2004 10% Test Procedures Manual

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					Multifamily Finance Production Division                                                    Director, Brooke Boston
Telephone: (512) 475-3340                                                                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.”




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                            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.




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                          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).




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                             2004 Carryover Allocation Procedures Manual Part II – 10% Test



 2004 10% TEST – OWNER AND DEVELOPMENT SUMMARY (TAB 1)

Development Name:                                                          TDHCA Development #:
 Development Address:
 City:                                                    Zip:
Owner Name:                                                                Federal Tax ID No.:
Owner Contact Name:
Owner Contact Address:                                               E-Mail (REQUIRED):
City:                             State:        Zip:                 Phone:                       Fax:
10% Test Contact Name:
10% Test Contact Address                                             E-Mail (REQUIRED):
City:                             State:        Zip:                 Phone:                       Fax :
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.




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                             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)




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                             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
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                            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                                   Date

Printed or Typed Name & Title
                                 ,
City                                 State
Contact Person for questions about this report:
Phone #                                           Facsimile #:




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