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Proposed Treasury Regulation §1.42-18 Qualified Contracts
Proposed Treasury Regulation §1.42-18 Qualified Contracts
Presented by
Michael J. Novogradac, [email protected]
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Background
Overview
Price
Process
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Background
• LIHC properties are required to meet initial 15 year compliance period
• Extended use agreement requires an additional 15 year compliance period
• Qualified contract allows building to transition to market after the initial 15 year compliance period
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Overview
• After year 14, owners can request state find a buyer at the qualified contract price
– State has 1 year
– Else, transition to market housing over three years
• Did you waive the right to a qualified contract?
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Qualified Contract Price
FMV of the non low-income portion of the building
Statutorily calculated price for the low-income portion of the building+Qualified Contract Price
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FMV of the non low-income portion of the building
Statutorily calculated price for the low-income portion of the building+
Qualified Contract Price
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FMV of the non low-income portion of the building
Statutorily calculated price for the low-income portion of the building+
Qualified Contract Price
Non Low-Income Portion
• FMV is determined at the date property is offered for sale
• Valuation must include impact of the extended use agreement
• All land is included at FMV
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
Low-Income Portion
FMV of the non low-income portion of the building
Statutorily calculated price for the low-income portion of the building+
Qualified Contract Price
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
Outstanding Indebtedness
• Remaining principal balance of debt
• Up to qualifying building costs (eligible basis)
• Includes developer fee notes
• Unclear if debt must be traced to qualifying costs
• Careful: Special rules apply to below-market loans
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
Outstanding Indebtedness
• Below Market Loans
– Principal balance on below market loans discounted using the OID rules
– May result in reduced cash for the seller if the loan is not assumed by the buyer
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
Adjusted Investor Equity
• Equity invested for qualifying building costs
• Investment must be made pursuant to an obligation to invest as of the beginning of the credit period
• Equity invested is grossed-up by increases in CPI
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
Other Capital Contributions
• Includes capital contributions not made pursuant to a requirement to invest as of the beginning of the credit period
• Other capital contributions are not grossed-up by increases in CPI
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OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
OutstandingIndebtedness
AdjustedInvestorEquity
Cash Distributions
• Includes all distributions to owners and related parties
• Includes cash available for distribution at the time of sale
• Anti-abuse rule: potentially reclassifies payments for operating expenses in excess of reasonable amounts
• Potential for double-counting if distributions are paid using refinancing debt proceeds
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OutstandingIndebtedness
AdjustedInvestorEquity
OtherCapitalContr.
CashDistr.
ApplicableFraction
Low-incomePortion
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Qualified Contract Process
Qualified Contract Process
• Offers must be “bona fide”
– No guidance on what constitutes “bona fide”
– May result in abuse of the process
• Property owners may reject the contract
• State may limit the number of re-applications
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Qualified Contract Process
• State housing agency may adjust the FMV of the building if:
– No buyer has made an offer
– Market values have adjusted downward
• Legal and accounting costs are excluded
– Unclear if costs capitalized to the building are excluded
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Qualified Contract Process• Documentation requirements vary• FL example:
(i) Calculation of qualified contract price
(ii) Narrative description of the project
(iii) Description of the regulatory restrictions
(iv) Photographs of exterior and sample units
(v) Operating statements for the prior 12 mos
(vi) Current rent roll
(vii) Copies of leases
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Question and Answers
