Carryover Allocations and 10% Test

1. Carryover Allocations and 10% Test IPED Housing Tax Credits “101”October 18-19, 2007William A. Baldwin, Esq.

2. Federal Placement in Service Deadlines To obtain such an extension, a project must receive a valid carryover allocation agreement and satisfy the “10% test” in a timely manner.

3. Requirements for a ValidCarryover Allocation • The credit dollar amount allocated to the building; • The name, address, and taxpayer identification number of the building owner; • The address of the building (or if none exists, a specific description of its location); • The date the building is expected to be placed in service; • The taxpayer’s total reasonably expected basis in the project as of the close of the second calendar year after the allocation year;

4. Requirements for a ValidCarryover Allocation (cont’d) • The taxpayer’s basis in the project at the close of the calendar year in which the allocation is made and the percentage that this amount bears to the total reasonably expected basis; • The name and address of the state tax credit agency; • The taxpayer identification number of the state tax credit agency; • The date of the allocation; and • The building identification number assigned to the building.

5. Satisfying the 10% Test • Federal Rule: 10% of the reasonably expected basis in the project (as of the close of the second calendar year) must be paid or incurred by the later of (i) the end of the calendar year for which the credit allocation is made, or (ii) six (6) months after the date of the carryover. • States may impose stricter standards as long as the terms do not violate the Federal credit rules. • 10% test is a “cliff” test.

6. Defining “Reasonably Expected Basis” For 10% Test Purposes • Reasonably expected basis means the adjusted basis of land and depreciable property (whether or not it is included in eligible basis). • Basis attributable to non-residential rental property (e.g., commercial property, site improvements) may be includable in carryover allocation basis even though such property is not included in eligible basis. • Eligible costs include building/construction costs, related personal property and land costs.

7. Defining “Reasonably Expected Basis” For 10% Test Purposes (cont’d) • Ineligible costs include permanent loan fees, reserves, syndication fees, partnership organizational costs and tax credit fees. • Costs may be incurred by taxpayer prior to the calendar year of the allocation. • QCT/DDA increases not included in 10% test calculations.

8. Common 10% Test Expenditures • Acquisition costs for land and buildings • Construction costs (e.g., materials, permits, etc.) • Development fee • Fees for services (e.g., architect, contractor, engineer) • Construction financing fees/construction period interest

11. EXH. 2 – SOURCES AND USES OF FUNDS AT FINAL CLOSING $4,787,173 $188,936 $247,336 $384,595 $200,200 $108,800 $15,000 $119,000 $28,400 $41,050 $15,000 $0 $0 $0 $22,500 $487,000 $0

12. 10% Test Review Examples of Supporting Documentation and Tax Considerations

13. Acquisition of Land/Buildings Documentation • Recorded deed to entity receiving carryover allocation • Title insurance policy • Settlement statement • Purchase money note/mortgage • Other financing documents (including evidence of at least 10% cash down payment) and • Appraisal

14. Construction Costs Documentation • Construction contract • Invoices/draw requests for all costs • Lumber and materials: need to review storage contracts, evidence of insurance, down payment and promissory note for any unpaid balance

15. Developer Fees Documentation • Development agreement • Need to review the written development agreement in place on 10% test deadline date • Scope of work limited to eligible services • Agreement must include benchmarks for earning fee • Confirm that benchmarks are satisfied to properly include development fee in 10% test calculation

16. Fees for Services Documentation • Written agreements (such as architect/engineering contracts) describing services • Invoices and work product for services rendered (such as environmental reports and market studies) • Statements of legal/accounting costs must be related to the actual acquisition/construction of the project (not for syndication, partnership formation or permanent loans)

17. Construction Financing Feesand Construction Period Interest Documentation • Evidence of obligation to pay, such as loan agreement or promissory note and interest statements • Additional issues with construction/permanent loans

18. 10% Test Review Additional Considerations

19. Incurring the Costs • Entity receiving the carryover allocation must be the entity that has incurred the costs. • If the entity is incurring an expense without actually paying the cost, the entity must be an accrual basis taxpayer (the election to be on the accrual basis is made on the entity’s first tax return). • If the entity incurring a cost is not the entity which has received tax credit allocation (e.g., the GP or developer), the parties should execute a Reimbursement Agreement before the 10% test deadline obligating the entity receiving the allocation to reimburse the entity providing the services.

20. Thank You