It is a long standing tenet of tax law that financing charges relating to loans that begin as construction financing and convert to permanent financing need to be amortized over the life of the loan, rather than included in eligible basis in total or in an amount designated by the lender as attributable to the construction portion of the loan.
Going back as far as 1972, the Tax Court held that loan fees are amortizable over the life of a loan. In a recent transaction, financing costs of several hundred thousand dollars were initially included in basis in a developer’s preliminary numbers and, when asked, the lender said that the entire amount was attributable to the construction portion. The Lender even offered to put that “in writing.” Of course, to a layman, it seems rational to go with what the lender says. However, this position on the tax treatment of loan fees has and likely would not hold up to IRS scrutiny in an audit and tax credits could be at risk, particularly in a bond deal or in a 9% deal where there is no extra basis.