1. Carryover Allocations and 10% Test
LEARNING THE BASICS:
HOUSING TAX CREDITS “101”
IPED, INC.
Boston, Massachusetts
June 7-8, 2007
Rebekka Hermans Or, Esquire
Nixon Peabody LLP
100 Summer Street
Boston, MA
(617)

2. Federal Placement in Service Deadlines
General Rule: A project must generally be placed in service in the year that the low income housing tax credit is allocated by the tax credit agency
Carryover Exception: A project which receives a valid carryover allocation may be placed in service no later than the end of the second calendar year after the year that a carryover allocation is made
To obtain such an extension, a project must receive a valid carryover allocation agreement and satisfy the “10% test” in a timely manner

3. Requirements for a Valid Carryover Allocation
The address of the building (or if none exists, a specific description of its location)
The name, address and taxpayer identification number of the building owner
The name and address of the state tax credit agency
The taxpayer identification number of the state tax credit agency
The date of the allocation
The credit dollar amount allocated to the building
The taxpayer’s total reasonably expected basis in the project as of the close of the second calendar year after the allocation year
The taxpayer’s basis in the project at the close of the calendar year in which the allocation is made and the percentage that this amount bears to the total reasonably expected basis
The date the building is expected to be placed in service
The building identification number assigned to the building
The carryover allocation containing the items above must be completed, signed and dated by an authorized state tax credit agency official

4. Satisfying the 10% Test
Federal Rule: 10% of the reasonably expected basis in the project (as of the close of the second calendar year) must be paid or incurred by the later of (i) the end of the calendar year for which the credit allocation is made, or (ii) six (6) months after the date of the carryover
States may impose stricter standards as long as the terms do not violate the Federal credit rules
10% test is a “cliff” test

5. Defining “Reasonably Expected Basis” For 10% Test
Reasonably expected basis means the adjusted basis of land and depreciable property (whether or not it is included in eligible basis)
Basis attributable to non-residential rental property (i.e., commercial property/site improvements) may be includable in carryover allocation basis even though such property is not included in eligible basis
Eligible costs include building/construction costs, related personal property and land costs
Ineligible costs include permanent loan fees, reserves, syndication fees, partnership organizational costs and tax credit fees
Costs may be incurred by taxpayer prior to the calendar year of the allocation
QCT/DDA increases not included in 10% test calculations

6. Common 10% Test Expenditures
Acquisition costs for land and buildings
Construction costs (e.g., materials, permits, etc.)
Development fee
Fees for services (e.g., architect, contractor and engineer)
Construction financing fees/construction period interest

7. Examples of Supporting Documentation
10% Test Review
Examples of Supporting Documentation
and
Tax Considerations

8. Acquisition of Land/Buildings
Documentation
Recorded deed to entity receiving carryover allocation
Title insurance policy
Settlement statement
Purchase money note/mortgage
Other financing documents (including evidence of at least 10% cash down payment)
Appraisal (especially important in related party transfers to support purchase price)

9. Construction Costs Documentation Construction contract
Invoices/draw requests for all costs
Lumber and materials: need to review storage contracts, evidence of insurance, down payment and promissory note for any unpaid balance

10. Developer Fees Documentation Development agreement
Need to review the written development agreement in place on 10% test deadline date
Scope of work limited to eligible services
Agreement must include benchmarks for earning fee
Confirm that benchmarks are satisfied to properly include development fee in 10% test calculation

11. Fees for Services Documentation
Written agreements (such as architect/engineering contracts) describing services
Invoices and work product for services rendered (such as environmental reports and market studies)
Statements of legal/accounting costs must be related to the actual acquisition/construction of the project (not for syndication, partnership formation or permanent loans)

12. Construction Financing Fees and Construction Period Interest
Documentation
Evidence of obligation to pay, such as loan agreement or promissory note and interest statements
Additional issues with construction/permanent loans

13. Additional Considerations
10% Test Review
Additional Considerations

14. Incurring the Costs
Entity receiving the carryover allocation must be the entity that has incurred the costs
If the entity is incurring an expense without actually paying the cost, the entity must be an accrual basis taxpayer (the election to be on the accrual basis is made on the entity’s first tax return)
If the entity incurring a cost is not the entity which has received tax credit allocation, the parties should execute a Reimbursement Agreement obligating the entity receiving the allocation to reimburse the entity providing the services