The partnership agreement (or operating agreement), that is entered into by a general partner and an investor/limited partner, is an important document of a low-income housing tax credit (LIHTC) development. This agreement governs each partner’s rights and obligations to each other and the partnership itself. Often times, the general partner has significant obligations and responsibilities to the LIHTC development. Today’s article reviews some of these obligations that might be easy to overlook.
Most of the time, there are deliverables that must be completed by a specified due date noted in the partnership agreement. Meeting those due dates is the responsibility of the general partner.
The most common deliverables are the annual audit and tax return. It is important that the general partner knows the due dates required by the limited partner, ensures an independent CPA firm is engaged, and has a plan to guarantee any draft or final due date requirements are met.
Some limited partners will look for a quarterly unaudited balance sheet, profit and loss statement, and additional information to supplement the annual audit and tax return. It is helpful to create a checklist of these various due dates to ensure compliance with the partnership agreement.
There are other deliverables that a limited partner could require from the general partner in order to meet certain milestones to obtain equity contributions; such items include a calculation to determine that the development has met the stabilization or breakeven operations, in accordance with the definitions of the partnership agreement. Requirements to receive equity contributions should be reviewed in detail by the general partner to ensure the partnership has engaged all necessary parties, such as an independent CPA firm. Engaging with an independent CPA firm in a timely manner can help avoid delays in receiving capital contributions.
Additional General Partner Contributions
There is often language in the partnership agreement that triggers additional general partner contributions to the partnership. The most frequent instances we have seen are listed below:
- If the designated proceeds (typically mortgage loans) are insufficient to pay development costs, a contribution from the general partner may be required to satisfy these obligations.
- Certain reserves, that may have annual funding requirements payable out of surplus cash, may require a general partner contribution if there is insufficient cash flow to meet the funding requirement.
- The general partner is often required to fund an equity contribution to satisfy any outstanding balances on a developer fee by a due date defined in the developer agreement or partnership agreement.
Depending on how the general partner entity is organized, the general partner may not have sufficient cash to pay such contributions. In these circumstances, the general partner will typically coordinate with an affiliated entity to obtain the necessary funding to satisfy required general partner contributions.
McKonly & Asbury, LLP is a leader in accounting for affordable housing partnerships. Our team has the specialized knowledge to help you ensure you comply with IRS and tax credit allocating agency reporting requirements. For more information on these services and more be sure to visit our Affordable Housing page, and don’t hesitate to contact us.