SECTION 42 QUALIFIED CONTRACTS

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SECTION 42QUALIFIED CONTRACTS

• More Questions Than Answers
• RICHARD S. GOLDSTEIN
• April 27, 2007
• IPEDAfter the Closing

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Background

• Added to Code in 1989
• Intended to balance preservation with incentive
  for investors to have back end possibility
• Effective for tax credit allocations and bonds
  issued in 1990
• Allows the owner to terminate the 30 year
  Extended Use Period after the 15th year if the
  State cannot
• Present a Qualified Contract to purchase the
  building and maintain it as a qualified
  low-income building within 1 year after the owner
  submits a written request to the Agency to find a
  buyer,

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Defining a Qualified Contract

• A Bona Fide Contract to purchase
• Within a reasonable period after the contract is
  entered into
• The non-low income portion for fair market
  value
• And the low-income portion for the applicable
  fraction of the sum of

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• The outstanding indebtedness secured by or with
  respect to the building, plus
• The adjusted investor equity in the building,
  plus
• Other Capital Contributions, less
• Cash distributions from (or available for
  distribution from) the project

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Adjusted Investor Equity

• Cash taxpayers invested with respect to the
  project increased by the CPI (up to 5 per year)
• But only to the extent there was an obligation
  to invest such amount as of the beginning of the
  credit period and to the extent such amount is
  reflected in the adjusted basis of the project

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Open Issues

• Check to see if your State Agency has published
  guidelines or procedures (either in QAP or
  separately)
• What information must be contained in the
  written request (this triggers the 1-year
  period for finding buyer)? Some states require
  substantial detailed information for due
  diligence purposes

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Presenting a Bona Fide Contract

• What is a bona fide contract?
• Is it sufficient that the State only present
  the contract?
• What if the buyer cant close?
• What if the owner refuses to accept the terms of
  the contract presented?
• What is a reasonable period to close?
• How to resolve contractual impasses?
• Present to binding arbitration

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Calculating the Qualified Contract Price

• What debt counts? Do partner loans count if not
  secured with a mortgage?
• Is the investor equity the gross or net amount?
  (Probably the net because of need to be reflected
  in basis)
• How to determine if reflected in basis
• Calculating cash distributionswhat documents are
  available. Is an Agreed Upon Procedures Report
  acceptable?
• Where in the waterfall is this calculated?
• Development Fees?
• Incentive Management Fees?
• Partner Loan Repayments?

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Next Steps

• IRS expected to issue guidance by June 30th
• AHTCC comments to IRS and NCSHA