Special Issues for Projects Involving Nonprofits IPED Housing Tax Credits “101” February 22-23, 2007

1. Special Issues for Projects Involving NonprofitsIPED Housing Tax Credits “101”February 22-23, 2007 Molly R. Bryson Thomas A. Giblin

2. Examples of Nonprofit Participation in Tax Credit Projects • General partner, or co-GP with a for-profit • Developer or property management agent • Lender • Social service provider • Lessor under ground lease (or Managing GP) to qualify for property tax exemption/abatement • Holder of right of first refusal under § 42(i)(7)

3. Obtaining and Maintaining 501(c)(3) Status: IRS Memo Dated 4/25/06 • Resolution of conflicts consistent with charitable purpose • Providing of low-income housing consistent with safe-harbor tests of Rev. Proc. 96-32 (75% “low-income” and 20% or 40% at lower levels) • Limit on amount and length of operating guarantee (6 months of expenses; 5 years from break-even)

4. IRS Memo, Dated 4/25/06 (cont’d) • Payment of tax credit guarantee treated as a capital contribution or a loan • Limit on amount of tax credit guarantee (to the extent of fees earned) • Limit on repurchase price to 100% of capital contributions • Removal only for cause after a reasonable cure period • Right of first refusal • Fixed price construction contract

5. Tax-Exempt Use Property Issues • 40-year depreciation (may be ok with investor) • Qualified allocation (0.01% interest in all tax items, including cash flow and sale/refinance proceeds) • be alert to incentive fees • For-profit subsidiary as general partner making a Section 168(h)(6) election • election made on tax return • also attached to exempt parent’s tax return • must state it is a 168(h)(6) election

6. Structuring Around Federal Grants • Often awarded to exempt organizations • Reduce qualified basis • Instead structure grant award to exempt organization followed by a loan to the partnership at AFR • partner non-recourse debt: potential issue if investor’s capital account goes negative • 79/21 solution (use of a second exempt organization as minority stockholder of the general partner)

7. Nonprofit Set-Aside • Each state tax credit agency must set aside at least 10% of its annual credit ceiling each year for projects involving qualified nonprofit organizations • Many states provide preferences for nonprofit sponsored projects by assigning “points” to projects with nonprofit involvement • Whenever there is nonprofit involvement, need to determine whether the tax credit agency actually awarded credits from the nonprofit set-aside

8. Nonprofit Set-Aside (Cont’d) • Nonprofit organization must be exempt from federal income tax under Section 501(c)(3) or 501(c)(4) of the IRC • One of the organization’s exempt purposes must include the fostering of low-income housing • Nonprofit cannot be “affiliated with or controlled by” a for-profit organization • Nonprofit must own an interest in the project (directly or indirectly) • Nonprofit must materially participate in the development and operation of the project throughout the compliance period

9. Right of First Refusal Under IRC Section 42(i)(7) • Added to IRC Section 42 in 1990 to facilitate nonprofit ownership of tax credit properties at the end of the 15-year compliance period • Eligible holders/minimum purchase price is specifically set forth in IRC Section 42(i)(7)

10. Eligible Holders of a Right of First Refusal Under IRC Section 42(i)(7) • Tenants of the project (in cooperative form or otherwise) • Resident management corporation of such building • Qualified nonprofit organization • Government agency

11. Determining Minimum Purchase Price Under IRC Section 42(i)(7) • Minimum purchase price is equal to the sum of: • the principal amount of the outstanding indebtedness secured by the buildings (other than indebtedness incurred during previous 5 years), plus • all Federal, state and local taxes attributable to such sale

12. Right of First Refusal:General Observations • A right of first refusal is not an option. Needs to be triggered by a bona fide third party offer • A right of first refusal can be granted at any time during a project’s lifecycle • Parties may come together in year 15 to negotiate fair price • Congress expected minimum purchase price to be favorable to nonprofits

13. Business Considerations When Granting a Right of First Refusal • The statutory purchase price is a minimum price. • Statutory purchase price does not include: • accrued but unpaid fees to limited partners • unpaid limited partner loans • unpaid tax credit adjusters

14. Business Considerations When Granting a Right of First Refusal (cont’d) • Need to understand how sales proceeds are distributed under the partnership agreement • Right of first refusal should terminate if an affiliate general partner withdraws or is removed • Need to determine a specific term for the right of first refusal • Loan documents should contemplate a sale in year 15

15. IRC Section 4965 • New Section 4965 (2005 Tax Act) and new Notice 2006-65 (7-11-06) provide: If an exempt organization is involved in a deal with “contractual protections,” then (i) possible 100% tax on organization’s income or cash from deal, and (ii) $20,000 fine on the “entity manager” • IRS has provided recent guidance 10311776