1. Early Withdrawal of Investment Partners
Dave Lundgren
Dec. 6, 2016

2. Low-Income Housing Tax Credit
Overview Included as a temporary measure in the Tax Reform Act of 1986 to encourage construction and rehabilitation of low-income rental housing. It allows investors an annual tax credit over a ten-year period, provided occupants qualify as low-income & low-rent applies.
Program was made permanent in 1993—IRC 42
Though tax credit claimed over 10 years, must comply with restrictions for 15 years—”compliance period”
Spokane Indian Housing Authority just released its investment partner under 2004 Tax Credit Project called “Spokane Homes I Project” (SH 1)—first early release for a Tribal housing project in Washington
Early Withdrawal of Investment Partner

3. NEED TO ADDRESS FOR EARLY WITHDRAWAL OF INVESTMENT PARTNER
SH 1 PROJECT
Master Lease & Sublease
Tenant lease
Partnership Agreement—Filed with state
Loan Agreement—Leasehold Mortgage
Subordination Agreement
Regulatory Agreement—Extended Use Agreement
State regulations
Laws: Tribal, Federal & state
PRESENTATION TITLE

4. Extended Use Agreements (Regulatory Agreement)
Taxpayer and Agency Allocating Housing Tax Credit In each state, the IRS designates an agency authorized to allocate low-income housing tax credits. In Washington it’s the Washington State Housing Finance Commission (WSHFC).
Tax Credit structure involves two foreign concepts:
Taxpayer status & state agency regulation
Create a limited liability partnership under state law, housing entity as general partner and investor as limited partner
Partnership enters extended use agreement with state agency & investor gets tax credit allocation under partnership agreement between Housing & investor
Early Withdrawal of Investment Partner

5. Partnership Agreement
Governs Distribution of Tax Benefits Since housing entity is nontaxable entity, partnership agreement provides that financial partner enjoys tax credits
Sets out dispute resolution process—sovereign immunity addressed
Sets out process for termination of partnership
Triggers state law provisions for dissolution and winding up
Early Withdrawal of Investment Partner

6. Terms of Extended Use Agreements
Extended Use Period
In addition to the 15-year compliance period, the Extended Use Agreement must extend the compliance period for at least another 15 years, or longer as set out in the agreement, called the “extended use period.” IRC 42(D)
SIHA created New House Lane Limited Partnership #1 in 2004 with Washington Mutual as investment partner
WAMU’s assets acquired by JPMorgan Chase Bank
Partnership had entered Agreement with WSHFC that included a 22-year extended use period
Early Withdrawal of Investment Partner

7. NAHASDA PROGRAM REGULATORY AGREEMENT
NAHASDA Funds Projects using NAHASDA funds require an agreement between housing entity—the Lender—and the partnership—the Borrower—to ensure the Borrower complies with NAHASDA.
Requires partnership to comply with NAHASDA and to report to the Lender to demonstrate compliance
If partnership terminated, requires Lender to obtain opinion from legal counsel that “termination will not adversely affect the eligibility of the Project for financing of the Project under the NAHASDA Regulations.”
Early Withdrawal of Investment Partner

8. STATE HOUSING COMMISSION
EXTENDED USE AGREEMENT COMPLIANCE FOR TERMINATION Housing entity must obtain prior approval from state agency to terminate the partnership and allow for transfer of limited partner’s partnership interests.
Application process
Transfer fees involved—For SIHA it was $2,500
Proof that insurance will transfer
Certify no change in management, status of project reserves, consideration to be paid & tax if any
Early Withdrawal of Investment Partner

9. RECAPTURE
DUTY TO AVOID RECAPTURE FOR INVESTOR IRC 42(j) provides tax credits claimed can be recaptured if the qualified basis for a project is reduced from one year to the next during the compliance period.
Eligible Basis = cost of project (IRC 42(d))
Qualified Basis = eligible basis X portion dedicated to low income housing
Credits based on qualified basis over 10 years
Recapture of credits can occur for full compliance period
Early Withdrawal of Investment Partner

10. AGREEMENTS WITH PARTNER
Two Agreements Required:
Purchase Agreement
Consideration
Clarify no transfer taxes (Quinault Indian Nation v. Gray’s Harbor County, 310 F.3d 345 (9th Cir. 2002))
Assignment and Assumption
Housing accepts transfer of interests and assumes responsibility to comply with IRC 42
Early Withdrawal of Investment Partner

11. Resolution from Housing Entity
AUTHORIZE PURCHASE, ASSUMPTION, DISSOLUTION AND WINDING DOWN Follow terms of partnership agreement and address sovereign immunity in consistent way:
Authorize signature on agreements
Authorize payment of consideration
Authorize initiation of process to comply with state law:
State Housing Agency Compliance
Notice to Secretary of State on Dissolution
Authorize winding down—acceptance of assets & liabilities
Early Withdrawal of Investment Partner

12. OPINION OF COUNSEL
NAHASDA REGULATORY AGREEMENT Legal opinion required that termination will not adversely affect eligibility for NAHASDA funding. The Code allows for transfer without recapture if project remains compliant, under IRC 42(j)(6)(a). However, IRC 42(d)(5)(A) provides:
The eligible basis of a project will be reduced by amounts received that are “federal grants” except:
Section 8 Vouchers (26 CFR (b)(1)) and
IHBG funding (Rev. Rul (2007))
Early Withdrawal of Investment Partner

13. Tenant Protection
During and After Initial Compliance Period Tenants must qualify as low-income and low-rent must be maintained during compliance period. After initial 15-year compliance period:
Tenants may purchase the unit (right of 1st refusal)
Credit given to tenant at original value less 5% per year reduction = 75% reduction for 15 years
Tenants may not be evicted without good cause
If tenant leaves, new tenant gets benefit of credit
Credit remains at 75% after year 15
Early Withdrawal of Investment Partner

14. Agreement with State Agency
Transfer Agreement State housing agency must authorize the transfer of limited partner’s partnership interests prior to the transfer.
Parties include the agency, the partnership and the housing entity
Housing entity agrees to assume tax credit responsibilities of the partnership
Housing entity agrees not to evict tenants, not to refuse to renew leases, and to allow tenants to sue to enforce
Early Withdrawal of Investment Partner

15. Options for Tenants
Purchase, Continue Renting or Transfer Tenants may utilize credits to purchase, continue renting or voluntarily transfer to another unit not part of the tax credit project
With early exit of investment partner tenants may be prepared to qualify for ownership
Housing entity may offer incentives, like down-payment assistance, which can make unit virtually free
Once unit is sold it is removed from tax credit program
Unsold units remain restricted for extended use period until sold
Early Withdrawal of Investment Partner

16. Questions? David R. Lundgren, PC P.O. Box 29 Loon Lake, WA 99148
(509)
Early Withdrawal of Investment Partners