CRITICAL TAX ISSUES IN
TODAY’S HOUSING TAX CREDIT
TRANSACTIONS: DEFERRED
DEVELOPMENT FEES
San Francisco, California
July 24-25, 2008
Molly R. Bryson
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DEVELOPMENT FEES
• A fee to the Developer for developing and constructing/rehabilitating
the property
• Fee earned for services rendered in connection with
construction/rehabilitation
– Earned in full by construction/rehabilitation completion
– May be paid after completion
• Development services described in a Development Agreement
between the property owner and the Developer
• Typically included in the property’s eligible basis (ie. Development
Fee will generate tax credits)
• Development Fee often paid to an affiliate of the general
partner/sponsor
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DETERMINING THE APPROPRIATE
DEVELOPMENT FEE FOR A PROPERTY
• Total Development Fee must be reasonable for services being
performed
• Amount of fee often restricted by state qualified allocation plans
• Development Fee is included in eligible basis to the extent the fee is
earned in connection with tax credit eligible activities
– Eligible activities include construction/rehabilitation activities
(reviewing plans, applying for building permits, monitoring
construction)
– Ineligible activities include lease-up/marketing activities,
obtaining permanent financing, acquiring land and obtaining tax
credits
• Investor/IRS scrutiny
3
HOW IS A DEVELOPMENT FEE PAID?
• From development sources (ie. equity and loan proceeds)
– Timing of payment (benchmarks)
– Lenders/investors will closely monitor any portion paid prior to
completion/stabilization
• From operations (cash flow available after payment of expenses)
– When development cost uses exceed development sources,
some or all of the Development Fee is deferred for later payment
– Final amount of any Deferred Development Fee is subject to
scrutiny
• Generally, the Developer is a cash basis taxpayer, so it takes the
Development Fee into income as it is paid
4
WILL A DEFERRED DEVELOPMENT FEE
REDUCE ELIGIBLE BASIS?
• The entire Development Fee is generally included in eligible basis
even if its payment is deferred
• The Deferred Development Fee can bear interest
• There must be an unconditional obligation to pay the Deferred
Development Fee at some reasonable point
• The financial projections should demonstrate that the Deferred
Development Fee will be paid
• 50% Bond Test caution
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TREATMENT OF UNPAID DEVELOPMENT FEE
ON ITS REQUIRED PAYMENT DATE
• Investors will require that any Deferred Development Fee be
unconditionally due and payable at some specified date
• Maturity date varies with facts/circumstances (usually 10-15 years)
• Typical payment method: the general partner (typically an affiliate of
the Developer) contributes capital to the Partnership and the
Partnership applies the funds to pay the unpaid balance of the
Deferred Development Fee
• A paper transaction, but it generates taxable income to the
Developer and is treated as a capital contribution by the general
partner
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DEFERRED DEVELOPMENT FEE MAY CAUSE
A REALLOCATION OF LOSSES/CREDITS
•
Once the capital account of the limited partner hits zero, losses
and credits are allocated based on the lowest priority debt, which is
usually the Deferred Development Fee
•
If the Development Fee obligation is recourse or the Developer is
related to a general partner (80% test) losses and credits
attributable to it will have to be allocated to the general partner
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STRUCTURING DEFERRED DEVELOPMENT
FEES TO AVOID REALLOCATION OF
LOSSES/CREDITS
•
Refinance the Development Fee obligation with third party nonrecourse debt
•
If the Developer and the general partner are affiliates, the general
partner can transfer 21% of its interest to a third party. In doing so,
the Developer is no longer related to the general partner for
purposes of this test
•
If the Development Fee obligation is non-recourse, the Developer
can assign the right to receive any unpaid Development Fee to an
unrelated person
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RESTRUCTURING DEFERRED DEVELOPMENT
FEES PRIOR TO PAYMENT
•
If the Development Fee was reasonably likely to be paid at the end
of the first year of the credit period, a renegotiation of the fee in a
later year should not impact eligible basis
•
Restructuring the terms of a Deferred Development Fee may
cause cancellation of indebtedness income if it impacts the interest
rate, maturity date, collateral, or guarantee
11084960
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