SECTION 5. EXAMPLES

The following examples illustrate the application of the requirements of section 4 of the revenue procedure to a transaction in which the Investor invests in a Partnership to obtain the § 47 rehabilitation credits. The examples assume that the taxexempt use property rules of § 168(h) do not apply. The examples also assume that the Partnership may validly claim the § 47 rehabilitation credits with respect to the rehabilitation of Building (defined below).

.01 Example 1 . (i) Transaction Struc- ture . The Developer Partnership is a limited liability company classified as a partnership for federal income tax purposes. The Developer Partnership is the owner for federal tax purposes of a historic commercial building (Building) that it plans to rehabilitate. The Developer Partnership is

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the Partnership for purposes of satisfying the requirements of this revenue procedure.

The Principal and the Investor will own Partnership. The Principal is the manager of the Partnership and authorized to act on behalf of the Partnership. The Investor is an unrelated party that will contribute money to the Partnership in exchange for an interest in the Partnership.

(ii) Investor’s Contribution to Partner- ship . The Investor enters into an agreement with the Partnership to acquire an interest in the Partnership in exchange for an expected capital commitment of $100x, of which $75x is fixed. Prior to the date Building is placed in service, Investor acquires its interest in the Partnership by making an up front cash contribution of $20x. Investor reasonably expects to contribute the remaining $80x of its expected capital commitment upon the achievement of mutually agreed upon milestones (e.g., receiving National Park Service approvals, leasing the Building to tenants).

(iii) Partnership Interests . The Partnership is governed by a partnership agreement that satisfies the requirements of § 704(b). From the date the Investor becomes a partner until the date that is five years after the Building is placed in service (Transition Date), the Investor will be allocated 99% of the Partnership’s profits and losses, as determined for federal income tax purposes. Consistent with the Partnership’s allocation of profit and loss, the Investor will also be allocated, and will claim, 99% of the § 47 rehabilitation credits available to the Partnership. The Principal will be allocated 1% of the profits and losses during this period. As of the Transition Date and until the earlier of the date that the Investor is no longer a member of the Partnership and the date that the Partnership terminates, the Investor will be allocated 5% of the Partnership’s profits and losses, and the Principal will be allocated 95% of the Partnership’s profits and losses. The Investor has a right to receive a pro rata share of all distributions commensurate with the Investor’s share of the Partnership profits. The Investor’s partnership interest has a reasonably anticipated value commensurate with the Investor’s overall percentage interest in the Partnership, separate from any federal,

state, and local tax deductions, allowances, credits, and other tax attributes to be allocated from the Partnership to the Investor.

(iv) Partnership Operations . The Partnership will operate the Building and lease the individual units in the Building to retail businesses under terms that are consistent with lease terms for a real estate development project that does not qualify for § 47 rehabilitation credits. All fees paid by the Partnership, including any fees paid to the Principal, are reasonable and are consistent with fees commonly paid in a real estate development that does not qualify for § 47 rehabilitation credits.

(v) Guarantees . No party involved in any part of the rehabilitation has directly or indirectly provided a guarantee to the Investor regarding the Investor’s ability to claim of § 47 rehabilitation credits, the cash equivalent of the credits, or the repayment of any portion of the Investor’s contribution due to an inability to claim the credits in the event the Service challenges all or a portion of the transactional structure of the Partnership. Further, no party involved in any part of the rehabilitation has directly or indirectly guaranteed the Investor that it will receive distributions from the Partnership or that the Investor will receive consideration in exchange for its Partnership interest (other than the Investor’s fair market value sale rights described in paragraph (vi) below). The Partnership and the Principal have provided the Investor with unfunded guarantees commonly provided to investors in commercial real estate development transactions that do not qualify for the § 47 rehabilitation credit. In addition, the Partnership and the Principal provided an unfunded guarantee to the Investor that the Partnership and the Principal will undertake any acts necessary for the Partnership to claim the § 47 rehabilitation credit. Similarly, the Partnership and the Principal have provided an unfunded guarantee to the Investor that the Partnership and the Principal will not engage in any act that will negatively impact the Partnership’s ability to claim the § 47 rehabilitation credit or that would result in the recapture of the § 47 rehabilitation credit. The Principal has also provided an unfunded guarantee requiring it to contribute additional cash to the Partnership to the extent of any

Partnership operating deficit. Under the terms of the guarantee, if the Principal or the Partnership fail to meet their obligations, the Investor will be repaid all or a part of its contribution and any costs that Investor has incurred with respect to the transaction. The operating deficit guarantee does not include amounts required to fund expenses for more than twelve months of operation.

(vi) Purchase Rights and Sale Rights . Neither the Partneship nor the Principal has any contractual right to purchase the Investor’s interest in the Partnership at a future date. For a period of six months beginning on the date that is six months after the Transition Date, the Investor has the right to require the Principal to purchase the Investor’s interest for the fair market value of the interest. The Investor did not acquire its interest in the Partnership with the intent of abandoning its interest.

(vii) Conclusion . Under the facts of this example, because each requirement set forth in section 4 of this revenue procedure is met by the Partnership and its partners, the Service will not challenge the Partnership’s allocation of 99% of the § 47 rehabilitation credits to the Investor.

.02 Example 2 . (i) Transaction Struc- ture . The facts are the same as in Example

1. In addition, the Master Tenant Partnership, a limited liability company classified as a partnership for federal tax purposes, will lease the Building from the Developer Partnership (Head Lease). The terms of the Head Lease are comparable to the lease terms of a real estate development project that does not qualify for § 47 rehabilitation credits. The Developer Partnership will make an election pursuant to § 1.48–4(a)(1) to treat the Master Tenant Partnership as having acquired the Building solely for purposes of the § 47 rehabilitation credits, allowing the Master Tenant Partnership to properly claim the § 47 rehabilitation credits. Therefore, the Master Tenant Partnership is the Partnership for purposes of satisfying the requirements of this revenue procedure. The Partnership will also own an interest in the Developer Partnership. The Investor does not own an interest in the Developer Partnership other than its indirect interest held through the Partnership. Further, the Partnership will sublease the Building to retail

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businesses as described in Example 1. The duration of these subleases will be shorter than the Head Lease.

(ii) Conclusion . Under the facts of this example, because each requirement set forth in section 4 of this revenue procedure is met by the Partnership and its partners, the Service will not challenge the Partnership’s allocation of 99% of the § 47 rehabilitation credits to the Investor.