Deferred Development Fees
and
Nonqualified, Nonrecourse
Financing
Michael D. Saad
Squire Sanders (US) LLP
41 South High Street
Columbus, OH 43215
614.365.2735
Michael.Saad@squiresanders.com
• General Rule: For “At Risk” taxpayers, the “credit base”
(Qualified Rehabilitation Expenditures) and thus Historic
Tax Credit are reduced by nonqualified nonrecourse
financing (determined at the end of the tax year of
placement in service) attributable to the credit base.
• At Risk Taxpayers are taxpayers subject to the tax credit
“at risk” rules of IRC Section 49(a)
• At Risk Taxpayers generally include individuals and
closely held corporations (generally, a corporation whose
stock is owned, directly or indirectly, by 5 or fewer
individuals)
• Nonqualified nonrecourse financing is any nonrecourse
financing that is not “qualified commercial financing,”
which is any property financing if:
– the property was acquired from an unrelated person;
– the amount of the nonrecourse financing with respect to the
property does not exceed 80% of the qualified rehabilitation
expenditures on the building;
– such financing is borrowed from or guaranteed by a
governmental agency, or from a “qualified person”; and
– such financing is not convertible debt
– A qualified person is any person regularly and actively engaged
in lending money and which is not–
•• related to the taxpayer,
•• the seller of the property (or related to the seller), or
•• a person that receives a fee with respect to the investment in
the property (or related to such person).
– For partnerships and S corporations, the determination is made
at the partnership or shareholder level
• The term “nonrecourse financing” also includes:
– any amount with respect to which the taxpayer is protected
against loss through guarantees, stop-loss agreements, or other
similar arrangements; and
– except to the extent provided in regulations, any amount
borrowed from a person who has an interest (other than as a
creditor) in the activity in which the property is used or from a
related person to a person (other than the taxpayer) having such
an interest.
• Thus, any recourse obligation would be nonrecourse if
either of the above two criteria apply to the obligation.
• If, at the close of a taxable year following PIS, there is a
net decrease in the amount of nonqualified nonrecourse
financing with respect to such property, such net
decrease is an increase in the credit base for such
property.
• Why are these rules relevant?
– Total nonrecourse financing (whether qualified commercial
financing or not) cannot finance more than 80% of the qualified
rehabilitation expenditures (“QRE”)
•• For this determination, nonrecourse financing may be
allocated, or a prorata basis, between QRE and other property
costs
– The IRS considers deferred development fees as “financing”
•• Thus, when testing for the 80% compliance, a deferred
development fee should be included as nonrecourse financing
– Investors in HTC property generally are not “at risk” investors
and deferred development fees will not reduce their HTC share
except in lease pass-through structures
– In lease pass-through structures, the lessor can “pass-thru” only
the amount of HTC that it could claim
•• Development fees, even if recourse to lessor, would be
considered by IRS as nonqualified nonrecourse financing if the
developer is a related person to a partner of the lessor, which it
typically is.
– As the deferred fee is paid, the “credit base’ is increased and the
HTC related to the portion paid can be claimed.