1. Proposed Treasury Regulation §1.42-18 Qualified Contracts Presented by Michael J. Novogradac, CPA michael.novogradac@novoco.com www.taxcredithousing.com

2. Background Overview Price Process www.taxcredithousing.com

3. Background LIHC properties are required to meet initial 15 year compliance period Extended use agreement requires an additional 15 year compliance period Qualified contract allows building to transition to market after the initial 15 year compliance period www.taxcredithousing.com

4. Overview After year 14, owners can request state find a buyer at the qualified contract price –State has 1 year –Else, transition to market housing over three years Did you waive the right to a qualified contract? www.taxcredithousing.com

5. Qualified Contract Price

6. FMV of the non low-income portion of the building Statutorily calculated price for the low-income portion of the building + Qualified Contract Price www.taxcredithousing.com

7. FMV of the non low-income portion of the building Statutorily calculated price for the low-income portion of the building + Qualified Contract Price www.taxcredithousing.com

8. FMV of the non low-income portion of the building Statutorily calculated price for the low-income portion of the building + Qualified Contract Price Non Low-Income Portion FMV is determined at the date property is offered for sale Valuation must include impact of the extended use agreement All land is included at FMV www.taxcredithousing.com

9. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion Low-Income Portion FMV of the non low-income portion of the building Statutorily calculated price for the low-income portion of the building + Qualified Contract Price www.taxcredithousing.com

10. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion www.taxcredithousing.com

11. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion Outstanding Indebtedness Remaining principal balance of debt Up to qualifying building costs (eligible basis) Includes developer fee notes Unclear if debt must be traced to qualifying costs Careful: Special rules apply to below-market loans www.taxcredithousing.com

12. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion Outstanding Indebtedness Below Market Loans –Principal balance on below market loans discounted using the OID rules –May result in reduced cash for the seller if the loan is not assumed by the buyer www.taxcredithousing.com

13. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion Adjusted Investor Equity Equity invested for qualifying building costs Investment must be made pursuant to an obligation to invest as of the beginning of the credit period Equity invested is grossed-up by increases in CPI www.taxcredithousing.com

14. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion Other Capital Contributions Includes capital contributions not made pursuant to a requirement to invest as of the beginning of the credit period Other capital contributions are not grossed-up by increases in CPI www.taxcredithousing.com

15. Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion Outstanding Indebtedness Adjusted Investor Equity Cash Distributions Includes all distributions to owners and related parties Includes cash available for distribution at the time of sale Anti-abuse rule: potentially reclassifies payments for operating expenses in excess of reasonable amounts Potential for double-counting if distributions are paid using refinancing debt proceeds www.taxcredithousing.com

16. Outstanding Indebtedness Adjusted Investor Equity Other Capital Contr. Cash Distr. Applicable Fraction Low-income Portion www.taxcredithousing.com

17. Qualified Contract Process

18. Offers must be bona fide –No guidance on what constitutes bona fide –May result in abuse of the process Property owners may reject the contract State may limit the number of re-applications www.taxcredithousing.com

19. Qualified Contract Process State housing agency may adjust the FMV of the building if: –No buyer has made an offer –Market values have adjusted downward Legal and accounting costs are excluded –Unclear if costs capitalized to the building are excluded www.taxcredithousing.com

20. Qualified Contract Process Documentation requirements vary FL example: (i) Calculation of qualified contract price (ii) Narrative description of the project (iii) Description of the regulatory restrictions (iv) Photographs of exterior and sample units (v) Operating statements for the prior 12 mos (vi) Current rent roll (vii) Copies of leases www.taxcredithousing.com

21. Question and Answers

22. E-mail additional questions to: michael.novogradac@novoco.com www.taxcredithousing.com