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

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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

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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.

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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


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LessorLessorDeveloperDeveloper General Contractor

General Contractor

(501(c)(3))


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Owner Partnership

Owner Partnership



LessorLessor

Lease

DeveloperDeveloper

General Contractor

General Contractor


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

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For the purpose of the arbitrage rules a materially higher spread for program investments is 1.5 percentage points.

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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

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Owner Partnership

Owner Partnership



LessorLessor

Lease


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

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Owner Partnership

Owner Partnership



Special Limited Partner



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

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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

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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

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Owner Partnership

Owner Partnership






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

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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

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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.

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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

paul carman chapman and cutler llp september, 2010 issues for hfas in low income housing...

Documents

type of income

exclusion of income

gross income

tax purposes slide

hfas organizational

limited liability entity

gp entity

gps bad acts liability