Year 10 to Year 15 by Texas Affiliation of Affordable Housing Providers

hosted by

St. David’s Episcopal Church  Austin, TX November 12, 2012

November 12, 2012

Fellow Housers: Welcome to TAAHP’s 2012 Fall Executive Management Series: Year 10 to Year 15 Strategies. Our Executive Management Series (EMS) is part of our member services program dedicated to building best management practices for not only our membership’s investment portfolio but for all stakeholders in the Texas affordable housing industry. Recently we have heard several tax credit developers and owners express concern about the future of their aging tax credit projects and their search for options available in meeting their future challenges. TAAHP has assembled a team of recognized successful professionals experienced in addressing solutions to the strategic areas facing the 10 to 15 year old properties. They will share with you their respective recommendations in addressing the eventual challenges faced by you as you plan ahead for the deadline. Our special thanks to our panelists, Cynthia Bast, Locke Lord LLP, Michael B. Backman, AmeriSphere, Bill Haley Northmarq, Cliff McDaniel ARA/Affordable Housing, Nancy A. Morton Dauby O’Connor & Zaleski LLC, Patricia Murphy TDHCA, to St. David’s Episcopal Church for the use of their meeting facilities, to Chef Ray Trono, St. David’s Chef in residence, to the TAAHP Staff, Kristi Sutterfield Conference Coordinator, Jesus Azanza Director of Member Services and Nancy Hardin, Administrative Assistant and most of all, to you the providers of affordable housing for Texans with limited incomes and special needs. We hope you will find today’s EMS informative as well as helpful and invite you to the 2013 Series and to the Texas Housing Conference, July 22 - 24 2013, Four Seasons Hotel here in Austin, Texas. Yours truly,

Jim T. Brown, Executive Director

AGENDA

AGENDA 11:00 am to 12 noon……..…………….……………………………….101 - HERE'S THE BASICS! Options for Years 10-15 Transfer of property Transfer of ownership interests Refinance Things to Consider What do your financing partners say? o Syndicator o Lender

o o o

What TDHCA restrictions are imposed? LURA ROFR Qualified Contracts What do your capital accounts look like?

12 noon -12:30 pm…………….………………………………………………………………….LUNCH 12:30 pm - 1:00 pm…………………………………………………………LUNCHEON SPEAKER Patricia Murphy, Chief of Compliance, Texas Department of Housing and Community Affairs

o o o o o o

Noncompliance issues that the Department is seeing frequently Social Services Affirmative Marketing Ineligible Households Failure to Complete the ‘Annual Eligibility Certification” Problems with Required Lease Language Administrative Penalty Process

1 pm - 2 pm…………………………………………………201 – EXIT STRATEGIES AND VALUES What do I own? What are my options? What is it worth? Who is my Buyer? ROFR - So, how does that work again? Who is my Lender? What happens when communications break down? 2:00 pm - 2:30 pm……………………………………..…301 - SUCCESSFUL CASE STUDIES

2:30 pm - 3:30 pm.………………………….401 - THERE'S MORE! TAX CODE REFORM, RECENT IRS RULINGS AND NEW IRS GUIDELINES Patient Protection and Affordable Care Act Expiring Tax Provisions New IRS Guidelines on Capitalization New Qualified Contract Regulations Virginia and Historic Court Case Analysis 3:30 pm – 4 pm…………………………………………………………………Questions & Answers

Special thank you to Patricia Murphy, Chief of Compliance, TDHCA for her participation as Luncheon Speaker

POWER OF A PROVEN TRACK RECORD NATIONAL EXPOSURE | LOCAL EXPERTISE

~~ Over 12,000 affordable units sold ~~ We have worked in 37 markets across the country and continue to expand ~~ Experience includes GP Sales, LIHTC Asset Sales, Project Based Section 8, & USDA RD section 515

the ara approach

ADVISE

RESEARCH

IDENTIFY

MARKET

TRANSACT

knowledge | P rocess | relationships

ARA AFFORDABLE HOUSING 901 S. MoPac Expressway Barton Oaks Plaza II, Suite 275 Austin, Texas 78746

COLUMBUS RICHMOND

Phone: 512.342.8100 Fax: 512.637.1740

www.ARAusa.com PROVIDING MULTIFAMILY INVESTMENT SERVICES THROUGHOUT THE UNITED STATES

With offices in numerous major markets across the country and market coverage of more than 300 cities, ARA is well-positioned to provide service to its clients from coast-to-coast.

MULTI HOUSING INVESTMENT SERVICES Atlanta • Austin • Boca Raton • Boston • Charlotte Chicago • Columbus • Dallas • Dayton • Denver • Houston • Irvine • Jacksonville • Kansas City • Las Vegas • Nashville • Orlando • Phoenix • Portland • Richmond • Sacramento • Salt Lake City • San Francisco • Seattle • Tampa • Tulsa • Washington DC

“ARA consistently achieves the highest prices for our clients.” ARA utilizes a “Principal to Principal” transaction process. ARA views a successful transaction as the culmination of a valued strategic relationship joining the Buyer, Seller, and Broker. ARA has been at the forefront of the process of aligning the interests of all parties to successful transactions. Experience enables us to anticipate and resolve issues before they become problems. We implement a proven marketing process consisting of strong relationships with key decision makers, a highly trained and knowledgeable staff, and an innovative technology platform to achieve our goal. These combine to create a competitive advantage for ARA clients, linking their assets with the most aggressive investors.

ARA AFFORDABLE HOUSING TEAM Dave Fournier (512) 637-1235 dfournier@ARAusa.com

Cliff McDaniel (713) 599-1800 Ext 404 mcdaniel@ARAusa.com

Chris Bergmann (713) 599-1800 Ext 456 cbergmann@ARAusa.com

Derek Dehay (512)637-1222 ddehay@ARAusa.com

Locke Lord’s Affordable Housing Group For more than a century, Locke Lord LLP has had a singular focus – understanding our clients’ needs and helping them achieve their goals. Our long-established tradition of providing responsive, personal service has made us one of the nation’s top law firms, and we bring that tradition to the affordable housing industry. The attorneys of Locke Lord’s Affordable Housing Group understand the business of affordable housing and tailor their services to meet each client’s unique needs.

Finance Transactions

Year 15

We help developers, lenders, investors, governmental agencies and non-profits use the right mix of financing tools for complex transactions. Our lawyers are skilled and knowledgeable regarding housing tax credits, historic rehabilitation tax credits, new markets tax credits, tax-exempt bonds, HUD programs and other federal, state and local financing tools.

The end of the housing tax credit compliance period opens up a complex new set of issues for affordable housing owners, and Locke Lord is uniquely poised to help. Our wealth of experience with qualified contracts, rights of first refusal and other back-end tools allow us to craft creative and feasible solutions to meet each client’s unique needs.

Compliance and Governmental Advocacy A critical component to any affordable housing development is compliance – and our Affordable Housing team has a thorough understanding of how to comply with current and ever-changing laws. We regularly represent clients before governmental authorities to resolve compliance issues. In addition, we advocate for affordable housing issues with the Texas Legislature and assist in drafting laws and agency rules for the benefit of the industry.

Workouts and Troubled Assets When properties and transactions face challenges, our team has a host of tools to solve problems and move forward. Property tax exemptions, restructuring existing financing, finding new soft financing, changing an ownership structure, pursuing foreclosure – all offer potential pathways to ultimate success.

Locke Lord’s Affordable Housing lawyers are committed advocates for quality affordable housing in our nation. They volunteer many hours in their communities, classrooms and in board rooms to benefit the cause of affordable housing. The team is led by Cynthia Bast, Chair of Affordable Housing and Co-Chair of the Firm’s Board of Directors, and a nationally recognized, preeminent attorney in the area of affordable housing and community development finance.

Cynthia Bast

Partner and Affordable Housing Chair, Austin 100 Congress Avenue, Suite 300 Austin, Texas 78701 Phone: (512) 305-4707 Fax: (512) 391-4707 cbast@lockelord.com

3,000 clients

45 states

YRS

and counting.

140 employees

THANKS TO OUR CLIENTS, DOZ IS CELEBRATING OVER 25 YEARS OF SERVICE.

Dauby Oâ&#x20AC;&#x2122;Connor & Zaleski, LLC Certified Public Accountants

Strength in numbers.

www.doz.net @dozcpa 866.848.5700

Capital Markets

Better relationships provide better results. Our Services DEBT/EQUITY The largest privately owned provider of commercial real estate debt and equity in the country. Offering solutions through strong relationships with institutional providers of capital, including life insurance companies, Freddie Mac, Fannie Mae, Wall Street and local, regional and national banks LOAN SERVICING Provides loan servicing for performing, non-performing and sub-performing loans for all types of commercial property on behalf of most of the nation’s leading lenders, including specialized loan servicing for Fannie Mae, Freddie Mac, FHA and Ginnie Mae MULTIFAMILY FINANCING & EQUITY SERVICES Offering solutions for any multifamily property type or size. Strong relationships with all types of investors, lenders and equity sources. Top-rated servicing department assists clients for the life of their loan.

NorthMarq Capital provides capital solutions for owners of commercial real estate through 33 regional offices coast-to-coast. We offer clients the ideal combination of a strong national company capable of attracting a wide range of capital sources and an organization strategically positioned to provide vital firsthand knowledge of local markets. With an annual production volume of $8 billion and a loan servicing portfolio of $40 billion on behalf of more than 50 institutional investors, NorthMarq is one of the largest commercial real estate mortgage banking firms worldwide. NorthMarq has a proud legacy of providing the highest-quality service to real estate investors, developers and capital sources for more than 50 years. We take pride in being a privately held company with an entrepreneurial heart. Our professionals recognize the importance of fulfilling the goals of each client and work harder to help achieve this success. NorthMarq continually sets new standards of excellence in serving our nationwide client base while always remembering the importance of local relationships and local service.

Total Servicing Portfolio: $40,000,000,000 Life Companies

$18.9 billion

3,072 loans

Agencies

$12.2 billion $8.6 billion $3.6 billion

1,483 loans 1,117 loans 366 loans

CMBS Pools

$6.5 billion

679 loans

Conduits/Banks

$2.4 billion

236 loans

FREDDIE MAC FANNIE MAE

Integrated Solutions Whatever you need, NorthMarq can deliver, including debt, equity, and everything in between. We have unparalleled access to commercial and multifamily real estate capital markets. NorthMarq offers a comprehensive range of services and products from an extensive grouping of debt and equity sources. We work with all types of income-producing real estate and at all levels of the “capital stack.”

The

Power of

Quick Facts • Transactions closed annually: >1,000 • Average originations annually: $8 billion • Loans serviced: >5,000 • Consistently among Freddie Mac’s top seller servicers • One of Fannie Mae’s top sources of business through our AmeriSphere affiliate

NorthMarq

strength agility

A unique blend of strength, agility and teamwork that enables us to quickly deliver customized commercial real estate solutions for our clients... that’s the Power of NorthMarq.

teamwork

Let us put it to work for you!

Our Team James Brolan John Burke

Our Locations With over 1,000 employees in 40 markets, NorthMarq Capital is the largest privately owned servicer and provider of commercial real estate debt and equity in the United States.

Kerry French

Seattle

Tony Gray William Haley

Minneapolis

Warren Hitchcock William Luedemann

San Francisco

Omaha Kansas City

St. Louis

Las Vegas

Chad Owens Lori Sowa

Denver

Boston Westchester New York City Long Island Parsippany Philadelphia Baltimore Washington, D.C.

Rochester Milwaukee Chicago

Raleigh Charlotte

Los Angeles San Diego

Phoenix

Atlanta Dallas

Roger Trapnell

Jacksonville San Antonio

Houston

Tampa

Orlando Boca Raton Miami

NorthMarq Capital ONE RIVERWAY, SUITE 2400 HOUSTON, TX 77056 713.622.6300

northmarq.com

Fannie Mae

FHA

LIHTC

Dallas Post Office – 78 Units Section 220 - Historic Tax Credits

Prospect House – 110 Units Section 232-223(f) – LIHTC

Crown Ridge – 64 Units Section 223(a)(7) – LIHTC

The Boulders – 54 Units Section 223(f) – LIHTC

AmeriSphere is a mortgage banking company engaged in originating, underwriting, closing and servicing high quality multifamily and health care mortgage loans throughout the United States. We provide financing for existing and proposed apartment buildings, senior living properties and hospitals in rural or metropolitan areas, including single-asset or pooled transactions. AmeriSphere also helps increase the availability of affordable multifamily housing through financing of properties that qualify for federal housing tax credits. AmeriSphere's headquarters are located in Omaha, Nebraska with offices in Colorado, Texas and Maryland. We have over seven years in the lending business. With our experienced in-house staff and a national correspondent network comprised of regional and independent commercial mortgage companies, we look forward to assisting you with your project financing needs. Mike Backman EVP & FHA Managing Director MBackman@AmeriSphere.net (972) 941 – 3403

Brian Harris FHA Production Manager BHarris@AmeriSphere.net (303) 831 – 6154

Providing housing for

Texans for over 15 years.

- 101 -

HERE’S THE BASICS!

hosted by

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

Year 10-15+ Considerations • Transfer of property – Right of first refusal – Qualified contracts

• Transfer of ownership interests TDHCA required to consent for transfers of general partner or property.

• Refinance Timing may influence choices.

Year 10-15+ Considerations • Look at the Partnership Agreement – What can the investor require?

• Look at the Loan Documents – Lock outs and prepayment penalties

• Look at the LURA – Right of First Refusal; extended compliance period

Year 10-15+ Considerations • Talk to the Asset Manager at TDHCA • Look at your capital accounts and discuss with your accountant

Transfer of Property

Transfer of Property • Properties may be subject to right of first refusal or option • Available at the end of the compliance period (which could be extended in the LURA) • More typical for a 9% deal than a 4% deal • Difference between a right of first refusal and an option

Transfer of Property • Right of First Refusal – IRC Section 42(i)(7) Impact of tenant's right of 1st refusal to acquire property. (A) In general. No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by the tenants (in cooperative form or otherwise) or resident management corporation of such building or by a qualified nonprofit organization (as defined in subsection (h)(5)(C)) or government agency to purchase the property after the close of the compliance period for a price which is not less than the minimum purchase price determined under subparagraph (B). (B) Minimum purchase price. For purposes of subparagraph (A), the minimum purchase price under this subparagraph is an amount equal to the sum of— (i) the principal amount of outstanding indebtedness secured by the building (other than indebtedness incurred within the 5-year period ending on the date of the sale to the tenants), and (ii) all Federal, State, and local taxes attributable to such sale. Except in the case of Federal income taxes, there shall not be taken into account under clause any additional tax attributable to the application of clause (ii).

Transfer of Property

Transfer of Property (Right of First Refusal)

• TDHCA Right of First Refusal more restrictive than federal law • Right of First Refusal must be satisfied before an owner can go through the qualified contract process • A property must be eligible to go through the qualified contract process to be considered for the At-Risk Set-Aside under the QAP

Transfer of Property (Right of First Refusal)

• New TDHCA rules Section 10.407 • http://www.tdhca.state.tx.us/property-forsale/multifamily/index.htm

Transfer of Property (Right of First Refusal)

• Generally, two different prices – Fair market value • Used in allocation years 1991 - 1995 • Based on appraisal or offer

– Section 42(i)(7)(B) “debt plus exit taxes” • Used in allocation year 1995 and 1997 to present • Became statutory in 1998 (2-year timeframe) – Texas Gov’t Code Sec. 2306.6726

• Includes debt secured by the property, not in the last five years

Transfer of Property (Right of First Refusal) Prior to 1995B

Transfer of Property (Right of First Refusal) 1995B and later

Transfer of Property (Right of First Refusal) 1997 and later (i) Upon the earlier to occur of: (I) the Development Owner's determination to sell the Development, or (II) the Development Owner's request to the Department, pursuant to ยง42 (h)(6)(E)(i)(II) of the Code, to find a buyer who will purchase the Development pursuant to a "qualified contract" within the meaning of ยง42 (h)(6)(F) of the Code, the Development Owner shall provide a notice of intent to sell the Development ("Notice of Intent") to the Department and to such other parties as the Department may direct at that time. If the Development Owner determines that it will sell the Development at the end of the Compliance Period, the Notice of Intent shall be given no later than two years prior to expiration of the Compliance Period. If the Development Owner determines that it will sell the Development at some point later than the end of the Compliance Period, the Notice of Intent shall be given no later than two years prior to the date upon which the Development Owner intends to sell the Development.

Transfer of Property (Right of First Refusal) (ii) During the two years following the giving of Notice of Intent, the Development Owner may enter into an agreement to sell the Development only in accordance with a right of first refusal for sale at the Minimum Purchase Price with parties in the following order of priority: (I) during the first six-month period after the Notice of Intent, only with a Qualified Nonprofit Organization that is also a community housing development organization, as defined for purposes of the federal HOME Investment Partnerships Program at 24 C.F.R. Â§ 92.1 (a "CHDO") and is approved by the Department; (II) during the second six-month period after the Notice of Intent, only with a Qualified Nonprofit Organization or a Tenant Organization; and (III) during the second year after the Notice of Intent, only with the Department or with a Qualified Nonprofit Organization approved by the Department or a Tenant Organization approved by the Department. (IV) If, during such two year period, the Development Owner shall receive an offer to purchase the Development at the Minimum Purchase Price from one of the organizations designated in subparagraphs (I) â&#x20AC;&#x201C; (III) of this paragraph (within the period(s) appropriate to such organization), the Development Owner shall sell the Development at the Minimum Purchase Price to such organization. If, during such period, the Development Owner shall receive more than one offer to purchase the Development at the Minimum Purchase Price from one or more of the organizations designated in subparagraphs (I) â&#x20AC;&#x201C; (III) of this paragraph (within the period(s) appropriate to such organization), the Development Owner shall sell the Development at the Minimum Purchase Price to whichever of such organization it shall choose.

Transfer of Property (Right of First Refusal) (iii) At any time after the fifteenth year of the Compliance Period, but no earlier than two years after delivery of a Notice of Intent, the Development Owner may sell the Development without regard to any right of first refusal established by this Declaration if: (x) no offer to purchase the Development at or above the Minimum Purchase Price has been made by a Qualified Nonprofit Organization, a Tenant Organization or the Department, or (y) a period of 120 days has expired from the date of acceptance of such offer without the sale having occurred, provided that the failure to close within such 120-day period shall not have been caused by the Development Owner or matters related to the title for the Development. (iv) At any time prior to the giving of the Notice of Intent, the Development Owner may enter into an agreement with one or more specific Qualified Nonprofit Organizations and/or Tenant Organizations to provide a right of first refusal to purchase the Development for the Minimum Purchase Price, but any such agreement shall only permit purchase of the Development by such organization in accordance with and subject to the priorities set forth in paragraph (ii) of this section.

Transfer of Property (Right of First Refusal) (v) The Department shall, at the request of the Development Owner, identify in this Declaration a Qualified Nonprofit Organization or Tenant Organization which shall hold a limited priority in exercising a right of first refusal to purchase the Development at the Minimum Purchase Price, in accordance with and subject to the priorities set forth in paragraph (ii) of this section. (vi) The Department shall have the right to enforce the Development Ownerâ&#x20AC;&#x2122;s obligation to sell the Development as herein contemplated by obtaining a power-of-attorney from the Development Owner to execute such a sale or by obtaining an order for specific performance of such obligation or by such other means or remedy as shall be, in the Departmentâ&#x20AC;&#x2122;s discretion, appropriate.

Transfer of Property (Qualified Contract) • Owner can request state housing agency to find a buyer at the qualified contract price. • If a buyer is not found within 12 months, the restrictive covenants are lifted. • A privilege, not a right.

Transfer of Property (Qualified Contract) • Code Section 42(h)(6) • Qualified Contract Price: (i)

the sum of—

(I) the outstanding indebtedness secured by, or with respect to, the building, (II) the adjusted investor equity in the building, plus (III) other capital contributions not reflected in the amounts described in subclause (I) or (II), reduced by (ii) cash distributions from (or available for distribution from) the project.

Transfer of Property (Qualified Contract – State Law) • Must go through right of first refusal first • Pre-application and application process • No qualified contracts for projects receiving allocations after 2001 Texas Gov’t Code Sec. 2306.185(c) LONG TERM AFFORDABILITY The department shall require that a recipient of funding maintains the affordability of the multifamily housing development for households of extremely low, very low, low, and moderate incomes for the greater of a 30-year period from the date the recipient takes legal possession of the housing or the remaining term of the existing federal government assistance. In addition, the agreement between the department and the recipient shall require the renewal of rental subsidies if available and if the subsidies are sufficient to maintain the economic viability of the multifamily development.

Transfer of Property â&#x20AC;˘ After Right of First Refusal, must go through ownership transfer process upon a sale of the property â&#x20AC;˘ LURA and Right of First Refusal do not go away unless there is a foreclosure or the LURA is eliminated in the Qualified Contract process

Transfer of Property • Can a non-profit acquire under the Right of First Refusal using a tiered organizational structure? • Some owners consider selling prior to Year 15 to avoid right of first refusal – Recapture issues

Transfer of Partnership Interests

Transfer of Partnership Interests â&#x20AC;˘ Many parties choose to acquire partner interests to avoid the Right of First Refusal issues â&#x20AC;˘ Transfer of general partner interest does not trigger Right of First Refusal under the LURA

Transfer of Partnership Interests • Transfer of all partnership interests in what looks like a sale does trigger Right of First Refusal • TDHCA ownership transfer package required

Capital Accounts • Capital Accounts: – Basic Rules providing increases and decreases to a partner’s capital account • • • •

Capital Contributions including cash and non cash contributions minus Distributions plus/minus Yearly taxable income plus/minus Permanent tax difference such as meals and entertainment/tax-exempt interest income

– In addition, certain liabilities can also increase a partner’s capital account • Assumption and contribution of Recourse Liabilities: – Recourse liabilities assumed by the partner are treated as money contributed to the partnership, which increases the partner’s capital account in the same manner as money. – Recourse liabilities that other partners assume from the contributing partner will decrease his capital account in the same manner as a distribution of money.

Capital Accounts • Assumption and Contribution of nonrecourse liabilities – A partnership liability is a nonrecourse liability if no partner or related person has an economic risk of loss for that liability. – A partner’s share of nonrecourse liabilities is generally proportionate to his or her share of partnership profits » However, this rule may not apply if the partnership has taken deductions attributable to nonrecourse liabilities or the partnership holds property that was contributed by a partner.

– Once a partnership liability is paid or forgiven, then the capital account of the partner is decreased by their share of the liability in the same manner as if they had received a monetary distribution.

• There is a limitation on the deduction of a partner’s distributive share of partnership loss. • A partner may only deduct his loss to the extent of his adjusted basis in the partnership.

Capital Accounts • Based upon the tax capital accounts at the time of the sale of the partnership interest will be a determining factor when analyzing the tax consequences of the sale. – Once a partner’s capital account goes negative due to the ability to use liabilities as an increase in the adjusted basis of the partnership interest, then once the capital account is restored to zero, a taxable event will occur which can and usually results in exit taxes.

Capital Accounts-Exit taxes Taxes can be a significant liability for the exiting investor partner Investor partner recognizes taxable income to the extent it has a negative capital account at time of sale Negative capital account is a result of loss allocations and distributions during the life of the partnership in excess of the original investment

Tax liabilities include federal, state and even local in some states, and can include franchise or excise tax as well

Capital Accounts-Exit taxes Non resident withholding tax liabilities are imposed by some states on the income allocated to the exiting partner This can be an unexpected cash outlay for the partnership

Minimization strategies Forgiveness of sponsor debt – creates income which increases capital account Reducing the Investor interest in the partnership in years prior to the potential exit year Capitalize rather than expense repairs

Capital Accounts-Exit taxes 

Improve overall property performance to reduce losses and therefore increase capital account balances

Project can remain affordable with restructuring/withdrawal by the investor Refinancing/debt restructuring lowers debt service and may provide funds to pay the withdrawing investor and fund capital improvements Developer maintains control of the project and continues to receive property management fees

Congratulations â&#x20AC;&#x201C; You have now met the prerequisites for Course 201

- 201 -

EXIT STRATEGIES AND VALUES

hosted by

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

Exit Strategies and valuations Step One - What Do I Own Step Two - What Are My Options Step Three - What is it Worth Step Four - Who is My Buyer

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

Step one- What Do I Own Documents Needed for Valuation • See Exhibit A

November 12, 2012

St. David’s Episcopal Church

Austin, TX

Step Two- What Are My Options What are you selling • GP Interest Transaction • Fee Simple Transaction • Refinance the Property Who has the right to make decisions Who will drive the process Who has the most at stake November 12, 2012

St. David’s Episcopal Church

Austin, TX

Step Two- What Are My Options GP Interest Transaction Will My LP let me sell Understanding the LP position Closing Funds Recapture Risk Who will drive the process Who has the most at stake Who has the rights to make decisions

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

Step Two- What are My Options Fee Simple Transaction Does My LP Want To Sell Understanding the LP position Closing Funds Recapture Risk Need for additional Losses What’s in it for them

November 12, 2012

St. David’s Episcopal Church

Austin, TX

Step Three- What is it Worth Value Considerations – – – –

Debt Options Qualified Contract options Right of First Refusal GP sales have Balance sheet issues

Underwriting Considerations – – – –

Current Cash Flow Market Conditions Operating Efficiencies Potential Rent Growth

November 12, 2012

St. David’s Episcopal Church

Austin, TX

Step Four- Who Is My Buyer Market Rate Buyers • Chasing Yield • Cheaper Capital • Aggressive in Nature

Re-Syndication • Good Option for Some Markets • Will Take Longer to Transact

November 12, 2012

St. David’s Episcopal Church

Austin, TX

I Think I checked the Box on ROFR

How Does that work again

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

LPA Provisions (Sample 1) Section 8.5 Disposition of Project. (a) The General Partner shall not transfer, sell or otherwise dispose of the Project Property to any Person except in accordance with this ยง8.5. At the conclusion of the Compliance Period, the General Partner or its designated Affiliate shall have the right to purchase the Project Property exercisable by written notice to the Special Limited Partner within 180 days after the conclusion of the Compliance Period, for a purchase price equal to the greater of: (1) the Fair Market Value of the Project Property, and (2) the sum of (A) the total outstanding indebtedness of the Partnership secured by liens on the Project Property, plus (B) the Credit Deficiency amount, plus (C) any amounts owed to the Limited Partners to repay any loans made by the Limited Partners to the Partnership, plus (D) Exit Taxes. (b) If the General Partner or its designated Affiliate fail to timely exercise and close its respective right to purchase described in ยง8.5(a), then the General Partner shall, upon the conclusion of the Compliance Period, use its best efforts to obtain a bona fide offer from an unrelated third party for the purchase of the Project Property. If such a bona fide offer is obtained and the General Partner and the Limited Partners elect to accept such offer, the General Partner shall thereafter have 60 days within which to notify the Special Limited Partner that the General Partner will purchase the Project Property for the same price and upon the same terms and conditions as the bona fide third party offer and, thereupon, shall close the purchase upon said terms and conditions. The purchase of the Project Property shall also be subject to and closed in accordance with the provisions set forth in Appendix III, attached hereto and incorporated herein. (c) Any disposition of the Project Property shall be in accordance with the Restrictive Covenant and the rules and regulations of the State Housing Finance Agency.

LPA Provisions (Sample 1) Section 8.6 Option to Acquire Limited Partner’s Partnership Interests. (a) Each Limited Partner and the Special Limited Partner hereby grant to the General Partner or its designated Affiliate the option, commencing on the day following the close of the Compliance Period (the “Option Period”) and ending one year thereafter, to purchase their respective interest in the Partnership (each, a “Partnership Interest”) for a purchase price equal to the greater of: (1) The Fair Market Value of the Partnership Interest, and (2) the sum of (A) any amounts owed to the applicable Limited Partner to repay any loan made by the Limited Partner to the Partnership, plus (b) the Credit Deficiency Amount, plus Exit Taxes. (b) The foregoing option to acquire any additional Partnership Interest shall lapse if notice of exercise is not given during the Option Period or closing does not occur within 90 days following the close of the Option Period. The purchase of any additional Partnership Interests shall also be subject to and closed in accordance with the provisions set forth in Appendix III, attached hereto and incorporated herein. Notwithstanding anything in this §8.6 to the contrary, the General Partner must concurrently acquire the Partnership Interests of the Limited Partner and the Special Limited Partner.

LPA Provisions (Sample 1) Section 8.7 Put Option. At any time after the expiration of the Credit Period, Limited Partner may require that the General Partner purchase the Limited Partner’s Interest and the Special Limited Partner’s interest, subject to all then existing liens and encumbrances to title, for an amount equal to $100 (the “Put Option”). To exercise the Put Option, the Limited Partner must deliver to the General Partner an irrevocable written notice of such exercise. The purchase by the General Partner will be closed within 60 days after the later of (i) the Limited Partner’s exercise of such right, or (ii) the receipt of all required consents, if any. Any conveyance from the Limited Partner and the Special Limited Partner to the General Partner under this §8.7 will be made by quitclaim transfer, without representation or warranty of any kind by the Limited Partner or the Special Limited Partner except that the Limited Partner and the Special Limited Partner will represent that such Partner has not previously transferred its Interest and such Partner’s Interest is free of liens or encumbrances other than those contemplated by the Partnership’s Project Loans and/or by this Partnership Agreement. The Limited Partner and the Special Limited Partner agree that the Partnership will have no liability for any Adverse Consequences to the Limited Partner or the Special Limited Partner as a result of the exercise of the Put Option, including, but not limited to, recapture or lost Tax Credits. Notwithstanding the foregoing, the indemnification and guaranty obligations hereunder and under the Guaranty Agreement shall not terminate as a result of the exercise of the Put Option and General Partner shall continue to provide reports and information described herein from and after the exercise of the Put Option.

LPA Provisions (Sample 2) Section 17.7 Expiration of Compliance Period. (a) Notwithstanding any provision hereof to the contrary (other than this Section 17.7), but subject to the rules and regulations of the State Tax Credit Agency, the Special Limited Partner will have the right at any time after the beginning of the last year of the Compliance Period to require, by written notice to the General Partner, that the General Partner promptly submit a written request to the applicable State Tax Credit Agency pursuant to Section 42(h) of the Code (or any successor provision) that such agency endeavor to locate within one year from the date of such written request a purchaser for the Apartment Housing who will continue to operate the Apartment Housing as a qualified low-income property, at a purchase price that is not less than the minimum amount set forth in Section 42(h)(6) of the Code (or any successor provision). In the event that the State Tax Credit Agency obtains an offer satisfying the conditions of the preceding sentence, the General Partner shall promptly notify the Special Limited Partner in writing with respect to the terms and conditions of such offer, and, if the Special Limited Partner notifies the General Partner that such offer should be accepted, the General Partner shall cause the Partnership promptly to accept such offer and to proceed to sell the Apartment Housing pursuant to such offer.

LPA Provisions (Sample 2) (b) Notwithstanding any other provision of this Agreement to the contrary, the Special Limited Partner will have the right at any time after the end of the Compliance Period to require, by written notice to the General Partner (the â&#x20AC;&#x153;Required Sale Noticeâ&#x20AC;?), that the General Partner promptly use its best efforts to obtain a buyer for the Apartment Housing on the most favorable terms then available. The General Partner shall submit the terms of any proposed sale to the Special Limited Partner for its approval in the manner set forth in Section 17.2(a) hereof. If the General Partner fails to so obtain a buyer for the Apartment Housing within six months of receipt of the Required Sale Notice or if the Consent of the Special Limited Partner in its sole discretion to any proposed sale is withheld, then the Special Limited Partner will have the right at any time thereafter to obtain a buyer for the Apartment Housing on terms acceptable to the Special Limited Partner (but not less favorable to the Partnership than any proposed sale previously rejected by the Special Limited Partner). In the event that the Special Limited Partner so obtains a buyer, it shall notify the General Partner in writing with respect to the terms and conditions of the proposed sale and the General Partner shall cause the Partnership promptly to sell the Apartment Housing to such buyer.

Exhibit A Documents Needed for Evaluation Trailing 12-Months Financials Most Recent Audits ( 2 years) Current Rent Roll Unit ID Number of Bedrooms Square Footage Occupancy Status (Leased, Vacant, Employee) Program Rent Restriction Market Rent Lease Rent Tenant Payment Subsidy Payment Concessions LIHTC Regulatory Agreement Partnership agreements HAP Contract State Program Regulatory Agreement County Program Regulatory Agreement City Program Regulatory Agreement Utility Allowance Sheet Prior 3-Yrs Property Tax Receipts Management Market Survey Most Recent Property Condition Report Most Recent Appraisal Loan Promissory Note(s) Owner-Entity Formation Document Land Use Restriction Agreement (LURA) Additional Documents for Bond Transactions Trust Indenture Financing Agreement Land Use Restriction Agreement Credit Enhancement Agreement All Multifamily Deeds to Secure Debt Assignment of Rents and Security Agreement Bond Mortgage Note Inter-creditor Agreement Reimbursement and Security Agreement SWAP DOCUMENTS ISDA Master Agreement, Schedule, Credit Support Annex and Confirmation. Executed counterpart of Swap Credit Enhancement Agreement

Processing and structural differences between the Freddie Mac Program Plus and Fannie Mae DUS processing models as it pertains to financing for targeted affordable (TAH) apartments across a number of regional markets in the U.S. Individual loan terms are comparable within a very tight range with both entities able to offer the most competitive interest rates for full leverage loans, interest only periods, prepayment flexibility, fully assumable loans, and secondary future funding.

Entity Quote – Application process

Underwriting – Third Parties

Processing Time Size restrictions

Net Worth Requirement Liquidity Requirement Guarantor Financial covenant

Execution

Fannie Mae DUS DUS Lender – 25 lenders DUS Lender does initial underwriting and issues application. May need prior approval from Fannie Mae on underwriting exceptions or waivers. TAH deals must be reviewed by TAH group at Fannie Mae. DUS Lender orders third parties directly and completes underwriting package. 45-60 Days – shorter timelines possible None

Reviewed on a per-deal basis 10% of the loan being underwritten Non-recourse with key principal guaranty in the event of bankruptcy, fraud, misapplication of funds, & environmental indemnity. Fannie Mae MBS Execution

Freddie Mac Seller Servicer – 23 lenders Seller must be one of 9 approved TAH lenders for Freddie Mac. Seller submits initial underwriting to Freddie Mac TAH group in home office for quote/ pricing. Seller-Servicer issues application. Seller orders third party reports, compiles Freddie Mac underwriting, and then submits to TAH group in home office. 45-60 Days – shorter timelines possible TAH deals under $3 Million are priced as portfolio loans and are priced an average of 50-70bp higher. Reviewed on a per-deal basis 10% of the loan being underwritten Non-recourse with key principal guaranty in the event of bankruptcy, fraud, misapplication of funds, & environmental indemnity. Both CME (securitized execution) and portfolio execution

Section 223(f) Refinance / Acquisition

Apartment & Senior Independent Living Facilities

The HUD section 223(f) program provides mortgage insurance for the refinance or acquisition of existing apartment properties and independent living projects for seniors (age 62 and older with no services) that are at least three years old. Eligible Borrowers:

Single asset, special purpose entities that are profit motivated, non-profit or public owners.

Eligible Asset Types:

Market rate, Affordable, or Rental Assisted properties.

Maximum Term:

The lesser of 35 years (fully amortizing) or 75% of the estimated remaining economic life, with a minimum term of 10 years.

Programmatic Maximum Loan Amounts:

Refinancing: The lesser of: 1. 83.3% LTV for Market Rate properties, 85% LTV for Affordable, and 87% LTV for properties with 90% or more Rental Assistance. 2. DSCR of 1.20x for Market Rate properties, 1.1765x for Affordable, and 1.15x for properties with 90% or more Rental Assistance. 3. Greater of 100% of eligible transaction costs or 80% of market value if a cash out transaction. *Eligible transaction costs include: existing indebtedness, required repairs, initial deposits to the replacement reserve, third party reports and other closing costs. 4. 100% of mortgagable costs less grants, public loans, and tax credits. Acquisition: The lesser of: 1. 83.3% LTV for Market Rate properties, 85% LTV for Affordable, and 87% LTV for properties with 90% or more Rental Assistance. 2. DSCR of 1.20x for Market Rate properties, 1.1765x for Affordable, and 1.15x for properties with 90% or more Rental Assistance. 3. 83.3% of eligible acquisition costs for Market Rate properties, 85% for Affordable, and 87% for properties with 90% or more Rental Assistance. *Eligible acquisition costs include: purchase price, required repairs, initial deposits to the replacement reserve, third party reports and other closing costs. 4. 100% of mortgagable costs less grants, public loans, and tax credits.

Commercial Space:

Limited to 20% of net rentable area and 20% of the effective gross income.

Occupancy:

1. Property must demonstrate average physical occupancy of at least 85% during the 6 months preceding submission of the Firm Application and maintain this through final endorsement. 2. Maximum underwritten physical occupancy of 93% for Market Rate or Affordable properties, 95% for properties with 90% or more Rental Assistance.

Interest Rate:

Fixed for the term of the loan and subject to market conditions at time of Rate Lock.

Recourse and Assumption:

The FHA insured loan is non-recourse and assumable (subject to HUD approval).

Prepayment:

Typically closed for 2 years then open to prepayment at 108% in year 3, declining 1% per year until open at par in year 11. Other variations are possible based on market conditions at the time of rate lock and borrower preferences.

1900 Grant Street, Suite 1250, Denver, CO 80203-4351

3/2012

Section 223(f) Refinance / Acquisition

Apartment & Senior Independent Living Facilities

FHA Application Fees:

0.30% of the loan amount, payable to HUD at submission of the firm application.

Mortgage Insurance Premium:

1.00% of final loan amount due to HUD at time of closing. The annual MIP thereafter ranges from 0.45%-0.60% of the outstanding loan amount depending on property characteristics.

Secondary Financing:

Permitted in the form of a surplus cash note, combined loan to value cannot exceed 92.5% unless secondary financing is from a governmental source.

Repairs & Improvements:

Repairs and replacements are limited to one major building component and cannot exceed the greater of: 1. $6,500 per unit multiplied by the high cost factor for the area. 2. 15% of the estimated replacement cost after completion of all repairs, replacements and improvements.

Additional Program Parameters: • • • • • •

The FHA Section 223(f) mortgage insurance program is the most attractive credit enhancement program available for taxable and tax-exempt acquisition financing or refinance of residential properties. Real estate taxes and insurance are escrowed monthly. An initial deposit to a replacement reserve will be required at closing. The deposit can be capitalized in the mortgage loan and is determined by the property’s physical needs assessment . Replacement Reserve deposits are escrowed monthly; monthly deposit amount is determined in accordance with HUD guidelines on a property specific basis (minimum $250 per unit per year). A repair escrow may be required at closing in the amount equal to 120% of the estimated cost to correct any deferred maintenance, as identified by the property's Physical Needs Assessment. A PCNA report will be required every 10 years.

LENDER DISCLAIMER: These terms are a general indication of current terms and requirements only, and are subject to change by AmeriSphere and/or HUD at any time without prior notice. This document does not constitute a commitment to lend.

For Additional Information Contact:

Mike Backman

SVP & FHA National Production Director MBackman@AmeriSphere.net (972) 941 – 3403

Brian Harris

FHA Production Manager BHarris@AmeriSphere.net (303) 831 – 6154 AmeriSphere Mortgage Finance, LLC is a leading FHA-approved MAP/LEAN lender and provides FHA-insured construction and permanent financing for multifamily and health care properties nationwide. Our staff is comprised of seasoned professionals with extensive FHA financing experience.

1900 Grant Street, Suite 1250, Denver, CO 80203-4351

3/2012

Freddie Mac 9% LIHTC Mortgage Financing for affordable multifamily properties that have received a 9% LIHTC allocation

Targeted Affordable Housing Offerings •

Bond Credit Enhancement – 4% LIHTC

•

Bond Credit Enhancement With Other Affordability Components

•

9% LIHTC Mortgage

•

Cash Mortgages With Other Affordability Components

•

Moderate Rehabilitation

•

Tax-Exempt Bond Securitization (TEBS)

•

Fixed and Variable Liquidity Pricing

At-a-Glance Comparison Product Summary

Forward Commitment

Immediate Funding

Moderate Rehabilitation

Product Description

Forward commitment for new construction or substantial rehabilitation of affordable multifamily properties with 9% LIHTC

Financing for the acquisition or refinance of stabilized affordable multifamily properties with 9% LIHTC

Financing for the moderate rehabilitation (with tenants in place) of affordable multifamily properties with 9% LIHTC

Type of Funding

Funded construction financing available; permanent financing at conversion

Permanent financing

Eligible Properties

To-be-built or substantially rehabilitated garden, mid-rise or high-rise multifamily properties that received a 9% tax credit allocation

Garden, mid-rise or high-rise multifamily properties with 9% LIHTC with 85% occupancy for 90 days

Financing for acquisition/ rehabilitation; based on projected post-rehab NOI; cash or letter of credit collateral required to fund gap between supportable debt on current NOI and mortgage amount (collateral held until stabilization). Interest only during the moderate rehabilitation period. Garden, mid-rise or high-rise multifamily properties with 9% LIHTC undergoing moderate rehabilitation with tenants in place

Minimum Debt Coverage Ratio

1.15x (1.10x w/ HUD Risk Sharing) Cash-out Refinance: 1.20x (1.15x w/ HUD Risk Sharing)

Maximum Loan-toValue Loan Term

90% of market value

Minimum term: lesser of 15 years or the remaining LIHTC compliance period. Maximum term: 35 years.

Minimum term: lesser of 15 years or the remaining LIHTC compliance period. Maximum term: 35 years. Rehabilitation and stabilization period (max 24 months) will be included in loan term.

Construction Loan Term

Maximum forward commitment term: 36 months plus a free 6-month extension during construction period

Maximum Amortization

35 years

Prepayment Provisions

Yield Maintenance

Subordinate Financing

Permitted per the TAH Guide

9% LIHTC Mortgage (continued)

Tax and Insurance Escrows Fees Securitization Available

Required per the TAH Guide

Refer to Exhibit 11: TAH Fee Schedule, in the TAH Guide No

Refer to Exhibit 11: TAH Fee Schedule, in the TAH Guide Yes, please refer to the Capital SM Markets Execution Term Sheet for securitization requirements

For more information, visit FreddieMac.com/Multifamily The information in this document is not a replacement or substitute for information found in the Delegated Underwriting for Targeted Affordable Housing Terms set forth herein are subject to change without notice.

速

Guide on AllRegs .

Pub. Num. 783 October 2011

For links to our list of Freddie Mac Seller/Servicers and to our product information page, visit FreddieMac.com/multifamily The information in this document is not a replacement or substitute for information found in the Freddie Mac Multifamily Seller/Servicer Guide. Terms set forth herein are subject to change without notice.

Pub. Num. 773 April 2009

Freddie Mac Bond Credit Enhancement – 4% LIHTC* Financing for affordable LIHTC multifamily properties funded by the sale of fixed- or variable-rate tax-exempt bonds

Targeted Affordable Housing Offerings •

Bond Credit Enhancement – 4% LIHTC

•

Bond Credit Enhancement With Other Affordability Components

•

9% LIHTC Mortgage

•

Cash Mortgages With Other Affordability Components

•

Moderate Rehabilitation

•

Tax-Exempt Bond Securitization (TEBS)

•

Fixed and Variable Liquidity Pricing

At-a-Glance Comparison Product Summary

Forward Commitment

Immediate Funding

Moderate Rehabilitation

Product Description

Bond credit enhancement provided for new construction or substantial rehabilitation of affordable multifamily properties with 4% LIHTC

Bond credit enhancement provided for the acquisition or refinance of stabilized affordable multifamily properties with 4% LIHTC

Bond credit enhancement provided for the moderate rehabilitation (with tenants in place) for the acquisition or refinance of stabilized multifamily properties with 4% LIHTC

Type of Funding

Bond credit enhancement available during construction phase; bond credit enhancement during permanent phase following conversion

Bond credit enhancement for fixedor variable-rate tax-exempt bonds

Bond credit enhancement for acquisition/rehabilitation; based on projected post-rehab NOI; cash or letter of credit collateral required to fund gap between supportable debt on current NOI and mortgage amount (collateral held until stabilization). Interest only during the rehabilitation/stabilization period.

Eligible Properties

To-be-built or substantially rehabilitated garden, mid-rise or high-rise multifamily properties with 4% LIHTC

Garden, mid-rise or high-rise multifamily properties with 4% LIHTC that maintain 85% occupancy for 90 days

Garden, mid-rise or high-rise multifamily properties with 4% LIHTC undergoing moderate rehabilitation with tenants in place

Minimum Debt Coverage Ratio

•

Variable-rate with cap hedge: 1.20x; 1.25x for cash-out refinance Fixed-rate and variable rate with minimum 10-year swap: 1.15x; 1.20x for cash-out refinance

•

Variable-rate with cap hedge: 1.20x; 1.25x for cash-out refinance Fixed-rate and variable rate with minimum 10-year swap: 1.15x; 1.20x for cash-out refinance

•

Variable-rate with cap hedge: 80% of adjusted value or 85% of market value Fixed-rate and variable rate with minimum 10-year swap: 85% of adjusted value or 90% of market value HUD Risk Sharing (fixed-rate only): 90% of adjusted value

•

Maximum Loan-to-Value

• •

•

Variable-rate with cap hedge: 1.20x; 1.25x for cash-out refinance Fixed-rate and variable rate with minimum 10-year swap: 1.15x; 1.20x for cash-out refinance Variable-rate with cap hedge: 80% of adjusted value or 85% of market value Fixed-rate and variable rate with minimum 10-year swap: 85% of adjusted value or 90% of market value HUD Risk Sharing (fixed-rate only): 90% of adjusted value

Guide on AllRegs .

Pub. Num. 781 September 2011

Bond Credit Enhancement â&#x20AC;&#x201C; 4% LIHTC (continued)

Product Summary

Forward Commitment

Immediate Funding

Moderate Rehabilitation

Loan Term

Minimum of the remaining LIHTC compliance period or 15 years, whichever is less. Maximum 35 years.

Minimum of the remaining LIHTC compliance period or 15 years, whichever is less. Maximum 35 years. Moderate rehabilitation period/stabilization (max 24 months)

Construction Loan Term

Maximum forward commitment term: 36 months plus a free 6-month extension during construction period

Maximum Amortization

35 years

Prepayment Provisions

Fee Maintenance

Subordinate Financing

Permitted per the TAH Guide

Tax & Insurance Escrows

Required per the TAH Guide

* May include bond refunding, substitution, or new issue transactions with 80-20 bonds, combination bonds, 501(c)(3) bonds, Section 8, Section 236, tax abatements, and LIHTC.

Pub. Num. 773 October 2011

Freddie Mac Cash Mortgages With Other Affordability Components* Financing for multifamily properties with regulatory rent or income restrictions

Targeted Affordable Housing Offerings •

Bond Credit Enhancement – 4% LIHTC

•

Bond Credit Enhancement With Other Affordability Components

•

9% LIHTC Mortgage

•

Cash Mortgages With Other Affordability Components

•

Moderate Rehabilitation

•

Tax-Exempt Bond Securitization (TEBS)

•

Fixed and Variable Liquidity Pricing

At-a-Glance Comparison Product Summary

Immediate Funding

Product Description

Financing for the acquisition or refinance of stabilized affordable multifamily properties

Type of Funding

Permanent financing

Eligible Properties*

Garden, mid-rise or high-rise multifamily properties that meet affordability criteria and with 85% occupancy for 90 days

Minimum Debt Coverage Ratio

1.25x (1.15x w/ HUD Risk Sharing) Cash-out Refinance: 1.30x (1.20x w/ HUD Risk Sharing)

Maximum Loan-to-Value

80% of market value; 90% of market value w/ HUD Risk Sharing

Loan Term

Maximum term of 30 years

Construction Loan Term

Maximum Amortization

30 years

Prepayment Provisions

Yield Maintenance

Subordinate Financing

Permitted per the TAH Guide

Tax & Insurance Escrows

Required per the TAH Guide

Fees

Refer to Exhibit 11: TAH Fee Schedule, in the TAH Guide

Securitization Available

Yes, please refer to the Capital Markets Execution securitization requirements

Term Sheet for

* May include transactions with Section 8, Section 236, tax abatements or other affordability components.

Guide on AllRegs .

Pub. Num. 784 October 2011

1998 Loan Prepay Calulation 1st Lien

$5,500,000

Interest Rate Amortization Loan Constant Payment

7.00% 0.0058333 30 Years 7.98% 0.006653 $439,099.65 $36,591.64

Yield Maintenance - Years 1-12 Annual Assumed Reinvestment Rate Note Rate Prepaid $ Remaining YM Period Monthly Payment

N/A N/A N/A N/A N/A

Dec-28

PV Factor Calculations

Year 13 Year 14 Year 15 Year 16 Year 17 & Thereafter

1+r (1+r)^-n 1-(1+r)^-n

5% 4% 3% 2% 1%

Prepayment Penalty: $4,207,498 Prepaid Balance 12/1/2012

4.00000% Diff in rate

= $168,299.93 4.00% PV Factor

2002 Loan Prepay Calculation 1st Lien

$5,500,000

Interest Rate Amortization Loan Constant Payment

7.00% 0.0058333 30 Years 7.98% 0.006653 $439,099.65 $36,591.64

Yield Maintenance - Years 1-12 Annual Assumed Reinvestment Rate Note Rate Prepaid $ Remaining YM Period Monthly Payment

2.435% 7.000% $4,710,621 2 $12,625.49

PV Factor Calculations

Year 13 Year 14 Year 15 Year 16 Year 17 & Thereafter

Dec-32

102.43500% 0.953022725 0.046977275 1.929251553

1+r (1+r)^-n 1-(1+r)^-n

5% 4% 3% 2% 1%

Prepayment Penalty: $4,710,621 Prepaid Balance 12/1/2012

4.56500% Diff in rate

1.929251553 PV Factor

= $414,865.96

8.81%

2006 Loan Prepay Calulation 1st Lien

$5,500,000

Interest Rate Amortization Loan Constant Payment

7.00% 0.0058333 30 Years 7.98% 0.006653 $439,099.65 $36,591.64

Yield Maintenance - Years 1-12 Annual Assumed Reinvestment Rate Note Rate Prepaid $ Remaining YM Period Monthly Payment

2.662% 7.000% $5,091,182 6 $12,625.49

PV Factor Calculations

Year 13 Year 14 Year 15 Year 16 Year 17 & Thereafter

Dec-36

102.66200% 0.854164811 0.145835189 5.478406791

1+r (1+r)^-n 1-(1+r)^-n

5% 4% 3% 2% 1%

Prepayment Penalty: $5,091,182 Prepaid Balance 12/1/2012

4.33800% Diff in rate

5.478406791 PV Factor

= $1,209,936.20 23.77%

- 301 -

SUCCESSFUL CASE STUDIES

hosted by

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

132 unit property in 6 two-story walk up apartment buildings with subterranean parking, two elevators, two swimming pools and open parking. The apartment buildings are situated on two legal parcels separated by a shared common driveway. The property is comprised of 100% affordable units in two buildings which received an allocation of bonds and 4% tax credits in 1999 for the acquisition and rehab of the units. 100% of the units are subject to a 60% of AMI restriction requirement through 2030.

Year Built:

1962 & 1965/ Rehab 1999

Land Area:

3.74 acres

Rentable Area:

115,905 SF

% LIHTC Units:

100%

Market Vacancy:

New Financing Freddie Mac offered the following financing terms: Loan amount Rate Term Amortization Minimum DCR Maximum LTV

$ 9,400,000 3.75% 7 years 30 years 1.49x 74.0%

The borrower was able to refinance the existing debt on the property, provide for closing costs, and provide enough return of equity to buy-out their limited partner. The prepayment premium associated with the bond payoff is was 2%. The new debt replaced tax-exempt bond financing that carried a coupon of 6.71%.

Important Considerations 

Equity partner was willing to be bought out – Partners had another property that they decided to sell.



Bonds allowed for redemption



Prepayment was reasonable – Penalty dropped to 2% the month of closing.



Stable, supply constrained market with limited vacancy.



Economics allowed for enough cash out to facilitate partner buyout.

Case Study - Year 14 Year Built

2000

# of Units

160

Avg SF

1099

Market Rent PSF

$0.66

Total Sales Price

$5,500,000

Sales Price Per Unit Sales Date Sales Highlights 

Assumed existing $4,400,000 loan ($1,000,000 prepayment penalty)



10 tours, 7 offers



Buyer plans to improve operations and refinance with an FHA loan



ROFR for debt plus taxes beginning in year 15

$34,375 Jul -2012

Case Study - Year 16 Year Built

1995

# of Units

144

Avg SF

1,021

Market Rent PSF

$0.90

Total Sales Price

$10,200,000

Sales Price Per Unit Sales Date

$70,833 Dec -2012

Sales Highlights 

New Debt option



14 tours, 15 offers



Non-Profit Buyer Using the Right of First Refusal option, with Market pricing



6.5 Cap on Trailing 12 operating numbers

ARA Case Study

Secondary Texas

EXECUTIVE SUMMARY - LOAN OR BOND ASSUMPTION PROPERTY SUMMARY

UNIT MIX

Date of Analysis: Address: City, State Built (Renovated): Placed in Service: End of 15 Yr Compliance: Extended Compliance: Current General Partner: Limited Partner: Management Company:

Nov-12 ARA Drive Secondary Texas 2000 1999 2013 2038

Total Square Feet: Buildings:

175,772 40

Acreage: Average Sq Ft Per Unit:

11 1,099

UNIT MIX $5,121,000 Jul-02 7.20% $4,423,130

- Two Bedroom - Three Bedroom - Four Bedroom

40 80 40

Fannie Mae Financing Yield Maintenance Penalty through 2017

PRICING WITH LOAN ASSUMPTION

Purchase Price: Purchase Price Per Unit: Estimated Capital Required: Assumption Fees: All In Cost (With Fees): All In Cost Per Unit:

CURRENT LOAN STATISTICS

$5,500,000 $34,400 $250,000 $67,000 $5,820,000 $36,400

SOURCES

Purchase: Captial: Assumption Fees: TOTAL Existing Debt at Purchase* Required Equity at Purchase TOTAL

Current Loan Original Amount Outstanding Debt @ Purchase Current Loan Interest Rate

$5,121,000 $4,423,130 7.20%

Monthly Payment Annual Payment

$34,761 $417,129

Current Loan Amortization Period Assumption Fee %

30 1.0%

NEW LOAN AT END OF YIELD MAINTENANCE PERIOD

$5,500,000 $250,000 $67,000 $5,817,000

USES

$4,423,000 $1,394,000 $5,817,000

FINANCIAL STATISTICS WITH LOAN ASSUMPTION

Cap Rate: Without Capital Cap Rate: Imputed w/ Capital: Year 1 Cash Return: 5 Year Cash on Cash Return: IRR (Levered): Cap Rate: T-12 Actuals Cap Rate: 2010 Actuals Cap Rate: 2009 Actuals

160 95%

LIHTC Investor LP

Existing Note Amount: Note Origination: Existing Note Rate: Outstanding Balance: Pre-Payable / Notes:

Total Units Current Occupancy

NOI at YMP + 1 Year* Max LTV Interest Rate Amortization Period Monthly Payment Annual Payment New Loan Proceeds Principal Balance at Reversion

$639,923 80% 7.0% 30 $34,059 408,713 $5,119,384 4,887,709

Growth Rate Assumptions

9.6% 9.2% 8.38% 10.31% 20.77% 8.3% 7.5% 7.3%

DCF Element Market Rent Growth Rate Gain/ (Loss) To Lease Vacancy/Non-Revenue Units Bad Debts Concessions Management Fee Inflation Factor

Prform / YR 1 3.0% -1.0% -5.0% -0.5% 0.0% 4.0% 3.0%

YR 2 - 3 3.0% -1.0% -5.0% -0.5% 0.0% 4.0% 3.0%

YR 4 - 5 3.0% -1.0% -6.0% -0.5% 0.0% 4.0% 3.0%

YR 6 - 11 3.0% -1.0% -6.0% -0.5% 0.0% 4.0% 3.0%

ARA Case Study

DCF WITH LOAN ASSUMPTION 2009

INCOME CATEGORIES

2010

Trailing 12

Secondary Texas Discounted Cash Flow Analysis

Dec-11

Proforma 2012

Year 2 2013

Year 3 2014

Year 4 2015

Year 5 2016

Year 6 2017

Year 7 2018

Year 8 2019

Year 9 2020

Year 10 2021

Year 11 2022

INCOME Annual Market Rents

$1,345,254

$1,388,442

$1,363,451

$1,429,731

$1,472,623

$1,516,801

$1,562,305

$1,609,174

$1,657,450

$1,707,173

$1,758,388

$1,811,140

$1,865,474

$1,921,438

Gain/(Loss) To Lease

($66,058)

-81,501

-29,073

-14,297

-14,726

-15,168

-15,623

-16,092

-16,574

-17,072

-17,584

-18,111

-18,655

-19,214

$1,279,196

$1,306,941

$1,334,378

-141,553

-94,366

-60,154

-70,772

-72,895

-75,082

-92,801

-95,585

-98,453

-101,406

-104,448

-107,582

-110,809

-114,133

Bad Debt

-5,035

-2,768

4,000

-7,077

-7,289

-7,508

-7,733

-7,965

-8,204

-8,451

-8,704

-8,965

-9,234

-9,511

Concessions

-4,593

-637

-325

$1,128,015

$1,209,170

$1,277,899

88.2%

92.5%

95.8%

94.5%

93.5%

$35,653

$39,625

$33,484

$31,900

$32,857

$33,843

$34,858

$35,904

$36,981

$38,090

$39,233

$40,410

$41,622

$42,871

$1,163,668

$1,248,795

$1,311,383

7.3%

5.0%

4.4%

3.0%

1.9%

3.0%

Variable Operating Expenses

513,985

526,091

524,721

503,660

518,770

534,333

550,363

566,874

583,880

601,396

619,438

638,021

657,162

676,877

Management Fee

58,080

62,193

65,388

54,779

56,423

58,115

59,240

61,017

62,848

64,733

66,675

68,676

70,736

72,858

Real Estate Taxes/Misc. Taxes

91,624

91,869

96,045

173,141

178,335

183,685

189,196

194,872

200,718

206,739

212,942

219,330

225,910

232,687

Property/Liability Insurance

29,081

82,557

97,072

56,000

57,680

59,410

61,193

63,028

64,919

66,867

68,873

70,939

73,067

75,259

$692,769

$762,710

$783,226

$787,580

$811,208

$835,544

$859,992

$885,791

$912,365

$939,736

$967,928

$996,966

59.5%

61.1%

59.7%

57.5%

58.1%

$470,899

$486,085

$528,157

$581,904

$599,361

$617,342

$621,014

$639,645

$658,834

$678,599

$698,957

$719,926

$741,523

$763,769

48,000

49,440

50,923

52,451

54,024

55,645

57,315

59,034

60,805

62,629

64,508

$422,899

$438,085

$480,157

$533,904

$549,921

$566,419

$568,563

$585,620

$603,189

$621,284

$639,923

$659,121

$678,894

$699,261

CAP RATE (EXCLUDING CAPITAL)

7.6%

7.9%

8.6%

9.6%

9.9%

10.2%

10.5%

10.8%

11.2%

11.5%

11.8%

12.2%

CAP RATE (INCLUDING CAPITAL)

7.3%

7.5%

8.3%

9.2%

9.5%

9.7%

9.8%

10.1%

10.4%

10.7%

11.0%

11.3%

11.7%

Proforma

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

-$417,129

-$412,219

-$408,713

Gross Potential Income Vacancy/Non-Revenue Units

Total Rental Income Economic Occupancy (%) Other Income EFFECTIVE GROSS INCOME % Change From Previous Period

$1,415,433 $1,457,896 $1,501,633 $1,546,682 $1,593,083 $1,640,875 $1,690,101 $1,740,804 $1,793,029 $1,846,819 $1,902,224

$1,337,585 $1,377,712 $1,419,043 $1,446,148 $1,489,532 $1,534,218 $1,580,245 $1,627,652 $1,676,482 $1,726,776 $1,778,579

$1,369,485 $1,410,569 $1,452,886 $1,481,006 $1,525,436 $1,571,199 $1,618,335 $1,666,885 $1,716,892 $1,768,398 $1,821,450

EXPENSES

TOTAL EXPENSES Expense Ratio (%) NET OPERATING INCOME (NOI) Capital Reserves NOI AFTER CAPITAL

SOURCES & USES Purchase Price Payables

DEBT SERVICE $5,500,000 $0

Principal & Interest Payments Principal Repayment

Capital

$250,000

PrePayment Penalty (1%)

Assumption Fee

$66,961

New Loan Proceeds

$1,026,875 $1,057,681

-$3,831,438

$6,696,066

Reversion Proceeds All-In Costs

$5,816,961

CASH FLOW AFTER DEBT

Existing Debt @ Purchase

$4,423,130

Debt Coverage Ratio

Total Equity

$1,393,831

Total All-In Costs

$5,816,961

CASH-ON-CASH RETURNS

$116,775

$132,792

$149,290

$151,434

$168,491

$3,055,598

1.28

1.32

1.36

1.40

-0.25

8.38%

9.53%

10.71%

10.86%

12.09%

219.22%

ALL CASH RETURn LEVERAGED IRR \

ARA Case Study Secondary Texas Loan Assumption Valuation Matrix NOI Cash Flow After Debt Existing Loan Balance Assumption Fee Capital (Deferred Maint.)

$533,904 $116,775 $4,423,130 $66,961 $250,000

Cash Return

Equity (1)

All In Cost

Less Capital/Fees

Purchase Price

Cap Rate

12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5%

$934,202 $973,127 $1,015,437 $1,061,593 $1,112,145 $1,167,752 $1,229,213

$5,357,331 $5,396,256 $5,438,566 $5,484,722 $5,535,274 $5,590,882 $5,652,342

$316,961 $316,961 $316,961 $316,961 $316,961 $316,961 $316,961

$5,040,371 $5,079,296 $5,121,606 $5,167,762 $5,218,314 $5,273,921 $5,335,382

10.0% 9.9% 9.8% 9.7% 9.6% 9.5% 9.4%

(1) Includes Capital and Assumption Fees

- 401 -

THERE’S MORE! TAX CODE REFORM, RECENT IRS RULINGS AND NEW IRS GUIDELINES

hosted by

November 12, 2012

St. Davidâ&#x20AC;&#x2122;s Episcopal Church

Austin, TX

Prepared by: Nancy Morton, Dauby Oâ&#x20AC;&#x2122;Connor & Zaleski, LLC, Member

401- Tax Update

Patient Protection and Affordable Care Act • • • • • •

Unearned Medicare Contribution Tax (2013) Medicare Surtax (2013) Individuals must buy coverage (2014) Tax for high-cost medical plans (2018) Certain businesses must provide coverage (2014) Credits for small businesses (2010-2015)

401- Patient Protection and Affordable Care Act

Patient Protection and Affordable Care Act • Tax Provisions for Everyone (ok – maybe not everyone ) – 3.8% Medicare contribution tax on investment income (NII) • • • • • •

Not trade or business income $250k threshold – example Estates and trusts have $11,950 threshold Applicability to partnership interest sales-example Who does it not apply to? What does it not apply to?

Patient Protection and Affordable Care Act • 0.9% additional Medicare tax (on top of 2% increase) – – – – –

Was 1.45% - now 2.35% Income over $200,000 single, $250,000 (married) related to WAGES No cap Employers withhold at $200k level Married scenario

Patient Protection and Affordable Care Act • High-cost plans – – – – –

Premiums greater than $10,200 individuals Premiums greater than $27,500 families Tax is 40% Tax is over the threshold 2018

Patient Protection and Affordable Care Act • Individuals must buy coverage if not in employer plan • Can join an exchange (must be in place by 2014 at state level) • Penalty is the greater of a flat fee or percentage of income

Year

Flat Fee

% of income

2014

$95

2015

$325

2016 on

$695

2.5%

Patient Protection and Affordable Care Act • Tax credit available for those making less than 400% of poverty level • Works like this… – If you make up to 133% of poverty level – insurance cost cannot be greater than 2% of income – If you make 400% of poverty level – can only pay up to 9.5% of income on insurance

• Difference is tax credit

Patient Protection and Affordable Care Act • Certain employers must provide coverage – Over 50 FTE’s – Must cover at least 60% of claim costs – Must be affordable-employee’s share of premium cannot exceed 9.5% of the employee’s total household income – Must have “minimal essential coverage” – Maximum out-of-pocket expenses • $6,200 individual • $12,300 family

– Maximum deductibles • $2,000 individual • $4,000 family

Patient Protection and Affordable Care Act • Can also provide “Free Choice Vouchers” – If employee household income is less than 400% of the federal poverty level (currently $88,200), and employee’s share of employer’s coverage would be 8%-9.8% of their household income – can give the employer portion to the employee to buy own policy – Deductible by employer, employee exempt from income

Patient Protection and Affordable Care Act

Patient Protection and Affordable Care Act • Small Employer tax credit – started in 2010 – From 1-25 employees with average wages less than $50,000 covering at least half of the employee premium – For 2010-2013 – credit is 35% of employer premium costs – Tax exempt employers get 25% credit – For 2014 – tax credit will be 50% if the “exchanges” are used (35% tax-exempt) – Only 6 year maximum for credit (4 year phase in and 2 years subsequent) – Not for self-employed until 2014 and then must use exchange

Other Provisions of the Affordable Care Act Item

Current

2013

Medical Deduction â&#x20AC;&#x201C; itemized

Greater than 7.5% of AGI

Greater than 10% AGI

Health care Flexible Spending $5,000 Accounts

$2,500

401-Expiring Tax Provisions

Expiring Provisions â&#x20AC;˘ Tax Brackets-ordinary income Old

New

$0-17,500

10%

15%

17,500-59,300

15%

59,300-71,000

15%

28%

71,000-143,350

25%

28%

143,350-218,450

28%

31%

218,450-390,050

33%

36%

390,050+

35%

39.6%

Expiring Provisions â&#x20AC;˘ Tax Brackets-ordinary income Old

New

Obama

Romney

$0-17,500

10%

15%

10%

17,500-59,300

15%

59,300-71,000

15%

28%

15%

71,000-143,350

25%

28%

25%

143,350-218,450

28%

31%

28%

218,450-390,050

33%

36%

36% Start at $250k

33%

390,050+

35%

39.6%

35%

Expiring Provisions â&#x20AC;˘ Tax Brackets-capital gains Old

New

0% (for below 25% bracket)

10% (those in 15% bracket)

15% - all others

20% - all others

18% - greater than 5 years 8% - greater than 5 years â&#x20AC;&#x201C; 15% bracket Dividends Same as capital

Ordinary income rates

Expiring Provisions â&#x20AC;˘ Tax Brackets-estate tax

Year

Exemption

Top Rate of Tax

2002

1,000,000

50%

2009

3,500,000

45%

2010

None

2011

5,000,000

35%

2012

5,120,000

35%

2013

1,000,000

55%

Expiring Provisions • Itemized Deduction Phase-outs – 2010-2012 – no limitation – 2013 Phase out returns • Applicable amount – married - $178,150 • Reduced by lesser of: – 3% of the excess of AGI over applicable amount – 80% of the amount of itemized deductions allowed in that tax year

• Average Itemized Deductions by AGI • Presidential proposals

Expiring Provisions • Personal Exemption Phase-outs (PEP) – Reduce personal exemptions by 2% for each $2,500 AGI exceeds a threshold – Threshold was $254,350 for 2011

Other Provisions • AMT Patch – What is it?

Was

2012!!!!!

$74,750

$45,000

Other Provisions Item

Current

2013

Standard Deduction

Married is 200% of singleâ&#x20AC;&#x2122;s

Married is 167% the deduction for singles

15% tax bracket

Upper limit for married is 200% of upper limit for singles

Upper limit for married is 167% of upper limit for singles

Employer provided education

$5,250 deduction

None

Student loan interest

Unlimited time $155k limit

5 year period $75k limit

Payroll tax cut

4.2%

6.2%

Other Provisions • Individuals – deduction for state and local sales taxes, refundability of the credit for prior AMT, above the line deduction for qualified tuition and related expenses, mortgage insurance premiums deduction as qualified interest, expansion of adoption credit, teacher expense deduction, child credit reduced • Businesses – bonus depreciation, research and experimentation credit, enhanced 179 deductions (back to $25k), New markets credit (300 applications pending)

401- New Capital Expenditure Rules

Introduction โ ข IRS has issued extensive temporary regs concerning deduction and capitalization of expenditures made to acquire, produce, or improve tangible property. โ ข Proposed regs issued in 2008 are withdrawn. โ ข Affected regulations are: ยง1.162-3T, ยง1.162-4T, ยง1.162-11T, ยง1.167(a)-4T, ยง1.167(a)-7T, ยง1.167(a)-8T, ยง1.168(i)-1T, ยง1.168(i)-7T, ยง1.168(i)-8T, ยง1.263(a)-1T, ยง1.263(a)-2T, ยง1.263(a)-3T, ยง1.263(a)-6T, ยง1.1016-3T, and ยง1.165-2T.

Background • Costs are currently deductible under Code §162 as a repair expense if they are: – Incidental in nature – Neither materially add to the value of the property nor appreciably prolong its useful life – For materials and supplies consumed during the year

Background • Expenses must be capitalized under Code §263 if they are for permanent improvements that: – – – –

Increase the value of the property Restore its value or use Substantially prolong its useful life Adapt it to a new or different use

Materials and Supplies – timing of deduction • Under the new temp regs, the costs of buying or producing: – Non-incidental materials and supplies are deductible in the tax year in which they are used or consumed in the taxpayer’s operations; and – Incidental materials and supplies that are carried on hand and for which no record of consumption is kept or physical inventories at the beginning and end of the tax year are not taken, generally are deductible in the tax year in which they are paid, provided taxable income is clearly reflected.

Materials and Supplies – definition • The temp regs define the term “materials and supplies” as tangible property used or consumed in the taxpayer’s business operations that is not inventory and that falls within any of the following categories: – It is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property; or – It consists of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in taxpayer’s operations; or – It is a unit of property with an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations; or – It is a unit of property with an acquisition cost or production cost (as determined under Code §263(a)) of $100 or less; or – It is identified in published IRS guidance as materials and supplies eligible for the rules in Reg. §1.162-3T.

Materials and Supplies – unit of property • The term “unit of property” is a central theme in the temp regs and it is defined in Reg. §1.263(a)-3T(e). • In general, all components that are functionally interdependent (one component’s placement in service by a taxpayer is dependent on the placement in service of another component by the taxpayer) comprise a single unit of property.

Materials and Supplies â&#x20AC;&#x201C; economic useful life â&#x20AC;˘ The temp regs generally provide that the economic useful life of a unit of property is not necessarily its inherent useful life, but is the period over which the property may reasonably be expected to be used by the taxpayer.

Materials and Supplies – elective de minimis rule • A taxpayer may elect to apply the de minimis rule in Reg. §1.263(a)-2T(g) to any material or supply as defined previously, whether incidental or nonincidental. • In general, under Reg. §1.263(a)-2T(d)(1), amounts paid to acquire or produce a unit of real or personal property must be capitalized. • Under the de minimis rule, such amounts (but not land or inventory) along with amounts paid for any material or supply don’t have to be capitalized if:

Materials and Supplies – elective de minimis rule (cont’d) – The taxpayer has an applicable financial statement (AFS) (such as one required to be filed with the SEC, or a certified audited financial statement); has written accounting procedures in place at the beginning of the tax year for expensing amounts paid for such property under certain dollar amounts, and treats such amounts as expenses on its AFS in accordance with such written procedures; and – The aggregate of amounts paid and not capitalized under the de minimis rule for the tax year are less than or equal to the greater of :

» 0.1% of the taxpayer’s gross receipts for the tax year as determined for federal income tax purposes; or » 2% of the taxpayer’s total depreciation and amortization expense for the tax year as determined in its AFS (Reg. §1.263(a)-2T(g))

Materials and Supplies – elective de minimis rule (cont’d) • The election is made for materials and supplies by deducting the amounts paid to acquire or produce a material or supply in the tax year that the amounts are paid and by complying with Reg. §1.263(a)-2T(g). • The election is made on a timely filed return for the year that amounts are paid for the material or supply. (Reg. §1.162-3T(f)(2)) • The de minimis rule doesn’t apply to businesses that don’t have an AFS.

Amounts Paid to Acquire or Produce Tangible Property • Under the new regs, generally, all costs that facilitate the acquisition or production of real or personal property must be capitalized, with exceptions for employee compensation and overhead costs. • Investigatory expenses related to the acquisition of realty do not have to be capitalized unless the expenses are “inherently facilitative”.

Amounts Paid to Acquire or Produce Tangible Property â&#x20AC;˘ Under the temp regs, unless the materials and supplies rule applies, or the de minimis rule applies, a taxpayer must capitalize amounts paid to acquire or produce a unit of real or personal property, including leasehold improvement property, land and land improvements, buildings, equipment, and furniture and fixtures. â&#x20AC;˘ Amounts paid to acquire or produce a unit of real or personal property include the invoice price and transaction costs.

Amounts Paid to Acquire or Produce Tangible Property • Taxpayers must capitalize costs for work performed before the date that the unit of property is placed in service by the taxpayer. (Reg. §1.263(a)2T(d)(1)) • The rule for work performed prior to the placed in service date can potentially transform what would normally be currently deductible repair expenses into capitalized expenses. (See Reg. §1.263(a)-2T(d)(2), Example 10)

Amounts Paid to Acquire or Produce Tangible Property • Amounts paid to facilitate the acquisition or production of real or personal property, i.e. paid in the process of investigating or otherwise pursuing the acquisition must be capitalized. • Facilitative amounts must be included in the basis of property acquired or produced. (Reg. §1.263(a)-2T(f)(3)(i)) • In determining whether an amount is paid in the process of pursuing or investigating an acquisition is a facts and circumstances test. • The fact that an amount would (or would not) have been paid “but for” the acquisition is relevant, but not determinative. (Reg. § 1.263(a)2T(f)(2)(i))

Amounts Paid to Acquire or Produce Tangible Property • Facilitative costs include “inherently facilitative” expenses which consist of eleven categories as defined within the temp regs. Costs are inherently facilitative of they are paid for: transporting the property (shipping and moving); securing an appraisal for the property; negotiating the terms or structure of the acquisition; application fees or bidding costs; preparing and reviewing documents that consummate the transaction; evaluating and examining the title to the property; obtaining any necessary regulatory approvals; sales and/or transfer taxes; finder’s fees or broker's commissions; architectural, engineering, environmental services; services provided by a QI in a §1031 exchange. (Reg. §1.263(a)-2T(f)(2)(ii))

Amounts Paid to Acquire or Produce Tangible Property • Special rules for acquisitions of real property: – Costs relating to activities performed in the process of determining whether to acquire real property and which real property to acquire generally aren’t facilitative expenses, unless they are “inherently facilitative” expenses. (Reg. §1.263(a)-2T(f)(3)(i)) – Acquisition of real and personal property in a single transaction – a taxpayer may use a reasonable allocation to determine which costs facilitate the acquisition of personal vs. real property. (Reg. §1.263(a)-2T(F)(iii))

Amounts Paid to Acquire or Produce Tangible Property • Amounts paid for employee compensation or overhead are treated as amounts that do not facilitate the acquisition of real or personal property ( but under Code §263A may have to be capitalized to property produced by the taxpayer or acquired for resale.) • The taxpayer may elect to capitalize employee compensation and overhead expenses related to each acquisition. (Reg. §1.263(a)2T(f)(iv)(B))

Amounts Paid to Acquire or Produce Tangible Property • De minimis rule under Reg. §1.263(a)-2T(g) applies to amounts paid to acquire or produce a unit of real or personal property . • Exceptions to de minimis rule - the rule does not apply to: – Inventory property – Land

Unit of Property â&#x20AC;˘ Significance â&#x20AC;&#x201C; Much of the guidance in the temp regs revolves around what constitutes the UOP that is being placed in service, repaired, or improved. â&#x20AC;˘ The smaller the UOP, the more likely that costs incurred in connection with that UOP will have to be capitalized.

Unit of Property • The new UOP rules apply only for: – Code §263(a), generally barring current deductions for new buildings or permanent improvements made to increase the value of any property or estate – Reg. §1.263(2)-1T, explaining which types of expenses must be capitalized – Reg. §1.263(a)-2T, dealing with amounts paid to acquire or produce tangible property – Reg. §1.263(a)-3T, dealing with improvements to tangible property – Reg. §1.162-3T, explaining how to handle materials and supplies

Unit of Property • Generally, for real or personal property that isn’t classified as a building by the temporary regs, all the components that are functionally interdependent comprise a single UOP. • Components of property are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer. (Reg. §1.263(a)-3T(e)(3))

Unit of Property • UOP for buildings – Generally, each building and its structural components are one UOP – “the building”. • Amounts are treated as paid for an improvement to a building if they improve: (1) the building structure; or (2) any designated building system.

Unit of Property • A building structure consists of a building and its structural components as defined at Reg. §1.48-1(e) (unless the component is a building system) (Reg. §1.263(a)-3T(e)(2)(ii)) • Under Reg. §1.48-1(e)(2), the term “structural components” includes such parts of a building as walls, partitions, floors, ceilings, as well as any permanent coverings such as paneling or tiling; windows and doors; as well as other components relating to the operation or maintenance of a building.

Unit of Property • If a taxpayer restores a building structure (replaces the entire roof), the expense is treated as an improvement to the single UOP which consists of the building. • If the taxpayer makes a betterment to a “building system” (heating, ventilation and air conditioning (HVAC) system), then the expense also constitutes an improvement to the building UOP. (T.D. 9564)

Unit of Property • The regulations introduce the term “building system” which includes nine structural components and their sub-components. Each of the components is a building system that is separate from the building structure and to which the improvement rules must be applied separately. • The nine components of the building system are: – HVAC systems (including motors, compressors, boilers, furnace, chillers, pipes); – Plumbing systems (including pipes, drains, valves, sinks, bathtubs, toilets, water and sewer collection equipment, site utility equipment);

Unit of Property – Electrical systems (including wiring, outlets, junction boxes, lighting fixtures and accessories, and site utility equipment ); – All escalators; – All elevators; – Fire protection and alarm systems (including sensing devices, computer controls; sprinkler heads, associated piping and plumbing, alarms and alarm control panels); – Security systems that protect the building and its occupants Including locks, security cameras, motion detectors, security lighting and alarm systems); – Electrical systems (including wiring, outlets, junction boxes, lighting fixtures and accessories, and site utility equipment );

Unit of Property – All escalators; – All elevators; – Fire protection and alarm systems (including sensing devices, computer controls; sprinkler heads, associated piping and plumbing, alarms and alarm control panels); – Security systems that protect the building and its occupants Including locks, security cameras, motion detectors, security lighting and alarm systems); – Gas distribution systems (including associated pipes and equipment used to distribute gas to and from property lined and buildings; and – Other structural components identified in published IRS guidance that aren’t part of the building structure and are designated as building systems. (Reg. §1.263(a)-3T(e)(2)(ii)) – Numerous examples in the regulations.

Unit of Property â&#x20AC;˘ Disadvantages to building UOP rules: improvements to building systems must be capitalized as part of a building that under the prior guidance the taxpayer may have been able to expense currently (i.e. replacement of part of a roof). â&#x20AC;˘ Advantage to building UOP rules: T.D. 9564 provides that a taxpayer will now be able to recognize a loss on the disposition of a structural component of a building before it sells the entire building, so that it will not have to continue depreciating amounts allocable to structural components that are no longer in service.

Unit of Property • The new temp regs specifically permit taxpayers to treat the retirement of a structural component as a disposition. (Reg. §1.168(i)-8T(b)). • The IRS acknowledges it may be difficult for taxpayers to determine the amount of adjusted basis of the property allocable to the retired component. • Reg. §1.263(a)-3T(g) also carries special rules applying UOP principles to condominiums and to lessors and lessees.

Unit of Property – Characterization of asset for depreciation purposes overrides UOP rules • Notwithstanding the previous UOP rules, a component (or group of components) of a UOP must be treated as a separate UOP if, when the UOP is originally placed in service by the taxpayer: – The taxpayer properly treated the component as being within a different class of property under Code §168(e) for MACRS depreciation purposes than the class life of the UOP of which the component is a part; or – The taxpayer properly depreciated the component using a different depreciation method than the depreciation method of the UOP of which the component is a part. (Reg. §1.263(a)-3T(e)(5)(i))

Unit of Property â&#x20AC;˘ Additionally, notwithstanding the general UOP rules, in any tax year after a UOP is initially placed in service by the taxpayer, if the taxpayer or IRS changes the treatment of that property to a proper MACRS class or a proper depreciation method (i.e. cost segregation study, change in use of property), then the taxpayer must change the UOP determination for that property to be consistent with the change in treatment for depreciation purposes. (Reg. Â§1.263(a)-3T(e)(5)(ii))

Unit of Property • Presumably, assets located in a building that aren’t structural components and don’t belong in one of the building system categories (i.e. §1245 property), will also be treated as a separate UOP for capitalization purposes. • Repairs undertaken contemporaneously with improvements – the temp regs specifically provide that indirect costs made at the same time as an improvement, but that do not directly benefit or are not incurred by reason of the improvement, don’t have to be capitalized under Code §263(a). (Reg. §1.362(a)-3T(f)(3)(i))

Unit of Property • Nonbuilding routine maintenance safe harbor – the cost of routine maintenance performed on a UOP that isn’t a building or structural component is treated as not improving that UOP and therefore is currently deductible. • Routine maintenance refers to recurring activities that a taxpayer expects to perform a s a result of its use of the UOP to keep it in its ordinary efficient operating condition. • The safe harbor only applies of at the time the UOP is placed in service by the taxpayer , it reasonable expects to perform the activities more than once during the class life of the UOP.

Unit of Property • Whether a expense is routine maintenance depends on factors such as the recurring nature of the activity, industry practice, treatment on AFS, manufacturer recommendations. • Routine maintenance does not include amounts paid to: – Replace a component of a UOP where the taxpayer has properly deducted a loss for that component, or properly taken into account the adjusted basis of the component in realizing gain or loss resulting form the sale or exchange of the component’ – Repair damage to a UOP for which the taxpayer has taken a basis adjustment as a result of a casualty loss or casualty event under Code §165; and

Unit of Property – To return a UOP to its formerly ordinarily efficient operating condition, if the property has deteriorated to a state of disrepair and is no longer functional for its intended use. (Reg. §1.263(a)-3T(g)(3))

• A change to comply with the above rules is a change in method of accounting to which Code §446 and 481 apply. • In general, the above rules apply to tax years beginning after December 31, 2011.

Capitalization vs. Expense • Existing rules: – Costs have been held to be currently deductible as a repair expense under Code §162 if they are incidental in nature, and neither materially add to the value of the property nor appreciably prolong its useful life. – Costs have been held to be capitalized expenses under Code §263 if they are for permanent improvements or betterments that increase the value of the property, restore its value or use, substantially prolong its useful life, or adapt it to a new or different use.

Capitalization vs. Expense • New temp regs: – Repair expenses are treated as deductible if they are not otherwise required to be capitalized. (Reg.§1.162-4T(a)) – Numerous examples within the regs to demonstrate rules.

Capitalization vs. Expense • Major categories of expense capitalization: – Under the temp regs, taxpayers must capitalize betterment costs, a new term that consists of amounts paid: • To ameliorate a material condition or defect that either existed before the taxpayer acquired the UOP or arose during its production, whether or not the taxpayer was aware of the condition or defect at the time of acquisition or production; • That results in a material addition (including a physical enlargement, expansion or extension) to the UOP; • That results in a material increase in capacity, productivity, efficiency, strength or quality of the UOP or its output. (Reg.§1.263(a)-3T(h))

Capitalization vs. Expense • Betterment costs : – Facts and circumstances test including but not limited to: the purpose of the expense; the physical nature of the work performed; the effect of the expense on the UOP; and the taxpayer’s treatment of the expense on its AFS. – The numerous examples indicate that a “betterment” is generally similar to the more-familiar term “improvement”.

Capitalization vs. Expense • Property’s “before and after” condition: where the need for an expense is triggered by a particular event, the appropriate comparison for determining whether an amount paid results in a betterment is made by comparing the condition of the UOP immediately after the expense with its condition before the circumstances necessitating the expense. (Reg.§1.263(a)-3T(h))

Capitalization vs. Expense • A taxpayer may incur an expense to correct the effects of normal wear and tear to a UOP. In this situation, for purposes of determining the property's “before and after” condition, the condition of the property immediately before the circumstances necessitating the expenditure is: – Its condition the last time the taxpayer corrected the effects of normal wear and tear.; or – If the taxpayer has not previously corrected the effects of normal wear and tear, the condition of the property when placed in service by the taxpayer. (Reg.§1.263(a)-3T(h)(3)(iii)(B))

Capitalization vs. Expense â&#x20AC;˘ Taxpayers trying to determine if an expense constitutes a betterment or improvement will often be reduced to comparing their particular situation to those provided in the regulations.

Capitalization vs. Expense • Costs to restore a UOP, including making good the exhaustion for which an allowance is made must be capitalized. An amount is treated as a restoration cost if: – It replaces a component of a UOP where the taxpayer has either properly deducted a loss for that component (other than a casualty loss under Reg.§1.165-7), or properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component – Repairs damage to a UOP for which the taxpayer has properly taken a basis adjustment as a result of a casualty loss or casualty event under Code §165

Capitalization vs. Expense – Returns the UOP to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use. – Results in the rebuilding of the UOP to a like new condition – Replaces a part or a combination of parts that comprise a major component or a substantial structural part of a UOP. (Reg.§1.263(a)-3T(i)) A major component or substantial structural part includes a part or combination of parts that comprise a large portion of the UOP’s physical structure, or that perform a discrete and critical function in the UOP’s operation.

Capitalization vs. Expense • The temp regs provide that an amount is paid to restore a unit of property if it is for the repair of damage to the unit of property for which the taxpayer had properly taken a basis adjustment as a result of a casualty loss under §165. • Under the revised §168 disposition rules, a taxpayer may elect to use a general asset account under Reg. §1.168(i)-1T, forgo recognizing a casualty loss (without reducing basis), and claim a repair deduction under §162 for the replacement property, provided the replacement cost is not treated as a capital expenditure under a different provision of the temp regs.

Capitalization vs. Expense • The cost of adapting a UOP to a new or different use must be capitalized. • Generally, a “new or different use” means a situation where the adaptation isn’t consistent with the taxpayer's intended ordinary use of the property when it was placed in service. (Reg.§1.263(a)-3T(j)).

Capitalization vs. Expense â&#x20AC;˘ A change to comply with the above rules is a change in method of accounting to which Code Â§446 and 481 apply. â&#x20AC;˘ In general, the above rules apply to tax years beginning after December 31, 2011.

Capitalization vs. Expense â&#x20AC;˘ The temp regs also provide rules for determining gain or loss on the disposition of MACRS property that are consistent with the disposition rules Under Reg. Â§1.168-6 of the proposed ACRS regulations. (These rules have generally been applied to MACRS property even though they were written for completely different and now expired depreciation regimes.) â&#x20AC;˘ Most importantly, the regs expand the definition of disposition for MACRS purposes to include retirement of a structural component of a building.

MACRS Accounting and Disposition Rule Changes • The temp regs also provide rules for determining gain or loss on the disposition of MACRS property that are consistent with the disposition rules Under Reg. §1.168-6 of the proposed ACRS regulations. (These rules have generally been applied to MACRS property even though they were written for completely different and now expired depreciation regimes.) • Most importantly, the regs expand the definition of disposition for MACRS purposes to include retirement of a structural component of a building.

Change to Accounting Method • Rev. Proc. 2012-19 and Rev. Proc. 2012-20 have been issued to help taxpayers obtain the automatic consent to change to an accounting method to comply with the temp regs. • Rev. Proc. 2012-19 generally applies to taxpayers wanting to make an accounting method change for items related to repairs and maintenance and materials and supplies. • Rev. Proc. 2012-20 generally applies to taxpayers wanting to make an accounting method change for property depreciated under §168 (MACRS).

401- Qualified Contract: New Guidance

Qualified Contract • Background – LIHTC properties are required to meet the initial 15 year federal compliance period. – Due to the LURA (land use restriction agreement), there is a requirement for an additional 15 year, if not more, compliance period. – The qualified contract allows a building to transition to market after the initial 15 year compliance period.

Qualified Contract • Qualified Contract Requirements – Treasury Decision 9587 • This guidance contains final regulations that provide guidance concerning taxpayers’ request to housing credit agencies to obtain a qualified contract as defined in Section 42(h)(6)(F) for the acquisition of a low-income housing credit building. • Section 42(h)(6)(F) requires the Secretary to prescribe such regulations as may be necessary or appropriate to carry out the provisions of section 42, including regulations to prevent the manipulation of the qualified contract amount. – The regulations will affect owners requesting a qualified contract, potential buyers, and the low-income housing credit agencies responsible for the administration of the lowincome housing program

– New Section 1.42-18 • Applies to requests to Agency on or after May 3, 2012

– Extended-use period terminates if Agency is unable to present a qualified contract.

Qualified Contract • Under Section 42(h)(6)(F), an LIHTC project could become a market-rate project upon the owner’s written request and within one-year period beginning on the date after the 14th year of the compliance period if the housing credit agency is unable to find a qualified contract for the acquisition of the low-income portion of the building. • Qualified contract is a bona fide contract to acquire the non low-income portion of the building for FMV and the low-income portion of the building for an amount not less than the application fraction in the commitment of the sum of: – (1) the outstanding indebtedness, – (2) the adjusted investor equity, plus – (3) other capital contributions; reduced by cash distributions from (or available for distribution from) the project.

Qualified Contract â&#x20AC;˘ Agency must present qualified contract within the 1-year period beginning on the date (after the 14th year of the compliance period) the owner submits a written request to Agency.

Qualified Contract • Highlights – No FMV cap on low-income portion of qualified contract amount – Land included in FMV of non low-income portion taking into the extended-use commitment – Agency may select appraiser

Qualified Contract • More Highlights: – Cash available for distribution includes reserve funds that are not legally required by mortgage restrictions, regulatory agreements, or third party contractual agreements to remain with the building following the sale of the building. – Proceeds from refinancing or additional mortgages in excess of qualifying building costs are not considered cash available for distributions.

Qualified Contract • Agency may establish reasonable requirements and determine whether failure to follow requirements prevents beginning of, or tolls, the 1-year qualified contract period – – – – –

Lacks essential information No owner substantiation of representations Limits on multiple owner requests Administrative fees, e.g., appraiser fees Other conditions applicable to the qualified contract consistent with Section 42.

401- Virginia Court Case Analysis

Virginia Historic Tax Credit Fund 2001 LP • The U.S. Court of Appeals for the Fourth Circuit held that purported capital contributions to Virginia historic rehabilitation credit syndicates organized as partnerships were taxable sales of Virginia Tax Credits – The court system determined that the transaction was a disguised sale of state historic tax credits and not tax-free capital contributions. – The IRS audited the Funds and recharacterized the payments from the Investors to the Funds. • The IRS’s position was that the Investors had not made capital contributions and were not partners of the Funds. • The IRS believed that, even if the Investors were partners of the Funds, the transactions with the Funds should be reported as taxable sales of state income tax credits to the Investors under Internal Revenue Code Section 707. – Internal Revenue Code Section 707 governs sales and other transactions between partnerships and partners.

Virginia Historic Tax Credit Fund 2001 LP • Implications: – The Fourth Circuit did not provide a roadmap that Virginia Tax Credit Syndicators can follow to avoid IRS scrutiny • At the very least, Virginia Tax Credit Syndicators will have to consider whether they want to report investors’ payments as taxable income from the sale of property or dramatically restructure themselves to avoid the presumption of a disguised sale under Code Section 707. – If the choose the later, they should question whether they can make disproportionately large allocation of Virginia tax credits to partners with negligible economic interest in the venture. – They should also question whether they can provide guarantees that diminish the partners’ entrepreneurial risk to a negligible amount.

• It is important to note that the disguised sale rules under Section 707 generally recharacterized transaction between partners and partnerships. Therefore, a party can be a partner in the partnership and still have a transaction recharacterized as a purchase or sale of assets. Accordingly, extending the time during which the Virginia Tax Credit Investors remain in the partnership or a similar modification to the arrangement likely will not remedy the result reached by the Fourth Circuit

Virginia Historic Tax Credit Fund 2001 LP • Unanswered questions surround the parties bases in the Virginia Tax Credits and the character of gain from the sale of the Virginia Tax Credits. – There is a question as to whether the Developer have any basis in the state tax credits since the expenditures were capitalized to the real property and subject to depreciation. » »

If the Developers have no basis, then 100% of the payments from the syndicators will become taxable income. In many cases, the income will be required to be allocated to the federal tax credit investors resulting in a change in the economics of the transaction. It will also need to be determined whether such taxable income is capital gain income or ordinary income; however, most persons believe that in most instances the gain is short-term capital gain income.

401- Historic Boardwalk Court Case Analysis

Historic Boardwalk Hall • Background – On September 4th, the Third Circuit Court of Appeals overturned the January 3, 2011 Tax Court decision that had held for the taxpayer in the Historic Boardwalk Case. – The Court concluded that the investor, Pitney Bowes was not a partner because it had no real prospect of an upside and was fully protected from any downward risk. • • • • •

Lack of Meaningful Downside Risk(Investment Risk) Lack of Meaningful Downside Risk(Audit Risk) Lack of Meaningful Downside Risk(Project Risk) “Guarantee” of the 3% Preferred Return Lack of Meaningful Upside Potential

– The court went on to state that the federal historic credits were not under attack. – The judges were careful to say that investors have a right to seek mitigation of their investment risk. – What they found was that Pitney Bowes had no risk at all.

Historic Boardwalk Hall • The Industry Impact – New Structures • Closing were delayed as taxpayers what post deals should look like. • Most investors appear ready to consider a higher risk profile in these transactions in exchange for more robust upside potential. • Credit pricing could change • Many groups are requesting the idea of a revenue procedure to recreate a safe harbor for HTC transactions.

– Taxpayer files Rehearing Petition to Third Circuit Court • One October 23rd, the Third Circuit denied the taxpayer’s petition for rehearing. • The taxpayer’s last hope is to seek Supreme Court review, though the case does not look like one that could pique the Court’s interest. A petition for certiorari would be due on January 22nd

401- Low Income Housing Tax Credit Recapture

Definition of Section 42 Recapture • Recapture occurs when the qualified basis decreased from one year to the next or you disposed of a building – Non-compliance event (Form 8823) – Casualty loss not restored/replaced within a reasonable period – Disposed of a building, and it is not reasonably expected that the building will continue to be maintained as a qualified low income building for the rest of the compliance period

• Recapture is on the accelerated portion of the credits – Credits taken but not earned – LIHTC is a 15 year credit taken over 10 years

• Recapture is allocated based upon the same method used to allocate the original credits even if the original partner is no longer in the partnership.

Agreements associated with Recapture • Partnership Agreement – In addition to the recapture calculated on the tax return, the partnership agreement will typically have provisions regarding downward equity adjustors that must be repaid to the partners/investors due to the reduction of the low income housing tax credits. – Even if the investors previously exited the partnership, the recapture attributable to the time period that the investor was a partner is shown on their corporate tax return. • Typically, the partnership agreement or a subsequent agreement will have an indemnification clause regarding the recapture event.

Tax Credit Recapture-Exceptions • There are five general exceptions to the recapture rules: – Posting a bond • The Housing Act of 2008 eliminated the bond posting requirement for interest in building disposed of after July 30, 2008.

– – – –

Originally claiming a reduced credit Receiving no tax benefit for the credit De minimis floor space changes Disposition due to casualty losses

How does the state report noncompliance issues • Housing credit agencies use Form 8823 to fulfill their responsibility under Section 42(m)(1)(B)(iii) to notify the IRS of noncompliance with the lowincome housing tax credit provisions or any building disposition. – The Housing Agency should also give a copy of the Form 8823 to the owners.

• The Housing Agency must file Form 8823 no later than 45 days after – The building was disposed of, or – The end of the time that was allowed to the building owner to correct the condition(s) that caused the noncompliance.

When must the state report noncompliance • All noncompliance found by the state agency must be reported to the IRS on Form 8823 – This is regardless of whether the item was later corrected unless, • Noncompliance issues were identified and corrected by the owner prior to notification of the upcoming review by the state agency, OR • Noncompliance issues are related to state requirements that are in excess of the Federal Requirements – An example would be supportive services that were used to get additional points on the application but are not a requirement under Section 42 to secure credits. – Another example would be noncompliance that happens during the extended use period but after year 15.

Why is December 31st an important date? • Under Section 42(f)(1), a building’s credit period is the period of 10 years(120 months) beginning with the first day of the taxable year in which the building is placed in service or the succeeding tax year if the election under Section 42(f)(3)(8) is made. – Credits are determined on a monthly basis only for the first year of the credit period and when they are additions to qualified basis. – Other than Section 42(f)(2)(A) and Section 42(f)(2)(B), there is no authority for disallowing credits on a monthly basis.

• For example, if a building is damaged by a casualty and fully restored within the same tax year, then there is no recapture and no loss of credits – If the owner failed to restore the building by the end of the year, no credits would be allowed for the entire taxable year even if the reasonable period to restore the building extends into the next year.

Difference between casualty and noncompliance issue • If the building has been damaged because of a casualty event and is not repaired by December 31st, then the project cannot take credits on the building and/or units not in service at the end of the year; however, since this a casualty loss, there is no recapture involved as long as the building/units are corrected within two years. – Once the building/units are repaired, then credits will commence again. – The credits associated with the time period in which the building/units are not in compliance, if it falls over a reporting year, will be lost permanently.

• If the casualty is a result of a national disaster in which the President has declared the area a national disaster area, then credits can continue to be taken as long as the property is repaired within the two years and recapture is not an issue.

Difference between casualty and noncompliance issue â&#x20AC;˘ If the building/unit is out of service due to a noncompliance issue such as UPCS or local inspection standards at December 31st, then no credits are allowed for the current year on those units and/or building and recapture of the accelerated portion of all previous credits must be calculated. â&#x20AC;˘ Once the building/units are placed back into service, then the remainder of the credits are taken as 15 year credits. â&#x20AC;&#x201C; Credits during the time period in which the units were not in compliance are permanently lost.