1. The Institute for Professional Development TAX CREDIT PROPERTY DISPOSITION A New Generation of Rights, Obligations and Opportunities through Year 15 and Beyond October 11 & 12, 2007 Seaport Hotel, Boston, Massachusetts TAX CREDIT RECAPTURE AND RECAPTURE BONDS By: Walter C. Spiegel, Esq. Nixon Peabody, LLP

2. 2 BASIC RULE If, (A) as of the close of any taxable year in the compliance period, the amount of qualified basis of any building with respect to the taxpayer is less than (B) the amount of such basis as of the close of the preceding taxable year, then the taxpayers tax for the taxable year shall be increased by the credit recapture amount Section 42(j)(1)

3. 3 QUALIFIED BASIS/DECREASE IN QUALIFIED BASIS In general, qualified basis is the portion of a building that comprises low-income units (based upon the number of low-income units in the building compared to all of the units, or the floor space of the low- income units compared to the floor space of all of the units, whichever is smaller). Decrease in qualified basis, therefore, is a decrease in the number of, or floor space of, low-income units; a decrease in the number of low- income units can result from: low-income unit not being in compliance with Section 42 failure to satisfy income/rent restrictions damage/destruction due to casualty (not promptly restored) disposition of the project disposition of more than one-third of interests of a partner in partnership, limited liability company that owns the project

4. 4 SPECIAL RULE: DISPOSITION OF 1/3 OR LESS OF A TAXPAYERS INTERST Recapture not triggered upon disposition of one-third or less of a taxpayers interest in a low-income building or of his interests in a partnership that owns a low-income building. Revenue Ruling 90-60 and subsequent IRS guidance.

5. 5 TAX CREDIT RECAPTURE AMOUNT Equal to the sum of – (A)the accelerated portion of the credit FOR ALL PRIOR TAXABLE YEARS with respect to the decrease in qualified basis, plus (B)interest at the overpayment rate, on the accelerated portion, for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved. Section 42(j)(2)

6. 6 ACCELERATED PORTION OF THE CREDIT Generally speaking, the concept in Section 42 is that a taxpayer earns tax credits for each year of a 15-year compliance period that taxpayer maintains property in compliance with the Section 42 Program. However, Section 42 allows a taxpayer to claim 15 years worth of credits over the first 10 years of the life of a project; i.o.w., Sec. 42 allows a taxpayer to accelerate 5 years worth (or 1/3) of the total credits over the first 10 years of the project, even though taxpayer hasnt yet earned the credit with respect to keeping the project in compliance for the final 5 years of the compliance period. Therefore, for each of the first 10 years of the compliance period, 1/3 of the tax credits the taxpayer is entitled to claim has not yet been earned. This is the accelerated portion of the credit.

7. 7 ACCELERATED PORTION OF THE CREDIT cont Starting in year 11 of the compliance period through year 15, the accelerated portion of the credit is reduced ratably over the last 5 years of the compliance period; i.e. by keeping property in compliance, taxpayer earns down the credit for the last 5 years. Example: Partnership A is entitled to claim $15 for credits For the first 10 years, $5 per year ($50 total) is the accelerated portion Starting at the end of year 11, the accelerated portion is reduced by 20% per year or $1 per year; i.e. at the end of year 11, the accelerated portion is $4 per year or $40 total ($4 X 10 years); and so on

8. 8 SPECIAL RULE: TAXPAYER WILL NOT INCUR RECAPTURE UPON THE DISPOSITION OF A BUILDING OR AN INTEREST THEREIN IF: (A)The taxpayer furnishes to the IRS a bond in an amount satisfactory to the IRS and for the period required by the IRS; AND (B)The taxpayer reasonably expects that the building will continue to be operated as a qualified low-income building for the remainder of the compliance period. Section 42(j)(6)

9. 9 RECAPTURE BONDS – REVENUE RULING 90-60 Rev Rule 90-60 sets forth IRS guidance as to recapture bond requirements. Bond must be secured by a surety holding a Certificate of Authority from Department of Treasury, Financial Management Service. Authorized bonding companies are listed in Treasury Department Circular 570 See http://www.fms.treas.gov/570 for current list of authorized companies.http://www.fms.treas.gov/570 Bond must be maintained for a period that ends no sooner than 58 months after the last day of compliance period for building. Amount of bond is determined by reference to a table of bond factor amounts published by IRS. See http://www.irs.gov/businesses/lists/0,,id=98230,00.htmlhttp://www.irs.gov/businesses/lists/0,,id=98230,00.html In general, the bond factor equals the maximum tax credit recapture liability, including interest

10. 10 RECAPTURE BONDS – REVENUE RULING 90-60 CONT Bond must be filed with IRS within 60 days of the recapture event. IRS Form 8693, Low-Income Housing Credit Disposition Bond, together with: Computation work pages supporting bond amount 8609 Bond Corporate resolution for authorized bond signers Ownership organization structure at time of recapture

11. 11 RECAPTURE RISK TO SELLERS Sellers can suffer recapture if Buyer fails to keep property in compliance with Section 42. Purchase and Sale Agreement provisions important Buyer representations and warranties Buyer/Guarantor indemnifications