DISPOSITIONS OF LIHTC PROPERTIES (OR LP INTERESTS THEREIN) WITHOUT RECAPTURE BONDS

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DISPOSITIONS OF LIHTC PROPERTIES (OR LP
INTERESTS THEREIN) WITHOUT RECAPTURE BONDS

• Allen A. Lynch, IIPartner
• Nixon Peabody LLP100 Summer Street Boston, MA
  02110 Office.   1 617-345-1235Mobile  1
  617-922-0212alynch_at_nixonpeabody.com

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Dispositions without Sec. 42 Bonds

• LPs are now exposed to recapture for a longer
  period of time for non-compliance
• Key questions
• What is the risk of recapture?
• Who will pay if the credits are recaptured due
  to
• pre-transfer, or post-transfer, non-compliance?
• For what period of time will LPs need to be
  protected?
• LPs must look back, and look forward, to address
  these questions

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LP Risk Matrix
Inexperienced/ Unknown Buyers Experienced/Established Buyers
Earlier(e.g., ltY14) ? risk (highest) ? risk (higher) risk influenced by Buyer experience and relationship w/ Seller
Later ? risk (less, depending on how close to Y 15) ? risk (lowest)
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Looking Back Pre-Transfer Non-Compliance DD

• Re pre-transfer non-compliance risk, LPs should
• Calculate potential recapture exposure
• Investigate and understand the compliance status
  of the property prior to, and at the time of,
  transfer
• Evaluate adequacy of existing GP guaranty, and
  the guarantor, in light of the projects
  compliance history and present status

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LP Protections for Pre-Transfer Non-Compliance

• Check PA and existing GP guaranty
• Upgrade guaranty if appropriate
• Consider re-affirmation from GP that its guaranty
  will survive transfer, and dissolution (if fee
  sale)

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Looking Forward Post-TransferNon-Compliance DD

• Re post-transfer Non-compliance, LPs should
• Calculate potential recapture exposure
• Understand state agency compliance practices
• Put more emphasis on compliance
  experience/reputation in selecting buyers
• Who will manage the project?
• Do what the surety bond underwriter did
• Underwrite the credit worthiness of guarantor,
  applying a net worth test (typically 3x recapture
  exposure, 10 of which must be cash/cash
  equivalents or marketable securities)

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LP Protections for Post-Transfer Non-Compliance

• Compliance/Indemnity Agreement (CA)
• Comply
• Copy
• Continuity
• Cover
• Guaranty
• Performance of Buyer under the CA
• Payment under the CA
• Net Worth covenant
• Notice of CA
• Recorded to put subsequent buyers on notice
• Some sureties are selling optional recapture
  bonds

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How does the new SOL affect LPs?

• 3 years after the Secretary of the Treasury is
  notified of non compliance (by the taxpayer!)
• Places LPs at risk of recapture until ?
• Means the indemnity in the CA, and thus the
  Guaranty, have to stay in effect until ?

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Canceling Existing Recapture Bonds

• If entire premium paid in advance, most surety
  contracts do not provide for a refund
• For bonds with annual premiums, not paying
  future premiums sounds nice, but where does that
  leave an LP in terms of recourse?
• IRS Rev. Proc. 2008-60 (10/2/08) how to make
  election to cancel recapture bond
• Signer of the 8693 sends letter to IRS
• taxpayer name, address, TIN
• statement that taxpayer reasonably expects
  compliance
• declaration that foregoing is made under penalty
  of perjury
• Copy of Form 8693

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• Allen A. Lynch, IIPartner
• Nixon Peabody LLP100 Summer Street Boston, MA
  02110 Office.   1 617-345-1235Mobile  1
  617-922-0212alynch_at_nixonpeabody.com