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

DISPOSITIONS OF LIHTC PROPERTIES (OR LP INTERESTS THEREIN) WITHOUT RECAPTURE BONDS. Allen A. Lynch, II Partner Nixon Peabody LLP 100 Summer Street  Boston, MA 02110  Office.:   +1 617-345-1235 Mobile:  +1 617-922-0212 alynch@nixonpeabody.com. Dispositions without Sec. 42 Bonds.

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

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  1. 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@nixonpeabody.com 11215938.1

  2. 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

  3. LP Risk Matrix

  4. 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 project’s compliance history and present status

  5. 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)

  6. 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)

  7. 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

  8. 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 …?

  9. 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

  10. Allen A. Lynch, IIPartner Nixon Peabody LLP100 Summer Street Boston, MA 02110 Office.:   +1 617-345-1235Mobile:  +1 617-922-0212alynch@nixonpeabody.com

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