A low-income housing tax credit (LIHTC) property in Kansas City, Mo., took a big step toward converting from apartments into an affordable homeownership development after a critical Internal Revenue Service (IRS) ruling.

The ruling is an important outcome for affiliates of McCormack Baron Salazar and DFC Group, the property’s co-general partners, and SunAmerica Affordable Housing Partners, the limited partner.

The companies want to turn their 84- unit Quality Hill development, which was completed and first occupied in 1993, into condominiums, giving the tenants an opportunity to purchase their units at affordable rates upon completion of the 15-year LIHTC compliance period.

They were seeking IRS guidance so that the state housing finance agency and the developer could extend the affordability requirements in homeownership form at the end of the initial compliance period, said Herb Stevens, a partner at Nixon Peabody, LLP, who served as legal counsel.

The IRS responded this year with Private Letter Ruling 200703024, which acknowledges that the right of first refusal to purchase a unit granted to each tenant as part of the condominium plan satisfies the requirements of Sec. 42 of the Internal Revenue Code, which governs the LIHTC program.

“The ruling said it is consistent with the Sec. 42 rules to have a homeownership model in the second 15 years and it wouldn’t cause a loss of the tax credits in the first 15 years,” said Steven Stogel, president of the St. Louis-based DFC Group.

The IRS said that after the compliance period, the land-use restriction agreement can be modified to focus on homeownership without replacing tenants who want to remain as rental tenants, according to Stogel.

The Missouri Housing Development Commission, which is key to the plan, supported the request. The homeownership plan calls for a new 30-year extendeduse period, so the state housing agency would continue to be involved with the project.

Private letter rulings cannot be used as precedent by others, but they do reflect the IRS’s interpretation of the law. As a result, the recent ruling could have a big impact on the industry, opening the door for other affordable housing owners interested in converting LIHTC properties into homeownership developments.

“This is a great opportunity for tenants to become homeowners and for government entities to not have to use new bond allocations or new 9 percent lowincome housing tax credit allocations to keep developments affordable,” said Howard Heitner, chief operating officer at SunAmerica Affordable Housing Partners.

The ruling will have to be looked at on a state-by-state basis. Many see Quality Hill as a model, however. Heitner said he thinks it is a “fantastic exit strategy” for tenants, new homeowners, and government entities.

Stogel said he expects units at Quality Hill Square Condominiums to sell for about $79,500 for one-bedroom units and $89,500 for two-bedroom units, including one parking space per home. Under the plans, residents will be able to buy their units starting in 2008. The mortgage payments and the condominium fees, combined, would not exceed the tax credit rents.