ACQUISITION/REHABILITATION: THE 10% ANTI-CHURNING RULE. LEARNING THE BASICS: HOUSING TAX CREDITS “101” IPED, INC. Arlington, Virginia October 18-19, 2007. Gary A. Band, Esquire Nixon Peabody LLP 401 9th Street, N.W. Washington, D.C. 20004 (202) 585-8809 (866) 947-3524 (fax)
- Cash Flow
- Sale/Refinancing Proceeds
- Maybe State Tax Credits
The LIHTC industry has prudently decided that if you have a 10% or greater interest in any item in the seller, you have to have less than a 10% interest in all items in the buyer.
Since a developer (GP) tends to have more than a 10% interest in Cash Flow in the old Partnership (the seller), the developer tends to have a 9.9% interest in Cash Flow and in Sale/Refinancing Proceeds in the new Partnership (the buyer).
Not your typical LIHTC business deal if the syndicator/investor has 90.1% of Cash Flow and Sale/Refinancing Proceeds.
So, what typically happens? syndicator/investor has 90.1% of Cash Flow and Sale/Refinancing Proceeds.
- Partnership Management Fee
- Incentive Management Fee
The question is whether or not these fees exceed a reasonable fee which would be paid to a third-party service provider performing the same services.
Anything paid (or payable if there were Cash Flow) in excess of a reasonable fee could be reclassified as additional Cash Flow to the General Partner.
And, since we’re already at 9.9% of the Cash Flow going to the General Partner, there’s no room for error.
The risk is the loss of all of the Acquisition Credits if the General Partner is deemed to really have a 10.01% interest in Cash Flow.
Look at these Cash Flow fees to see if they’re “reasonable.”
For instance, would a third-party service provider agree to be paid only if there were sufficient Cash Flow at that point in the Cash Flow waterfall?
A Cash Flow fee looks more like a real fee, rather than like a Cash Flow distribution, if it accrues, even if there is no Cash Flow available to pay it currently.
- Higher Property Management Fees
- Existing GP has 9.9% of Cash Flow and new Co-GP has 70-80% of Cash Flow.
- Need to closely examine the full relationship between the two GPs.
- to an affiliate of the seller
- appraisal issue
- market rate ground lease
- especially if minimal rehabilitation
- similar issue with fee to an affiliated general contractor for the rehabilitation work
Some investors are more risk adverse than others, so find out early on what is acceptable.
Also, don’t forget the 10% test from the investor side.