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PRIVATE LETTERRULING

200703024 (“PLR”)©

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The PLR Was Published OnJanuary 19, 2007

• Each tenant, granted a right of first refusal, can buy that unit, along with all the tenants in the property, upon the conversion of Section 42 rental property to condominiums. The ownership plan can be implemented after the compliance period ends. All tax credits taken will not be recaptured.

• The State HFA can terminate the existing LURA after the compliance period terminates and substitute a new LURA for rental and home ownership.

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MHDC Supported PLR• A conversion does not diminish the affordable

housing pool;• Tenants will be more committed to stay to conversion

date, keeping property in better condition;• Prior to conversion, the owner has the incentive to

maintain the property;• Following the conversion, tenants, as owners, have the

incentive to maintain the property;• MHDC will not have to use new allocations of

housing tax credits or other resources;• The property’s use for affordable housing is

maintained and extended; and• The American Dream of home ownership is advanced.

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Major PLR Guidelines• The Mathematical Formula setting the

home’s sales price is derived from the maximum monthly LITC rent. The new monthly payment pays the mortgage and the condominium fee.

• No displacement can occur after the conversion process starts.

• The extended use period was extended from 15 years to 30 years.

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The PLR’s Redacted Facts1. The sales price is $79,500 for the 1BR and $89,500

for the 2BR (including one parking space).

2. The condominium fee is all inclusive.

3. The tenancy rent credit is 1% of the sales price for each full year of occupancy.

4. Any home re-sales must be to a then income eligible Section 42 buyer.

5. The re-sale price is capped at the original sales price plus 10%, compounded per year.

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MHDC’s Baseline

1. MHDC has issued a Baseline memorandum detailing implementation rules that include:

i. No ongoing tenant income re-certifications after conversions;

ii. Non-tenant and resale home buyers are income certified on the date of the sale contract;

iii. HOA manager must be Section 42 experienced;iv. All units must be owner occupied; andv. The qualified contract period can be by-passed.

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2. The Baseline sets forth PLR criteria for other 1990 – 1995 project conversions:

i. MHDC must approve all PLR conversions;ii. Once approved, all leases must include a tenant right of

first refusal;iii. A physical needs assessment must be prepared;iv. A sales schedule and HOA management plan must be

submitted;v. No conversion will be approved if there are material

Form 8823 violations; andvi. MHDC will continue to monitor the property’s physical

condition.

3. Nixon Peabody Reliance Letter.

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PLR Sponsor Imposed Requirements

• Common paymaster for mortgage payment and condominium fee;

• Mandatory home ownership counseling course; and

• HOA management company will have entry rights to fix common elements and make unit repairs.

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Each State HFA Must Adopt the PLR

• Nixon Peabody Reliance Letter.

• Each State HFA may specify its own approval process.

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Downtown Kansas City, MO

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Quality Hill Projects

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Phase II-B

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Phase II-B

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Phase II-B

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Before

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After

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Before

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After

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Phase II-B

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• 84 Units 60 1-BRs24 2-BRs

• Parking 90

• LITC Allocation – 1991

• Year Completed – 1993

• LITC Award – 9%

Quality Hill Phase II-B

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• 2005/2006 NOI = $200,000 ± per year

• Apartment Value = $2,500,000 ±

• Existing Debt (12/31/06) = $5,110,000 ±

(1st Mortgage = $1,110,000)

(2nd – 5th Mortgages = $4,000,000 ±)

Phase II-B

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Value as Condos = $6,900,000• Less1. Commissions2. Marketing3. Closing costs4. Project Close Out5. Home Ownership Counseling6. Professional Fees7. Condominium Survey/Platting8. Rehabilitation – Interior/Exterior9. Conversion Loan Interest/Additional Advance10. Existing Debt Retirement11. Developer Fee12. LP Return of Capital/Taxes

Phase II-B

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1 BR 2 BRCurrent Maximum Tax Credit Rents(Net of Utility Allowances) $ 695 $ 817

Purchase Price (with 1 parking space) $79,500 $89,500

Monthly PaymentAll In Condo Fee $ 232 $ 276Mortgage-Monthly(6%, 30 Year) (95% Financing) $ 454 $ 510

$ 686 $ 786

Down Payment RequiredBefore Occupancy Credit & Grant$ 3,706 $ 4,516

Phase II-B

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Special Home Buyer Incentives

• 1% Per Annum Credit To Tenant For Occupancy Up To 10 Years.

• Homeowner Down Payment/Closing Grant From City of $3,000 per Home.

• Real Estate Tax “Freeze”.

• CRA End Loan Programs

(A) Bank Of America

(B) HFA (First Time HFA Financing).

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1 BR 2 BRPrice $79,500 $89,500Closing Costs 905 905Less:City Grant ($3,000) ($3,000)Credit 3 yr Occupancy ($2,385) ($2,685)Cash Down Payment ($500) ($500)

$74,520 $84,220Monthly PaymentLoan (6%, 30 years) $ 447 $ 505Condo Fee 232 276

Total $ 679 $ 781

Max Tax Credit Rent $ 695 $ 817(Net Of Utility Allowance)

Purchase Example For A 3-Year Tenant

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Other Issues

• Local and State condominium conversion laws.

• Section 8 Tenants.

• Partner Consents.

• Lender Consents.

• Tax Implications.

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• Each State HFA Must Approve the PLR.

• The “politics” of affordable/workforce Home Ownership are positive and real.

• The Mathematical Formula must “work” for the homebuyers and the developer.

• Conversions are not for “beginners”.

• Most post compliance period properties may not fit into the PLR.

Take Aways