Lessons Learned: Dispositions & Improving Organizational Execution in Year 15 @dozcpa

Determining Year 15 Basics of Year 15 Based off first year LIHTC were claimed Example: First Year: 2000 Year 15: 2014 Outside of LIHTC compliance period: 2015

Basics of Year 15

What does Year 16 mean for: Basics of Year 15 What does Year 16 mean for: IRS State Agency Investor Early exit Additional considerations – future recapture? Guarantees, bonds, indemnity agreements Are there any 15 year credits? When does year 16 start if there are multiple BINs?

Basics of Year 15 Investors/Syndicators General Partner Goals: Is there cash/value on the investment? Exit tax consideration Get out early to minimize Exit Tax? Timing of exit – Preference of specific fund/investors Other investments within a fund General Partner Long term ownership (management fees, cash-flow) Profit from sale Resyndication

How is Y15 addressed in the Partnership Agreement? Planning Stages How is Y15 addressed in the Partnership Agreement? Planning starts at the Placed-in-Service date Capitalization Allocation Depreciation Management $10,000,000 Building Allocated as Following (no bonus depreciation) Year 10 of the deal: (5y) 4%, (15y) 4%, (27.5y) 92% - Accumulated Losses: $4,012,121 (40%) (5y) 6%, (15y) 6%, (27.5y) 88% - Accumulated Losses: $4,200,000 (42%) (5y) 8%, (15y) 8%, (27.5y) 84% - Accumulated Losses: $4,387,879 (44%) (5y) 10%, (15y) 10%, (27.5y) 80% - Accumulated Losses: $4,575,758 (46%) $375k difference at year 10

Planning Stages Monitoring Capitalization (De Minimis Safe Harbor election) Book and tax have to be the same Monitoring Capital Accounts 704(b) – general concept – liquidation must follow positive capital balances Exit tax considerations Potential issues - 704(b) trumps the waterfall calculation Reduction in 704(b) basis from other Federal credits: Historic, solar, 45L Managing Deferred Development Fee Who and when is it paid? How does that effect the capital accounts? Is it bona fide debt?

Minimum Gain Calculation Planning Stages Minimum Gain Calculation Determination of Qualified Non-recourse debt Determination of Reserves in the calculation Are the Projections anticipating a minimum gain? 9% vs. 4% deals Allocating Losses Special allocations in Partnership Agreement GP contribution/ODL for operating expenses - can be allocated to GP? Flip in P&L % after year 11 Difference consequences depending on GP (FP or NFP)

Planning Stages – Other Considerations Types of Debt: Soft debt, usually need approval before sale, or money can be paid out HUD debt: requires HUD approval for the change in ownership Potential for refinance Use Agreements: Adjustment for extended Use Agreements Other loan, grant, or restrictive covenants

Purchase of LP interest Resyndication Qualified Contract Exit Options: Purchase of LP interest Hold, sell, refinance Resyndication Qualified Contract Right of First Refusal (ROFR) Sale of property to 3rd Party

Purchase of LP Interest GP purchases LP’s ownership interest Technical termination is transfer of 50% interest OR Termination if only one partner – partnership is disregarded for Federal Tax purposes Options for GP after purchase of LP interest Repurpose the building (Qualified Contract) Hold the building & continue to operate/manage Cash flow? Sell the building to 3rd Party Refinance and rehab the building Resyndicate the building (more on this later…)

Purchase of LP interest Considerations in purchase of LP interest Is there a need to keep the Partnership intact? Termination vs. Technical Termination Transfer taxes Section 754 election Potential Section 743(b) adjustment to GP - step up or step down Is the Section 743(b) step down adjustment mandatory? Partnership audit rules – new rules to be in effect for years beginning after 12/31/2017 Potential impact particularly in the realm of ‘early exits’ before end of 15 year compliance period

Resyndication Potential for new round of LIHTC & LIHTC equity Rehab credits – 9% Owner must spend the greater of $6,600 per unit (adjusted annually for inflation) OR 20% of its adjusted basis Period of no longer than 24 months to accumulate rehab expenditures Acquisition credits – 4% 10 year rule – must be at least 10 years between the date of acquisition and the last time the building was placed in service Waived if substantially assisted by HUD or RD (HERA 2008) Related Party Rule – new property owner must not be related to the previous owner HERA 2008 – changed the related party threshold is 50% of capital or profits interest overlap in old vs. new partnership Pre-HERA 2008 – used to be 10%

Allows for repurposing the building Qualified Contract Based on the individual state, but the state will calculate a selling price and put it on the market for 1 year. If no buyer is found, then the extended use agreement is terminated Price is usually much higher than market value, unless the land and building have appreciated Price: Outstanding debt + Capital Invested (adjusted for Cost of Living) – and distributions and funds available for distribution Allows for repurposing the building If the market has changed, allows for the building to be converted to other types of property

Set up to Purchase the real property not the LP interest Right of First Refusal Available to NFP only Calculation: Approx. the cost of the debt + any transfer costs/taxes Usually ends up being $1 Set up to Purchase the real property not the LP interest In practice, it is used to determine the price Other factors: Amounts of reserves and who gets them

Sale of property to third party Considerations in a third-party sale: If GP wants out of the Project, or GP/LP do not agree Extended use agreement in place? Impact on appraised value Buyer could have intent to resyndicate 10 year hold rule for Acquisition Credits Waived if HUD ‘substantially assisted’ by HUD or RD Computation of gain/loss on sale of property Cash distributions – LPA waterfall vs. 704(b) liquidation Non-resident withholding considerations What if 704b liquidation trumps waterfall? (See example) GP can purchase LP interest before sale

Example of sale – 80/20 cash split

Example – sale of property with problematic 80/20 cash split

Contact name, nmorton@doz.net or ewilde@doz.net Questions? Contact name, nmorton@doz.net or ewilde@doz.net @dozcpa