lis 217 stemming the tide - LISC

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Phantom Income. If the property is experiencing"phantom income," there can be a substantialincentive to convert to market, refinance, orsell. The problem occurs in an aging propertywhen mortgage interest and depreciationdeductions are no longer sufficient to offsetmortgage principal payments. If cash flow islimited, the owner must pay taxes on "phantomincome"—money the owner never received. Asnoted above, the burden of phantom income isprimarily borne by the property's limited partners.Exit Taxes. Taxes due on sale can deter ownershiptransfers unless the cash proceeds generatedare sufficient to cover it. Sale of the propertytriggers a tax on the owner's capital gain,which consists of the cash proceeds realized onsale minus the owner's capital account. Thecapital account is the original cash investmentadjusted by cumulative profits and tax losses todate. After 20 years, properties that have providedgenerous depreciation and interestdeductions but limited dividends will typicallyhave a negative capital account. In these cases,owners will owe taxes even if they realize nocash proceeds from the sale.Tax Mitigation. Nonprofit purchasers may beable to assist the seller in developing tax mitigationor tax deferral strategies using one ofthe following measures:• Like-Kind Exchange. This is a three-way propertyswap which enables the seller to deferthe exit taxes for a period of time.• Bargain Sale. If the property is sold at abelow-market price, the seller may be able totake the difference between the market valueand the sales price as a charitable donation tooffset the seller's tax liability.• Affordable Housing UPREIT. 46 The sale can bestructured to involve an entity like theCommunity Development Trust, a LISC-affiliatedaffordable housing UPREIT which can providecontinued tax deferrals for investors.• Stepped Up Basis/Passive Losses. To theextent that the LPs are not tax-sensitive, exittaxes will be less of a problem. For example,any second generation LPs who have inheritedtheir interests are likely to have a"stepped up" tax basis, which wipes out theoriginal owner's negative capital account.Some LPs may have suspended passive lossesfrom other investments that can also beused to offset exit tax liability.Relationship to Regulatory AgenciesAfter 20 or more years of operations in a highlyregulated environment, the cumulative experiencewith HUD can be a significant factor affectingthe owner's decision-making process and indetermining the available options. Factors toconsider include:HUD Watch List. Is the owner in trouble withHUD? under pressure to complete majorrepairs? Owners on HUD's Watch List—thosewith significant regulatory or contract violations—canbe barred from participating in HUDprograms, including Section 8 contract renewal.Unless they can opt out, these owners may bemotivated to sell. If they do sell, they arerequired to sell to a tenant-endorsed, community-basednonprofit purchaser on a preferentialbasis. Once the sale is completed, the newowner would then be eligible to renew theSection 8 contract.Owner Attitude. What is the owner's generalattitude towards HUD? Even owners in goodstanding may no longer be willing to work withinthe HUD system. As HUD regulatory requirementsbecome more complex, less sophisticatedowners may be inclined to sell if they cannotopt out. This is especially true in the case oflow-value Mark-to-Market properties now thatmechanisms to facilitate sales are in place.Business PlanWhat course of action has the owner followedwith its other subsidized properties in the cityor region, or in other states? An owner with alarge inventory may have an overall businessplan for its portfolio which will be known tonational advocacy groups. A local or regionaldeveloper may be in the process of getting outof the subsidized housing business and repositioningits portfolio for market conversion.40 chapter four: Researching the Property: Towards a Preservation Strategy36
Personal FactorsHave there been any newsworthy personal orfamily events involving the owner? The death ofthe original developer/owner who was intimatelyinvolved with the property, or the bankruptcyof a family business, may be a harbinger ofchanges to come.Local LeverageDoes the owner have any new developmentdeals pending with the city or state? a history ofcode violations, discrimination complaints, ortax delinquency? A local owner who wants tomaintain a favorable public image may be vulnerableto negative publicity and communitypressure.OWNERSHIP INFORMATION SOURCESHUD Section 8 Expiring Contracts Database. This database includes useful basic ownership and managementinformation for Section 8 properties. See http://www.hud.gov/offices/hsg/mfh/mfhsec8.cfm. Click on"Multifamily Assistance and Section 8 Contracts Database" link. Click on "Download." The database can bedownloaded from this site. (See Exhibit 9 in Exhibits, which illustrates some of the information that can beextracted from the database.)Partnership Documents. These documents describe the structure of the ownership entity and any changesthat have occurred over time. They are generally found in the Secretary of State's office in the state where thepartnership was formed.HUD Documents. The most recent management contract and management certification will indicate anyowner/management affiliation. If the property has ever been sold subject to a HUD mortgage, there should bea Transfer of Physical Assets application and related documentation of the transaction in HUD's files.SEC Documents Online. The Securities and Exchange Commission (SEC) has recent documents for partnershipsthat are registered as public securities, including annual and quarterly reports, partnership agreements,and syndication prospectuses. See www.sec.gov. Click on "Search EDGAR" link. At "Search the EDGARDatabase," click on "EDGAR CIK Lookup" to locate the CIK (Central Index Key/search string) for a specificpartnership. Return to "Search the EDGAR Database" and click on "Search the EDGAR Archives" link. Enterthe CIK/search string to generate a list of available documents for the partnership. (See Exhibit 10 in Exhibits,for a sample report of available documents.)Owner Documents. The owner's most recent audited financial statement may be helpful in ballparking theextent of phantom income and exit tax liability problems, but the partnership’s tax returns (K-1s) present themost accurate picture. A potential nonprofit purchaser who has a good relationship with the seller may beable to obtain this information. The general ownership history should indicate what the tax issues will be.Other. For information about national owners, contact the National Housing Trust or the LISC PreservationInitiative. For information about local owners, keep abreast of local news, including the obituaries.chapter four: Researching the Property: Towards a Preservation Strategy 41
Page 1 and 2: LOCAL INITIATIVES SUPPORT CORPORATI
Page 3 and 4: STEMMING THE TIDEA Handbook on Pres
Page 5 and 6: CONTENTSIntroductioniChapter One 1S
Page 7 and 8: chapter oneSubsidized Housing Prese
Page 9 and 10: payments where the project would co
Page 11 and 12: The reaction to HUD's proposal was
Page 13 and 14: In addition, there are special rule
Page 15 and 16: Over the past few years, new federa
Page 17: tions. However, the nonprofit purch
Page 20 and 21: may construe the IRP as an "old and
Page 22 and 23: owner converts to non-rental use or
Page 24 and 25: 6. MARK-TO-MARKET INCENTIVESHUD/OMH
Page 26 and 27: PROFORMA 4: NONPROFIT PURCHASE WITH
Page 28 and 29: chapter threeState and Local Preser
Page 30 and 31: after refusing to accept the housin
Page 32 and 33: Owner Assessments. Assessment of th
Page 34 and 35: StrategiesAdvocates brought the own
Page 36 and 37: 3. STATE AND LOCAL FUNDING INITIATI
Page 38 and 39: chapter fourResearching the Propert
Page 40 and 41: insured projects, this date is 20 y
Page 42 and 43: 2. MARKETUltimately, the conversion
Page 44 and 45: 3. OWNERSHIPThe owner of a HUD-assi
Page 48 and 49: 4. FINANCIALProject finances will a
Page 50 and 51: FINANCIAL INFORMATION SOURCESProjec
Page 52 and 53: Most HUD-subsidized properties have
Page 54 and 55: Social IssuesWhat is the nature and
Page 57 and 58: EXHIBIT 3OPT OUT SUMMARYSTATETexasO
Page 59 and 60: EXHIBIT 4OMHAR PAE and Assigned Pro
Page 61 and 62: Total Units Assisted Units Program
Page 63 and 64: EXHIBIT 8OPT OUT STATISTICS BY STAT
Page 65 and 66: Owner Phone Agent Name Agent Addres
Page 67 and 68: Amortized Principal Interest Rate H
Page 69 and 70: Intermediary TechnicalAssistance Gr
Page 71 and 72: Tenant-Based Section 8. Rentalassis
Page 73 and 74: 16 For background on the IRP subsid
Page 75 and 76: iographiesEmily P. Achtenberg is a

lis 217 stemming the tide - LISC

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