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Deeper Into Year 15 - AZ

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Deeper Into Year 15
How to Survive the Transition from Compliance Period to Extended Use
Limited Partner Exits
Structure of LP Exit
End of Year 15 Compliance Period
The last day of the 15thyear since the credits were first takenCheck 8609’s – Look when credits were taken for last building PISPIS 2000, credits taken 2000, Y15 = 12/31/2014PIS 2000, credits taken 2001, Y15 = 12/31/2015Plan disposition for early Year 16 unless you negotiate an early exit with LPStart talking to LP in Year 14/early Year15
Negotiating the LP Exit
Check your Limited Partnership Agreement:If Non-profit, should have a ROFR for debt + exit taxesDo you have a purchase option?Is there a “Put” option?LPA may be ambiguousBeaware of any deadlines –Can LP force a sale?When can options be exercised?Can LP transfer LP interest without GP consent or remove GP?Does LP or GP get the majority of residual proceeds?
Structure of LP Exit
Purchase PropertyNon-Profit Typically has Right of First RefusalAssignment/ Purchase of LPInterestTypical Exit StructurePartnership SellsProperty to 3rdParty
ROFR to Purchase Property
IRS Code allows the sale of LIHTC projects through ROFR to certain groups at a bargain priceQualified Non-profitsResident Management CorporationsTenantsGovernment Agencies
ROFR cont.
Price = Debt + Exit Taxes (and sometimesunpaidbenefits)Possible Issues:Bona fide 3rdParty Offer May be RequiredPrice may exceed FMVifdebt is highReserves may not be includedTransaction Costs
Assignment of LP Interest
Price is normally the GREATER of Fair Market Value of the Partnership Interest ORUnpaid Benefits plus Exit TaxesAdvantages:No change in title providing reduced transaction costs (transfer taxes and recordation fees)Simpler Legal Agreements
Analyze Potential Sale
Estimate a Theoretical Sale of Property to determine LP’s interestThe LP will most likelydoan appraisal orvaluationof theproperty to determine the pricePurchase proceeds will need to go through the waterfall and be distributed accordinglyAmountof equityat stakemay make negotiations easy ordifficult
Analyze Potential WaterfallDistributions
TIPS:GP can get another appraisal (process may be spelled out in Purchase Option)GP can get a Capital Needs Assessment done to show capital improvements needed by propertyIf not actual sale, will LP consider deducting costs from PP as if it were an actual sale (broker’s fees, marketing costs, etc.)?Ifreplacement reserveswill bedistributed through the waterfall,can they be used for capital needs beforeY15 so they benefit the property?Don’t forget to include all costs in the waterfall:AccountspayableFinal Audit CostEstablish Reserves reasonably required byGPNegotiate
Purchase Option
Purchase Option Price Varies by Investor (Check your LPA)Some examples are:GREATER of Fair Market Value of LP interest OR Unpaid Benefits + Exit Taxes + Expenses from SaleGREATER of FMV OR Debt + Taxes + Unpaid Adjusters OR AppraisalGREATER of FMV OR Debt + Taxes +Expenses from Sale + Amounts owed to LP
Sale to Third Party
Typically occurs if:GP does not want to own the propertyGP does not exercise ROFR or Option to purchaseLP and GP can not reach an agreement
Negotiating the LP Exit – For Profit
Key for profit distinction -- will be Fair Market ValueFully know your & your investors rights – documentsIf there is no forced sale it is a business negotiation
LP Exit by the Numbers
Capital Gain vs Depreciation Recapture vs Ordinary IncomeHow to manage capital accounts – goal is $0Opportunities (i.e. timing) to avoid exit taxesThe Year 15 ProblemExit Examples
What is The Year 15 Problem?
GPthinks it is a 90/10residual splitTax Code:“onliquidation, distributions must be made in accordance with capital accounts”Treasury Reg 1.704-I(b)(2)(ii)(b)(2) “cash is distributed according to positive capital accounts”But wait! The partnershipagreementwaterfall…
Typical Waterfall
Sale or Refinancing Proceeds shall be applied in the following order of priority:A) To the payment of all expenses of such sale or refinancing.B) To the payment of all debts and obligations of the partnership other than amounts owed to Partners.C) To establish any Reserves reasonably required by the GP.D) To repay any LP Loans.E) To repay any GP Loans.G) The balance shall be distributed10%to the LP and90%to the GP.
What “Trumps” the Waterfall
Eventswhich cause a Dissolution of the Partnership shall include:A) Election made by the GP with the consent of the LPB) Withdrawal of GPC) Sale or other disposition of all or substantially all of the assets of the Partnership.Priorityon Liquidation – To extent proceeds are sufficient, they shall be applied in the following order:A) In accordance withwaterfall AthroughEB) The balance shall be distributed in accordance with positive Capital Accounts.
4% Example
9% Example
Timing of LP Exit
Start earlyLP decision making processPlanningMake concrete written proposalBroker opinion of value?Early Exit Yr. 10 – Indemnify RecaptureGP now gets lossesYear 15 and later
Things to Consider
10 Year Rule
Requires10yearsbetweenthe date of acquisition (the placed in service date for the acquisition credits) by the new owner and the last time the building was placed in service, or the date of the most recent substantial rehabilitation.
10 Year Rule - Continued
Transferofownershipnottreated as a new “placed in service”date ifthe building is acquired by a unit of government or a nonprofitorganization;andit has been at least 10 years since it was most recently placed inservice.also applies if sale was due to foreclosure or project is purchased from failed financial institution
10 Year Rule - Continued
HERA 2008 waived the10-yearrule for properties substantially assisted byHUD, Rural Development, or similar State programs.Under the 10-year rule, for the purchaser of a property to qualify for acquisition credits, the buyer can’t have purchased the property from a “related”party.
Existing Use Restrictions
LURA survives saleWho is Buyer? Seller? Related parties?
Related Party - Defined
Prior to the Housing and Economic Recovery Act of 2008, related ownership could not exceed 10%.After HERA 2008, the threshold was changed to 50%.Related ownership:person is considered related to the purchaser if the relationship between such person and the purchaser is one contained inIRC Sec.267(b) or 707(b)(1)
Related Party - Continued
Threshold determined through ownership in either the capital or profits interestExample:GP loss percentage is .01%GP cash split is 90%GP is considered to have 90% ownership in profits interestApplies to all partners in common between selling and buying entities.
Related Party Example
PartnerP owned more than a50%interest in Partnership A.NewPartnership B is formed to purchase the building of Partnership A with the objective of rehabilitating it to obtain Low Income Housing Tax credits.PartnerP’s ownership interest in the capital or profits in New Partnership B cannot exceed50%.
Ways to Structure to Meet Related Party requirements
General partner is >51% controlled by a dis-affiliated entityAdvantagesDo not have tocap fees to GPSomemembers may overlap – check with counselIf co-GP is a non-profit or Housing Authority, maygetproperty tax exemptionDisadvantagesLoss ofcontrol of general partnershipMay need to pay or share fees with disaffiliated entityMay not qualify for property tax exemption if disaffiliated entity is not non-profit
Ways to Structure to Meet Related Party requirements
GP can reduce distributions to <50%If there is a largesellernote, soft notes, and/or deferred developer fees to absorb cash flow, disaffiliation issues may not be a problem as distributions may not be significant
Ways to Structure to Meet Related Party requirements
Non-profit purchases property and owns and manages property for a fee before re-syndicationAdvantagesCan use when purchasing from non-related party to maintain 10 year hold and not cause related-party issues before re-syndicationDisadvantagesMayhave to payfeesto interim non-profit holderDo not havedirect control ofproperty before re-syndication, while incurring pre-development costsDifficult to find non-profit holder
Ways to Structure to Meet Related Party requirements
Dominium “Standard” / “Non-Standard” transactions
Financing the Gap
Same limited sources as new 9%Seller note if possibleBona fide debtApplicable Federal Rate
Example 4% Re-syndication

Robin Raida ( Sween ( Gibson (





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Deeper Into Year 15 - AZ