1. Section 8 Preservation Deal Challenges Presented by:Terry Kimm Reznick Group

2. Reznick Group Building Business Value 1 Depreciation rules applicable to projects with non US taxpayer entity as the general partner  Subject to tax-exempt use property rules with respect to depreciation  Define terms: MACRS Depreciation vs. ADS Depreciation Qualifying allocations vs. Varying Allocations  If GP only entitled to qualifying allocations you can use MACRS depreciation for all assets  If varying allocations, then to extent of GP’s highest participation percentage, that portion of the fixed assets must be depreciated using the ADS rules.  No ability to cure with 168(h) election

3. Reznick Group Building Business Value 2 Acquisition Basis – Assumed Debt Issues In order to get basis for all assumed debt, must be able to show: Basis is supported by an appraisal Reasonable expectation of repaying the assumed debt – residual analysis Land / Building splits are supported by the appraisal If doing a tax-exempt bond deal, possible 50% Test Issue – do you have enough tax-exempt bond proceeds to meet the test? Both land and building go into your denominator for purposes of calculating the 50% Test

4. Reznick Group Building Business Value 3 New Debt Issues  Still have residual analysis requirement  Pre enactment rules were onerous with respect to 9% Deals Loans of federal sourced funds needed to bear AFR interest rate HOME loans had the two out of three rule  Post enactment rules took away unfavorable treatment for below AFR federal loans  The allowable lower interest rates make the residual analysis easier to satisfy on soft debt – interest now accrues at a lower rate

5. Reznick Group Building Business Value 4 No change in rules with respect to seller take back debt – OID rules still apply and must use the AFR interest rate. Possible this could cause residual analysis issue.

6. Reznick Group Building Business Value 5 Special considerations when doing a tax-exempt bond deal  50% Test issue – test includes land and building in denominator.  May not want to be so aggressive with residual analysis with respect to assumed acquisition indebtedness  Controlling the 50% test—have some cushion/language in the development agreement that makes the fee reduced if overruns exceed a certain threshold/address the impact immediately when you overrun in case you can increase the tax exempt bonds.  Remember the 9% rate is fixed but the 4% rate continues to float

7. Reznick Group Building Business Value 6 Other Considerations  Importance of the needs analysis and if the project is in good shape try to focus on improvements that will reduce maintenance and utility costs.  Know your low income percentage. Some section 8 projects have people between 60 and 80% that don’t qualify.  Careful with any soft debt limitations on distributable cash flow  Difficulty in finding investors – consider alternative investments such as direct investment by lending bank  Anti-churning rule changes are an inducement for old GPs to revitalize because with 50% of residuals, they are likely better off with the new deal (same residual, improved property, development fee, legal right to continue to manage for 15 more years as GP).

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