SERVICE WAIVES HOLDING PERIOD FOR ACQUISITION OF LOW-INCOME HOUSING PROJECT.

Index Number: 42.04-07

This letter responds to a letter dated September 21, 2005, and subsequent correspondence submitted by one of Taxpayer's authorized representatives requesting a ruling that will waive for Project buildings the 10-year holding period requirement for existing buildings under § 42(d)(2)(B)(ii) of the Internal Revenue Code, pursuant to the authority for the acquisition of certain federally- assisted buildings provided in § 42(d)(6)(C). The Internal Revenue Service Office that will have examination jurisdiction over Taxpayer is located in City A.

The relevant facts and representations in these submissions are set forth below.

Taxpayer entered into a real estate purchase agreement on a, which was amended on f, to purchase Project from Seller for a purchase price of $b. The anticipated closing date of the acquisition of Project will be c.

Project is a d-unit multi-building residential project.

Project was originally constructed and placed in service by First Owner, a State 2 limited partnership, in Year 1. On g, Second Owner, a State 2 limited partnership, purchased Project from First Owner. At that time, in consideration of the sale of Project to Second Owner, Second Owner executed a promissory note in favor of First Owner, and the partners of Second Owner pledged all of their partnership interests in Second Owner to First Owner as collateral for the note. Second Owner failed to make payment on the promissory note when it became due and First Owner foreclosed on the note. On h, the District Court of County, in case number e, granted judgment to First Owner on its foreclosure action. As a result of the foreclosure and judgment dated h, First Owner became the 100 percent owner of Second Owner. This foreclosure resulted in anew placed in service date for federal tax purposes.

On i, First Owner changed its name to Name 1, and made General Partner, a State 2 limited liability company, its general partner. Name 1 was later changed to Name 2 on k.

Because the interval between the date Project was last placed in service and the expected date of acquisition on c is less than 10 years, Taxpayer will fail to meet the 10-year holding period requirement of § 42(d)(2)(B)(ii) for existing buildings in Project. Thus, a waiver of the 10-year holding period requirement is necessary to qualify Project buildings for the acquisition credit under § 42.

Project is subject to a mortgage loan, the unpaid balance of which is projected to be $o on c. The mortgage loan is insured by the United States Department of Housing and Urban Development (HUD) and is secured, in part, with interest reduction payments from HUD pursuant to Section 236 of the National Housing Act. The Project is designated as FHA project number m. Project also receives substantial federal rental assistance under Section 8 of the United States Housing Act of 1937.

The mortgage loan is eligible for prepayment under subtitle B of the Emergency Low Income Housing Preservation Act of 1987 (ELIHPA) at any time provided the owner gives the mortgagee, HUD, the residents, and the appropriate representative of the state/local government the requisite statutory notice. In a certification from HUD received by Taxpayer on n, HUD states that if the Service does not grant the requested waiver, it is reasonable to expect that Project will cease to comply with the low-income occupancy requirements.

If Taxpayer is able to obtain the requested waiver, it represents that it will agree to sign a waiver of its unconditional right to prepay the mortgage loan and such waiver will be binding on all successors of Taxpayer. Further, Taxpayer represents that it will enter into new long-term use restrictions with HUD which will preserve Project as affordable housing. In consideration of agreeing to long-term use restrictions on Project, HUD is expected to approve a financing plan proposed by the Taxpayer to acquire, rehabilitate, and maintain Project as an affordable housing development.

Taxpayer makes the following additional representations and certifications concerning Project:

1) Taxpayer's acquisition of Project buildings will be by purchase as defined in § 179(d)(2), as applicable under § 42(d)(2)(D)(iii)(I);

2) Taxpayer will acquire Project buildings to provide affordable housing to qualified low-income households;

3) To the best of Taxpayer's knowledge, there have been no nonqualified substantial improvements to Project buildings since they were last placed in service;

4) As of the date of Taxpayer's application for waiver, each building in Project is a "federally-assisted building" as defined in § 42(d)(6)(B) and § 1.42-2(c)(1) of the Income Tax Regulations;

5) No Project buildings were previously placed in service by Taxpayer, or by a person who was a related person (as defined in section 42(d)(2)(D)(iii)(II)) to Taxpayer at the time the buildings were last placed in service;

6) To the best of Taxpayer's knowledge, no prior owner of Project was allowed a tax credit under § 42 for Project;

7) Taxpayer is in compliance with the applicable requirements of § 1.42-2; and

8) All terms and conditions of § 42 and related sections, including minimum substantial rehabilitation as provided by § 42(e)(3), will be met except for the 10-year holding period requirement of § 42(d)(2)(B)(ii).

For an existing building to qualify for the 30-percent present value low-income housing credit, § 42(d)(2)(B)(ii) requires there be a period of at least 10 years between the date of the building's acquisition by the taxpayer and the later of:

(I) The date the building was last placed in service, or

(II) The date of the most recent nonqualified substantial improvement of the building.

Section 42(d)(6)(A) provides an exception to the 10-year holding period requirement of § 42(d)(2)(B)(ii). It provides that a waiver may be granted for a federally-assisted building if the Secretary determines that the waiver is necessary --

(i) to avert an assignment of the mortgage secured by property in the project (of which such building is apart) to HUD or the Farmers Home Administration (now Rural Housing Service, USDA-RHS), or

(ii) to avert a claim against a Federal mortgage insurance fund (or such Department or Administration) with respect to a mortgage which is so secured.

Section 42(d)(6)(C) provides that a waiver may be granted under § 42(d)(6)(A) (without regard to clauses (i) and (ii)) for a federally-assisted building described in § 42(d)(6)(B)(ii) or (iii) if:

Section 1.42-2 contains requirements that must be satisfied before the Secretary will grant the waiver referred to in § 42(d)(6). Taxpayer's representations, including a written certification from HUD, indicate that these requirements have been satisfied.

Based solely upon the above facts, Taxpayer's representations, and the certification from HUD, we have determined that Project buildings are federally-assisted within the meaning of § 42(d)(6)(B)(ii), the mortgage loan on Project buildings is eligible for prepayment under subtitle B of ELIHPA, the appropriate Federal official has certified that absent the requested waiver it is reasonable to expect that if the waiver is not granted the Project buildings will cease to comply with their low-income occupancy requirements, and the ability to prepay the mortgage without HUD's consent will be waived by Taxpayer and will be binding on all successors of Taxpayer. Therefore, we rule as follows:

The 10-year holding period requirement of section 42(d)(2)(B)(ii) is waived for Taxpayer's acquisition of Project pursuant to § 42(d)(6)(C).

No opinion is expressed or implied regarding the application of any other provision in the Code or regulations. Specifically, no opinion is expressed or implied regarding whether Taxpayer's costs of acquisition and rehabilitation of Project buildings will otherwise qualify for the low-income housing credit under § 42.

This ruling is directed only to the Taxpayer which requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. A copy of this letter should be filed with the federal income tax return for Taxpayer and its partners for the first taxable year in which the low-income housing credit for the building(s) in the project is/are claimed.

In accordance with the power of attorney on file with the ruling request, a copy of this letter is being sent to each of Taxpayer's authorized representatives.