LIHTC Pitfalls and Solutions Presenter: Harold R. Berk, Esquire

Eligibility for LIHTC Building (new or rehabilitated) must be placed in service. Placed in service generally means the building is fit and ready for its intended use. Issuance of Certificate of Occupancy

Eligibility for LIHTC Units must be occupied by income qualified tenants. Documentation of income and other eligibility criteria. Lease at rent restricted amount But signing a lease not sufficient for LIHTC. Actual tenant occupancy required

Completion of Construction Have all the construction costs been incurred? Is there work remaining to be performed on the building? Will the construction work be completed after the end of the year? Cost certification prepared after completion of all the construction work

First Year of the LIHTC Credit Period The ten year LIHTC Credit Period starts with the year in which the building was placed in service. Or, at the election of the owner, in the year after placement in service. The election once made is irrevocable.

When to defer beginning the LIHTC Credit Period Building is substantially complete, but costs remain to be incurred. Building was placed in service, but there is less than 100% qualified tenant occupancy. Qualified basis= eligible depreciable costs incurred x percentage qualified tenant occupancy If LIHTC Credit period started in Yr 1, there will be an increase in qualified basis in next year for additional costs or tenant occupancy.

Increases in Qualified Basis Subject to 2/3 Rule If credit period started, additional construction costs subject to 2/3 rule Additional qualified tenants also subject to 2/3 Rule Under 2/3 Rule the increase in qualified basis reduces annual LIHTC to 2/3 and the credit period is extended to 15 years. 2/3 Rule only applies to additional qualified basis

Example of 2/3 Rule Year 2015 Qualified Basis $1,000,000 Year 2016 increase in Qualified Basis to $1,200,000. $200,000 increase reduced to $133,333 for each year for 15 years. Results in less LIHTC per year. At 9%, $18,000 LIHTC reduced to $12,000. But lower annual LIHTC continues for 15 years

Qualified Occupancy and 2/3 Rule Eligible basis is $1,000,000 Dec 1, 2015 Qualified occupancy is 70% Dec. 31, 2015 Qualified Occupancy is 80% Qualified basis is $800,000 No deferral of credit period to 2016 Feb. 1, 2016 Qualified Occupancy 100% Qualified Basis $1,000,000 But increase of $200,000 subject to 2/3 Rule

Partnership Agreement Promised LIHTC Delivery Delaying start of tax credit period may reduce LIHTC delivery below projections. Could result in adjuster reduction of capital contributions. – Projected $500,000 LIHTC in 2015 in Partnership Agreement. – Capital Contributions will be reduced if no LIHTC delivery in Need calculate difference in loss of capital contributions from deferring credit period vs. application of 2/3 Rule Example: Projected annual LIHTC $500,000 in – Qualified Occupancy 95% on December 31. – May be better to start credit period in 2015 and have 5% subject to 2/3 Rule – Depends on terms of partnership agreement adjusters –

Negotiating Partnership Agreement Try to reduce projected first year credit to give you margin for construction delays and slow tenant lease-up and occupancy Often investors will push back credit delivery dates without reducing their capital contributions But reducing first year credit, investor may modify investor pay-in rate Depending on timing, get agreement to delay first year of the credit period to year after placement in service

Form 8609 Allocates the LIHTC, sets qualified basis, date of placement in service and eligible basis for first year credit period State Tax Credit allocating agency prepares upper portion Prepared on a building by building basis Lower portion completed by building owner Line 10(a) has the election to defer the start of the credit period until year after placement in service Once election is made it is irrevocable.

Form 8609 Best Practices Have at least two people review and approve the Form 8609 Submit 8609 to accountant for review and approval Submit 8609 to project attorney for review and approval Submit 8609 to investor for review and approval Multiple reviews may save you from serious loss of LIHTC and investor capital contributions Do not file Form 8609 before the end of the year of placement in service as need to assess occupancy as of Dec 31

Form 8609 Errors Building placed in service July 1, 2015 Cost Certification complete and State Agency issues 8609 As of December 1, 75% qualified occupancy & 100% leased File 8609 on Dec. 5 and do not elect to defer credit period On Dec. 31 only 85% qualified occupancy. Move-in delays Results in 15% qualified basis subject to 2/3 Rule. What can be done?

Private Letter Rulings IRS process to correct inadvertent errors Requires application to IRS and filing fee PLR application complex and needs lawyer to prepare Apply for relief from error on deferral of start credit period Even though election irrevocable, possible relief Only available if can show that the parties intended to defer start of credit period Need documentation that intended to defer credit period

Private Letter Ruling PLR Difficult on 8609 deferral elections Partnership agreement providing for deferral could help Directions to staff to defer IRS will reject PLR unless show documentation of prior intent to defer credit period IRS will reject if merely inadvertent error

Private Letter Ruling Dec. 1 80% qualified occupancy Dec. 5 Form 8609 without deferral of credit period Dec. 15 Broken pipes cause flood preventing move- ins Dec % qualified occupancy Possible PLR based on circumstances occurring beyond owner’s control

Private Letter Ruling File 8609 deferring credit period to 2016 But building had 100% occupancy at Dec. 31, of year of placement in service 2015 Lost all LIHTC for 2015 Possible PLR based on partnership agreement showing intent to deliver LIHTC in Tax credit application and projections

Private Letter Ruling Tax credit deferral errors are difficult because issue is usually not dealt with in project documents If IRS not inclined to grant PLR, you do have a right to a telephone conference or a face to face conference in Washington on the PLR application May be able to convince IRS at Washington conference that you intended to defer but made inadvertent error. Facts and circumstances

Private Letter Ruling How does IRS PLR make irrevocable elections revocable? If facts and circumstances show prior intent to make other election IRS may grant PLR PLR will grant taxpayer an extension of time to make the correct election PLR will essentially negate the erroneous election and grant an extension to file an amended 8609 with correct election

Private Letter Ruling If accountant or tax attorney prepares the Form 8609 and there are election errors If owner can show that they relied on tax professional and Based on background of tax professional reliance was warranted IRS may grant PLR even if would not based solely on error by owner

Minimum Set Aside Test 20% of tenants at or below 50% AMI 40% of tenants at or below 60% AMI If elect Min Set Aside Test, ALL tenants must have incomes below 50% AMI. Can choose test and still target percentage units for below 50% AMI – 20% at 30% AMI and 40% at 50% AMI

Form 8609 Minimum Set Aside Test Line 10(c) on Form 8609 sets the Minimum Set Aside The election of either or is irrevocable What if you elect thinking that as long as 20% are under 50% AMI you can lease remainder to 60% AMI? Any units leased to tenants between 50% AMI and 60% AMI are ineligible for LIHTC. If income eligible tenants not in occupancy by end of first year of tax credit period, will lose all LIHTC for building

Form 8609 Errors Minimum Set Aside 8609 electing test filed, but no one notices error By end of first year of tax credit period, 80% of tenants have incomes between 50% AMI and 60% AMI Building would not satisfy Minimum Set Aside test by end of first year of credit period. Invalidates all LIHTC Seven years later, state agency reviews 8609 and finds election Full recapture of all LIHTC taken for seven years Possible PLR depending on documentation

Private Letter Ruling If documents show intent elect 40-60, possible to get PLR for extension of time to make accurate election Possible documents: – LIHTC application – LIHTC reservation or allocation letter – Partnership Agreement – Investor Letter of Intent Though election is irrevocable, PLR can grant extension of time to make correct election of

Multiple Building Election Line 8(b) of Form 8609 has election for building as part of project. If project is only 50% LIHTC and 50% market rate, multiple building election may be needed. If no multiple building election, then each building must satisfy the Minimum Set Aside test If elect 40-60, then each building must have at least 40% of units leased to tenants under 60% AMI If one building fails test, then no LIHTC for building ever Must meet Minimum Set Aside Test by end of first year of credit period If multiple building election, then test determined on project basis

Private Letter Ruling Possible PLR to extend time to make multiple building election Need documents showing intent elect multiple building project If PLR obtained, then Minimum Set Aside Test measured on a project basis and not building basis PLR will restore LIHTC for all buildings if Minimum Set Aside met for project as a whole

Can You Amend Form 8609? IRS will not allow you to amend erroneous elections on Form 8609 without a PLR. IRS requires issuance of PLR to allow amendment of Form Amendments to Form 8609 to correct erroneous amounts of qualified basis may be permitted without PLR. State Tax Credit allocating agency cannot give you authority to amend 8609.