Multifamily Finance Production Division Telephone: (512) 475-3340
Director, Brooke Boston Facsimile: (512) 475-0764
2004 Carryover Allocation Procedures Manual Part II – 10% Test
For developments that received a 2004 commitment of tax credits, the submission of the documentation required for the 10% Test is necessary to show that, no later than the date that was six months after the date of the Department’s execution of the carryover allocation agreement, expenditures comprising a part of the taxpayer’s basis in the Development were incurred in excess of 10% of the total reasonably expected taxpayer’s basis as of December 31, 2006. The deadline for submitting the 10% Test documentation is June 30, 2005. This Carryover Allocation Procedures Manual Part II – 10% Test describes the conditions and documentation necessary to satisfy the 10% Test requirement pursuant to §50.14(b) of the 2004 Qualified Allocation Plan and Rules (the “QAP” or the “Rules”). All instructions in this manual must be followed exactly as written. The Department may amend any part of the Carryover Allocation Procedures Manual from time to time as necessary. The following items are necessary to prepare the documentation of the 10% test for submission: A. 2004 Carryover Allocation Procedures Manual — Part 2, 10% Test. This document is posted on the Housing Tax Credits page of the TDHCA website. B. Tab set, numbers 1 – 6. Tabs must be purchased from an office supply store. Tabs are not available from TDHCA. C. Dark blue pressboard cover. Covers must be purchased from an office supply store and are not available from TDHCA. Development name, Development Owner name and General Partner names used throughout the documents must match the names on file with the secretary of state and should be the same as indicated in the Application. Do not truncate or abbreviate any part of the name, and punctuate exactly as recorded with the secretary of state. If the ownership entity name uses the words “Limited Partnership”, do not substitute “Ltd.”, or “L.P.”
Page 1 of 7
2004 Carryover Allocation Procedures Manual Part II – 10% Test
PART 2, 10% TEST REQUIREMENTS
§50.14(b) of the 2004 QAP states the following:
(b) 10% Test. No later than six months from the date the Carryover Allocation Document is executed by the Department and the Development Owner, more than 10% of the Development Owner’s reasonably expected basis must have been incurred pursuant to §42(h)(1)(E)(i) and (ii) of the Internal Revenue Code and Treasury Regulations §1.42-6. The evidence to support the satisfaction of this requirement must be submitted to the Department no later than June 30 of the year following the execution of the Carryover Allocation Document in a format prescribed by the Department.
NOTE: The total reasonably expected basis used to calculate the 10% test must be the same figure stated in the carryover allocation agreement. As Department staff reviews the documentation submitted, the names, calculations and other specific information in each document must all be reconciled with the corresponding or related information in all other documents. Therefore, every instruction in this manual must be followed very closely. SECTION 1: GENERAL REQUIREMENTS FOR FILING DOCUMENTATION OF THE 10% TEST
To verify satisfaction of the 10% test and fulfill the Department’s requirements, the Development Owner must comply with the following requirements: 1. The deadline for meeting the 10% test is the close of the date that is six months after the date the carryover allocation was made (six months after the Carryover Allocation Agreement was signed by the Department). The Development Owner must have incurred more than 10% of the reasonably expected basis as of the end of the second year after the carryover allocation was made (pursuant to Section 42(h)(1)(E)(i) and (ii) of the Internal Revenue Code and Treasury Regulations, Section 1.42-6.) 2. All conditions and requirements in Exhibit "A" of the Commitment Notice that were due by the deadline for documenting the 10% test, including any that were extended to the date for documenting the 10% test, must have been satisfied. 3. The Development Owner must have satisfied the provisions of Section 42(h)(1)(E)(i) and (ii) of the Internal Revenue Code and Section 1.42-6 of the Treasury Regulations. The Development Owner must comply with any new directives as appropriate. 4. The package containing documentation that the 10% test was met by the required deadline must be submitted to the Department by no later than 5 p.m. June 30, 2005.
Page 2 of 7
2004 Carryover Allocation Procedures Manual Part II – 10% Test
SECTION 2:
OUTLINE OF FORMAT AND REQUIREMENTS FOR FILING 10% TEST DOCUMENTATION
All documentation stated in this section must be submitted to the Department behind the tabs listed and in the order stated below. If deficiencies are found, the Department will notify the Development Owner. The Development Owner will be given a specific length of time to correct the deficiencies. If the Development Owner does not correct the deficiencies within the time allowed, the Department may terminate the Carryover and the Commitment. Where original signatures are specified, copies are not acceptable. When all conditions and requirements of this manual have been satisfied, the Department will issue a notification to the Applicant indicating that the requirements of the 10% test have been satisfied. SUBMISSION REQUIREMENTS 1. Binder and Label – All documentation submitted must be bound using pressboard report covers and tabs. The color of the report covers must be dark blue. A label with the following information must be placed on the front cover of the binder: a. “2004 HTC 10% Test Documentation” b. Development Name, TDHCA Development Number (Use the 2004 development number assigned to your development. The number is on the Carryover Allocation Agreement, Commitment Notice, etc.) c. “10% Test Documentation Contact Name”, “Phone Number” and “Fax Number” 2. Documentation – All items must be submitted in the order stated below. All documents must be separated with numbered tabs as indicated below. Tab1: 2004 10% Test – Owner and Development Summary form must be completed and submitted behind this tab. Extensions – Approval letter must be included for any extension of the deadline to submit documentation of the 10% test. No extension can be given for the deadline to actually incur 10% of taxpayer’s basis because it is a federal requirement. Tab 2: 2004 Commitment Notice must be submitted. Place a signed copy behind this tab. 2004 Carryover Allocation Agreement must be submitted. Place a copy of the document signed by the Department behind this tab. Tab 3: Resolution of Commitment Notice Conditions Form must be completed with exhaustive explanations and appropriate documentation of how the conditions of the Commitment Notice in Appendix “A”, Section (1)(H) that are due at the time of documentation of the 10% test have been met. For each condition, no matter how obvious the explanation appears, include a narrative explaining exactly how the documentation submitted satisfies the condition. Tab 4: Changes in the Development – Approval letters must be submitted for amendments to the application such as ownership changes or changes in construction subsequent to application. Any change in ownership or construction from the representations made in the application must be approved. Tab 5: Independent Accountant’s Report must be submitted from a third party accountant on the accounting firm’s letterhead with original signatures. The report must include the name, telephone and facsimile information of the individual CPA who actually produced the report. Note that all figures referenced in the report must be consistent with the Development Cost and Basis Schedule that must be submitted behind Tab 6. The total reasonably expected taxpayer’s basis used to calculate the 10% test should be the same figure stated in the carryover allocation agreement. Tab 6: 10% Test: Taxpayer’s Basis Schedule (Excel worksheet).
Page 3 of 7
2004 Carryover Allocation Procedures Manual Part II – 10% Test
2004 10% TEST – OWNER AND DEVELOPMENT SUMMARY (TAB 1)
Development Name: Development Address: City: Owner Name: Owner Contact Name: Owner Contact Address: City: 10% Test Contact Name: 10% Test Contact Address City: State: Zip: E-Mail (REQUIRED): Phone: Fax : State: Zip: E-Mail (REQUIRED): Phone: Fax: Zip: Federal Tax ID No.: TDHCA Development #:
Conditions of the Commitment Notice and Other Conditions – Were any conditions of the Carryover or Commitment extended to be due at the time of the 10% test? Yes No Have all conditions due at the time of the 10% Test been fulfilled or resolved? NA Yes No (Document compliance with conditions as appropriate behind Tab 3 in this binder.) Ownership Changes – Has there been any change in the ownership indicated in the Application, Underwriting Report or Board Summary? Yes No If “Yes”, provide a copy of the letter of approval from the Executive Director of TDHCA behind Tab 4 in this binder. Development Changes – Have the acreage, number of buildings, units, applicable fraction or other features changed from the description in the Application, Underwriting Report or Board Summary that were the basis for Board approval of the award of tax credits? Yes No
If “Yes”, provide a copy of the letter of approval from the Executive Director of TDHCA in Tab 4 in this binder. If other allocations of tax credits were made to the subject development in the past, provide the previous TDHCA numbers of the development(s): Please note: As stated in the QAP, the Board of Directors may rescind an allocation of tax credits if there is a modification or amendment in the development proposal that: • would materially alter the development in a negative manner; or • would have adversely affected the selection of the application in the application round. Material alteration of a development includes: o a significant modification of the site plan; o a modification of the number of units or bedroom mix of units; o a substantive modification of the scope of tenant services; o a reduction of three percent or more in the square footage of the units or common areas; o a significant modification of the architectural design of the development; o a modification of the residential density of the development of at least five percent; and o any other modification considered significant by the board.
Page 4 of 7
2004 Carryover Allocation Procedures Manual Part II – 10% Test
RESOLUTION OF COMMITMENT NOTICE CONDITIONS FORM (TAB 3)
Below, state each condition under Section (1)(H) of the Commitment Notice that is due at the time of the 10% test. Use exactly the wording and punctuation used in the original statement of the condition in the Commitment Notice. After each condition is stated, explain how the documentation that has been provided in the 10% test submission package proves that the condition has been met. Conditions (A) through (G) of the Commitment Notice pertain to future dates and are not applicable. Write the underlined headings given below as you either state the condition or explain your response to the condition.
Condition 1: Response to Condition 1:
Condition 2: Response to Condition 2:
(continue in the same manner as above for all subsequent conditions)
Page 5 of 7
2004 Carryover Allocation Procedures Manual Part II – 10% Test
INDEPENDENT ACCOUNTANT’S REPORT (TAB 5) The same [identical] language used in this template must be used in the letter submitted. The total reasonably expected basis used to calculate the 10% test must be the same figure stated in the carryover allocation agreement. If an item is not applicable, do not omit it; indicate via use of the term “NA” that it is not applicable. The numbers indicated in this letter for the total development cost and costs incurred before the close of the date that is six months after the Department’s execution of the Carryover Allocation Agreement should be at least as much as shown in the Carryover Allocation Agreement and must be the same as the “10% Test Taxpayer’s Basis Schedule.” If you are required to certify an amount as of a specific date, confirm that the date is consistent in all documents where it appears. The letter must include the parenthetical referents in quotation marks that are in this template, such as (the “Department”) and (the “Owner”). However, the italicized terms are to be replaced by the actual names that the terms describe. If there are any questions about the letter’s contents or execution, contact the Multifamily Finance Production Division at (512) 475-3340. (To be submitted under accounting firm's letterhead) Date: To: Texas Department of Housing and Community Affairs 507 Sabine Street Austin, Texas 78701 and ___________________________ (the “Owner”) (Owner Address) (Owner City, State, Zip) RE: Housing Tax Credit Carryover Allocation Name of the Development (the “Development”): TDHCA Number: (TDHCA Number of the Development): Name of Development Owner: We have audited the accompanying certification of costs incurred in the “10% Test: Taxpayer’s Basis Schedule” (the “Basis Schedule”) of the Owner of _________________________________ (the “Development”) as of _(state month, day and year), which is the “Effective Date” of this letter. The Effective Date is before the close of the date that was six months after the Department’s execution of the Carryover Allocation Agreement. The Basis Schedule is the responsibility of the Owner and the Owner’s management. Our responsibility is to express an opinion about the entries in the Basis Schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Basis Schedule is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Basis Schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the information in the Basis Schedule. We believe that our audit provides a reasonable basis for our opinion. The presentation in the Basis Schedule was prepared in conformity with the accounting practices prescribed by the Internal Revenue Service under the accrual method of accounting and by the Texas Department of Housing and Community Affairs (the “Department”), which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, the Basis Schedule, referred to above presents fairly, in all material respects, costs incurred for the Development as of the Effective Date, on the basis of accounting described above. In addition to auditing the entries in the Basis Schedule, we have, at your request, performed certain agreed-upon procedures, as enumerated below, with respect to the Development. These procedures, which were agreed to by the Owner and the Department, were performed to assist you in determining whether the Development has met the 10% test in accordance with Internal Revenue Code Section 42(h)(1)(E) and Treasury Regulation Section 1.42-6. All references to Section 1.42-6 in this letter include the proposed Section 1.42-6, now pending approval, regarding the timing of the 10% requirement. These agreed-upon procedures were performed in accordance with standards established by the
Page 6 of 7
2004 Carryover Allocation Procedures Manual Part II – 10% Test
American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the specified users of the report. Consequently, we make no representations regarding the sufficiency of the procedures below either for the purpose for which this report has been requested or for any other purpose. We performed the following procedures as of the Effective Date unless another date is stated: ♦ We calculated, based on estimates of total development costs provided by the Owner, the Development’s total reasonably expected basis, as defined in Treasury Regulation Section 1.42-6, to be $_________. ♦ We calculated the reasonably expected basis incurred by the Owner to be $_________. ♦ We calculated the percentage of the development fee incurred by the Owner to be ___% of the total development fee. ♦ We compared the reasonably expected basis incurred to the total reasonably expected basis of the Development, and calculated that ____% had been incurred. ♦ We determined that the Owner uses the accrual method of accounting, and has not included any construction costs in carryover allocation basis that were not properly accrued. ♦ Based on the amount of total reasonably expected basis listed above, for the Owner to meet the 10% test in accordance with the Internal Revenue Code Section 42(h)(1)(E) and Treasury Regulation Section 1.42-6, we calculated that the Development needed to incur at least $___________ of costs on or before the Effective Date. As of the Effective Date, costs of at least $___________ had been incurred, which is approximately _______% of the total reasonably expected basis of the Development. We were not engaged to, and did not, perform an audit of the Owner’s financial statements or of the Development’s total reasonably expected basis. Accordingly, we do not express an opinion on the two items just named. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the Owner and the Owner’s management and for filing with the Department and should not be used by those who have not agreed to the procedures and taken responsibility for the sufficiency of the procedures for their purposes.
Signature of Principal of Firm Printed or Typed Name & Title , City
Phone #
Date
State
Facsimile #:
Contact Person for questions about this report:
Page 7 of 7