Early Withdrawal of Investment Partners Dave Lundgren Dec. 6, 2016

Low-Income Housing Tax Credit Overview Included as a temporary measure in the Tax Reform Act of 1986 to encourage construction and rehabilitation of low-income rental housing. It allows investors an annual tax credit over a ten-year period, provided occupants qualify as low-income & low-rent applies. Program was made permanent in 1993—IRC 42 Though tax credit claimed over 10 years, must comply with restrictions for 15 years—”compliance period” Spokane Indian Housing Authority just released its investment partner under 2004 Tax Credit Project called “Spokane Homes I Project” (SH 1)—first early release for a Tribal housing project in Washington Early Withdrawal of Investment Partner

NEED TO ADDRESS FOR EARLY WITHDRAWAL OF INVESTMENT PARTNER SH 1 PROJECT Master Lease & Sublease Tenant lease Partnership Agreement—Filed with state Loan Agreement—Leasehold Mortgage Subordination Agreement Regulatory Agreement—Extended Use Agreement State regulations Laws: Tribal, Federal & state PRESENTATION TITLE

Extended Use Agreements (Regulatory Agreement) Taxpayer and Agency Allocating Housing Tax Credit In each state, the IRS designates an agency authorized to allocate low-income housing tax credits. In Washington it’s the Washington State Housing Finance Commission (WSHFC). Tax Credit structure involves two foreign concepts: Taxpayer status & state agency regulation Create a limited liability partnership under state law, housing entity as general partner and investor as limited partner Partnership enters extended use agreement with state agency & investor gets tax credit allocation under partnership agreement between Housing & investor Early Withdrawal of Investment Partner

Partnership Agreement Governs Distribution of Tax Benefits Since housing entity is nontaxable entity, partnership agreement provides that financial partner enjoys tax credits Sets out dispute resolution process—sovereign immunity addressed Sets out process for termination of partnership Triggers state law provisions for dissolution and winding up Early Withdrawal of Investment Partner

Terms of Extended Use Agreements Extended Use Period In addition to the 15-year compliance period, the Extended Use Agreement must extend the compliance period for at least another 15 years, or longer as set out in the agreement, called the “extended use period.” IRC 42(D) SIHA created New House Lane Limited Partnership #1 in 2004 with Washington Mutual as investment partner WAMU’s assets acquired by JPMorgan Chase Bank Partnership had entered Agreement with WSHFC that included a 22-year extended use period Early Withdrawal of Investment Partner

NAHASDA PROGRAM REGULATORY AGREEMENT NAHASDA Funds Projects using NAHASDA funds require an agreement between housing entity—the Lender—and the partnership—the Borrower—to ensure the Borrower complies with NAHASDA. Requires partnership to comply with NAHASDA and to report to the Lender to demonstrate compliance If partnership terminated, requires Lender to obtain opinion from legal counsel that “termination will not adversely affect the eligibility of the Project for financing of the Project under the NAHASDA Regulations.” Early Withdrawal of Investment Partner

STATE HOUSING COMMISSION EXTENDED USE AGREEMENT COMPLIANCE FOR TERMINATION Housing entity must obtain prior approval from state agency to terminate the partnership and allow for transfer of limited partner’s partnership interests. Application process Transfer fees involved—For SIHA it was $2,500 Proof that insurance will transfer Certify no change in management, status of project reserves, consideration to be paid & tax if any Early Withdrawal of Investment Partner

RECAPTURE DUTY TO AVOID RECAPTURE FOR INVESTOR IRC 42(j) provides tax credits claimed can be recaptured if the qualified basis for a project is reduced from one year to the next during the compliance period. Eligible Basis = cost of project (IRC 42(d)) Qualified Basis = eligible basis X portion dedicated to low income housing Credits based on qualified basis over 10 years Recapture of credits can occur for full compliance period Early Withdrawal of Investment Partner

AGREEMENTS WITH PARTNER Two Agreements Required: Purchase Agreement Consideration Clarify no transfer taxes (Quinault Indian Nation v. Gray’s Harbor County, 310 F.3d 345 (9th Cir. 2002)) Assignment and Assumption Housing accepts transfer of interests and assumes responsibility to comply with IRC 42 Early Withdrawal of Investment Partner

Resolution from Housing Entity AUTHORIZE PURCHASE, ASSUMPTION, DISSOLUTION AND WINDING DOWN Follow terms of partnership agreement and address sovereign immunity in consistent way: Authorize signature on agreements Authorize payment of consideration Authorize initiation of process to comply with state law: State Housing Agency Compliance Notice to Secretary of State on Dissolution Authorize winding down—acceptance of assets & liabilities Early Withdrawal of Investment Partner

OPINION OF COUNSEL NAHASDA REGULATORY AGREEMENT Legal opinion required that termination will not adversely affect eligibility for NAHASDA funding. The Code allows for transfer without recapture if project remains compliant, under IRC 42(j)(6)(a). However, IRC 42(d)(5)(A) provides: The eligible basis of a project will be reduced by amounts received that are “federal grants” except: Section 8 Vouchers (26 CFR 1.42-16(b)(1)) and IHBG funding (Rev. Rul. 2008-6 (2007)) Early Withdrawal of Investment Partner

Tenant Protection During and After Initial Compliance Period Tenants must qualify as low-income and low-rent must be maintained during compliance period. After initial 15-year compliance period: Tenants may purchase the unit (right of 1st refusal) Credit given to tenant at original value less 5% per year reduction = 75% reduction for 15 years Tenants may not be evicted without good cause If tenant leaves, new tenant gets benefit of credit Credit remains at 75% after year 15 Early Withdrawal of Investment Partner

Agreement with State Agency Transfer Agreement State housing agency must authorize the transfer of limited partner’s partnership interests prior to the transfer. Parties include the agency, the partnership and the housing entity Housing entity agrees to assume tax credit responsibilities of the partnership Housing entity agrees not to evict tenants, not to refuse to renew leases, and to allow tenants to sue to enforce Early Withdrawal of Investment Partner

Options for Tenants Purchase, Continue Renting or Transfer Tenants may utilize credits to purchase, continue renting or voluntarily transfer to another unit not part of the tax credit project With early exit of investment partner tenants may be prepared to qualify for ownership Housing entity may offer incentives, like down-payment assistance, which can make unit virtually free Once unit is sold it is removed from tax credit program Unsold units remain restricted for extended use period until sold Early Withdrawal of Investment Partner

Questions? David R. Lundgren, PC P.O. Box 29 Loon Lake, WA 99148 (509) 233-8152 LundgrenPC@gmail.com Early Withdrawal of Investment Partners