Additional IRS Private Letter Rulings Reaffirm Use of Integrated Unit Test in Multiple-Building Projects

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Tax Credit Advisor, January 2010: In a pair of recently released private letter rulings, the Internal Revenue Service has reaffirmed the ability of a taxpayer to use the “integrated unit test” to determine whether a proposed multiple-building new markets tax credit (NMTC) project meets a key program income threshold. The Service also held that the partnership sponsoring the project may be classified as a qualified business.

The identical rulings (200947004, 20094705), made public on 11/20/09, build on a previous groundbreaking private letter ruling that first permitted the use of the integrated unit test for a multiple-building NMTC project in Jackson, Miss. (For details, see Tax Credit Advisor, October 2009, p. 29.)

The latest rulings addressed a situation where the taxpayer and another company formed a partnership that would be the Qualified Active Low Income Community Business (QALICB) to invest in the NMTC project. The proposed project would consist of three buildings – two contiguous buildings and a nearby parking garage – redeveloped into a single integrated project. Two of the buildings would be renovated for both commercial use (retail, office) and residential use (apartments, hotel). The parking garage, across the street from one building, would be renovated and add interior pathways and a skywalk connecting to the other two buildings. Project tenants would be given priority to lease parking spaces, but there would also be public access. The project has been designed to provide for seamless movement between the three buildings by residents and commercial tenants.

The IRS rulings held that the three buildings may be treated as one for purposes of determining whether the NMTC program’s commercial income test is satisfied. Under this test, a real estate project isn’t eligible for the NMTC if more than 80% of its gross income comes from residential rental property (i.e. at least 20% must be derived from commercial uses). Normally, this 20% commercial income test must be met on a building-by-building basis. The new letter rulings allow this threshold to be met project-wide for the proposed development through application of the “integrated unit test.” As a result, the three buildings can be treated as one for purposes of determining whether the project is to be classified as residential rental property or as nonresidential (i.e. commercial) real estate.

In the current rulings, key facts included that the buildings would be connected together and that the proposed project would share common plans of ownership, development, financing, and operation. Financing for the proposed project was to come from Gulf Opportunity Zone bonds, historic rehabilitation tax credits, new markets tax credits, and equity investment.

In the second part of the ruling, the IRS held that the partnership sponsoring the project is a qualified business as defined under the NMTC program, if the single integrated building (and its structural components) is classified as nonresidential real estate.

(Rulings: http://www.irs.gov/app/picklist/list/writtenDeterminations.html)