Section 8 Preservation Deal Challenges

Presented by: Terry KimmReznick Group

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Depreciation rules applicable to projects with non US taxpayer entity as the general partner

Subject to tax-exempt use property rules with respect to depreciation

Define terms:• MACRS Depreciation vs. ADS Depreciation• Qualifying allocations vs. Varying Allocations

If GP only entitled to qualifying allocations you can use MACRS depreciation for all assets

If varying allocations, then to extent of GP’s highest participation percentage, that portion of the fixed assets must be depreciated using the ADS rules.

No ability to cure with 168(h) election

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Acquisition Basis – Assumed Debt Issues

In order to get basis for all assumed debt, must be able to show:

• Basis is supported by an appraisal• Reasonable expectation of repaying the assumed debt –

residual analysis • Land / Building splits are supported by the appraisal• If doing a tax-exempt bond deal, possible 50% Test Issue –

do you have enough tax-exempt bond proceeds to meet the test?

• Both land and building go into your denominator for purposes of calculating the 50% Test

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New Debt Issues

Still have residual analysis requirement Pre enactment rules were onerous with respect to 9%

Deals• Loans of federal sourced funds needed to bear AFR

interest rate• HOME loans had the two out of three rule

Post enactment rules took away unfavorable treatment for below AFR federal loans

The allowable lower interest rates make the residual analysis easier to satisfy on soft debt – interest now accrues at a lower rate

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No change in rules with respect to seller take back debt – OID rules still apply and must use the AFR interest rate. Possible this could cause residual analysis issue.

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Special considerations when doing a tax-exempt bond deal

50% Test issue – test includes land and building in denominator.

May not want to be so aggressive with residual analysis with respect to assumed acquisition indebtedness

Controlling the 50% test—have some cushion/language in the development agreement that makes the fee reduced if overruns exceed a certain threshold/address the impact immediately when you overrun in case you can increase the tax exempt bonds.

Remember the 9% rate is fixed but the 4% rate continues to float

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Other Considerations

Importance of the needs analysis and if the project is in good shape try to focus on improvements that will reduce maintenance and utility costs.

Know your low income percentage. Some section 8 projects have people between 60 and 80% that don’t qualify.

Careful with any soft debt limitations on distributable cash flow

Difficulty in finding investors – consider alternative investments such as direct investment by lending bank

Anti-churning rule changes are an inducement for old GPs to revitalize because with 50% of residuals, they are likely better off with the new deal (same residual, improved property, development fee, legal right to continue to manage for 15 more years as GP).

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