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