PREPARING FOR THE YEAR 15 TRANSITION IN LIHTC PROJECTS: FISCAL MANAGEMENT CHALLENGES

1. PREPARING FOR THE YEAR 15 TRANSITION IN LIHTC PROJECTS: FISCAL MANAGEMENT CHALLENGES Presented by Max Hunt, CPA, MBA MHunt@LoveridgeHuntcpa.com For the Oregon Opportunity Network Spring 2011 Conference

2. PURPOSE OF PRESENTATION • TO DISCUSS VARIOUS ACCOUNTING MATTERS RELATED TO THE PURCHASE OF THE LP INTEREST IN A LIHTC PARTNERSHIP • TO DISCUSS “PREPARING” FOR YEAR 15 • TO REVIEW REGULATORY AGENCY REQUIREMENTS WHEN THE GP PURCHASES THE LP INTEREST • EQUITY PARTNERS AND YEAR 15 EXPECTATIONS • OTHER STUFF THAT COMES TO MIND

3. YEAR 15 – WHAT DOES IT MEAN? • LIHTC COMPLIANCE PERIOD IS THE FIFTEEN YEARS FROM THE DATE UNITS ARE PLACED IN SERVICE FOR THE PURPOSE OF “TAKING CREDITS” • AFTER YEAR FIFTEEN OWNERSHIP INTERESTS MAY BE TRANSFERRED WITHOUT A RECAPTURE OF CREDITS • DEALS ARE UNDERWRITTEN WITH THE GENERAL EXPECTATION THAT AFTER YEAR FIFTEEN THE INVESTOR ENTITY WILL BE “TAKEN OUT”

4. TAKING OUT YOUR INVESTOR • TYPICAL SCENARIOS: • GP ACQUIRES INVESTOR INTEREST AND CONTINUES PROPERTY AS IS • GP ACQUIRES INVESTOR INTEREST AND REFINANCES OR RESYNDICATES PROPERTY • PARTNERSHIP SELLS TO A 3RD PARTY • UNITS TRANSFER TO HOMEOWNERSHIP (LEASE/PURCHASE SCENARIO)

5. OUR FOCUS • GP PURCHASES INVESTOR INTEREST (WE WILL DEFER THE ISSUES OF RESYNDICATION AND/OR REFINANCING)

6. TIME FOR AN EXCEL WORKSHEET – ACCOUNTING STUFF • POINTS TO EMPHASIZE: • ACCOUNTING FOR AN INVESTMENT S/B THE “EQUITY METHOD” • USING “K-1” MAY OR MAY NOT BE APPROPRIATE • IF INVESTMENT IS “UNDER WATER” THEN SHOULD NOT RECORD LOSSES IN EXCESS OF INVESTMENT BASIS (DISCUSS EXCEPTION) • SEE THE VERY SIMPLE PRESENTATION OF PAYING FOR INVESTOR MINIMUM GAIN (DISCUSS CONCEPT) • WHAT IF INVESTOR HAS POSITIVE CAPITAL? WELL - HALLELUJAH • WHAT IF INVESTOR SAYS “THANK YOU BUT NO THANK YOU TO PAYMENT OF ITS EXIT TAXES”? NO IMPACT OF GP OR THE LOWER TIER PARTNERSHIP – THE MATTER IS DEALT WITH AT THE UPPER TIER LEVEL

7. PLANNING MATTER AND INVESTOR CAPITAL • MONITOR CAPITAL ACCOUNTS – IF IT LOOKS LIKE THE INVESTOR IS “BURNING THROUGH CAPITAL” CONSIDER DISCHARGE OF INDEBTEDNESS (TYPICALLY DEBT PAYABLE TO GP WHO RECEIVED $S AS GRANT OR LOAN UP FRONT) • RE-VISIT CAPITALIZATION POLICY • EXPLORE OTHER SOURCES OF REVENUE

8. STAY WITH THE WORKSHEET • MAKE NOTE OF VARIOUS ACCOUNTS ON THE NP STATEMENT OF FINANCIAL POSITION • ARE THESE TYPICAL? • ARE WE MISSING ANYTHING? • SETTING ASIDE THE YEAR 16 BUYOUT OF THE LP INTEREST, ARE THERE ANY “GAAP” ISSUES WITH THESE ACCOUNTS? • GP ENTITY IS LEGALLY SEPARATE FROM SPONSOR (BUT PROBABLY CONSOLIDATED FOR FINANCIAL ACCOUNTING PURPOSES – EITHER BASED ON CONTROL OR SPONSOR IS SOLE MEMBER OF GP ENTITY – LATTER IS VERY COMMON)

9. NOW TO THE CONSOLIDATION DISCUSSION • RETURN TO THE WORKSHEET • NOTE WHAT HAPPENS TO: • CASH • RESTRICTED DEPOSITS • ESPECIALLY FIXED ASSETS • NO “STEP-UP” IN BASIS – THIS IS THE OLD “POOLING OF INTEREST” CONCEPT OF ACCOUNTING – THINK APB 16 (BUSINESS COMBINATIONS) • IS THIS CORRECT?

10. MORE ON CONSOLIDATION DISCUSSION • BUT WAIT – HAVE WE MISSED A STEP? WHY CONSOLIDATE? YOU ARE THE “SOLE MEMBER” OF THE ENTITY THAT OWNS THE PARTNERSHIP – YOU MUST CONSOLIDATE • PARTICIPANT QUESTIONS ON THIS TOPIC: • IF NP SETS UP A SOLE MEMBER LLC TO BE THE LIMITED (DISCUSS WHY?) AND ANOTHER SOLE MEMBER LLC TO BE THE GENERAL, HOW IS THIS RECORDED ON THE NP’S BOOKS? (FOR BOOKS WE PRESUME “INTERNAL”; FOR FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH GAAP LET’S CALL THEM “EXTERNAL GAAP FINANCIAL STATEMENTS”) • SOLE MEMBER LLC AS LIMITED WOULD BUY INVESTOR LP INTEREST – DR INVESTMENT IN; CR CASH • BUT, SINCE NP IS SOLE MEMBER OF BOTH GENERAL AND LIMITED, I SEE THE CONSOLIDATION TAKING PLACE AT THE NP LEVEL

11. MORE ON CONSOLIDATION AND QUESTIONS • BUT – DO YOU STILL KEEP SEPARATE BOOKS FOR EACH ENTITY? • IN PREVIOUS FACT PATTERN THERE IS A GP LLC, AN INVESTOR LLC, AND THE PARTNERSHIP FOR WHICH SEPARATE RECORDS HAVE BEEN MAINTAINED • SINCE THE GP LLC AND INVESTOR LLC ARE “DISREGARDED ENTITIES” FOR TAX PURPOSES, WHY KEEP SEPARATE BOOKS AND RECORDS (ESPECIALLY OF THE PROPERTY?

12. THOUGHTS ON SEPARATE BOOKS AND RECORDS • THINK DIVISION-LEVEL OPERATING ANALYSIS – DOES IT MAKE SENSE TO KEEP SEPARATE BOOKS AND RECORDS FOR THE PROPERTY OPERATIONS IN ORDER TO KNOW WHETHER IT (THE PROPERTY) IS PERFORMING AS EXPECTED? • IF YOU HAVE AN OHCS LOAN ON THE PROPERTY, WILL OHCS REQUIRE “SEPARATE PROJECT-LEVEL” REPORTING? IN OUR EXPERIENCE, YEP – WHAT IS YOUR EXPERIENCE? • HUD – WHAT DO THEY REQUIRE? SEE EXTRACT FROM SUBMISSION AND REVIEW REQUIREMENTS. • CITY AND COUNTY AGENCIES?

13. MORE THOUGHTS ON SEPARATE BOOKS AND RECORDS • STATE/CITY/COUNTY FUNDING WHERE REPAYMENT IS SUBJECT TO NET CASH FLOW CALCULATIONS (PROPERTY SPECIFIC) - JUSTIFIES MAINTAINING SEPARATE BOOKS AND RECORDS • RURAL DEVELOPMENT (PROJECT-SPECIFIC REPORTING IN SUPPLEMENTAL DATA ON FORMS 3560-7 AND -10, AT MINIMUM)

14. MORE QUESTIONS FROM THE PARTICIPANTS • “HOW” IS THE NEW ENTITY AUDITED? I THINK THE QUESTION IS – WHAT DO THE FINANCIAL STATEMENTS LOOK LIKE FOR THE “REPORTING ENTITY”? • “IF” NP WAS HISTORICALLY AUDITED “GAAS ONLY”, WILL “CONSOLIDATING” THE PARTNERSHIP RESULT IN GAGAS, MAYBE EVEN A-133 SCOPE? • CONSIDER PREVIOUS SLIDES – ESPECIALLY THE DISCUSSION POINTS ON SUPPLEMENTAL DATA

15. MORE QUESTIONS FROM THE PARTICIPANTS • PARTNERSHIP HAS DEFERRED DEVELOPER FEES DUE TO EQUITY PARTNER AND GP; HOW DO THESE GET PAID WITHOUT BANKRUPTING THE SPONSOR? HM – PAYMENT TO GP IS “CIRCULAR” – GP CONTRIBUTES CASH, THEN PAYS FEE TO ITSELF. GP INVESTMENT ACCOUNT IS INCREASED; PARTNERSHIP LIABILITY IS OBVIOUSLY REDUCED. • DEFERRED DEVELOPER FEES DUE TO EQUITY PARTNER? ANOTHER “HM” – THIS IS A GOOD QUESTION TO OPEN UP FOR “GROUP THINK”

16. MORE QUESTIONS FROM THE PARTICIPANTS • WHAT HAPPENS TO RESERVE ACCOUNTS? SEE EXCEL WORKSHEET • VERY COMMON THAT OPERATING RESERVE, IF NOT ALREADY RELEASED BASED ON PROJECT MEETING REQUIRED CONDITIONS, WILL BE RELEASED TO SPONSOR AT YEAR 16 • REPLACEMENT RESERVE – WHEN YOU TAKE 100% CONTROL OF THE PROPERTY BY VIRTUE OF 100% “BUSINESS” OWNERSHIP YOU “CONTROL” THE REPLACEMENT RESERVE • WHAT HAVE YOU SEEN THAT IS “CONTRARY” TO THESE OBSERVATIONS?

17. MORE QUESTIONS FROM THE PARTICIPANTS • DO YOU NEED TO HAVE A “RECORDED” SETTLEMENT STATEMENT? TO THE BEST OF MY KNOWLEDGE, NO – ANY EXPERIENCE(S) THE CONTRARY? • ARE THERE OTHER “LEGAL” CONSIDERATIONS? • OREGON: • ANY REAL ESTATE TRANSFER TAX? • ANY REQUIREMENT TO FILE AN AMENDED CERTIFICATE OF LIMITED PARTNERSHIP? (ORS 70.080 SUGGESTS “NO” TO ME)

18. MORE QUESTIONS FROM THE PARTICIPANTS • RELATED QUESTIONS (HOW ARE EQUITY PARTNERS APPROACHING YEAR 15 – WHAT DO THEY REQUIRE? AND WHAT CAN YOU DO TO “EASE THE TRANSITION” TO A NEW PARTNERSHIP LATER ON)? HM – OK, MAYBE THESE ARE NOT DIRECTLY RELATED…LET’ SEE • EQUITY PARTNERS: • THEY EXPECT YOU TO KNOW THE TERMS OF YOUR PARTNERSHIP (OR OPERATING) AGREEMENT, ESPECIALLY THE RIGHT OF FIRST REFUSAL RULES • THEY EXPECT YOU TO KNOW WHETHER, OR NOT, YOU DELIVERED ON LIHTCs AND LOSSES • THEY EXPECT YOU TO UNDERSTAND THE 1065S YOU HAVE SIGNED, ESPECIALLY THEIR K-1

19. MORE QUESTIONS FROM THE PARTICIPANTS • EQUITY PARTNER EXPECTATIONS, CONTINUED: • BASED ON CONVERSATIONS WITH EXPERIENCED CLIENTS, THEY EXPECT YOU TO BE “PRO-ACTIVE”, AND START THINKING ABOUT WHAT YOU WANT TO DO WITH THE PROPERTY SEVERAL YEARS BEFORE YEAR 16 ARRIVES

20. MORE QUESTIONS FROM THE PARTICIPANTS • WHAT CAN YOU DO TO “EASE” THE TRANSITION TO A NEW PARTNERSHIP? • IF THE QUESTION MEANS “WHAT CAN YOU DO TO PLAN FOR A RESYNDICATION OF THE PROPERTY” INTO A NEW PARTNERSHIP, THEN:

21. SIDEBAR – EITF 04-5 • THIS EITF ADDRESSES THE ISSUE AS TO WHETHER, OR NOT, A GP (OR MANAGING MEMBER) OF A PARTNERSHIP (OR LLC) SHOULD CONSOLIDATE THE FINANCIAL STATEMENTS OF THE PARTNERSHIP OR LLC • KEY ISSUE IS CONTROL – OVERARCHING PRESUMPTION IS THAT THE GP DOES CONTROL, AND THAT CONSOLIDATION IS REQUIRED • BUT…MUST EVALUATE WHETHER INVESTOR(S) HAVE • THE RIGHT DISSOLVE PARTNERSHIP OR REMOVE GP WITHOUT CAUSE, OR • HAVE SUBSTANTIVE PARTICIPATING RIGHTS (EXAMPLES OF WHICH ARE IN THE EITF)