Every Battle is Won Before it is Fought.
Planning for Year 15
Presenter:
Dan Mendelson, President, DTM and Assoc. Inc.
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OBJECTIVES OF HAND YEAR 15 SESSION
– Understand background on Year 15/Exits and current
Market Conditions-early exits, debt, etc.
– Discuss key issues/factors to help you think about exits,
assets and how to approach portfolios or single
properties.
– Touch on Role of Public Sector Lenders in the “deal”
and the process.
– Learn how to develop an action plan.
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THE YEAR 15/EXIT PROCESS
– Step 1: Know the Properties and Portfolio
– Step 2: Know your partners and stakeholders
– Step 3: Know your documents and Section 42
– Step 4: Develop your plan(s)
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THE PROPERTY- WORKBOOKS AND/OR SUMMARY
Project
Property Condition
Capital Needs- Marketability?
Income 2010- at Maximum? Section
8s?
Property Operating Expenses 2011
at Market?
Tax Abatement? Continuing?
Per Unit/Per Year Expenses
2011 NOI
Replacement Reserve Payment Per
Year
Projected Value at Year 15 using
Cap Rate of 8%
Price per Unit
Estimated Total Reserves (Operating
and Replacement) at Year 15
Estimated Total Reserves (Operating
and Replacement) at Year 15
Estimated Debt at Year 15
Current Owner's Equity At Year 15
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PARTNERS AND STRUCTURE OF LIHTC INVESTMENTS
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Investments are sold through Limited Partnerships and
LLC’s
Partnership Agreements control dispositions, providing:
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Transfer restrictions and price
Consent requirements
Financial hurdle: Benefits or Return
Distribution of Proceeds
Liquidation and Dissolution
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Investor
$
Equity Fund
LP = Investor(s) 99.99%
GP = .01%
$
Project
LP =Syndicator NNEHIF 99.99%
GP = Developer/Sponsor .01%
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TYPES OF INVESTORS
Types of Investor vary:
• Direct Investors
• Syndicators (“Intermediaries”)
– Single Corporate Investor Funds
– Multiple Corporate Investor Funds
– Multiple Individual Investor Funds
Types of Syndicators vary:
• National for-profit
• National nonprofit
• Regional (mostly nonprofit)
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PARTNERS MATTER – THOUGHTS?
• Different Investors/Syndicators have different goals and
constraints.
• And this has and will continue to change!
• EVERYONE is looking for Value/Cash these days. Money
goes in different pockets! Value is a changing definition.
• What’s Your Partner Thinking these days? M&Ms?
• 70-85% of properties have no value- LP exit is the easiest
part of the equation.
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ONE SYNDICATOR’S OBJECTIVES
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Deliver Expected Investor Benefits
Exit investor in Year 16
Transfer to Nonprofit Sponsors
Works with the sponsor to develop its Year 15 transition plan
Preserve affordability
Minimize displacement of low-income residents
Preserve project viability
May provide equity to resyndicate the project with new tax
credits
• May provide debt to refinance the project
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THE “OTHER”STAKEHOLDERS
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Residents
General Partners/Sponsors/Developers
Private Lenders
Public Lenders
Allocating Agencies
The IRS
HUD
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KNOW THE PROGRAM-SIGNIFICANCE OF YEAR 15
Initial compliance period expires at the end of Year 15
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Can transfer ownership in year 16 without recapture
Tax credit transactions are envisioned by investors as
15-year investments
– Most investors are ready to dispose of their interest in
year 16
– Greater willingness to dispose between years 11-15
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PURCHASE AND REUSE OPTIONS
Purchase of Real Estate or Investor’s Interest:
– Sponsor Acquires
•Continue Operations As Is
•Rehabs through Resyndication and/or Refinancing
•Sells to Third Party (may convey fee title or GP
interest)
– Partnership Sells to Third Party
– Homeownership (Lease-Purchase)
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SALE TO THIRD PARTY
May occur when:
• Investor and General Partner cannot come to terms
• General Partner does not exercise the Right of First Refusal
or Buyout Option
• General Partner wants out of the project
• Market exists for GP stake
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EARLY EXIT
Investor can dispose of its interest prior to Year 16, provided:
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LIHTC compliance is maintained
Early outs are generally not feasible for multiple investor
funds, but ask your syndicator
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RESYNDICATION OPPORTUNITY IN YOUR MARKETS?
• Makes sense where rehab is needed
• Minimum rehab:
– 20% of acquisition cost or
– $6,000 investment per low-income unit
• Need to Structure to preserve Acquisition Credit
– Problems if buyers and sellers are related parties- need to work with
lawyers at exit to protect acquisition credit
– 9% credits unlikely in many states- DC, Maryland, Virginia?
– 4% Credits (3.18%)Work in some projects but might need a
portfolio- combining small properties generally bond costs are too
expensive
– OID rules and existing below market loans
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PUTTING IT ALL BACK TOGETHER- THE PLAN
The GP Perspective
• Does the GP have the desire and capacity to purchase
the project?
Investor Perspective
• Is the Investor flexible with sale or transfer?
• Were Investor benefits realized?
Capital Account Balance
• Are there exit taxes?
• If so, are there sufficient funds to pay exit taxes?
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PUTTING IT ALL BACK TOGETHER- THE PLAN
Physical Condition
•Are significant capital improvements needed?
•Is there a current Capital Needs Assessment (CNA)?
Market Conditions
•Is the project marketable?
•Is there competition from other projects?
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PUTTING IT ALL BACK TOGETHER- THE PLAN
Mortgages
• Are balloon loans or deferred interest payments due at
or immediately after Year 15?
• Does existing debt exceed fair market value?
• Are lenders flexible with transfer of debt?
• Can debt be refinanced or forgiven?
• Are there sources for soft debt?
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ACTION PLAN FOR PURCHASERS
YEARS 1-13:
• Create a closing binder with all critical documents-loans, extended
use, partnership agreement etc.
• Annual Review of operating performance and update projectionsincluding capital account. Portfolio Approach (see template)
• Update capital needs- who gets the reserves?
• Review and project capital account, exit taxes and LP valuation
• Develop strategic plan:
• Through Year 15
• After Year 15
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ACTION PLAN FOR PURCHASERS
YEAR 10-14:
Determine Likely Purchase Price
• Per Option or Right of First Refusal
• Does the price make sense?
• Early exit possible?
Explore Sources of Funds to Meet Purchase Price and Capital
Needs:
• Resyndication
• Refinance: Conventional debt or soft loans
• Reserves
• Combinations
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Even After You Negotiate Still Work to Do…
YEARS 14-15:
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Consult with Accountant and Attorney
Meet with Syndicator
Negotiate Purchase Price
Sign Letter of Intent
Obtain Lender Approvals
Obtain Regulator Approvals (State, HUD if applicable)
Draft Legal Agreements
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ACTION PLAN FOR PURCHASERS
YEAR 16:
• Close on purchase in 1st quarter of year 16
• File amended Certificate of Limited Partnership
(if applicable)
• File tax return and provide final K-1 to Limited Partner(s)
• Execute an amendment to the Partnership Agreement,
signed by withdrawing and new partners
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YEAR 1 – BACK TO THE FUTURE
Do Financial and Business Analysis as part of the syndication
investor/syndicator selection process…
Things for you to consider:
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General Partner Structure
Cash Flow and Residual Splits-90/10
Puts and Calls, Triggers- Liquidation Avoidance
Reserve Releases or Tie Ups
Prepayment Abilities on Mortgages, Refinancing
approvals post Compliance Period
• Lender or third Party approvals of changes in
Ownership
• Exit Taxes, depreciation and pricing?
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Dan Mendelson
Chief Broker
CCA Mortgage
33 S. Gay Street, Suite 200
Baltimore, MD 21202
410-685-6005
CCA
MORTGAGE
dmendelson@ccadev.com
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