Non-Profit Developers

General Rules for Qualified 501(c)(3) Multifamily Housing Bonds

  • Property financed must be newly constructed, or if not newly constructed (used property is acquired), the 20-50 test (40-60 test) must be satisfied or 100% rehabilitation is required.
  • 100% of property financed must be owned by 501(c)(3).
  • No more than 5% of the net proceeds may be used in private trade or business.
  • Must have a TEFRA hearing.
  • No prohibited facilities (skybox, retail liquor, gambling, etc.).
  • Weighted average maturity of Bonds may not exceed 120% of useful life of assets financed (ignore land; life of working capital equals zero).
  • No more than 2% of tax-exempt proceeds may pay costs of issuance.
  • Arbitrage and rebate rules apply.

Management Contract Rules Under Rev. Proc. 97-13

  • For-profit manager can be paid expenses and reasonable fee for services.
  • No part of manager’s fee may be based on net revenues.
  • Formulaic approach to permitted duration—15 years if 95% of fee is fixed; 10 years if 80% of fee is fixed; 5 years if 50% of fee is fixed. With 50% fixed fee, contract must be terminable by the 501(c)(3) at Y3 without penalty.

7 Warning Signs
IRS field agents’ manual highlights 7 "red flags" that suggest possible violations

  1. Board scattered with no connection to project/community.
  2. Created and controlled by a for-profit.
  3. Organizational/start up costs of the non-profit paid by (loan from) for-profit.
  4. For-profit seller of project recently acquired it at significantly lower price.
  5. For-profit seller is buying subordinated debt.
  6. LOC bank or guarantor has control over non-profit’s budget/finances.
  7. Management Contract violates Rev. Proc. 97-13.

Benefits of Qualified 501(c)(3) Multifamily Housing Bonds

  • No Private Activity Bond cap allocation required.
  • No prohibition on advance refundings.
  • No limit on land purchase.
  • No "substantial user/related party" problem.
  • No restriction on acquisition of used property (existing assets).
  • No Alternative Minimum Tax (AMT).
Non-Profit Apartment Developers Exemption from Real Property Taxes
In order to be eligible for an exemption from real property taxes an apartment owner must be wholly owned, on a direct or indirect basis, by a non-profit organization which has received a determination letter from the Internal Revenue Code with respect to the requirements of Internal Revenue Code Section 501(c)(3). Additionally, the Maricopa County Assessor’s office will only provide partial exemptions to the extent that the property is actually occupied by tenants who fit one of the following 3 criteria:
  1. Documentation exists that the individual or family occupying an apartment unit has an income at or below 50% of the median income limit per HUD;
  2. Documentation exists that the person or family occupying the apartment unit is considered elderly (i.e., 62 years of age or older); or
  3. Documentation exists that the person or family occupying the apartment unit is a recipient of SSD payments.

Unless one of the above 3 criteria are met the individual apartment unit and applicable percentage of the apartment project will be taxed in the same manner as if the project were owned by a for-profit business. As an example if a 100-unit apartment project had 25 units which met 1 of the 3 criteria set forth above then the Assessor would give the project a 25% exemption from taxation.

Please note that if a non-profit organizations, which is the general partner in limited partnership which utilized private activity bonds and the 4% low income housing tax credit to finance the project will be treated as for-profit developers; despite the fact that 100% of the units may be available for persons or families meeting each of the above-reference criteria.