Our firm was lead counsel in a complex real estate transaction that involved 2000 inner-city low income housing units located on nearly 400 non-contiguous parcels in four cities. The owners were 17 limited partnerships. Our client managed all 2000 units and was a principal in the partnerships. The housing units, purchased between 1972 and 1982, carried approximately $60 million in debt in 40-year nonrecourse first mortgages, insured by HUD.
When the units were initially purchased, developed and rehabilitated, the partnerships benefited from tax provisions that allowed for rapid depreciation for deteriorated neighborhoods. When the HUD rental assistance contracts ended 20 years later, the partnerships either had to sell the housing units or restructure their financing. Selling, however, meant a significant tax consequence based on recapture of the depreciation the partnerships had taken during the prior 20 years. Complex restructuring allowed for the preservation of critical income tax basis for the original partnerships yet provided a mechanism for new funding to improve the properties.
Minimizing the tax burden and providing funding for long term viability of the properties involved several key steps: finding a buyer that was in the business of funding, managing and owning low income housing through tax credits and creative financing; modifying the HUD first mortgages to second positions so the new buyer could utilize low income tax credits and obtain new financing; coordinating several HUD programs, coupled with new and old income tax concepts; and transferring the 2000 units to a HUD and IRS qualified entity.
Completing the transaction, which closed in April 2003, took approximately two years and involved two of the largest law firms in Columbus representing the buyer and HUD.
