Carryover Allocations and the 10% Test

1. Carryover Allocations and the 10% Test IPED Housing Tax Credits “101”July 24-25, 2008Faith K. Bruins, Esq.

2. Federal Placement in Service Deadlines To meet the exception, the Project must receive a valid carryover allocation agreement and satisfy the “10% Test” in a timely manner.

3. The 10 Requirements for a ValidCarryover Allocation • The credit dollar amount allocated to the building; • The name, address, and taxpayer identification number of the building owner; • The address of the building (or if none exists, a specific description of its location); • The date the building is expected to be placed in service; • The taxpayer’s total reasonably expected basis in the project as of the close of the second calendar year after the allocation year;

4. The 10 Requirements for a ValidCarryover Allocation (cont’d) • The taxpayer’s basis in the project at the close of the calendar year in which the allocation is made and the percentage that this amount bears to the total reasonably expected basis; • The name and address of the state tax credit agency; • The taxpayer identification number of the state tax credit agency; • The date of the carryover allocation; and • The building identification number assigned to the building.

5. Satisfying the 10% Test Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Jun 2007 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 • Federal Rule: 10% of the reasonably expected basis in the project (as of the close of the second calendar year) must be paid or incurred by the later of (i) the end of the calendar year for which the credit allocation is made, or (ii) six (6) months after the date of the carryover. Due Date

6. Satisfying the 10% Test Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Jun 2007 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 Due Date Jan 2008 Feb 2008 Mar 2008 Apr 2008 May 2008 Jun 2008 Jul 2008 Aug 2008 Sep 2008 Oct 2008 Nov 2008 Dec 2008 • Federal Rule: 10% of the reasonably expected basis in the project (as of the close of the second calendar year) must be paid or incurred by the later of (i) the end of the calendar year for which the credit allocation is made, or (ii) six (6) months after the date of the carryover.

7. Satisfying the 10% Test • States may impose stricter standards as long as the terms do not violate the Federal credit rules. • 10% test is a “cliff” test.

8. Defining “Reasonably Expected Basis” For 10% Test Purposes • “Reasonably expected basis” means the adjusted basis of land and depreciable property (whether or not it is included in eligible basis). • Basis attributable to non-residential rental property (e.g., commercial property, site improvements) may be includable in carryover allocation basis even though it is not included in eligible basis. • Costs may be incurred by taxpayer prior to the calendar year of the carryover allocation. • QCT/DDA increases not included in 10% test calculations.

9. Common 10% Test Expenditures • Acquisition cost for land and buildings • Construction costs (e.g., construction materials, permits, etc.) • Development fee • Fees for services (e.g., architect, contractor, engineer) • Construction financing fees and construction period interest

11. EXH. 2 – SOURCES AND USES OF FUNDS YES YES YES YES YES* YES YES YES YES YES YES NO NO NO YES* YES NO NO

12. 10% Test Review Examples of Supporting Documentation and Tax Considerations

13. Acquisition of Land/Buildings Documentation • Recorded deed to entity receiving carryover allocation • Title insurance policy • Settlement statement • Purchase money note/mortgage • Other financing documents (including evidence of at least 10% cash down payment) • Appraisal

14. Construction Costs Documentation • Construction contract • Invoices/draw requests for all costs • Lumber and materials: review storage contracts, evidence of insurance, down payment and promissory note for any unpaid balance

15. Developer Fees Documentation • Development Agreement • Review the written development agreement in place on 10% test deadline date • Scope of work is limited to eligible services • Agreement must include benchmarks for earning fee • Confirm that benchmarks are satisfied to properly include development fee in 10% test calculation • Amount of fee in 10% test must be reasonable in light of the facts • Services must have been performed, and there must be acknowledgment of services rendered

16. Fees for Services Documentation • Written agreements (such as architect/engineering contracts) describing services and fees • Invoices and work product for services rendered (such as environmental reports and market studies) • Statements of legal/accounting costs must be related to the actual acquisition/construction of the Project (not for syndication, partnership formation or permanent loans)

17. Construction Financing Feesand Construction Period Interest Documentation • Evidence of obligation to pay, such as loan agreement or promissory note and interest statements • Note: Issues with construction/permanent loans

18. Additional Consideration: Incurring the Costs • Entity receiving the carryover allocation must be the entity that incurred the costs. • If the entity incurs an expense without actually paying the cost, the entity must be an accrual basis taxpayer (the election to be on the accrual basis is made on the entity’s first tax return). • If the entity that incurred a cost is not the entity which has received tax credit allocation (e.g., the GP or developer), the parties should execute a Reimbursement Agreement before the 10% test deadline obligating the entity receiving the allocation to reimburse the entity that incurred the cost.

19. Thank You