Paul Carman Chapman and Cutler LLP September, 2010 Issues for HFAs in Low Income Housing...
-
Upload
lizbeth-page -
Category
Documents
-
view
216 -
download
3
Transcript of Paul Carman Chapman and Cutler LLP September, 2010 Issues for HFAs in Low Income Housing...
Paul Carman Chapman and Cutler LLP September, 2010
Issues for HFAs in Low Income Housing Partnerships
1
Issues for HFAs in Low Income Housing Partnerships
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
Issues for HFAsin 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
Issues for HFAsin Low Income Housing Partnerships
9/13/2010
4
Investment PartnershipInvestment Partnership
Owner Partnership
Owner Partnership
General PartnerGeneral Partner
Housing Finance Agency
Under Treas. Reg. § 301.7701-2(b)(6),GP is a corporation for tax purposes
Issues for HFAsin Low Income Housing Partnerships
9/13/2010
5
General PartnerGeneral Partner
Housing Finance Agency
LessorLessorDeveloperDeveloper General Contractor
General Contractor
(501(c)(3))
Issues for HFAsin Low Income Housing Partnerships
9/13/2010
6
Investment PartnershipInvestment Partnership
Owner Partnership
Owner Partnership
General PartnerGeneral Partner
Housing Finance Agency
LessorLessor
Lease
DeveloperDeveloper
General Contractor
General Contractor
Issues for HFAsin 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
Issues for HFAsin 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
Issues for HFAsin 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
Issues for HFAsin Low Income Housing Partnerships
9/13/2010
10
Investment PartnershipInvestment Partnership
Owner Partnership
Owner Partnership
General PartnerGeneral Partner
Housing Finance Agency
LessorLessor
Lease
Issues for HFAsin 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
Issues for HFAsin Low Income Housing Partnerships
9/13/2010
12
Investment PartnershipInvestment Partnership
Owner Partnership
Owner Partnership
General PartnerGeneral Partner
Housing Finance Agency
Special Limited Partner
Special Limited Partner
Issues for HFAsin 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
Issues for HFAsin 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
Issues for HFAsin 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
Issues for HFAsin Low Income Housing Partnerships
9/13/2010
16
Investment PartnershipInvestment Partnership
Owner Partnership
Owner Partnership
General PartnerGeneral Partner
Housing Finance Agency
Special Limited Partner
Special Limited Partner
Issues for HFAsin 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
Issues for HFAsin 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
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
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