1.  Paul Carman  Chapman and Cutler LLP  September, 2010 Issues for HFAs in Low Income Housing Partnerships 1

2.  I.R.C. § 115 – Exclusion of Income from Governmental Functions  Property Tax Exemption  State Law Liability for General Partnerships  Alternative Depreciation  I.R.C. § 470 – Excess Losses  I.R.C. § 752 – Allocation of Debt in Partnerships 9/13/2010 2

3. Issues for HFAs in Low Income Housing Partnerships  I.R.C. § 115  Section 115 provides that gross income does not include any income derived from the exercise of an essential governmental function that accrues to a State or any political subdivision thereof or the District of Columbia.  Housing has been recognized as a governmental function. See PLR 200321005 (May 23, 2003).  Where the HFA’s organizational purpose includes promotion of low income housing, 115 should apply. 9/13/2010 3

4. Issues for HFAs in Low Income Housing Partnerships 9/13/2010 4 Investment Partnership Owner Partnership General Partner Housing Finance Agency Under Treas. Reg. § 301.7701-2(b)(6), GP is a corporation for tax purposes

5. Issues for HFAs in Low Income Housing Partnerships 9/13/2010 5 General Partner Housing Finance Agency Lessor Developer General Contractor (501(c)(3))

6. Issues for HFAs in Low Income Housing Partnerships 9/13/2010 6 Investment Partnership Owner Partnership General Partner Housing Finance Agency Lessor Lease Developer General Contractor

7. Issues for HFAs in Low Income Housing Partnerships  Types of Income from Structure:  Rental income (GP’s allocable share)  GP fee income  Development fees  Management fees  Each type of income must be tested separately under Section 115  If tax exempt bonds are used to finance the project, the arbitrage rules may limit the amount of income that the Agency can receive 9/13/2010 7

8. Issues for HFAs in Low Income Housing Partnerships  For the purpose of the arbitrage rules a materially higher spread for program investments is 1.5 percentage points. 9/13/2010 8

9. Issues for HFAs in Low Income Housing Partnerships  Property State Exemption  The availability of a property tax exemption will vary from state to state  In Texas, we have repeatedly received exemption letters  In California and Illinois, the structure may qualify 9/13/2010 9

10. Issues for HFAs in Low Income Housing Partnerships 9/13/2010 10 Investment Partnership Owner Partnership General Partner Housing Finance Agency Lessor Lease

11. Issues for HFAs in Low Income Housing Partnerships  State Law Liability  GPs have liability for all obligations of the partnership  The GP entity is generally a limited liability entity  The HFA may still have liability if the GP is pierced:  Alter ego  Inadequate capitalization  Failure to respect formalities  Commingling funds 9/13/2010 11

12. Issues for HFAs in Low Income Housing Partnerships 9/13/2010 12 Investment Partnership Owner Partnership General Partner Housing Finance Agency Special Limited Partner

13. Issues for HFAs in Low Income Housing Partnerships  Liability of GP may be limited by limiting guarantees and indemnification obligations to only GP’s bad acts  Liability of HFA may be limited by  Having Investment Partnership and Special Limited Partner waive rights to pursue HFA  Obtaining indemnification from Special Limited Partner 9/13/2010 13

14. Issues for HFAs in Low Income Housing Partnerships  Section 168(h)  Section 168(h) would force the partnership on to alternative depreciation  Alternative depreciation is required if property is bond financed or exempt use property  Tax-exempt bond property excludes qualified residential rental projects under Section 142(a)(7)  To avoid tax exempt use property, the interest in the project may be held by a taxable subsidiary and a Section 168(h)(6)(F) election made 9/13/2010 14

15. Issues for HFAs in Low Income Housing Partnerships  Section 168(h)  The Section 168(h)(6)(F) election  Causes the subsidiary to not be treated as a tax-exempt entity  Requires the exempt org to treat the gain on the disposition of the subsidiary and any dividend or interest accrued from the tax exempt subsidiary to be treated as unrelated business taxable income for the purposes of Section 511 9/13/2010 15

16. Issues for HFAs in Low Income Housing Partnerships 9/13/2010 16 Investment Partnership Owner Partnership General Partner Housing Finance Agency Special Limited Partner

17. Issues for HFAs in Low Income Housing Partnerships  Section 470  Section 470 limits tax-exempt use losses  In general, Section 470 looks to Section 168(h) to determine whether the property has tax-exempt use  Section 470 excludes from tax-exempt use properties that would have tax-exempt use under Section 168(h) solely because the property is held by a partnership with an exempt partner 9/13/2010 17

18. Issues for HFAs in Low Income Housing Partnerships  Section 752  Nonrecourse debt of a partnership is allocated to a partner who is the lender to the partnership or who is related to the lender to the partnership  The partner nonrecourse debt rule does not apply to a debt from a partner (or related person) who holds 10% or less in the partnership and is borrowed from a State or local government or instrumentality thereof  If the bond holders are viewed as the lenders to the partnership, the 752 related party rules would generally not apply 9/13/2010 18

19. Circular 230 Notice To the extent that any part of this presentation is interpreted as being tax advice, no taxpayer may rely upon this presentation for the purposes of avoiding penalties. This presentation has been prepared in connection with the promotion or marketing of the transactions described. Taxpayers should consult independent tax advisors. 19

20. 20 This document has been prepared by Chapman and Cutler LLP attorneys for informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal advice. Accordingly, readers should consult with, and seek the advice of, their own counsel with respect to any individual situation that involves the material contained in this document, the application of such material to their specific circumstances, or any questions relating to their own affairs that may be raised by such material. © 2010 Chapman and Cutler LLP