAPTER 8 Housing Finance Agency s Year 15 Concerns and Options 80 8.01 Overview 80 8.02 Housing Finance Agency s Goals and Concerns 80 8.03 Qualified Allocation Plans 81 8.04 Tools and Solutions 82 [1] Tax Exempt Bonds 83 [2] Resyndication with Additional LIHTCs 84 [3] Debt Forgiveness 84 [4] Bargain Sale 84 [5] Reduced Use Restrictions 84 [6] Qualified Contract Procedures 85 [7] Conversion to Owned Units 86 [8] IRC 501(c)(3) Bonds 87 12
CHAPTER 9 LIHTC Compliance Issues for Year 15 88 9.01 Overview 88 9.02 Recapture of Credits 88 [1] How Recapture is Calculated 88 [2] How Recapture is Triggered 91 [3] Allocation of LIHTC Recapture Between Buyer and Seller Prior to Year 15 95 [4] Reporting the Recapture 96 9.03 10-Year Hold Period and Resyndication 97 9.04 Rent and Income Limits 99 [1] Resyndicated LIHTC Properties Not Held Harmless 99 [2] Over-Income Tenants 100 [3] Existing LURA Remains in Place 102 9.05 Allocation of LIHTCs Between Buyer and Seller in Year 11 102 CHAPTER 10 Debt Issues at Year 15 104 10.01 Overview 104 10.02 Refinance 104 [1] Lender s Concerns 105 [2] Original Issue Discount and Cancellation of Debt Concerns 106 [3] U.S. Department of Housing and Urban Development Refinancing Options 107 10.03 Foreclosure 110 [1] General 110 [2] Recapture of Debtor s Credits 110 [3] Creditor s Ability to Take Unused Credits 111 [4] Housing Finance Agency Reporting Requirements 112 10.04 Forgiveness of Debt 112 [1] COD Income 112 [2] Conversion of Related Party Debt to Equity 113 [3] Basis Reduction and Other Potential Problems 113 [4] Bona Fide Debt 114 10.05 Character of the Income or Loss Generated by a Debt Restructuring 116 [1] Debt Forgiveness 116 [2] Foreclosure 117 13
CHAPTER 11 Unpaid Deferred Development Fees at Year 15 118 11.01 Overview 118 11.02 Why It s an Issue 118 [1] Eligible Basis 118 [2] Deferred Depreciation Expense 120 [3] Reallocation of Losses and Credits 120 11.03 Modification of Terms or Transfer of the Developer Fee Note 122 CHAPTER 12 Valuation of Partnership Interests at Year 15 124 12.01 Overview 124 12.02 Market Value 125 [1] Restricted or Unrestricted Cash Flow 125 [2] Additional Subsidy 125 [3] Real Estate Tax Abatements 125 12.03 Income Capitalization 126 [1] Discounted Cash Flow 126 [2] Direct Capitalization 126 12.04 Net Operating Income 126 [1] Revenue Projections 127 [2] Operating Expense Projections 127 12.05 Determination of Underlying Real Estate Value 127 12.06 Partnership Net Proceeds 127 [1] Non-Operating Expenses 127 [2] Calculation of Liabilities 128 [3] Other Assets 128 12.07 Partnership Waterfall 128 CHAPTER 13 GAAP Accounting for Property Transactions at Year 15 130 13.01 Overview 130 13.02 Sale of the Property 130 [1] Record the Sale and Revenue Recognition 130 [2] Allocation of Profits and Losses to Partners 133 13.03 Sale of a Partnership Interest 133 13.04 Bargain Sales 134 14
13.05 Resyndication 134 13.06 Revenue Recognition Decision Tree 134 APPENDICES APPENDIX A IRS Guidance 139 IRC 42 Low-income housing credit (08.08.2013) 140 IRC 108 Income from discharge of indebtedness 175 IRC 708 Continuation of partnership 180 APPENDIX B Treasury Regulations 186 Treas. Reg. 1.42-2 187 Treas. Reg. 1.42-18 193 APPENDIX C Revenue Rulings 200 Rev. Rul. 99-6, 1999-1 CB 432, 1/15/1999, IRC 708, Continuation of partnership sale of partnership interests. 201 APPENDIX D Revenue Procedures 207 Revenue Procedure 2014-12, 2014-3 I.R.B 415., Safe Harbor for Partnership Allocations 208 APPENDIX E Private Letter Rulings 225 PLR 200703024, Condominium conversion; Tenant s Right of First Refusal under 42(i)(7). 226 PLR 200614019, 04/07/2006, LIHC eligible basis existing buildings; 10-year Hold Rule. 234 APPENDIX F Technical Advice Memorandum 243 TAM 200044004, 11/06/2000, IRC 42, 168: Developer fees includable in eligible basis. 244 APPENDIX G Chief Council Advice 254 CCA 201146016, Termination of extended-use period upon foreclosure doesn t result in automatic recapture. 255 APPENDIX H Excerpts from the IRS Audit Technic Guide, IRC 42 258 Chapter 5, Extended Use Agreement 259 15
Chapter 7, No Longer Participating in the IRC 42 Program 266 Chapter 16, Tax Credit Recapture 270 Chapter 19, Auditing Partners 285 Appendix A, Glossary of Terms 299 APPENDIX I IRS LIHC Newsletters 310 Grace Roberts, IRS, Dispositions in the 11th Year of the 15-Year Compliance Period: Allocating the Credit Between the Buyer and Seller, LIHC Newsletter #48 (March 2012): pp 4-5. 311 Grace Roberts, IRS, Foreclosures, LIHC Newsletter, Issue #55, April 2014, page 4. 313 Grace Roberts, IRS, Developer Fees, LIHC Newsletter #53 (October 2013). 314 Grace Roberts, IRS, Multiple Allocations of Credit. LIHC Newsletter #39 (April 2010), pp 4-5. 321 APPENDIX J Novogradac Journal of Tax Credits and Precursors Article List 323 16