Thursday, June 27, 2013
Eric Mittereder (Applegate & Thorne-Thomsen, Chicago), Pushing the Limits: Nonprofit Guarantees in LIHTC Joint Ventures, 22 J. Affordable Housing & Commun. Dev. L. 79 (2013):
The first section of this article provides an overview of nonprofit participation in LIHTC partnerships and the need for certain guarantees, followed by the legal background for imposing limits on those nonprofit guarantees. After introducing the Urban Memo and other IRS guidance providing specific limitations on nonprofit guarantees, the first section analyzes this guidance’s impact on nonprofit organizations negotiating transactions in a shifting financial market. The discussion draws from industry perspectives comparing the standards in the IRS guidance to current industry practices, based on both publications and interviews with legal practitioners, who represent a variety of geographic markets and interests in their roles as counsel for developers, investors, and syndicators.
The second section of the article applies this discussion to the three most contested guarantees that nonprofits provide to for-profit investors in LIHTC partnerships: (1) tax credit guarantees, (2) operating deficit guarantees, and (3) interest repurchase guarantees. The section identifies the issues raised by each particular guarantee and gauges the extent to which current industry practices overlap and diverge from the limitations proposed in the IRS guidance. These three pressure points in negotiations have produced several nuances in the terms of these guarantees, which vary in the degree to which they adhere to the standards set forth in the informal IRS guidance, but may nonetheless provide alternative mechanisms to minimize the risk to charitable assets. Some of these examples may be valuable improvements in developing formal guidance, in order to alleviate IRS concerns while enhancing flexibility to make business arrangements that provide investors with necessary security.