Investor and Developer Alert!

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The new audit guidelines issued by the Internal Revenue Service have strong provisions concerning the treatment of developer fees that could have far-reaching impact for the entire Low Income Housing Tax Credit Industry. The IRS is attempting to exclude a portion of developer fees from eligible basis that could be attributed to land acquisition and syndication activities. The following activities are considered land acquisition services and under the guidelines should be attributed to land and excluded from basis:

1. Analyze the Qualified Allocation Plan for targeted areas within a state.
2. Identify potential land sites
3. Analyze the demographics of potential sites
4. Analyze a site's economy and forecast future growth potential
5. Determine site's zoning status and possible rezoning actions
6. Contact local government officials concerning access to utilities, public transportation, impact fees and local ordinances.
7. Perform environmental tests on selected sites.
8. Negotiate the purchase of the land and its related financing.

It should be clear that all of these activities are done for every project in the site location and feasibility portion of the project. It should also be clear that unless the developer keeps detailed records of the time spent by his staff in these activities, the developer fee included in basis can be attacked by the IRS, probably successfully, with very negative impacts on the tax credits already sold to equity investors.

We are offering a solution that will eliminate developer fee exclusion problems. We will conduct all land acquisition activities for a modest consulting fee. You will not be exposing your partnership to developer fee exclusion problems and possible recapture of credits. As an example, let's say a project has a developer fee of $500,000. On audit, the IRS finds that 10% of the developer's time was spent on land acquisition activities. Therefore, 10%, or $50,000 of the developer fee would be excluded from basis. This $50,000 exclusion could result in a loss of $45,000 in credits and a potential $36,000 loss in tax credit equity from the investor. Even worse, if the credits were sold and the project was placed in service at the time of the audit, your investor would face recapture of the first year's credits taken on their tax return.

Click here to review excerpts from the IRS audit guide that discuss the treatment of developer fees.

Click here to have someone contact you regarding land acquisition activities.