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Tax-Exempt Use Property

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Presentation on theme: "Tax-Exempt Use Property"— Presentation transcript:

1 Tax-Exempt Use Property
When we talked about a tax credit property, we are talking about a minimum 15 year investment. Projects are committed for longer than that. 15 years is a long time. No surprise that owners may not be willing or able to continue. Before we get started, I want to welcome our speakers back. Mike and Monica have already been introduced but I want to welcome them back. We’ve seen a lot of ownership changes over the years and see same issues. Secondary activity isn’t a bad thing. It’s a healthy sing of maturing market. More liquidity. This panel is going to focus on general partner transfers and structuring general partner transfers during the ownership period. We will start by discussing what drives these sales. We are going to break this panel into 3 parts. I’m going to introduce the topic with a very basic overview of the tax and business issues to consider when structuring general partner ownership changes. I’ll turn it over to the Michael Kotin who will give us the buyer’s perspective. What are the major issues he focuses on when determining whether to step into an existing tax credit property. We’ll end with Monica Sussman who will walk us through the process when HUD is involved. HUD projects are very unique so want to make sure we leave room for this. There is no one way to structure these. No single set of issues. I’m going to provide general overview of issues that typically arise. ___________ issues in ___________ but at least we can leave here with basic issues list so we don’t get blindsided. We are going to focus on general partner changes but many of these concepts apply to other types of secondary market activity. Hope these items will be transferable. Every deal is different. Aleks Frimershtein (213)

2 Section 47(c)(2)(B) HTC is based on amount of QREs
“Qualified Rehabilitation Expenditures” do not include — (v) … Any expenditures in connection with the rehabilitation of a building which is allocable to the portion of such property which is (or may reasonably be expected to be) tax-exempt use property

3 What is Tax-Exempt Use Property?
Ownership -- Tax-exempt entity -- Property owned by partnership with tax-exempt partners -- Property owned by partnerships with partners that are subsidiaries of tax-exempts Disqualified Lease -- Tax-exempt entity -- Partnership with tax-exempt partners

4 What is a Tax-Exempt Entity
The US, any state, political subdivision, possession of the US, any agency or instrumentality Exempt organizations (e.g., 501(c)(3), (c)(4), and pension funds) Any foreign person or entity or Indian tribe Tax-exempt controlled entity - corporation 50% of value is owned by tax-exempt

5 Section 168(h)(6) Election
If we have a tax-exempt controlled entity, then it can make an election to not have the rules apply The election makes dividends, interest from the subsidiary, liquidating distributions, and sales of the corporate stock taxable to the exempt parent(s)

6 “Proportionate Share”
Only the tax-exempt’s “Proportionate Share” of the property is considered “tax-exempt use” This is defined to be the tax-exempt’s highest interest in the partnership’s income or gain Ownership - If the tax-exempt’s interest in all tax items is the same, then we have a “qualified allocation”, and there’s no problem .

7 Illustration of Proportionate Share
A tax-exempt has a .01% interest in tax credits, and operating profits and losses. It also has a 50% interest in profits from a capital transaction (the “back end”) Proportionate share is 50% HTC cannot be claimed on 50% of the property unless qualified allocation

8 Disqualified Lease A "disqualified lease" is defined as a lease to an exempt organization where (1) Part or all of the property was financed directly or indirectly by tax-exempt debt … and the exempt org (or a related entity) participated in the financing, or

9 Disqualified Lease (2) Under the lease there is a fixed or determinable purchase price or an option to buy that involves the exempt org, or

10 Disqualified Lease (3) The lease term is in excess of 20 years,
the term of the lease is deemed to begin when the property is first made available to the lessee under the lease. Include “realistic contemplation of the parties” at the time the property is first put into service. Includes enforceable option to renew Renewable at fair market value exception

11 Disqualified Lease (4) The lease occurs after a sale or other transfer of the property from the exempt org (or a related entity) and the exempt org (or a related entity) used the property before the sale or lease. There’s a 3-month exception when first placed in service

12 Exceptions 35% Test - The disqualified lease rules apply only if the portion leased to tax-exempt entities under disqualified leases is more than 35% of the property Test applies to the “net rentable floor space” of the building. It does not include the common areas of the building. Short Term Lease - Less than 3 years

13 What Constitutes a Lease?
Lease means any “grant of a right to use property” License Booking Arrangements Management/Servicing Contract

14 Lease Term Options to renew Service Contracts Successive Leases
Part of the same transaction which includes a lease With respect to the property or substantially similar property Successive Leases

15 The Master Lease Problem
Reg §1.168(j)-1T provides that you add together “multiple leases covering the same or substantially similar property that are part of the same (or substantially similar) transaction” Can apply to a master lease with a shorter lease to an exempt organization executed at the same time.

16 Recapture Regs, (f)(3): if all or a portion of a rehab becomes tax-exempt use property within five years after the credit is claimed, the credit is recapture as if the property had then been sold.

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