Reviewing Growing Year-15 Volume, Guidance on Qualified Contracts
By Caitlin Jones & A. J. Johnson
3 min read
Tax Credit Advisor May, 2006: In a follow-up interview with Tax Credit Advisor, Adam Galowitz of Recapitalization Advisors assessed the growing volume of properties approaching the Year 15 deadline, and the expanding list of states providing guidance on qualified contracts.
Year 15 Volume
The first tax-credit properties became eligible for Year-15 qualified contracts in 2004, as approximately 200 projects reached the end of the 14th year of their compliance periods, Galowitz said. In 2005, that number rose to about 400, and by the end of this year, it will be about 1000. After 2009, about 1,000 properties a year will become newly eligible for qualified contracts.
But developers are likely to request qualified contracts for only a small fraction of these properties, Galowitz said. Often there are additional use restrictions imposed on a tax-credit property by housing finance agencies, or by lenders. In addition, a number of states, including California and Texas, have required that developers waive their rights to qualified contracts in order to obtain Low Income Housing Tax Credits, he said.
Guidance on Qualified Contracts: High Expenses Ahead
Galowitz said that at least 13 states have published some form of guidance on the qualified contract process: Arizona, Colorado, Florida, Georgia, Indiana, Minnesota, Montana, North Carolina, North Dakota, Pennsylvania, South Dakota, Texas and Virginia.
Costs for qualifying contracts are highest in Texas and Indiana, he said, with expenses totaling as much as $500,000. Five other states that have issued guidance – Arizona, Colorado, Florida, North Dakota, and South Dakota – will probably charge up to $250,000. Least expensive, he said are Georgia, Minnesota, Montana, North Carolina, Pennsylvania, and Virginia, where the process costs under $100,000.
Expenses, he said, are driven by requirements that appraisals and other preparatory work be prepared, and that a separate accountant be hired to calculate the qualified contract price. Many of the states that have issued guidance also require deposits and state agency brokerage and disposition fees. In addition, states may insist that properties meet certain physical condition requirements.
“Some developers will be scared off by these expenses and preconditions, but I’m also hopeful that you will begin to see a process of negotiation, and in some cases waivers,” Galowitz said.
So far the IRS has not provided guidance on qualified contracts, and is unlikely do so anytime soon, he said. “My guess is that there will not be any real involvement from them until there is a train wreck,” he added. “Then there may be some court cases, and the IRS will get involved – and when that happens, everything will change.”
