Applications for exemption and miscellaneous determination requests are assigned to Exempt Organizations specialists for review. If additional information is necessary to make a determination, a specialist will contact the organization for the information. Here’s a list of questions that might be asked on this topic.
1. Identify the specific proposed housing project to be operated by the limited partnership (LP) or limited liability company (LLC) and explain how it will accomplish your charitable purposes, as an organization that provides low-income housing, consistent with the safe harbor or the facts and circumstances test set forth in Rev. Proc. 96-32, 1996-1 C.B. 717.
2. You are not required to provide a final LP agreement or LLC governing document. However, in its absence, provide a written representation that your organizational documents will require that charitable purposes be advanced as follows:
a. The LP or LLC will operate housing that it owns in a manner that furthers charitable purposes by providing decent, safe, sanitary and affordable housing for low income persons and families (including the elderly or physically handicapped, where appropriate).
b. In the event of a conflict between the obligations of you (in your capacity as general partner or managing member) to operate the LP or LLC in a manner consistent with such charitable purpose and any duty to maximize profits for the limited partners or other members, the charitable purposes contained in the LP agreement or the LLC governing documents will prevail.
3. Attach your adopted conflict of interest policy. The sample conflict of interest contained in the Instructions for Form 1023, or a similar conflict of interest policy, may be adopted.
4. Provide written representations with respect to the following factors, all of which limit your financial exposure in the event the housing project does not go forward as planned. Some representations relate to terms and conditions that will be contained in the final organizational documents. Other representations relate to actions that you have performed, are performing, or will perform. If you cannot provide the precise representation with respect to a particular factor, describe how you will satisfy that factor.
a. Prior to entering into a formative document, you shall review an independent Phase I environmental report on the proposed project and exercise due diligence to minimize any risk before entering into any agreements for any environmental indemnification.
b. You will require the LP or LLC to enter into a fixed price construction contract with a contractor that is bonded or that provides a performance letter of credit or adequate personal guarantee.
c. To the extent the agreement requires the general partner to provide an operating deficit guarantee, the agreement must limit the general partner’s liability in one or more of the following ways:
- Limit the guarantee to not more than five years from the date the project first achieves break-even operations. Prior to entering into the formative documents, you will obtain a market study or undertake other due diligence to verify that break-even operations for the project are expected within a reasonable period following completion of construction.
Note: “Break-even operations” means the date upon which the project achieves 95 percent occupancy and the revenues received from the normal operation of the project equal all accumulated operational costs of the project for a period of three consecutive months after completion of construction computed on a cash basis and in accordance with the project and loan documents.
- Limit the guarantee to six months of operating expenses (including debt service). An operating debt reserve may be established based on projected operating expenses.
d. If the formative documents require you to make a payment to the investors in the event of a reduction in the amount of tax credits received by the LP or LLC (other than any reductions to the investor’s capital contributions required under the agreement) from the amount expected at the time the agreement is signed, the agreement must limit the payments in one or more of the following ways:
- Where the formative documents include separate tax credit adjuster provisions due to (i) a permanent reduction in tax credits, (ii) a timing difference in tax credits where the projected tax credits for the first year must be delayed and taken in a later year(s), and/or (iii) ongoing shortfalls or credit recapture, limit payment under each separate adjuster provision to an amount that does not exceed the aggregate amount of developer and other fees (both payable and deferred) that you (or any affiliate) is entitled to receive in connection with the project.
- Provide that payments by you will be treated as a capital contribution to the entity or as a loan, which shall take priority over any other distribution of residual assets to partners upon sale or refinancing of the property.
e. You must secure a right of first refusal to acquire the project at the end of the low income housing tax credit compliance period. Your board of directors shall review any purchase of the project to ensure that the purchase price is reasonable and consistent with your status as an organization described in Internal Revenue Code Section 501(c)(3) or (c)(4).
f. To the extent the formative documents require that the general partner or managing member repurchase the investors’ interest in the LP or LLC in the event of a failure to meet certain fundamental requirements relating to the viability of the project, such as failure to qualify for the LIHTC in whole or substantial part, failure to obtain permanent financing, and/or commencement of foreclosure proceedings on the construction loan, the repurchase price may not exceed the amount of capital contributions.
g. If your organizational documents provide that you must obtain the consent of the limited partners or the investor members with respect to certain matters that do not involve day to day operations, including, but not limited to, the following: (i) sale or refinancing of the LIHTC project; (ii) admission of a new partner or member; (iii) acquisition of additional property; (iv) transfer of your interest in the LP or LLC; (v) borrowing substantial additional funds; (vi) entering into contracts with affiliated entities; (vii) amendment of the LP agreement or operating agreement; (viii) change of accountant or property manager; and/or (ix) approval of annual budget, then such consent shall not be unreasonably withheld. Consent may be withheld if one or more of the above actions would likely be inconsistent with preserving the housing as a low-income housing project.
h. Any right of the limited partner(s) or other member(s) to remove you as general partner should only be for cause as set forth in the agreement or governing documents. In this circumstance, the agreement shall also require that you be provided with written notice of any proposed removal, which states the cause for such action, and a reasonable period to cure the enumerated deficiencies.
See the complete list of Applying for Exemption/Miscellaneous Determination Sample Questions by topic.