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

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• 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

Twinning

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Overview of Twinning

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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

Overview of Twinning

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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

Risks of Twinning: The Federally Subsidized Taint

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• 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)

Risks of Twinning:

The Federally Subsidized Taint

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(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

Risks of Twinning: The Federally Subsidized Taint

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Central challenge:

• 9% credits are ‘tainted’ by tax-exempt financing
• 4% credits depend on tax-exempt financing

Solution:

• Separate buildings, costs and financing

Structuring Real Estate: Separate “Buildings”

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• 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?

Structuring Financing: Noah’s Ark

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• Create two projects: separate and allocate costs
• Two separate deals, two plans of financing and two of

everything

• Appraisals, budgets, cost certifications, documents...
• Two loans:
• no cross-collateralization [or cross-defaults]
• best with single lender and single investor
• Two contracts (?)
• Separate or just allocate?

Structuring Financing: Timing of Bonds

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TIMING OF BONDS:

• Bonds throughout
• Bonds during construction targeted to 4% building(s)
• Bonds at the end
• 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
• 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

Conjoined Twins: Gov’t Residences A&B

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Fraternal Twins: Creekside I & II

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Checkerboarded: Alice Griffith 3

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Questions?

Dan Rosen Klein Hornig LLP 617.224.0607 drosen@kleinhornig.com