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Special Issues for Projects Involving Nonprofits IPED Housing Tax Credits 101 February 22-23, 2007 Molly R. Bryson Thomas A. Giblin.

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Presentation on theme: "Special Issues for Projects Involving Nonprofits IPED Housing Tax Credits 101 February 22-23, 2007 Molly R. Bryson Thomas A. Giblin."— Presentation transcript:

1 Special Issues for Projects Involving Nonprofits IPED Housing Tax Credits 101 February 22-23, 2007 Molly R. Bryson Thomas A. Giblin

2 Examples of Nonprofit Participation in Tax Credit Projects General partner, or co-GP with a for-profit Developer or property management agent Lender Social service provider Lessor under ground lease (or Managing GP) to qualify for property tax exemption/abatement Holder of right of first refusal under § 42(i)(7)

3 Obtaining and Maintaining 501(c)(3) Status: IRS Memo Dated 4/25/06 Resolution of conflicts consistent with charitable purpose Providing of low-income housing consistent with safe-harbor tests of Rev. Proc (75% low- income and 20% or 40% at lower levels) Limit on amount and length of operating guarantee (6 months of expenses; 5 years from break-even)

4 IRS Memo, Dated 4/25/06 (contd) Payment of tax credit guarantee treated as a capital contribution or a loan Limit on amount of tax credit guarantee (to the extent of fees earned) Limit on repurchase price to 100% of capital contributions Removal only for cause after a reasonable cure period Right of first refusal Fixed price construction contract

5 Tax-Exempt Use Property Issues 40-year depreciation (may be ok with investor) Qualified allocation (0.01% interest in all tax items, including cash flow and sale/refinance proceeds) – be alert to incentive fees For-profit subsidiary as general partner making a Section 168(h)(6) election – election made on tax return – also attached to exempt parents tax return – must state it is a 168(h)(6) election

6 Structuring Around Federal Grants Often awarded to exempt organizations Reduce qualified basis Instead structure grant award to exempt organization followed by a loan to the partnership at AFR – partner non-recourse debt: potential issue if investors capital account goes negative – 79/21 solution (use of a second exempt organization as minority stockholder of the general partner)

7 Nonprofit Set-Aside Each state tax credit agency must set aside at least 10% of its annual credit ceiling each year for projects involving qualified nonprofit organizations Many states provide preferences for nonprofit sponsored projects by assigning points to projects with nonprofit involvement Whenever there is nonprofit involvement, need to determine whether the tax credit agency actually awarded credits from the nonprofit set-aside

8 Nonprofit Set-Aside (Contd) Nonprofit organization must be exempt from federal income tax under Section 501(c)(3) or 501(c)(4) of the IRC One of the organizations exempt purposes must include the fostering of low-income housing Nonprofit cannot be affiliated with or controlled by a for-profit organization Nonprofit must own an interest in the project (directly or indirectly) Nonprofit must materially participate in the development and operation of the project throughout the compliance period

9 Right of First Refusal Under IRC Section 42(i)(7) Added to IRC Section 42 in 1990 to facilitate nonprofit ownership of tax credit properties at the end of the 15-year compliance period Eligible holders/minimum purchase price is specifically set forth in IRC Section 42(i)(7)

10 Eligible Holders of a Right of First Refusal Under IRC Section 42(i)(7) Tenants of the project (in cooperative form or otherwise) Resident management corporation of such building Qualified nonprofit organization Government agency

11 Determining Minimum Purchase Price Under IRC Section 42(i)(7) Minimum purchase price is equal to the sum of: (1)the principal amount of the outstanding indebtedness secured by the buildings (other than indebtedness incurred during previous 5 years), plus (2)all Federal, state and local taxes attributable to such sale

12 Right of First Refusal: General Observations A right of first refusal is not an option. Needs to be triggered by a bona fide third party offer A right of first refusal can be granted at any time during a projects lifecycle Parties may come together in year 15 to negotiate fair price Congress expected minimum purchase price to be favorable to nonprofits

13 Business Considerations When Granting a Right of First Refusal The statutory purchase price is a minimum price. Statutory purchase price does not include: – accrued but unpaid fees to limited partners – unpaid limited partner loans – unpaid tax credit adjusters

14 Business Considerations When Granting a Right of First Refusal (contd) Need to understand how sales proceeds are distributed under the partnership agreement Right of first refusal should terminate if an affiliate general partner withdraws or is removed Need to determine a specific term for the right of first refusal Loan documents should contemplate a sale in year 15

15 IRC Section 4965 New Section 4965 (2005 Tax Act) and new Notice ( ) provide: If an exempt organization is involved in a deal with contractual protections, then (i) possible 100% tax on organizations income or cash from deal, and (ii) $20,000 fine on the entity manager IRS has provided recent guidance


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