How much longer can you afford to wait?
Housing & Tax Consultants, LLC provides an analysis service to help you determine which strategies or ideas will work best for you. We look at all aspects of the project including the following:
- Age of project
- Status of restrictive use provisions
- Size of negative capital account
- Which accounting program is in use-either DIAS or PASS
- Objectives of the Owners, Developers, or Managers
- Amount of rental assistance (or lack thereof)
- The financial condition of the project
- The physical condition of the project
Based on your project’s circumstances and those of the owners, we can help you determine which strategies are most appropriate for your project.
GP Brokerage Services
In general, the value of a general partnership (GP) interest is equal to multiple of the value of the management contract. This is typically worth about two times the annual management fees less any deductions for the condition of the property. Although in the past we have seen prices topping three times management fees, the norm is between 1.5 – 2 times the annual management fees.
Housing & Tax Consultants, LLC has consulted in both the purchase and sale of GP interests. We have been successful in negotiating a fair price for all involved. Regardless of whether you are a buyer or seller, our Project Analysis Service can give you a good target value.
Special Allocation & Bargain Sale
Many projects with large depreciation deductions create very large negative capital accounts as a consequence. Once the projects start generating phantom income and the owners experience the tax consequences, and the limited partners start to show interest in disposing of their partnership interests. The tax ramifications of selling or gifting the limited partnership interests make these transactions prohibitive.
Housing & Tax Consultants, LLC has a Special Allocation Strategy to help reduce the annual burden of phantom income. Under this strategy, the partnership would admit a qualified charity as an additional non-equity limited partner. Then using the special allocation rules under Section 704 of the Internal Revenue Code (IRC), the partnership would allocate 95% of the taxable income to the charity. Distributable cash flow (return to owner) is allocated in the same manner.
A qualified charity needs to be a public, 501(c) 3, whose mission is related to low-income housing. Early on, we attempted to find charities that would participate in this program, but due to issues with unrelated business taxable income (UBTI), they all backed out. Therefore, our founders assisted in the formation of DLH Low-Income Housing, Inc. (DLH), whose sole mission is the preservation of affordable housing. This charity participates as an additional non-equity limited partner.
A bargain sale is the technical term used for a gift of a mortgaged property to a non-profit organization. This is considered by the IRS to be a part sale – part gift transaction. The sale part is equal to the outstanding obligations less the prorated remaining basis. The gift portion is equal to the appraised value minus the outstanding obligations.
Under this approach, the owner(s) would get an appraisal of the project and then gift their interests to a qualified non-profit or 501(c) 3. Any remaining tax basis in the property would be prorated between the sale and gift portions.
This strategy is best used on projects with low negative capital accounts and where the mortgage balances are lower than on a standard project. Most of these will have used DIAS accounting, had full rental assistance or project based subsidies, or have a HAP contract along with a RHS subsidized loan. The objective of this strategy is to use the tax deduction from the gift to charity to offset the recapture and capital gains tax in order to create a net deduction.
Housing & Tax Consultants, LLC has an arrangement with a qualified 501(c) 3, DLH Low-Income Housing, Inc. to accept gifts of partnership interests as well as outright gifts of assets. We can project and outline what the net tax savings would be through our Project Analysis Service.
Sales and Transfers
Given the age of many of the projects and their owners, there are many reasons why they are sold or transferred. However, unlike traditional commercial multi-family properties, these can be more difficult as it is harder to put a commercial value on limited disbursement projects or properties subject to Restrictive-Use Covenants (RUC’s). The following are some common circumstances.
- An aging limited partner wants to sell. An important consideration here is that current estate tax law allows for a step-up in the basis upon death as well as re-calculating the depreciation using Section 754. It is far better for the limited partner to hold on to the project and use the Special Allocation Strategy to reduce the ongoing phantom income
- A fee-based manager wants to purchase the GP interest. They understand that the GP controls the management of the project and by purchasing the GP interest, they are more secure in their management contract and can receive the full amount of the management fees. The GP Brokerage Service can help speed things along.
- A manager or developer has a project or projects in an area or State that is not conducive to their business. This happens a lot when people expand or purchase a block of projects and then later find that some are not feasible to operate. These projects can be sold to another company that has business in that area. We have contacts in most of the States and our GP Brokerage Service can assist them.
- The owner of a management company or development company wants to retire and liquidate their GP interests. In many cases, they may want to transfer them to a younger family member and in others they may want to sell them outright. Our Project Analysis Service can be used to make sure they are getting a fair value or setting an appropriate target price.
- A Syndicator wants to close out a tax credit fund by selling their LP Interests. Once a tax credit project has met the required holding period, the Syndicator may want to sell it. However, the value of the interest is depended on whether the lower-tier GP is interested in re-syndicating or whether an investor is interested in acquiring them for the passive loss deductions such as in our LP Purchase Strategy.
- A limited partner wants to sell a project that has a small negative capital account or a positive capital account. This situation presents a number of opportunities: they could sell the project to an investor looking for passive-losses (LP Purchase Strategy); they could receive funds from a transfer to a new syndication; they could sell it to the GP; or they could gift it to a charity (Bargain Sale Strategy). The Project Analysis Service can outline the pros and cons of each of these as well as help determine the most financially advantageous approach.
These are just a few examples of why project ownership may be sold or transferred. Housing & Tax Consultants, LLC has developed many strategies to assist Owners, Developers and Managers in the secondary marketplace.
Offer in Compromise
Some projects inevitably become troubled assets and just cannot make ends meet. This may be because they have no rental assistance, or the local employer has shuttered the plant or moved away, or the population has shrunk to a point where there are not enough low-income tenants in the area, or the property has physical defects and they are not willing to provide funding to correct.
The usual result of these situations is that the general partner is asked to contribute capital to maintain operations. Eventually, when the general partner can no longer fund the project, the government starts to send deficiency notices or notices of intent to accelerate the loan.
Many people do not know that the government has an Offer-In-Compromise (01C) program that may allow them to settle the note for a small fraction and take the project out of the program. However, this program can only be used by the current partnership.
Housing & Tax Consultants, LLC has worked with many people in filing the necessary documents and arriving at an acceptable price. We also help to get the government to conclude that the failure of the project is not due to management, but rather some outside influence such as lack of need for the units.