Our work on behalf of developers typically encompasses all aspects of the development process including the acquisition of land or an existing building, the negotiation of construction contracts and architect agreements, the negotiation, documentation and closing of conventional debt financing, the documentation and closing of various “soft” loans from government agencies, the negotiation, documentation and closing of an equity investor’s investment in Federal low income housing tax credits and/or Federal historic tax credits, the handling of all title and survey matters with respect to the property, the documentation of any applicable tax abatements, exemptions or payments in lieu of taxes for which the project may be eligible, the interaction with various government agencies including the state housing finance agency and HUD whose consent or approval will be required for the closing of the financing for the project. These transactions will often involve some combination of the following types of subsidies:
Many of our clients’ projects involve the development of affordable rental housing utilizing Federal low income housing tax credits (“LIHTCs”). The LIHTCs are either the 9% credits allocated by the state housing finance agency or 4% tax credits that can be available “as of right” if the project is financed with volume cap multifamily housing tax-exempt bonds. Our work on these transactions often spans a period of over one year from the inception of the project through the gaining of site control, the submission of applications for funding and ultimately the closing of the financing for the project.
We often represent developers of projects that are eligible for Federal, and sometimes also state, historic tax credits (“HTCs”) either as a stand alone project or together with other tax credits such as LIHTCs or new markets tax credits (“NMTCs”). We have significant experience in navigating the complexities of the master lease structure that is typically used for stand alone HTC transactions and the requirements of the IRS safe harbor in Revenue Procedure 2014‑12. In these transactions we assists the developers in navigating the competing interests of the Federal historic tax credit investor and the project lenders and work closely with the outside accountants who prepare the projections for the transactions.
We represent developers who own the “qualified active low income community business" in NMTC transactions. Sometimes the NMTC transactions are developed alongside an affordable housing development utilizing LIHTCs, in which case we work with the developer to separate the real estate, using a condominium or air estates regime. In these transactions we assist in the documentation and closing of the source loans to the leverage lender, negotiate the various loan documents from the community development entities (“CDEs”) and deliver tax opinions to the CDEs and the NMTC investor.
Over the years more and more states have adopted state level LIHTCs and HTCs, or more generic credits that can be used to support these types of developments. We have become conversant with the requirements of these programs in a number of states in which our clients do business and, more generally, have developed expertise in the structuring of transactions to utilize these state tax credits in ways that minimize the Federal income tax costs. State tax credits generally can be separated into credits that are allocated to the partners in a partnership and tax credits that are certificated and sold to taxpayers that are not partners in the entity that owns the project. The tax consequence for Federal income tax purposes of these two types of credits are quite different. With respect to certificated state tax credits, it is often desirable to introduce a tax-exempt entity into the structure of the transaction to avoid the recognition of taxable income for Federal income tax purposes from the sale of the state tax credit certificates. We have developed considerable expertise in the structuring of these transactions utilizing tax-exempt entities, under a variety of structures that are utilized in different states.
We represent developers of affordable rental housing projects that include public housing units that receive rental subsidies from public housing authorities under the Section 9 program (“ACC”), the Section 8 program (i.e., project-based vouchers or project-based rental assistance) and under the Rental Assistance Demonstration program (“RAD”). These transactions sometimes also involve the loan of capital funds from the housing authority to the project as a source of soft financing. We have developed expertise in the conversion of ACC subsidies to Section 8 subsidies under the RAD program and the refinancing and re-syndication of existing properties when the operating subsidy is converted.
We have represented both developers and investors utilizing the Opportunity Zone benefits under Section 1400Z of the Internal Revenue Code, enacted in 2017. For investors, the Opportunity Zone provisions offer a tax advantaged way to invest in real estate in certain designated census tracts and for developers, the Opportunity Zone provisions offer the potential of a reduced cost of capital for real estate projects.
All of our clients’ affordable rental housing developments are subject in one form or another to various HUD compliance rules, as the LIHTC program adopted wholesale an obligation to comply with HUD fair housing rules. We advise our clients regularly concerning aspects of housing discrimination including the designation of projects as eligible for elderly residents, the obligation to market projects in a non-discriminatory way and the enforcement of various provisions in tenant leases.
Many affordable rental housing projects benefit from preferential real estate tax treatment, which varies dramatically from state to state. In some states, exemptions and abatements are available based upon the ownership of the project, often requiring the participation of a tax-exempt organization, while in other states a payment in lieu of taxes may be available at a statutory formula price, while in still other states the benefit may be in the form of legislation that affects the assessment of the value of affordable housing properties. We work with our clients in all of the jurisdictions in which they develop properties to determine the availability of property tax relief and negotiate and document the appropriate agreements locking in those benefits.
Many of the affordable rental housing developments that our clients develop utilize volume cap tax-exempt multifamily housing bonds issued by state housing finance agencies or other issuers within the state because the use of such tax-exempt bond financing can make available to the project 4% LIHTCs outside of the more competitive 9% allocation process. We represent our clients as borrower’s counsel in connection with these tax-exempt bond financings and advise them as to (i) issues that arise in connection with the placement of the bonds where ownership by the LIHTC investor can be problematic and (ii) other rules to insure that the issuance of the bonds will be tax-exempt and that a sufficient amount of tax-exempt bond proceeds will be used with respect to the project to insure the availability of the 4% LIHTCs.
Many of our clients developed affordable rental housing projects more than 15 years ago utilizing LIHTCs and the initial 15-year tax credit compliance period has expired. We represent these clients in repurchasing the interests of the LIHTC investors and, in many cases, either the sale of the projects to unrelated parties or the “re-syndication” of the project by selling the property to a new partnership controlled by our client that will engage in a transaction that will generate new LIHTCs with respect to the acquisition costs of the project and new rehabilitation costs that will be incurred. Our attorneys have been involved in these transactions for more than 30 years and that experience provides a basis to understand the issues that will arise in connection with the acquisition or disposition of subsidized projects that were developed many years ago and that continue to be subject to legal requirements under programs that were in effect at the time those projects were first developed.
There are numerous soft loan programs in each state channeling both Federal funds and state funds into redevelopment projects, particularly those involving the development of affordable housing. Some of these programs will operate as soft loans with below-market interest rates and debt service payable only to the extent of available cash flow. Others must be structured as grant programs which raise income tax issues with which we have been involved repeatedly. Some of these programs work best with tax‑exempt sponsors. In each case, we work with our clients to structure these soft loan subsidies in a way that is compatible with the syndication of LIHTCs and the operations of the project.
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