Is your Low Income Housing Tax Credit (LIHTC) project approaching year 15 of its compliance period? Most year 15 planning starts before the project is in service, during the structuring and drafting of project agreements. However, a lot can happen in 15 years and partnerships should assess exit strategies that are available for them now and throughout the life of the project. Checking the original terms of the partnership agreements and closing documents is a good place to start as the terms and conditions may affect negotiations. For example, option agreements, regulatory extended use agreements, or lender agreements may restrict disposition or partnership options. Section 47(i)(7)(A) defines the right of first refusal provisions each LIHTC property must follow.
There are several exit strategies available to partnerships, each with its own tax consequence. One option is to sell the property at the end of the compliance period. Any gain on the sale will have tax consequences and sale proceeds must follow the waterfall in the partnership agreements, which specifies the priority of the distribution of cash and other assets to partners. Another option available is sale of the partnership interest, as opposed to the property. Using this strategy, the LIHTC partnership still exists after the sale, but other tax considerations for technical termination and basis issues must be examined. Additional options are to complete further rehabilitation through re-syndication, donate the property to a charitable organization or donate the partnership interest to a charity, or explore options to become a market-rate project through a qualified contract offering. Partnerships will also want to be aware of recapture rules for dispositions before the end of the compliance period.
Understanding the original intent of the disposition plan, keeping good tax records, careful monitoring of investor capital accounts, and estimating the tax consequences of the exit prior to year 15 is vital. Initiate early conversations with your investors to discuss the options. You’ll need a team with knowledge and experience to help you with the numerous options available and what exit strategy might be right for you. For more information contact your MarksNelson professional at 816-743-7700.