10 TAC §1.9
The Texas Department of Housing and Community Affairs (the
Department) proposes new §1.9, concerning the Qualified Contract Policy.
This section is proposed to address the procedure for administering requests
for qualified contracts.
Ms. Edwina P. Carrington, Executive Director, has determined that for the
first five-year period the section is in effect there will be no fiscal implications
for state or local government as a result of enforcing or administering the
rule.
Ms. Carrington has also determined that for each year of the first five-years
the section is in effect the public benefit anticipated as a result of enforcing
the section will be to allow for more meaningful public input to the Department.
There will be no effect on small businesses. There is no anticipated economic
cost to persons who are required to comply with the rule as proposed.
Comments on the proposal may be submitted to Emily Price, Multifamily Housing
Specialist, Multifamily Finance Production Division, Texas Department of Housing
and Community Affairs, P. O. Box 13941, Austin, Texas 78711-3941, emily.price@tdhca.state.tx.us,
or by fax 512/475-0764, within thirty days of this notice.
This section is proposed pursuant to the authority of the Texas
Government Code, Chapter 2306.
No other code, articles or statutes are affected by this section.
§1.9.Qualified Contract Policy.
(a)
Purpose. Pursuant to §42(h)(6)(E) of the Internal
Revenue Code, after the end of the 14th year of the compliance period, the
owner of a development utilizing housing tax credits can request that the
allocating agency find a buyer at the qualified contract price. If a buyer
can not be located within one year, the extended use commitment will expire.
This rule provides the procedures for the submittal and review of the qualified
contract requests.
(b)
Definitions. Many of the terms used in this section are
defined in the Department's Housing Tax Credit Program Qualified Allocation
Plan and Rules, known as the "QAP". Those terms that are not defined in the
QAP or which may have another meaning when used in this section shall have
the meaning set forth in this subsection unless the context clearly indicates
otherwise.
(1)
Code--The Internal Revenue Code of 1986, as amended from
time to time, together with any applicable regulations, rules, rulings, revenue
procedures, information statements or other official pronouncements issued
thereunder by the United States Department of Treasury or the Internal Revenue
Service.
(2)
Compliance Period--With respect to a building, the period
of 15 taxable years, beginning with the first taxable year of the credit period
pursuant to the Code, §42(i)(1).
(3)
Department--The Texas Department of Housing and Community
Affairs.
(4)
Extended Use Period--The period beginning with the first
day of the Compliance Period and ending on the date which is 15 years after
the end of the Initial Affordability Period.
(5)
Initial Affordability Period--The Compliance Period or
such longer period as shall have been elected by the owner as the minimum
period for which units in the development shall be retained for low-income
tenants and rent restricted, as set forth in the LURA.
(6)
Land Use Restriction Agreement (LURA)--An agreement between
the Department and the owner which is binding upon the owner's successors
in interest, that encumbers the development with respect to the requirements
of Chapter 2306, Texas Government Code, and the requirements of the Code, §42.
(7)
One Year Period (1YP)--Period commencing on the date on
which the Department and the owner agree to the Qualified Contract price in
writing and lasting twelve calendar months.
(8)
Qualified Contract (QC)--A bona fide contract to acquire
the non-low-income portion of the building for fair market value and the low-income
portion of the building for an amount not less than the applicable fraction
(specified in the LURA) of the calculation as defined within §42(h)(6)(F)
of the Code.
(9)
Qualified Contract Price (QC Price)--Calculated purchase
price of the development as defined within §42(h)(6)(F) of the Code and
as further delineated in subsection (g) of this section.
(10)
Qualified Contract Request (Request)--A request containing
all information and items required by the Department.
(11)
Qualified Purchaser--Proposed purchaser of the development
who meets all eligibility and qualification standards stated in the QAP of
the year the request is received. The purchaser must also attend, or assign
another individual to attend, the Department's Property Compliance Training.
(c)
Eligibility. An owner may submit a Qualified Contract Request
at any time after the end of the year preceding the last year of the Initial
Affordability Period, following the Department's determination that the owner
is eligible, as provided in subsection (f) of this section. The Initial Affordability
Period starts concurrently with the credit period; therefore, beginning at
placement in service or deferred until the beginning of the next tax year,
if there is an election. Unless the owner has elected an Initial Affordability
Period longer than the Compliance Period, this can commence at any time after
the end of the 14th year of the Compliance Period. References in this section
to actions which can occur after the 14th year of the Compliance Period shall
refer, as applicable, to the year preceding the last year of the Initial Affordability
Period, if the owner shall have elected an Initial Affordability Period longer
than the Compliance Period.
(1)
If there are multiple buildings placed in service in different
years, the end of the Initial Affordability Period will be based upon the
date the last building placed in service. For example, if five buildings in
the development began their credit periods in 1990 and one began in 1991,
the 15th year would be 2005.
(2)
If a development received an allocation in multiple years,
the end of the Initial Affordability Period will be based upon the last year
of a multiple allocation. For example, if a development received its first
allocation in 1990 and a subsequent allocation and began the credit period
in 1992, the 15th year would be 2006.
(d)
Preliminary Qualified Contract Request. An owner may file
a preliminary Qualified Contract Request (Pre-request) any time after the
end of the year preceding the last year of the Initial Affordability Period.
(1)
In addition to determining the basic eligibility described
in subsection (c) of this section, the Pre-request will be used to determine
the following:
(A)
the property does not have any outstanding instances of
noncompliance, with the exception of the physical condition of the property;
(B)
there is not a right of first refusal connected to the
property;
(C)
the Compliance Period has not been extended in the LURA;
and
(D)
the owner has all of the necessary documentation to submit
a Request.
(2)
In order to assess the validity of the pre-request, the
Owner must submit:
(A)
Preliminary Request Form;
(B)
$250 nonrefundable processing fee;
(C)
copy of recorded LURA;
(D)
first years 8609s for all buildings showing Part II completed;
(E)
documentation from original application regarding right
of first refusal, if applicable; and
(F)
local code compliance report within the last 12 months
or HUD certified UPCS inspection.
(3)
The Pre-request will not bind the owner to submit a Request
and does not start the 1YP. A review of the pre-request will be conducted
by the Department within 90 days of receipt of all documents described in
paragraph (2) of this subsection. If the Department determines that this stage
is satisfied, a letter will be sent to the owner stating that they are eligible
to submit a Request.
(e)
Right of First Refusal. If the owner elected at the time
of application to provide a right of first refusal, all requests for right
of first refusal submitted to Department, regardless of existing regulations,
must adhere to this process.
(1)
If at any time following the end of the Compliance Period
or Initial Affordability Period, as applicable, the owner shall determine
to sell the development and the owner has agreed to provide a right of first
refusal to purchase the property for the minimum purchase price provided in,
and in accordance with the requirements of, §42(i)(7) of the Code (the
"Minimum Purchase Price"), to a Qualified Nonprofit Organization, the Department,
or either an individual tenant with respect to a single family building, or
a tenant cooperative, a resident management corporation in the Development
or other association of tenants in the Development with respect to multifamily
developments (together, in all such cases, including the tenants of a single
family building, a "Tenant Organization"), the right of first refusal shall
be subject to the following terms.
(A)
Upon the earlier to occur of:
(i)
the owner's determination to sell the Development, or
(ii)
the owner's request to the Department, pursuant to §42(h)(6)(E)(II)
of the Code, to find a buyer who will purchase the Development pursuant to
a "qualified contract" within the meaning of §42(h)(6)(F) of the Code,
the owner shall provide a notice of intent to sell the Development ("Notice
of Intent") to the Department and to such other parties as the Department
may direct at that time. If the owner determines that it will sell the Development
at the end of the Compliance Period or Initial Affordability Period, as applicable,
the Notice of Intent shall be given no later than two years prior to expiration
of the Compliance Period or Initial Affordability Period, as applicable. If
the owner determines that it will sell the Development at some point later
than the end of the Compliance Period, the Notice of Intent shall be given
no later than two years prior to date upon which the owner intends to sell
the Development. If the Development is already within two years of the expiration
of the Compliance Period or Initial Affordability Period, as applicable, and
the owner intends to sell the Development at the end of the Compliance Period
or Initial Affordability Period, as applicable, the two year period referenced
in subparagraph (B) of this paragraph will begin when the owner files a Notice
of Intent.
(B)
During the two years following the giving of Notice of
Intent, the Sponsor may enter into an agreement to sell the Development only
in accordance with a right of first refusal for sale at the Minimum Purchase
Price with parties in the following order of priority:
(i)
during the first six-month period after the Notice of Intent,
only with a Qualified Nonprofit Organization that is also a community housing
development organization, as defined for purposes of the federal HOME Investment
Partnerships Program at 24 C.F.R. §92.1 (a "CHDO") and is approved by
the Department,
(ii)
during the second six-month period after the Notice of
Intent, only with a Qualified Nonprofit Organization or a Tenant Organization;
and
(iii)
during the second year after the Notice of Intent, only
with the Department or with a Qualified Nonprofit Organization approved by
the Department or a Tenant Organization approved by the Department.
(iv)
If, during such two-year period, the owner shall receive
an offer to purchase the Development at the Minimum Purchase Price from one
of the organizations designated in clauses (i) through (iii) of this subparagraph
(within the period(s) appropriate to such organization), the owner shall sell
the Development at the Minimum Purchase Price to such organization. If, during
such period, the owner shall receive more than one offer to purchase the Development
at the Minimum Purchase Price from one or more of the organizations designated
in clauses (i) through (iii) of this subparagraph (within the period(s) appropriate
to such organizations), the owner shall sell the Development at the Minimum
Purchase Price to whichever of such organizations it shall choose.
(C)
After whichever occurs the later of:
(i)
the end of the Compliance Period or Initial Affordability
Period, as applicable, or
(ii)
two years from delivery of a Notice of Intent, the owner
may sell the Development without regard to any right of first refusal established
by the LURA if no offer to purchase the Development at or above the Minimum
Purchase Price has been made by a Qualified Nonprofit Organization, a Tenant
Organization or the Department, or a period of 120 days has expired from the
date of acceptance of all such offers as shall have been received without
the sale having occurred, provided that the failure(s) to close within any
such 120-day period shall not have been caused by the owner or matters related
to the title for the Development.
(D)
At any time prior to the giving of the Notice of Intent,
the owner may enter into an agreement with one or more specific Qualified
Nonprofit Organizations and/or Tenant Organizations to provide a right of
first refusal to purchase the Development for the Minimum Purchase Price,
but any such agreement shall only permit purchase of the Development by such
organization in accordance with and subject to the priorities set forth in
subparagraph (B) of this paragraph.
(E)
The Department shall, at the request of the owner, identify
in the LURA a Qualified Nonprofit Organization or Tenant Organization which
shall hold a limited priority in exercising a right of first refusal to purchase
the Development at the Minimum Purchase Price, in accordance with and subject
to the priorities set forth in subparagraph (B) of this paragraph.
(F)
The Department shall have the right to enforce the owner's
obligation to sell the Development as herein contemplated by obtaining a power-of-attorney
from the owner to execute such a sale or by obtaining an order for specific
performance of such obligation or by such other means or remedy as shall be,
in the Department's discretion, appropriate.
(2)
The owner must submit evidence of the calculation of the
Minimum Purchase Price with the Notice of Intent.
(f)
Qualified Contract Request. An owner may file a Qualified
Contract Request (Request) anytime after approval that the owner is eligible
to submit a Request has been received in writing from the Department.
(1)
The documentation that must be submitted with a Request
includes:
(A)
A completed application and certification.
(B)
The qualified contract price calculation worksheets completed
by a third party certified public accountant (CPA). The CPA shall certify
that they have reviewed annual partnership tax returns for all years of operation,
loan documents for all secured debt, and partnership agreements. They shall
also certify that they are not being compensated for the assignment based
upon a predetermined outcome.
(C)
A thorough description of the Development, including all
amenities.
(D)
A description of all income, rental and other restrictions,
if any, applicable to the operation of the Development.
(E)
A current title report.
(F)
A current appraisal consistent with 10 TAC §1.34.
(G)
A current Phase I Environmental Site Assessment (Phase
II if necessary) consistent with 10 TAC §1.35.
(H)
A current property condition assessment consistent with
10 TAC §1.36.
(I)
A copy of the monthly operating statements for the Development
for the most recent 12 consecutive months.
(J)
The three most recent consecutive annual operating statements.
(K)
A detailed set of photographs of the development, including
interior and exterior of representative units and buildings, and the property's
grounds (including digital photographs that may be easily displayed on the
Department's website).
(L)
A current and complete rent roll for the entire property.
(M)
A certification that all tenants in the Development have
been notified in writing of the request for a Qualified Contract. A copy of
the letter used for the notification must also be included.
(N)
If any portion of the land or improvements are leased,
copies of the leases.
(O)
Nonrefundable processing fee of one fourth of one percent
of the QC Price determined by the CPA.
(P)
Additional information deemed necessary by the Department.
(2)
Unless otherwise directed by the Department pursuant to
subsection (i) of this section, the owner shall contract with a broker approved
by the Department to market and sell the property. The fee for this service
will be paid by the seller, not to exceed 6% of the QC Price.
(3)
Within 90 days of the submission of a complete Request,
the Department will notify the owner in writing of the acceptance or rejection
of the owner's QC Price calculation. The Department will have one year from
the date of the acceptance letter to find a Qualified Purchaser and present
a Qualified Contract. The Department's rejection of the owner's QC Price calculation
will be processed in accordance with subsection (h) of this section and the
1YP will commence as provided therein.
(g)
Determination of Qualified Contract Price. The CPA contracted
by the owner will determine the QC Price in accordance with §42(h)(6)(F)
of the Code and the following guidelines.
(1)
Distributions to the owner include any and all cash flowing
to the owner, including incentive management fees and reserve balance distributions
or future anticipated distributions, but excluding payments of any eligible
deferred developer fee. These distributions can only be confirmed by a review
of all prior year tax returns for the development.
(2)
All equity contributions will be adjusted based upon the
lesser of the consumer price index or five percent (5%) for each year, from
the end of the year of the contribution to the end of year 14 or the end of
the year of the request for a Qualified Contract Price if requested at the
end of the year or the year prior if the request is made earlier than the
last year of the month.
(3)
These guidelines are subject to change based upon future
IRS Rulings and/or guidance on the determination of owner distributions, equity
contributions and/or any other element of the QC Price.
(4)
The QC Price calculation is not the same as the Minimum
Purchase Price calculation for the right of first refusal.
(h)
Appeal of Qualified Contract Price. The Department reserves
the right, at any time, to request additional information to document the
QC Price calculation or other information submitted. If the documentation
does not support the price indicated by the CPA hired by the owner, the Department
may engage its own CPA to perform a QC Price calculation. Cost of such service
will be paid for by the owner. If an owner disagrees with the QC Price calculated
by the Department, an owner may appeal in writing. A meeting will be arranged
with representatives of the owner, the Department and the CPA contracted by
the Department to attempt to resolve the discrepancy. The 1YP will not begin
until the Department and owner have agreed to the QC Price in writing.
(i)
Marketing of Property.
(1)
By submitting a Request, the owner grants the Department
the authority to market the development and provide development information
to interested parties. Development information will consist of pictures of
the development, location, amenities, number of units, age of building, etc.
Owner contact information will also be provided to interested parties. The
owner is responsible for providing staff to assist with site visits and inspections.
Marketing of the development will continue until such time that a Qualified
Contract is presented or the 1YP has expired.
(2)
Notwithstanding subsection (f)(3) of this section, the
Department reserves the right to contract directly with a third party in marketing
of the development. Cost of such service, including a broker's fee not to
exceed 6%, will be paid for by the existing owner.
(3)
The Department must have continuous cooperation from the
owner. Lack of cooperation will cause the process to cease and the owner will
be required to comply with requirements of the LURA for the remainder of the
Extended Use Period. Responsibilities of the owner include but are not limited
to:
(A)
allowing access to the property and tenant files;
(B)
keeping the Department informed of potential purchasers;
and
(C)
notifying the Department of any offers to purchase.
(4)
A prospective purchaser must complete all exhibits required
for an ownership transfer request. The Department will then assess if the
prospective purchaser is a Qualified Purchaser.
(j)
Presentation of a Qualified Contract.
(1)
If the Department finds a Qualified Purchaser willing to
present an offer to purchase the property for an amount at the QC Price, the
owner must agree to enter into a commercially reasonable form of earnest money
agreement or other contract of sale for the property and provide a reasonable
time for necessary due diligence and closing of the purchase.
(2)
Although the owner is obligated to sell the development
for the QC Price pursuant to a Qualified Contract, the consummation of such
a sale is not required for the LURA to continue to bind the development for
the remainder of the extended use period. Once the Department presents a Qualified
Contract to the owner, the possibility of terminating the extended use period
is removed forever and the property remains bound by the provisions of the
LURA.
(3)
The Department will attempt to procure a QC for the acquisition
of the low income portion of any project only once during the extended use
period.
(4)
If the transaction closes under the contract, the new owner
will be required to fulfill the requirements of the LURA for the remainder
of the extended use period.
(5)
If the Department fails to present a QC before the end
of the 1YP, the Department will file a release of the LURA and the development
will no longer be restricted to low-income requirements and compliance. However,
in accordance with §42(h)(6)(E)(ii) of the Code, for a three-year period
commencing on a the termination of the extended use period, the owner may
not evict or displace tenants of low-income units for reasons other than good
cause and will not be permitted to increase rents beyond the maximum tax credit
rents. Additionally, the owner should submit evidence, in the form of a signed
certification and a copy of the letter to be created by the Department, that
the tenants in the Development have been notified in writing that the LURA
has been terminated and have been informed of their protections during the
three-year time frame.
(6)
Prior to the Department filing a release of the LURA, the
owner must correct all instances of noncompliance with the physical condition
of the property.
(k)
Compliance Monitoring during Extended Use Period. For developments
that continue to be bound by the LURA and remain as affordable after the end
of the Compliance Period, the Department will implement modified compliance
monitoring policies and procedures. Refer to the Extended Use Period Compliance
Policy for more information.
(l)
Waiver and Amendment of Rules.
(1)
The Board, in its discretion, may waive any one or more
of these Rules if the Board finds that a waiver is appropriate to fulfill
the purposes or policies of Chapter 2306, Texas Government Code, or for other
good cause, as determined by the Board.
(2)
The Department may amend this Rule to comply with IRS guidance,
if and when issued.
This agency hereby certifies that the proposal has been
reviewed by legal counsel and found to be within the agency's legal authority
to adopt.
Filed with the Office of
the Secretary of State on May 27, 2005.
TRD-200502162
Edwina P. Carrington
Executive Director
Texas Department of Housing and Community Affairs
Earliest possible date of adoption: July 10, 2005
For further information, please call: (512) 475-3726