Page 18 —
COLORADO REAL ESTATE JOURNAL
— January 6-January 19, 2016
Law & Accounting
P
ublic-private partner-
ships are all the rage
and for good reason:
Even in a strong market as we
currently enjoy, putting togeth-
er a large real estate project is
becoming more difficult and
certainly more complicated than
ever.
With high land costs, contin-
ued increases in fee structures
and escalating construction
costs, a long-term project is chal-
lenging – and that is without
consideration to the substantial
market risk that comes with
such projects. Throw in issues
related to large-scale infrastruc-
ture requirements, environmen-
tal issues or below-market rate
components and a developer
typically cannot make a deal
pencil without some govern-
ment help. As a result, pub-
lic-private partnerships have
become a permanent fixture for
most projects of any scale. Those
arrangements can take many
forms, from bonds issues sup-
ported by additional taxes or
special district taxes and fees to
outright grants of funds from
governmental authorities.
The transfer of benefits from
the public side of the equation
to the private side also can take
many forms: use of special dis-
tricts to allow the developer to
act as a quasi-governmental
entity to assess taxes to fund
infrastructure, relief from zoning
rules to allow more density, or
direct transfers of public prop-
erty and tax increment financ-
ing to allow the developer to
claim a portion of tax revenues
from the developed property
to help fund the development,
to name a few. If the private
side of the equation is receiv-
ing measurable benefit from the
arrangement, the question of the
income tax treatment must be
addressed.
Some arrangements may take
the form of debt (a borrowing
with a required repayment),
but if the benefit comes without
substantial strings attached, it
would be, on its face, income
to the developer. That is, the
Internal Revenue Code defines
income by exception; anything
received is income unless some
provision of the statute says it is
not. A loan (albeit cash received)
would be an exception since it
has to be repaid; a reward of
i n c r e a s e d
density
or
use of public
lands
may
be
except-
ed because
the
public
good offsets
any
value
received, but
a receipt of
cash that will
be used to
create assets
that will be
owned
by
the private
partner would generally be con-
sidered income without some
explicit exception.
Some examples for con-
sideration are receipt of some
kind of TIF payment directly
to the developer for its use in
building assets that the devel-
oper will own or a transfer of
property directly to the devel-
oper by a governmental entity
(either public lands or private
land acquired through emi-
nent domain). These types of
situations provide an obvious
example where the developer
has received a direct benefit that
would be taxable under the nor-
mal tax rules, which read, “gross
income means all income from
whatever source derived.”
There are amultitude of excep-
tions to this draconian concept,
with one particularly important
one for the matter at hand: A
contribution to a corporation by
a nonshareholder can be exclud-
ed from income. That means
simply that a corporate struc-
ture (yes, S corporations qualify)
should be used if the developer
receives direct benefit, at least
with respect to the entity receiv-
ing the benefit. There are spe-
cific rules around qualifying for
this corporate exception, so do
your homework, but most typi-
cal arrangements should qualify.
The takeaway, however, is
that partnerships cannot qualify
for this general exception from
reporting income; no similar
exception is available for non-
partner contributions to a part-
nership. This matter has been
batted around quite a bit and at
one time, the IRS had given its
blessing to a partnership quali-
fying under the same exception
as a corporation. However, the
IRS subsequently reversed its
field on the issue (this goes back
to 2011) and the courts have
consistently confirmed that only
corporations can take advantage
of the relief of income for non-
owner contributions, noting that
it is clear in the statue that it is a
corporation-only exception.
If you do use the corporate
exception to opt out of reporting
the benefit as income, the tax-
payer is also not allowed basis in
the asset. So no depreciation if a
built asset (with nonshareholder
funds) and no reduction for gain
calculations upon sale (likely not
a bad bargain since you push off
the tax event until a later year).
If you are compelled to use
a partnership structure, a pos-
sible out is to try to qualify the
receipt of the benefit as a loan;
proceeds from a loan, as noted
above, are an exception from the
general “everything is income”
requirement in the statute. This
approach could be applicable
where TIF bonds are created and
will be repaid, but the “debt”
under this approach must be
treated as real debt with all that
entails and any failure to repay
could just defer the taxable
income event to a later year.
Public-private partnerships
are a critical tool in any develop-
er’s toolbox, but don’t forget the
appropriate tax planning if you
go down that path, particularly
if you are new to that world. I
would also note that the status
of tax-exempt bonds as such can
be put at risk if not structured
properly. Direct private use of
assets funded by tax-exempt
bonds is tricky at best and care-
ful planning pre- and post-issu-
ance of the bonds is critical to
maintaining tax-exempt status
of the bonds. That is, not just at
the issuance of the bonds, but
for the term that the bonds are
outstanding as well.
It is important to note that
new regulations released in
October provide some guidance
and relief to the issues discussed
above. A careful review of the
new regulations, which will take
effect in early 2016, will pro-
vide a great assist in structur-
ing transactions that meet the
needs of the developer and the
public, helping to close the gap
between what is currently per-
mitted under the tax rules and
the reality of the marketplace.
s
Zane Dennis, CPA
Tax partner and real
estate practice leader,
Richey May & Co. LLP,
Englewood
Our national real estate practice
is focused on the evolving
needs of clients.
We advise on current positions,
opportunities, and complex
transactions in:
• Acquisition
• Development
• Financing
• Leasing
For more information, please call
Beverly Quail at 303.292.2400
