1. Financial Projections
Advanced Concepts
Becca Hartstein
Lisa Pekkala
2019 Applegate & Thorne-Thomsen, P.C. Investor & Syndicator Boot Camp, September 9, 2019

2. Eligible Basis
General Rule – eligible basis equals adjusted basis (depreciable basis) of the residential rental space
Eligible Basis is determined separately for new construction/rehabilitation and acquisition costs
Tax Rules – all expenditures will have a specified tax treatment
Capitalized into cost of building and recovered over a specified “class life” through annual depreciation deductions
Costs that are incurred during the production period of property
Also includes personal property and site work
Once property is in service, costs may be expensed immediately in the year they are incurred (or accrued)
Amortized over a specified period and deducted over that period (organizational costs, loan fees)

3. Eligible Basis Allocation between Land and Building
Construction Loan Fees and Interest in Occupied Rehab
Compare to Budget
266 Election
Expense all interest and fees related to occupied rehab
Relocation Costs
Bond Issuance Fees
Commercial Space Costs
Amenities (parking, laundry, vending)
Community Service Facility
QCT
Basis Limitation
Rent charged to service provider tenant

4. Eligible Basis Reductions for Historic and Energy Credits
Reduction for Federal Grants
Exclusion of Ineligible Site Improvements
Basis Boost
QCT/DDA grandfathering
Discretionary boosts (not available for tax-exempt bond deals)

5. Developer Fee Is Interest Necessary? Repayment
Use of Alternate Trending Assumptions
Acquisition/Rehab allocation
10% Test Considerations
Percentage of Fee Deferred
Accrual Schedule

6. Soft Funds Interest Rate Term Percentage of Cash Flow Seller Financing
Is 0% OK?
Maximum Rate?
Simple or Compounding
Term
Percentage of Cash Flow
Seller Financing
Appraisal
TDA Considerations
Structuring
TIF, CDBG, grants and other soft sources
State Tax Credits

7. True Debt Analysis
Purpose of Analysis – Need to establish that soft debt will be respected as debt and not a grant or an ownership interest (critical for every project)
Must Use Reasonable Assumptions – common to use 3/3/5 rather than 2/3/7
Test Date – generally earliest maturity of soft debt
Assume Market Rate Loan Refinancing for early maturing debt?
Vacancy Rate – never lower than market study; 5% is commonly accepted
Debt Term – Best to have soft debt mature no earlier than end of Extended Use Period; This allows Project to go market rate and refinance/sell
Market Rents – look to market study and trend forward
Cap Rate – Capped NOI is commonly used; Look to cap rate in appraisal
No Forgivable Debt
Diligence Items -– appraisal, market studies, all regulatory agreements

8. Capital Accounts - Generally
Represents a partner’s investment in the Partnership
Increases in capital account:
Capital contributions
Share of Partnership income allocated to partner
Decreases in capital account:
Partnership distributions
Share of Partnership losses allocated to partner

9. Capital Accounts - Generally
Treatment of Certain Items:
Reasonable fees should not be treated as “distribution” that would reduce capital account
LIHTCs do not reduce Capital Accounts
State Credits do not reduce Capital Accounts
Federal HTCs and Energy Credits do reduce Capital Accounts
HTC – Reduce Capital Account and basis by amount of HTC
Energy Credits - Reduce Capital Account and basis by 50% of Energy Credits

10. Capital Accounts – Problems
Zero capital account – cannot be allocated further losses or LIHTC unless:
Deficit Restoration Obligation (“DRO”)
Minimum Gain
Zero Capital Account After Credit Delivered- Yield issue, but can be lived with

11. Tax Reform’s Impact on Capital Accounts
Lower tax rates mean tax losses are worth less and hurts equity pricing
Less equity means lower capital accounts and capital will run out sooner
100% Bonus Depreciation
Projects with lower proportions of equity (especially 4% bond deals) may have issues with negative capital accounts before all credits are delivered; also more exit taxes
Can no longer elect 40-year depreciation for building (this slowed down losses so that Investor capital account remained positive during credit period)
Can no longer “force” tax-exempt use for buildings

12. Capital Accounts – Projections Example
LIHTC Delivered
Capital Account is positive until after all LIHTC delivered in 2029 – Numbers Work!

13. Capital Accounts - Solutions
What if capital account runs out before all LIHTC delivered?
Slowing Depreciation Doesn’t Help Much Anymore- Prior 168(g) Alternative Depreciation election or forced tax-exempt use no longer effective!
Bonus Depreciation – opt out (by asset class)
Generally not recommended for personal property as it rarely helps
Forced categorization as commercial property by failing 80% test?
Reduce Interest Rate or Fees
Reduce interest rate on loans (soft debt)
Reduce or eliminate Fees
Accruing Fees
DRO
“Bridge” capital contributions – DRO capped and extinguished once contributions are made

14. Capital Accounts – Solutions (continued)
Loss Flips Don’t Solve Credit Reallocations
Loss Flips Must occur after Credit Period so won’t help avoid Credit reallocation
Special Allocation of Losses – specially allocate non-depreciation losses to the General Partner or State Credit Partner
Allocation to State Credit Partner may be best solution
General Partner may need a deficit restoration obligation
Special Allocations to Nonprofit Tax-Exempt Entities can create Tax-Exempt Use
Specific line items vs. Percentage of all deductions other than depreciation?
Used to be touchy issue for Syndicators and used as last resort; industry generally seems to be accepting now
Delay “electing real property trade or business” election
Create “Good” Minimum Gain

15. Capital Accounts – Minimum Gain
Minimum Gain Definition - the difference between the secured nonrecourse debt on the Project and the adjusted basis of the Project
Explanation - To the extent that the debt exceeds the Project’s value, there is gain that must be eventually recognized. Even if the partnership gave the property to the lender for nothing, the partnership would be considered to have exchanged the property for the amount of the debt. Because the debt is higher than the property’s basis, there will be gain equal to the difference. Because this gain is unavoidable, the IRS will allow a partner to go negative to the extent that it has minimum gain
Recourse Debt – does not make minimum gain if it is the most junior debt
Stacked Debt Adds Complicates Tax Analysis – if recourse debt is stacked between other debt, needs to be reviewed with tax counsel – “Stacking Rules”
Deferred Developer Fee Is Usually Not Nonrecourse – Most Deferred Developer Fee is structured as unsecured recourse debt. As such, typical Deferred Developer Fee would not create minimum gain. But see the discussions below for alternative approaches
Minimum Gain Example – Unrelated Debt
Unrelated Nonrecourse Debt $11,000,000
Net Assets (adjusted Basis) ($10,000,000)
Partnership Minimum Gain $ 1,000,000 Investor Capital Account can go negative
up to $1,000,000

16. Capital Accounts – Minimum Gain (cont’d)
Allocation of Minimum Gain – The allocation of Minimum Gain is determined by the nature of the debt.
(“Bad”) Partner Nonrecourse Debt – If a partner (or a party related to a partner) bears the risk of loss on the debt, then the debt is allocated to that partner. This is called “Partner Nonrecourse Debt”
(“Good”) Partnership Nonrecourse Debt – If no partner bears the risk of loss, then the debt is considered “Partnership Nonrecourse Debt” and can be allocated among the partners through the partnership agreement. The partnership agreement will then allocate 99.99% to the limited partner
Minimum Gain Example – Related Party Debt
Nonrecourse Debt - Related $11,000,000 Loan from GP
Net Assets (adjusted Basis) ($10,000,000)
Partner Minimum Gain $ 1,000,000 All minimum gain allocated to GP.
Investor cannot have a negative capital account

17. Capital Accounts – Minimum Gain (cont’d)
Related Party Debt Example
The below makes “Bad” Partner Minimum Gain
99.99% Interest
10% Cash Flow & Back-End
0.01% Interest
90% Cash Flow & Back-End
Syndication
Partnership
Apartment Building
Investor Fund LLC
Sponsor/
Lender
Loan
General Partner

18. Capital Accounts – Minimum Gain (cont’d)
Minimum Gain Cure – 79/21 - If the Project lender owns less than 80% of a partner in the Partnership, then it will not be considered a related party. This will allow the debt to be treated as (“Good”) Partnership Nonrecourse Debt
Must Be a Corporate Partner – The entity that is a partner in the Partnership must be a corporation or an LLC that elects to be taxed as a corporation on IRS Form 8832
Only 79% Ownership Must Be Real – Must have 79% of GP’s Vote and Value. Make everything pro rata
Nonprofits and Relatedness – A nonprofit entity is deemed related to another entity if that entity controls it. This is usually measured based on a majority interest in the Board of Directors. If Developer controls 3 out of 5 Board members, then it would be deemed to control the nonprofit

19. Capital Accounts – Minimum Gain (cont’d)
79/21 Org Chart – Creating “Good” Partner Nonrecourse Debt
99.99% Interest
10% Cash Flow & Back-End
0.01% Interest
90% Cash Flow & Back-End
79%
21%
Apartment Building
Investor Fund LLC
Sponsor/Lender
Loan
General Partner Corporation
Unrelated Party
Syndication
Partnership

20. Capital Accounts – Minimum Gain (cont’d)
Minimum Gain Cure – 10% De Minimis Rule -If the Project lender is a governmental entity (or an entity that regularly engages in the business of lending) and the lender’s direct or indirect interest in the partnership is less than 10%, the debt will be considered unrelated debt
Must limit everything below 10% - Incentive management fees and residual interests must be capped at less than 10%. General partner fees or any other distributions to partners or related parties must be closely scrutinized
Two General Partners – If there are 2 General Partners, but one is not related to the lender, then the other general partner can pick up the excess cash flow above 10%
Cash Flow Strategies
Loan Payments– Often cash flow will be absorbed for the 15-year period paying off the Deferred Developer Fee and applying 90% of cash flow to the related party debt.
Section 42 Right of First Refusal (“ROFR”) – If the Sponsor is a Qualified Nonprofit, then it can control the back-end with the Right of First Refusal price of debt + taxes
NFPs that are not governmental entities must also satisfy additional requirements!

21. Capital Accounts – Minimum Gain (cont’d)
10% De Minimis Org. Chart – Creating “Good” Partner Nonrecourse Debt
99.99% Interest
> 90%10% Cash Flow & Back-End
0.01% Interest
< 10% Cash Flow & Back-End
Loan
100%
Syndication
Partnership
Apartment Building
Investor Fund LLC
General Partner Corporation
Sponsor
/Lender

22. Minimum Gain – Stacking Rules
Minimum gain is deemed to be generated in layers, beginning with the lowest priority debt
Bottom layer is Partnership Nonrecourse Debt, it will generate “good” minimum gain
Once the minimum gain exceeds that layer of debt, additional minimum gain is deemed to be generated by the next layer of debt
Must analyze each layer of debt to determine whether it generates “good” or “bad” Partner Nonrecourse Debt minimum gain
Partner Nonrecourse Debt will generate “bad” minimum gain

27. Capital Accounts – Minimizing Exit Taxes
Exit Taxes – Using the above techniques, an Investor can often be allocated minimum gain and would be allowed to go negative in its capital account and be able to receive 99.99% of LIHTC
Downside is creation of exit taxes for the Investor when it gets out of the Partnership sometime after Year 15
Because a General Partner’s right to buy out an Investor is at a price that is no less than the amount of exit taxes, this often becomes an issue for the General Partner
Loss Flip – A not uncommon tactic to avoid or reduce exit taxes is to provide that after all LIHTC have been delivered, as much as 80%-90% of losses (including depreciation) can be allocated to the General Partner. This will reduce the later- year losses to the Investor and avoid negative capital accounts or at least slow down how far its capital account goes negative
Special allocation of losses to GP from the outset