1. HFC Public-Private Partnership Basics
Presented By: Chris Sayers
Naman Howell Smith & Lee PLLC

2. The Partnership
HFC participation in an affordable housing partnership typically involves the HFC (through one or more of its affiliates) serving in the following roles:
General Partner of Tax Credit Limited Partnership
Landowner/Landlord of real property (not improvements)
Co-Developer
General Contractor

3. Benefits of Public-Private Partnership Structure
HFC benefits include:
Participation in and certain levels of control of design and operation of the development.
Fees and other income that can be used to serve the mission and purpose of the HFC.
Developer benefits include:
Property tax exemption.
Ability to take advantage of sales tax savings on hard construction costs.
HFC's ability to assist in navigating the political processes involved, including obtaining resolutions of no objection, help with permitting delays, identifying sources for soft money, etc.

4. General Partner
The HFC will typically form a single member LLC to act as the general partner of the Partnership in order to minimize risk to and reduce potential liability of the HFC.
The GP entity will have certain levels of control of and participation in the decision-making and day-to-day operations of the Partnership.
Generally, affiliates of the developer and the tax credit investor will be the limited partners of the Partnership.
Typically structured so that the assets of the GP entity will revert back to the sole member upon dissolution of the GP entity.
May need to make 168h election to potentially allow investor limited partner to receive the benefit of accelerated depreciation

5. Landowner/Landlord
The HFC or an affiliate entity will own fee simple title to the land.
The landowner entity will then enter into a long-term ground lease with the Partnership.
The HFC’s ownership of the land and other rights typically contained in the ground lease are important components of qualification for property tax exemption.

6. Co-Developer
The HFC will generally form a new affiliate entity to serve as co-developer of the project.
This allows the HFC to participate in the development process.

7. General Contractor
The HFC will form an affiliate (either a single member LLC or a nonprofit 501(c)(3)) to serve as the general contractor on a project, which can allow for an exemption from sales taxes for hard construction costs.
The HFC will typically enter into a subcontract with a subcontractor.

8. Sample Entity Structure

9. Property Tax Exemption
The property tax exemption is based on the HFC’s participation in the Partnership and ownership of the land.
Generally, under Chapter 394, Texas Local Government Code, all property owned by an HFC and used for public purposes is exempt from taxes imposed by the State.
Under Section 11.11, Texas Tax Code, property owned by the State or a political subdivision is exempt from taxation if the property is used for public purposes.

10. Property Tax Exemption
Key factors used to qualify for property tax exemption include:
The HFC’s ownership of the land.
The HFC’s ability to control the actions of the property owner through its role as GP and as landowner.
The HFC’s ability to compel title at any time (typically through a purchase option contained in the ground lease).
The HFC’s residual ownership of the development upon termination or the expiration of the ground lease.

11. Property Tax Exemption – Sample Value Chart

12. Sales Tax Exemption
Qualification for sales tax exemption on hard construction costs typically comes from the HFC or an affiliate LLC acting as its agent serving as the general contractor, or from a nonprofit 501(c)(3) entity serving as general contractor or participating in a joint venture.

13. Limitation of Liability
Various partnership documents usually contain typical indemnification provisions protecting the HFC.
HFCs will typically form single member LLC affiliate entities to participate as GP, landowner, co-developer, and sometimes as general contractor.
Nonprofit 501(c)(3) corporations affiliated with the HFC can also be used to act as the sole member of the GP entity and to serve as general contractor.
Forming a nonprofit entity and obtaining recognition of tax-exempt status from the IRS can take 6-9 months.

14. Working with an HFC – 4% Bond Deal Timelines
Submission of initial application to the HFC by the developer
Negotiation and finalization of MOU containing deal terms
Initial resolution by HFC board
Bond Review Board initial application
Bond Review Board 35-Day, 120-Day, and 150-Day deadlines
Request preliminary determination letter from appraisal district confirming availability of property tax exemption(varies by county, but can take up to 3 months to obtain)
TEFRA/Public Hearing (15-day notice of hearing)
TEFRA Approval
Bond Resolution approved by HFC Board of Directors
Attorney General filing deadlines:
Initial filing 12 business days before closing
Final Bond 5 business days before closing
Final documents and all signatures 3 business days before closing
Final AG Opinion issued
Closing
This process takes a lot of time!

15. Memorandum of Understanding
The MOU will contain the high level deal points between the Partnership, developer, and HFC.
Typical negotiated deal points include:
Developer Fee (typically 15-35%)
Cash Flow Split (typically 30-50%)
General Contractor Fee (can be calculated based on sales tax savings or as a percentage of hard construction costs, typically 20-30%)
ROFR
Purchase Options
Levels of GP oversight, involvement, and management of Partnership

16. Final Considerations – Benefits and Burdens
Public-Private partnerships are an excellent way to provide additional affordable housing by providing significant cost savings to the Partnership.
In some instances, a proposed affordable development would not otherwise underwrite without the tax savings made possible through the partnership structure.
Allows HFCs to have additional control over developments and to make additional money to use on other affordable housing initiatives.
Burdens:
Adds complexity to transactions.
Increases administrative burdens on HFC staff.
Working with developer/HFC can take some getting used to.

17. Thank you!
This presentation is not legal advice. It is a broad overview of a complex subject and an evolving area of law. Please consult an attorney and your team of advisors before entering into any type of transaction described in this presentation.