ACQUISITION/REHABILITATION: THE 10% RELATED PERSON RULE James F. Duffy, Esquire Nixon Peabody LLP 100 Summer Street Boston, MA 02110-2131 (617) 345-1129 (866) 947-1697 (fax) [email protected]HOUSING TAX CREDITS “101” IPED, INC. Phoenix, Arizona February 22-23, 2007
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ACQUISITION/REHABILITATION: THE 10% RELATED PERSON RULE James F. Duffy, Esquire Nixon Peabody LLP 100 Summer Street Boston, MA 02110-2131 (617) 345-1129.
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ACQUISITION/REHABILITATION: THE 10% RELATED PERSON RULE
James F. Duffy, EsquireNixon Peabody LLP100 Summer StreetBoston, MA 02110-2131(617) 345-1129(866) 947-1697 (fax)[email protected]
HOUSING TAX CREDITS “101”
IPED, INC.
Phoenix, Arizona
February 22-23, 2007
THE RULE
Section 42(d)(2)(B)(iii) of the Code provides that in order to receive acquisition credits the building cannot previously been placed in service by the taxpayer or by a related person.
RELATED PERSON TEST
Section 42(d)(2)(D)(iii)(II) tells you that a “related person” to a taxpayer means 10% or greater common ownership.
Selling Partnership
GP OldLP
Property
Cash
Buying Partnership
NewLP
GP
How do you determine your percentage ownership in a LIHTC Partnership?
LIHTC Partnerships are structured with partners receiving different percentage interests in different items:
The LIHTC industry has prudently decided that if you have a 10% or greater interest in any item in the seller, you have to have less than a 10% interest in all items in the buyer.
Since a developer (GP) tends to have more than a 10% interest in Cash Flow in the old Partnership (the seller), the developer tends to have a 9.9% interest in Cash Flow and in Sale/Refinancing Proceeds in the new Partnership (the buyer).
Not your typical LIHTC business deal if the syndicator/investor has 90.1% of Cash Flow and Sale/Refinancing Proceeds.
So, what typically happens?
- Partnership Management Fee
- Incentive Management Fee
The question is whether or not these fees exceed a reasonable fee which would be paid to a third party service provider performing the same services.
Anything paid (or payable if there were Cash Flow) in excess of a reasonable fee could be reclassified as additional Cash Flow to the General Partner.
And, since we’re already at 9.9% of the Cash Flow going to the General Partner, there’s no room for error.
The risk is the loss of all of the Acquisition Credits if the General Partner is deemed to really have a 10.01% interest in Cash Flow.
Look at these Cash Flow fees to see if they’re “reasonable.”
For instance, would a third party service provider agree to be paid only if there were sufficient Cash Flow at that point in the Cash Flow waterfall?
A Cash Flow fee looks more like a real fee, rather than like a Cash Flow distribution, if it accrues, even if there is no Cash Flow available to pay it currently.