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Q&A: How a Real Estate Entity Qualifies as a QALICB Under the Targeted Populations Rules

Published by Gregory Clements on Tuesday, May 1, 2012

Journal cover May 2012   Download PDF

Question: How does a real estate entity qualify as qualified active low-income community business (QALICB) under the new markets tax credit (NMTC) targeted population regulations?

Answer: Treasury Regulation Section 1.45D-1(d)(9)(i)(D) gives guidance as to how a real estate entity can qualify as a QALICB under the targeted population rules.  This guidance breaks the requirement into two items, a location test and a gross income test.

The location test is addressed under Treasury Regulation Section 1.45D-1(d)(9)(i)(D)(1), which states that an entity that rents real property to others for low-income targeted populations and otherwise is a  qualified business  under Treasury Regulation Section 1.45D-1(d)(5) (i.e. not a “sin business”) will be treated as located in a low-income community if at least 50 percent of its total gross income is derived from:

  1. rentals to individuals who are low-income persons, or
  2. rental to QALICBs that meet the low-income targeted population requirements by either:
    1. the sales, rentals, and services requirement (Treasury Regulation Section 1.45D-1(d)(9)(i)(B)(1)(i)), or
    2. the employee requirement (Treasury Regulation sections 1.45D-1(d)(9)(i)(B)(1)(ii) and (d)(9)(i)(B)(2)).

The gross income test is addressed under Treasury Regulation Section 1.45D-1(d)(9)(i)(D)(2) that states if an entity’s sole business is the rental to others of real estate, and the entity meets the location test, the 40 percent gross income requirement under Treasury Regulation Section 1.45D-1(d)(9)(i)(B)(1)(i) is considered satisfied.

Although the income test is a requirement for real estate targeted population entities, the income test is met if the location test is met. As a result, all attention should be focused on the location test.

The following is an example of a real estate entity qualifying as a QALICB using targeted populations.  ABC is an operating business that leases a building from XYZ. ABC qualifies as a QALICB under the low-income targeted populations rules because 56 percent of ABC’s employees are low-income persons thus meeting the employee requirement under Treasury  Regulation sections 1.45D-1(d)(9)(i)(B)(1)(ii) and (d)(9)(i)(B)(2). ABC is located in a census tract that meets the 120 percent income restriction in accordance with Treasury Regulation Section 1.45D-1(d)(9)(i)(C). XYZ’s sole business is leasing real property to ABC. XYZ generates 100 percent of its revenue from ABC, a QALICB serving a low-income targeted populations, therefore XYZ meets the QALICB requirements under Treasury Regulation Section 1.45D-1(d)(9)(i)(D).

If a real estate entity attempts to satisfy the location test by rentals to individuals who are low-income persons, that rental will likely be residential. It is important to note that no more than 80 percent of the entity’s revenue can be derived from residential rental in order to qualify as a QALICB.

In the more likely event that the real estate entity attempts to qualify by leasing to a targeted population QALICB, documentation of QALICB qualification should be retained not only for the real estate entity but also for the tenants. In most cases there will be a single tenant requiring qualification as a targeted population QALICB; however, there may be circumstances that would require multiple tenants to qualify as targeted population QALICBs.  

To the extent the tenants are entities under common control with the real estate entity, and the group either serves or employs low-income people as a normal course of business, this requirement may not be extremely difficult to meet, but the documentation requirements may increase or change from current practice. In the event that the real estate entity has not identified some or all of its tenants or the tenants are not under common control, the lease restrictions can be extremely burdensome, and should be addressed early in the lease term discussions.

If you plan to attempt to qualify a real estate entity under the targeted population QALICB rules, it is very important to surround yourself with professionals that possess a track record of closing targeted population QALICB transactions.

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