1. Name the specific proposed housing project to be operated by the limited partnership (LP) or limited liability company (LLC). Explain how it will accomplish your charitable purposes by providing low-income housing, consistent with the safe harbor or the facts and circumstances test in Revenue Procedure 96-32, 1996-1, 717.
2. Provide copies of your final LP agreement or LLC governing document. If you can't provide copies, send a written statement that your organizational documents will require the organization to advance charitable purposes as follows:
- 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).
- In the event of a conflict with your obligations (as general partner or managing member) to operate the LP or LLC in a manner consistent with a 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. You can find a sample in the Form 1023 Instructions.
4. Provide written representations of the factors below to show how the organization limits, or plans to limit, financial exposure if a housing project doesn't go 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 can't provide the precise representation for a particular factor, describe how you will satisfy that factor.
- Prior to entering into a formative document, you will 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.
- You'll 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.
- 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 when the project achieves 95% occupancy and the revenues received from the normal operation of the project equal all accumulated operational costs of the project for 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.
- 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.
- If the formative documents require you to make a payment to the investors if the LLP or LLC receives less in tax credits than the amount expected at the time the agreement is signed (other than any reductions to the investor's capital contributions required under the agreement), 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, and/or (iii) ongoing shortfalls or credit recapture, limit payment under each separate adjuster provision to an amount that doesn't exceed the total 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 will take priority over any other distribution of residual assets to partners upon sale or refinancing of the property.
- 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 will review any purchase of the project to ensure that the purchase price is reasonable and consistent with your status as an organization described in IRC Section 501(c)(3) or (c)(4).
- 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 Low-Income Housing Tax Credit (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.
- 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 don't involve day-to-day operations, including, but not limited to: (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, or (ix) approval of annual budget, then such consent will 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.
- Any right of the limited partners or other members 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 will also require that you be provided with written notice of any proposed removal, which states the cause for the action, and a reasonable period to cure the enumerated deficiencies.