deeper into year 15
TRANSCRIPT
Deeper Into Year 15How to Survive the Transition from Compliance Period to Extended Use
LIMITED PARTNER EXITS
Structure of LP Exit
End of Year 15 Compliance PeriodThe last day of the 15th year since the
credits were first taken Check 8609’s – Look when credits were
taken for last building PIS PIS 2000, credits taken 2000, Y15 = 12/31/2014 PIS 2000, credits taken 2001, Y15 = 12/31/2015
Plan disposition for early Year 16 unless you negotiate an early exit with LP
Start talking to LP in Year 14/early Year15
Negotiating the LP ExitCheck 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 ambiguousBe aware 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 ExitPurchase Property
◦Non-Profit Typically has Right of First Refusal
Assignment / Purchase of LP Interest◦Typical Exit Structure
Partnership Sells Property to 3rd Party
ROFR to Purchase PropertyIRS Code allows the sale of LIHTC projects through ROFR to certain groups at a bargain price• Qualified Non-profits• Resident Management Corporations• Tenants• Government Agencies
ROFR cont.Price = Debt + Exit Taxes (and
sometimes unpaid benefits)Possible Issues:
• Bona fide 3rd Party Offer May be Required
• Price may exceed FMV if debt is high• Reserves may not be included• Transaction Costs
Assignment of LP InterestPrice is normally the GREATER of
Fair Market Value of the Partnership Interest OR
Unpaid Benefits plus Exit TaxesAdvantages:No change in title providing
reduced transaction costs (transfer taxes and recordation fees)
Simpler Legal Agreements
Analyze Potential SaleEstimate a Theoretical Sale of Property to determine LP’s interest• The LP will most likely do an appraisal
or valuation of the property to determine the price
• Purchase proceeds will need to go through the waterfall and be distributed accordingly
• Amount of equity at stake may make negotiations easy or difficult
Analyze Potential Waterfall DistributionsTIPS:• 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 property• If not actual sale, will LP consider deducting costs from PP
as if it were an actual sale (broker’s fees, marketing costs, etc.)?
• If replacement reserves will be distributed through the waterfall, can they be used for capital needs before Y15 so they benefit the property?
• Don’t forget to include all costs in the waterfall:• Accounts payable • Final Audit Cost• Establish Reserves reasonably required by GP
• Negotiate
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 Sale
GREATER of FMV OR Debt + Taxes + Unpaid Adjusters OR Appraisal
GREATER of FMV OR Debt + Taxes + Expenses from Sale + Amounts owed to LP
Sale to Third PartyTypically occurs if:• GP does not want to own the property • GP does not exercise ROFR or Option to purchase• LP and GP can not reach an agreement
Negotiating the LP Exit – For ProfitKey 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 NumbersCapital 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?
GP thinks it is a 90/10 residual splitTax Code:
◦“on liquidation, 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 partnership agreement waterfall…
Typical WaterfallSale 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 distributed 10% to the LP and
90% to the GP.
What “Trumps” the WaterfallEvents which cause a Dissolution of the Partnership shall include: A) Election made by the GP with the consent of the LP B) Withdrawal of GP C) Sale or other disposition of all or
substantially all of the assets of the Partnership. Priority on Liquidation – To extent proceeds are sufficient, they shall be applied in the following order: A) In accordance with waterfall A through E B) The balance shall be distributed in accordance
with positive Capital Accounts.
4% ExampleGP LP
Sales Price 12,000,000 Assets 8,000,000 Debt 8,500,000 Capital Account (500,000) 0 (500,000)
Gain 4,000,000
Gain Allocation Neg Capital Accts 500,000 0 500,000 Remainder Per LPA 3,500,000 3,150,000 350,000
Cash Distribution (3,500,000) (3,150,000) (350,000)
Ending Capital Account 0 0
Cash Split 90% 10%
9% ExampleGP LP
Sales Price 12,000,000
Assets 8,000,000
Debt 6,000,000
Capital Account 2,000,000 0 2,000,000
Gain 4,000,000
Gain Allocation Neg Capital Accts 0 0 0
Remainder Per LPA 4,000,000 3,600,000 400,000
Cash Distribution (6,000,000) (3,600,000) (2,400,000)
Ending Capital Account 0 0
Cash Split 60% 40%
Timing of LP ExitStart early
◦LP decision making process◦Planning
Make concrete written proposal◦Broker opinion of value?
Early Exit Yr. 10 – Indemnify Recapture◦GP now gets losses
Year 15 and later
RE-SYNDICATIONThings to Consider
10 Year RuleRequires10 years between the
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 - ContinuedTransfer of ownership
◦not treated as a new “placed in service” date if the building is acquired by a unit of government or a nonprofit organization;
◦and it has been at least 10 years since it was most recently placed in service.
◦also applies if sale was due to foreclosure or project is purchased from failed financial institution
10 Year Rule - ContinuedHERA 2008 waived the 10-year
rule for properties substantially assisted by HUD, 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 RestrictionsLURA survives saleWho is Buyer? Seller? Related
parties?
Related Party - DefinedPrior 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 in IRC Sec. 267(b) or 707(b)(1)
Related Party - ContinuedThreshold determined through
ownership in either the capital or profits interest
Example:◦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 ExamplePartner P owned more than a 50%
interest in Partnership A. New Partnership B is formed to
purchase the building of Partnership A with the objective of rehabilitating it to obtain Low Income Housing Tax credits.
Partner P’s ownership interest in the capital or profits in New Partnership B cannot exceed 50%.
Ways to Structure to Meet Related Party requirementsGeneral partner is >51% controlled by a dis-affiliated entity
Advantages Do not have to cap fees to GP Some members may overlap – check with counsel If co-GP is a non-profit or Housing Authority, may get
property tax exemptionDisadvantages Loss of control of general partnership May need to pay or share fees with disaffiliated entity May 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 large seller note, 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 requirementsNon-profit purchases property and owns and manages property for a fee before re-syndication
AdvantagesCan use when purchasing from non-related party
to maintain 10 year hold and not cause related-party issues before re-syndication
DisadvantagesMay have to pay fees to interim non-profit holderDo not have direct control of property 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 possible
Bona fide debt Applicable Federal Rate
Example 4% Re-syndication
New Development Sources / Uses
SOURCES Construction Perm USES
Tax-exempt bonds $5,000,000 $4,000,000 Acquisition Costs $4,800,000
GP Capital $100 $100 $100
Fed LIHTC - 4% $500,000 $2,500,000 Hard Costs $2,500,000
Seller Note $2,250,000 $2,250,000 Soft Costs $450,000
Deferred Developer Fee $1,200,000 $200,000 Developer's Fee $1,200,000
TOTAL $8,950,100 $8,950,100 $8,950,100
Sales Analysis of Purchase
Sales Proceeds $4,800,000
Less existing hard debt (cannot be assumed by new LP) -$1,900,000
Less payoff of fees owed to original LP (DDF, payout to LP, etc.) -$500,000
Max Seller Note $2,400,000Less New Seller Note -$2,250,000Cash to Seller $150,000
