ACCOUNTING AND AUDITING UPDATE FOR 2010 Joint AHMA/CARH CONFERENCE

ACCOUNTING AND AUDITING UPDATE FOR 2010 Joint AHMA/CARH CONFERENCE Presented by Max Hunt, CPA, MBA Member in Charge of Audit Practice of Loveridge Hunt & Co., CPAs April 21, 2010

PURPOSE OF PRESENTATION • IDENTIFY/DISCUSS ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS RELEVANT FOR USERS OF HUD/RD FINANCIAL STATEMENTS • IDENTIFY/DISCUSS “REGULATORY” ACCOUNTING TOPICS (IRS/HUD/RD) RELEVANT FOR PROPERTY MANAGEMENT CONTROLLERSHIP STAFF AND FOR USERS OF HUD/RD/CONVENTIONAL WITH LIHTC FINANCIAL STATEMENTS • DISCUSS “ISSUES” THAT AROSE THIS PAST “AUDIT/TAX” BUSY SEASON THAT MAY BE USEFUL TO PROPERTY MANAGEMENT CONTROLLERSHIP STAFF AND FOR USERS OF HUD/RD/CONVENTIONAL WITH LIHTC FINANCIAL STATEMENTS AND TAX RETURNS

PURPOSE OF PRESENTATION, CONTINUED • IF TIME PERMITS, DISCUSS ENGAGEMENT PLANNING AND OTHER “EFFICIENCY” TECHNIQUES TO HELP EVERYBODY MEET USER NEEDS/TIME FRAMES – S/B RELEVANT TO OWNERS AND PROPERTY MANAGEMENT CONTROLLERSHIP STAFF • IF ANY TIME REMAINS, SOME TAX TOPICS FOR FUN • WWW.LOVERIDGEHUNTCPA.COM

PART I – ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS • DISCUSSION RE: SUBSEQUENT EVENTS (FAS 165/ASC 865: • PRIMARY IMPACT - REQUIRES DISCLOSURE OF DATE THROUGH WHICH SUBSEQUENT EVENTS WERE EVALUATED, AND WHETHER THE DATE REPRESENTS THE DATE THE FINANCIAL STATEMENTS WERE AVAILABLE TO BE ISSUED • DISCUSSION RE: FAIR VALUE OF DEBT (PART OF THE FAIR VALUE PROJECT) – DEBT ON BOOKS APPROXIMATES FAIR VALUE, OF IT IS NOT PRACTICABLE TO ESTIMATE FAIR VALUE

PART I – ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS - CONTINUED • ACCOUNTING AND DISCLOSURE OF IMPAIRED ASSETS (FAS 144/ACS 360) • FIRST, THE FACTS – SLOW RENT-UP, SUBSEQUENT TURN-OVER AND HIGHER THAN EXPECTED VACANCY RATES HAVE RESULTED IN OWNERS/GUARANTORS FUNDING OPERATING CASH FLOW DEFICITS • SECOND, THE ACCOUNTING ISSUE – FUNDING OPERATING DEFICITS IS A “TRIGGERING EVENT” THAT SHOULD CAUSE AN OWNER/CONTROLLER TO CONSIDER WHETHER OR NOT ASSETS HAVE BEEN IMPAIRED [I.E., FAIR VALUE IS LESS THAN BOOK VALUE (COST LESS ACCUMULATED DEPRECIATION)] • WHAT SHOULD AN OWNER/CONTROLLER DO?

PART I – ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS - CONTINUED • IMPAIRMENT MATTER, CONTINUED: • IN THEORY OWNER/CONTROLLER SHOULD PERFORM AN ANALYSIS OF FAIR VALUE BY CALCULATING UNDISCOUNTED OPERATING CASH FLOWS PLUS DISPOSITION VALUE • IF RESULTS OF CALCULATION IN PREVIOUS BULLETED ITEM RESULT IN ESTIMATE OF FAIR VALUE MATERIALLY LESS THAN BOOK VALUE, THEN A MORE FORMAL DETERMINATION OF FAIR VALUE IS REQUIRED (WHICH COULD MEAN AN APPRAISAL)

PART I – ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS - CONTINUED • IMPAIRMENT MATTER, CONTINUED: • REALITY CHECK – WHO CARES? • DOES “NOT” AFFECT PARTNERSHIP RETURN • BUT, “DOES” AFFECT INVESTMENT BY UPPER TIER FUND • IS THE UPPER TIER FUND’S INVESTMENT IN THIS PROPERTY “MATERIAL” TO THE UPPER TIER FUND? IF YES, IMPAIRMENT ANALYSIS WILL PROBABLY BE REQUIRED, WHETHER THE LOCAL OPERATING PARTNERSHIP WANTS IT OR NOT • IF “NOT MATERIAL” TO UPPER TIER FUND, THEN SEE FIRST BULLETED ITEM THIS PAGE – WHO CARES? CONSIDER GAAP EXCEPTION AND MOVE ON.

PART I – ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS - CONTINUED • IMPAIRMENT MATTER, CONTINUED: • FOR THE INVESTORS IN THE AUDIENCE (NONPROFITS AND FOR-PROFIT ENTITIES WITH INVESTMENTS IN REAL ESTATE) – IMPAIRMENT ANALYSIS ALSO APPLIES TO YOU • YOUR INVESTMENT IN THE REAL ESTATE PROJECT S/B SUBJECT TO IMPAIRMENT CONSIDERATION, IN THE SAME MANNER AS DISCUSSED ON THE PREVIOUS PAGE • AND – NOTES AND OTHER RECEIVABLES DUE FROM A REAL ESTATE PROJECT ARE SUBJECT TO “VALUATION” ANALYSIS

PART I – ACCOUNTING/FINANCIAL STATEMENT DISCLOSURE TOPICS - CONTINUED • SSARS 19 – THINK “OVERHAUL” OF THE COMPILATION AND REVIEW STANDARDS • WILL IMPACT ALL RD COMPILATIONS • PRACTICAL EFFECT: • REQUIREMENT FOR ENGAGEMENT LETTERS • CONCEPT OF MATERIALITY • MODEST DOCUMENTATION REQUIREMENTS FOR COMPILATIONS (SIGNIFICANT FINDINGS OR ISSUES)

PART II – REGULATORY ACCOUNTING TOPICS • HUD: • NOTHING NEW WITH REAC TEMPLATES • NO UPDATES IN EITHER HANDBOOKS OR HOUSING NOTICES THAT AFFECT REGULATORY ACCOUNTING • THAT WAS EASY • RD: • NO UPDATES RE: ACCOUNTING IN EITHER HANDBOOKS OR DIRECTIVES (PROCEDURE NOTICES; ADMIN NOTICES OR UNNUMBERED LETTERS) • HOWEVER – NOTE UNNUMBERED LETTER ISSUED MARCH 11, 2010 – DISCUSSION NEXT SLIDE

PART II – REGULATORY ACCOUNTING TOPICS • RD AND EXCHANGE $S AND ROI • Page 2 of the aforementioned unnumbered letter reads as follows: Loans are processed pursuant to 7 CFR 3560.63c in the same manner as other loans receiving low-income housing tax credit benefits in determining equity contributions • 7 CFR 3560.68 – Borrowers operating on a limited profit basis will be permitted a return not to exceed 8 percent of their required initial investment determined at the time of loan approval in accordance with 7 CFR 3560.63c • IS IT POSSIBLE THAT THE EXCHANGE $S, WHICH ARE, IN EFFECT, THE FEDERAL GOVERNMENT’S GRANT TO THE PROJECT WHICH WILL CREDIT OWNER’S CAPITAL ACCOUNTS, WILL ALSO PROVIDE FOR A HIGHER ROI?

PART II – REGULATORY ACCOUNTING TOPICS - CONTINUED • IRS: • NOTICE 2010-18 – ARRA CLARIFICATIONS • KEY EXTRACTS, AS FOLLOWS: • The Legislative history to the Act provides that grants received under this provision (Exchange $s) do not reduce the tax basis of a qualified low-income building • The legislative history to the Act further provides that grants under this provision are not taxable income to recipients • Also applies to sub awards • ACCOUNTING IMPACT – EXCHANGE DOLLARS WILL BE RECOGNIZED AS INCOME FOR BOOK PURPOSES, BUT NOT TAX – PARTNERS’ ACCOUNTS WILL BE CREDITED WITH THEIR PRO-RATA SHARE OF THE EXCHANGE DOLLARS

PART III – ISSUES FROM THE AUDIT SEASON • HUD ENGAGEMENTS: • ALLOWABLE DISTRIBUTIONS • SECTION 8 PROJECTS SUBJECT TO REVISED REGS • WHICH ARE ALSO SMALL PROJECTS (50 OR FEWER UNITS, INCLUDING UNASSISTED UNITS) • WHICH DO NOT HAVE ANY REGULATORY AGREEMENT OR USE AGREEMENT • ARE NOT SUBJECT TO ANY LIMITATION ON DISTRIBUTIONS, EITHER THE TIMING THEREOF OR SURPLUS CASH • SETTING AUDIT SCOPE • COMMON “OVER-AUDITING” ITEM #1 – IF IT’S A NON-MAJOR PROGRAM, THE MINIMUM SAMPLE SIZES DO NOT APPLY • ITEM #2 – THE ONLY PROGRAM IS PROJECT-BASED SECTION 8 (MOST OF THE CONSOLIDATED AUDIT GUIDE DOES NOT APPLY)

PART III – ISSUES FROM THE AUDIT SEASON – CONT’D • RD ENGAGEMENTS: • ACCOUNTING FOR ROI – RD VERSUS PARTNERSHIP ACCOUNTING • RD FORM 3560-7 LINE 23 – RETURN TO OWNER/NP ASSET MANAGEMENT FEE SECTION • ACCOUNTING FOR ROI • FOR EASE OF PRESENTATION IN GENERAL LEDGER, RECORD AS AN EXPENSE (CASH BASIS) • BUT RECOGNIZE THAT THE PAYMENT OF THE ROI IS GOVERNED BY THE BUSINESS AGREEMENT • FOR LIHTC DEAL, WILL TYPICALLY BE APPLIED FIRST TO EITHER INVESTOR SERVICES FEE OR DEVELOPER SERVICES FEE • APPLICATION OF THE ROI IS SET FORTH IN “USES OF CASH FLOW” (THE WATERFALL PROVISIONS) IN THE BUSINESS AGREEMENT (PARTNERSHIP AGREEMENT OR OPERATING AGREEMENT)

PART III – ISSUES FROM THE AUDIT SEASON – CONT’D • COMMON AUDIT FINDINGS (OR NONCOMPLIANCE ISSUES) • HUD OR CMS MORS WITH BELOW AVERAGE OR UNSATISFACTORY RATINGS – WHAT’S AN AUDITOR TO DO • IS A FINDING MANDATORY? DO WE HAVE ANY “WIGGLE-ROOM”? • ADVANCES FROM AFFILIATES • IF NECESSARY REMINDER TO OBTAIN HUD APPROVAL FOR REPAYMENT FROM PROJECT CASH FLOW (AND NOT SUBJECT TO SURPLUS CASH) • OTHERWISE AN OBVIOUS FINDING

HUD AND ALLOWABLE COSTS • 4381.5 CHAPTER 6 PARAGRAPH 6.38 – MGMT COSTS CHARGED TO PROJECT OPERATING ACCOUNT • FRONT-LINE MANAGEMENT • CENTRALIZED ACCOUNTING, INCLUDING HARDWARE, SOFTWARE AND TECH SUPPORT • ADMIN COSTS OF 401K, 403B, SECTION 125 CAFETERIA PLAN • TRAINING COSTS (BOTH FRONT-LINE EMPLOYEES AND BOARD MEMBERS – ONE PROJECT-RELATED SESSION/MEMBER/YEAR) • RETIREMENT ACCOUNTS (BUT NOT TO EXCEED 10% OF BASE EMPLOYEE PAY)

PART IV – ENGAGEMENT PLANNING AND EFFICIENCY TECHNIQUES • MY LEAST FAVORITE DEFINITION – THE LONG-STANDING DEFINITION OF THE AUDITOR – THE AUDITOR IS THE PERSON WHO COMES IN AFTER THE WAR IS LOST TO BAYONET THE WOUNDED….BLECH!!! • BUT NOT AS BAD AS LAWYER – THE PERSON WHO GOES IN AFTER THE AUDITOR TO STRIP THE BODIES… • HOW TO AVOID VIEWING YOUR AUDITOR AS THAT TYPE OF AUDITOR? • IF POSSIBLE, ENGAGE EARLY (THAT WAS SELFISH!!!) • POST-BUSY SEASON “AFTER ACTION REVIEWS” • REVIEWS FOCUS ON: • WHAT WENT WELL • WHAT DID NOT • HOW TO FIX

PART IV – ENGAGEMENT PLANNING AND EFFICIENCY TECHNIQUES – CONT’D • INTERIM WORK… • CONTROLS UPDATE • COMPLIANCE TESTING • IF THERE ARE PROBLEMS (WITH EITHER) ADDRESS BEFORE YEAR END • WILL NOT ELIMINATE A FINDING, BUT FINDING WILL NOT HAVE AN AUDITOR RECOMMENDATION, BECAUSE ACTION HAS ALREADY BEEN TAKEN • CLIENT TASKS: • REVIEW ASSET CAPITALIZATION POLICY • RE-READ PRIOR YEAR FINANCIAL STATEMENTS; CONSIDER CURRENT YEAR ACTIVITIES THAT COULD AFFECT DISCLOSURES (NEW DEBT, FOR EXAMPLE)

PART IV – ENGAGEMENT PLANNING AND EFFICIENCY TECHNIQUES – CONT’D • USE OF ELECTRONIC DATA TRANSFER AND DATA STORAGE • THINK GREEN – IF THE DOCUMENT CAN BE PROVIDED AS AN ATTACHMENT TO AN EMAIL OR CAN BE ACCESSED FROM REMOTE WITHOUT HARMING INTERNAL SECURITY DO IT • BUT….AUDITING BY EMAIL VERSUS “ON SITE” • OUR FOCUS – TO THE MAXIMUM EXTENT POSSIBLE FIELD WORK AT CLIENTS – VASTLY MORE EFFICIENT • I IN PART EVALUATE OUR ENGAGEMENT EFFICIENCY BY THE # OF EMAILS – THE FEWER THE EMAILS, THE BETTER WE DO

PART IV – ENGAGEMENT PLANNING AND EFFICIENCY TECHNIQUES – CONT’D • ACTIONS THAT CAN REALLY FOUL UP AN ENGAGEMENT: • OWNER CHANGES PROPERTY MANAGEMENT • CONSIDERATION OF GOING CONCERN – ADDRESS IT ASAP • TARDY COMMUNICATION OF FINDINGS OF NONCOMPLIANCE – IF YOU KNOW IT, COMMUNICATE IT AND DEAL WITH IT • OWNERS NOT SHARING “ENTITY’ TRANSACTIONS WITH PROPERTY MANAGEMENT ACCOUNTING (OR JUST “NOT SHARING”) • IMPAIRMENT CONSIDERATION – ESPECIALLY WHEN A CORPORATE INVESTOR IS INVOLVED – DISCUSS EARLY (NOT ON FEBRUARY 28TH)

PART V - TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • DEVELOPMENT ASSUMPTIONS THAT CAUSE HEARTBURN – LOAN FEES • DEVELOPERS TYPICALLY ASSUME THAT 100% OF CONSTRUCTION LOAN FEES (AND RELATED CLOSING COSTS AND LEGAL FEES) ARE 100% CAPITALIZABLE INTO DEPRECIABLE BASIS (EVEN WHEN THE CONSTRUCTION LOAN CONVERTS TO PERMANENT) • LENDERS WILL TYPICALLY CHARGE A LOAN FEE THAT HAS TWO COMPONENTS – AN ORIGINATION FEE FOR THE CONSTRUCTION LOAN AND A FEE FOR THE PERMANENT LOAN

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • DEVELOPMENT ASSUMPTIONS THAT CAUSE HEARTBURN – LOAN FEES (CONT’D) • THE AMOUNT OF CONSTRUCTION LENDER-RELATED COSTS THAT SHOULD BE CAPITALIZED INTO DEPRECIABLE BASIS ARE: • THE CONSTRUCTION LOAN FEE • AN ALLOCABLE PORTION OF THE CLOSING COSTS (CONSIDER USING THE RATIO CONSTRUCTION LOAN FEE/PERMANENT LOAN FEE) • AN ALLOCABLE PORTION OF LENDER LEGAL (SEE PRIOR RATIO)

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • BORROWER LEGAL COSTS AND COST ALLOCATION • THIS COST AREA, LIKE INTEREST, IS ONE WHERE WE SEE THE MOST “OVER-ESTIMATE” OF COSTS INTO ELIGIBLE BASIS • REMEMBER – BORROWER COUNSEL PROVIDES NUMEROUS SERVICES: REVIEWING BUSINESS AGREEMENTS (PARTNERSHIP OR OPERATING AGREEMENT), CONSULTATION REGARDING THE PROPOSED INVESTOR AND REVIEW OF INVESTOR DOCUMENTS, REVIEW OF LOAN AGREEMENTS, REVIEW OF CONSTRUCTION AND OTHER CONTRACTS, ETC. • TYPICAL ALLOCATION OF BORROWER COUNSEL COSTS INTO DEPRECIABLE BASIS IS OFTEN 40% OR LESS (COMBINATION OF VALUE OF TIME RELATED TO REVIEW OF CONTRACTS AND CONSTRUCTION LOAN AGREEMENTS)

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • ALLOCATION OF DEVELOPER FEE • A COMMON ADJUSTMENT MADE BY INVESTORS IN THEIR REVIEW OF COST CERTIFICATIONS INCLUDES THE ALLOCATION OF THIS FEE • IF PROJECT IS ACQ/REHAB, INVESTOR EXPECTS A PORTION OF THE FEE TO BE ALLOCATED TO ACQ (WHICH MEANS THAT A SUB-PORTION WILL BE ALLOCATED TO LAND) • IF DEVELOPER USES AN OUTSIDE CONSULTANT, AND THE FEE AGREEMENT WITH THE OUTSIDE CONSULTANT DISCUSSES SERVICES RELATED TO LOANS AND SYNDICATION, THEN THERE SHOULD BE AN ALLOCATION OF THE “CONSULTANT PORTION” OF THE DEVELOPER FEE TO LOANS AND SYNDICATION

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • ALLOCATION OF CC FEE • SOME SYNDICATORS REQUIRE THE AUDITOR’S CC FEE TO BE TREATED AS A COST SIMILAR TO APPLICATION FEES TO THE STATE (ERGO, NON-BASIS) – EXAMPLE PNC

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • DEVELOPER ASSUMPTION – BASIS IS EVERYTHING SO CAPITALIZE EVERYTHING YOU CAN REGARDLESS OF THE IMPACT ON TAXABLE INCOME OR LOSS IN THE YEAR THE PROJECT IS PLACED INTO SERVICE • IF THE INVESTOR HAS ASSUMED A RATE OF RETURN BASED ON (A) THE VALUE OF SECTION 42 CREDITS AND THE VALUE OF TAX LOSSES, THIS ASSUMPTION COULD BE A PROBLEM • WHAT WE’VE SEEN – DEVELOPERS FOR ACQ/REHAB DEALS (IN PARTICULAR, BUT NOT LIMITED THERETO) CREATING TAXABLE INCOME IN PIS YEAR, AND BEING PENALIZED BY INVESTOR IN THE DETERMINATION OF THE FINAL EQUITY INSTALLMENT

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • DEAL ECONOMICS – UNDERSTANDING THE CONCEPT OF ISSUES RELATED TO “CAPITAL BURN RATE” • CAPITAL IS THE AMOUNT OF INVESTMENT BY YOUR LIMITED PARTNER OR INVESTOR MEMBER (“INVESTOR”) • BURN RATE IS THE REDUCTION IN THE INVESTOR CAPITAL • ISSUE #1 – SPECIAL LOSS ALLOCATION • PARTNERSHIP HAS A NEW CONSTRUCTION PROJECT THAT DOES NOT RENT UP IN A TIMELY MANNER; TAX LOSSES IN 1ST THRU 3RD YEAR FAR EXCEED INVESTOR ESTIMATES • LOSSES ARE FUNDED VIA ADVANCES FROM THE GENERAL PARTNER (“GP”) OR MANAGING MEMBER (“MM”) • INVESTOR REPRESENTATIVE WILL OFTEN EXPECT A SPECIAL LOSS ALLOCATION TO THE EXTENT OF THE ADVANCES

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • DEAL ECONOMICS – UNDERSTANDING THE CONCEPT OF ISSUES RELATED TO “CAPITAL BURN RATE” (CONT’D) • IMPACT ON INCOME STATEMENT AND BALANCE SHEET OF GP OR MM – INCOME STATEMENT WILL REFLECT “LOSS IN EQUITY IN PARTNERSHIP”; BALANCE SHEET WILL REFLECT REDUCTION IN INVESTMENT IN PARTNERSHIP • ISSUE #2 – BURN RATE EXCEEDS INVESTOR EXPECTATIONS (SIMILAR TO #1, BUT NO SPECIAL ALLOCATION) • INVESTORS DO NOT WANT THEIR CAPITAL ACCOUNTS TO “GO NEGATIVE” • TO AVOID DOING SO, AND ESPECIALLY WHERE THE PARTNERSHIP HAS DEBT PAYABLE TO THE GP, INVESTORS ARE REQUIRING THE GP TO “FORGIVE” A PORTION OF THE DEBT, CREATING INCOME TO PARTNERSHIP (AND THEREFORE BASIS) – BUT GP HAS TO “WRITE-OFF” A COMPARABLE PORTION OF NOTES RECEIVABLE, THEREBY NEGATIVELY AFFECTING IS AND BS

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • YEAR FIFTEEN AND BUYING OUT THE INVESTOR • KNOWN: • BUSINESS AGREEMENTS HAVE PROVISION FOR INVESTOR “TAKE-OUT” AT END OF THE FIFTEEN YEAR COMPLIANCE PERIOD • ISSUE – WHAT IS THE “BUY-OUT PRICE”? • TYPICAL APPROACH – ASK LEGAL COUNSEL AND/OR OUTSIDE TAX CONSULTANT TO “WORK THROUGH THE AGREEMENT AND COME UP WITH AN ESTIMATE” • INHERENT PROBLEM WITH THAT APPROACH – THE INVESTOR IS TYPICALLY A “FUND”, WHICH MEANS THERE ARE NUMEROUS PROJECTS REPORTING INTO THE FUND

TAX ACCOUNTING ISSUES ON WHICH YOU CAN STUB YOUR TOE • YEAR FIFTEEN AND BUYING OUT THE INVESTOR (CONT’D) • UNKNOWN – WHETHER, OR NOT, THE INVESTOR WILL EVALUATE THE BUY-OUT BASED ON THE FACTS OF THE SPECIFIC PROPERTY OR THE PERFORMANCE OF THE FUND AS A WHOLE • RECOMMENDATION – INQUIRE OF INVESTOR A COUPLE OF YEARS PRIOR TO YEAR FIFTEEN; ASK FOR THEIR ANALYSIS OF THE ANTICIPATED BUY-OUT • THEN, IF NECESSARY, HIRE OUTSIDE PROFESSIONALS

THOUGHTS ON ENGAGEMENT EFFICIENCIES • ASSUMPTION – IN THIS ECONOMIC ENVIRONMENT DEVELOPERS WANT TO “CONTROL COSTS”, INCLUDING OUTSIDE AUDIT SERVICE COSTS • 10% CARRYOVER TESTS – REMINDER THAT THIS REPORT HAS A SINGLE PURPOSE – TO DEMONSTRATE THAT THE RECIPIENT OF THE PRELIMINARY ALLOCATION HAS EXPENDED SUFFICIENT COSTS TO JUSTIFY A CARRYOVER ALLOCATION – THAT’S IT • IF ACQ/REHAB, THEN THE COST OF THE PROPERTY IS TYPICALLY 50% OR MORE OF THE “REASONABLY EXPECTED BASIS” (WHICH IS ELIGIBLE BASIS PLUS LAND) • RECOMMENDATION FOR 10% CARRYOVER FOR ACQ/REHAB – USE THE PURCHASE AGREEMENT AND CLOSING STATEMENT TO SUPPORT COSTS – DON’T WORRY ABOUT OTHER COSTS INCURRED

THOUGHTS ON ENGAGEMENT EFFICIENCIES • COST CERTIFICATION TO SUPPORT APPLICATION FOR 8609S • AGAIN, THIS IS A “ONE-TIME” REPORT, AND AT A SPECIFIC POINT IN TIME • THE “POINT IN TIME” IS SELECTED BY THE DEVELOPER, AND IS TYPICALLY AS OF THE MONTH “OR QUARTER” DURING WHICH THE PROJECT IS SUBSTANTIALLY COMPLETED • THE COST CERTIFICATION IS ON THE INCOME TAX BASIS OF ACCOUNTING, SO IT OFTEN DOES NOT DIRECTLY SUPPORT THE GAAP FINANCIAL STATEMENTS

THOUGHTS ON ENGAGEMENT EFFICIENCIES • COST CERTIFICATION (CONT’D) • WHERE INEFFICIENCIES OCCUR: • SEE NUMEROUS DISCUSSION POINTS UNDER TAX ACCOUNTING ISSUES – IDENTIFY THESE ISSUES “UP FRONT” – BE PREPARED TO PROVIDE TO AUDITOR ALLOCATION SCHEDULE OF LEGAL FEES (CONFIRMED BY OUTSIDE COUNSEL), AS WELL AS ALLOCATION SCHEDULES OF DEVELOPER FEES AND LOAN FEES • IF YOU HAVE SUFFICIENT BASIS TO SUPPORT PRELIMINARY LIHTC CREDIT ALLOCATION, DO NOT TRY TO “CAPTURE” ALL COSTS – REMEMBER, THE LIHTC CC HAS ONE PURPOSE – TO SUPPORT THE APPLICATION FOR 8609S

THOUGHTS ON ENGAGEMENT EFFICIENCIES • COST CERTIFICATIONS AND INEFFICIENCES • MIXED-USE PROJECTS • CURRENT OREGON REPORTING TEMPLATE REQUIRES THE DISCRETE PRESENTATION OF COMMERCIAL VERSUS RESIDENTIAL COSTS • TYPICAL ISSUE – DEVELOPER ACCOUNTING CAPTURES “TOTAL” COSTS INCURRED WITHOUT DIFFERENTIATION BETWEEN COMMERCIAL AND RESIDENTIAL • RECOMMENDATION – HAVE GC OR ARCHITECT IDENTIFY COSTS PROPERLY ALLOCABLE TO COMMERCIAL – TAX ACCOUNTING PROVIDES NUMEROUS OPTIONS BUT “SPECIFIC IDENTIFICATION” IS RECOMMENDED

ACCOUNTING AND AUDITING UPDATE FOR 2010 Joint AHMA/CARH CONFERENCE