Twinning 9% Credits and 4% Credits Dan Rosen Klein Hornig LLP 2019 - PowerPoint PPT Presentation

“Twinning” 9% Credits and 4% Credits Dan Rosen Klein Hornig LLP 2019 NH&RA Annual Meeting Pre-Conference Symposium February 27, 2019

Twinning 9% Credits and 4% Credits Outline 1. Overview • Use 4% Credits to Monetize 9% Credit Excess Basis 2. Technical Challenges and Rules: • Tainting 3. Structuring Real Estate (Condos, Etc.) • Financing and Costs (Separate Agreements) • Bond Financing (How and When) • 4. Sample Deals 2

Twinning 3

Overview of Twinning Two Types of LIHTC: • 9% credits : competitively awarded by allocating agency from state ceiling • 4% credits: credits available without competitive award from allocating agency, to the extent financed with tax-exempt bonds subject to volume cap 4

Overview of Twinning In a “Twinned” or Hybrid Transaction: • Limited 9% credit allocation often leads to ‘excess’ basis not generating credits – especially for larger projects • Monetize excess basis with 4% credits • Claim both 9% and 4% credits for a single project 5

Risks of Twinning: The Federally Subsidized Taint • New building can claim 9% credits only if it is not federally subsidized – federally subsidized “if the proceeds of a tax-exempt bond are or were used (directly or indirectly) with respect to the building or the operation thereof. . .” • New building can claim 4% credits only to the extent it is financed with tax-exempt bonds (typically more than 50% bond-financed) 6

Risks of Twinning: The Federally Subsidized Taint (Limited) IRS Guidance: • Tax-exempt bonds in some buildings will taint 9% credits in other buildings: no cross-collateralization • Cannot claim 4% for bond-financed acquisition costs and also claim 9% for rehabilitation if single plan of finance 7

Risks of Twinning: The Federally Subsidized Taint Central challenge: • 9% credits are ‘tainted’ by tax-exempt financing • 4% credits depend on tax-exempt financing Solution: • Separate buildings, costs and financing 8

Structuring Real Estate: Separate “Buildings” • Relatively easy with separate buildings • What about single structure or multiple buildings (structures) including a ‘shared’ 9% and 4% building (structure)? – IRS recognizes condominium unit as a separate ‘building’ for tax credit purposes – Therefore use condominium, ground lease or air rights parcel – New construction: when can you create the ‘building’ under local law? 9

Structuring Financing: Noah’s Ark • Create two projects: separate and allocate costs • Two separate deals, two plans of financing and two of everything o Appraisals, budgets, cost certifications, documents... • Two loans: o no cross-collateralization [or cross-defaults] o best with single lender and single investor • Two contracts (?) o Separate or just allocate? 10

Structuring Financing: Timing of Bonds TIMING OF BONDS: • Bonds throughout o Bonds during construction targeted to 4% building(s) • Bonds at the end o No bonds during construction, but used as takeout for 4% building(s) and remain through end of first year of credit period • Bonds at the beginning o Bonds throughout construction for all buildings but partially redeemed prior to 9% building(s) placement in service to avoid taint, remain in place for 4% building(s) at least until placed in service 11

Conjoined Twins: Gov’t Residences A&B 12

Fraternal Twins: Creekside I & II 13

Checkerboarded: Alice Griffith 3 14

Questions? Dan Rosen Klein Hornig LLP 617.224.0607 drosen@kleinhornig.com