LIHTC Exit Strategies
IPED
February 21, 2008
Stephen D. Roger
Investor/Syndicator Y-15 Goals
Now
= Public Fund Investors, (PF)
Future = Corporate Investors, (CI)
–
Close Funds soon after year 15
-
Value is established.
-
PF=12+ IRR, Fund Op. costs high
-
CI = Losses w/o benefits
–
Maximize Residual Value… PF and CI
–
Minimize Exit Taxes.. CI
–
Responsible Transitions to new ownership… CI
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Let Them Eat Cat Food
live area
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Status of Centerline Public Funds
Fund
Sold
Under Contract
Total
Liberty I
77%
10%
87%
Liberty II
85%
0%
85%
Liberty III
71%
18%
89%
Freedom
100%
0%
Patriot
86%
12%
98%
Independence I
11%
14%
89%
Closed
Since 2005, Capital Transactions team has sold 143 properties from the Public Fund
portfolios, with an additional 24 under contract.
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Tax Credit Property Sale issues
– “First generation” properties, the economics go to the LP
General Partners lack motivation to exit
LP must drive the dispo process
LP has more experience creating value
LP has fiduciary obligation to create value
– Partnership documents, regulatory agreements, financing
documents often confusing or contradictory
– Must do extensive analysis/research on options
– It takes longer and is more difficult than you expect
– QC process… Has changed the dispo landscape
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Year 15 Exit Strategies
–
–
–
–
–
Operate “as is”…sale or refi LP out
Convert to market (pre 90 ..or QC)
Convert to Condominium
Recycle as 4% or 9% tax credit
Partner with non-profits
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Year 15 Exit Strategies: QC Impact ?
– Operate “as is”, sale or refinancing LP out.
NO
– Convert to market rental.
YES
– Convert to condominium.
YES
– Recycle as 4% or 9% tax credit deal.
YES
– Partner with non-profit to access NP benefits. NO
7
Qualified Contracts… Difficult to Use
QC Formula: Outstanding debt; plus initial capital contribution; plus 4%
return on capital, Less distributions
Issues:
Every state has different requirements
Burden of document compilation…15 years of Tax and Financials, loan & PA info.
Expensive Process...Consultants, Broker, Appraiser, Mkt studies, A& E, Phase 1. Title.
Did we start yet ? Start dates subjective.
QC Formula = Fuzzy Math. Critical terms not defined
Does a Qualified Contract = a Qualified Buyer ?
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Decision to go to QC
Property Value
Value as
Unrestricted
Value as
Restricted
QC Price more than Unrestricted
YES
Restricted More than QC Price less than
Unrestricted
MAYBE
QC Price less than Restricted
NO
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Operate ‘As Is”
–
Many affordable properties can compete with market w/o
significant new capital
–
Pool of available tenants increases (students, etc), some
restrictions may go away
–
Transition is seamless, no forced dislocation
–
May provide the highest return for $ spent
–
Strategy can be reversed
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Convert to Market: pre 90 and Future w/QC
+ No development risks… permitting, approvals (NIMBY),
major construction, income stream in place
+ 15 yrs of Operational history… leasing, rents, costs
+ Many financing programs still available for Multifamily,
HUD insured, Fannie, Freddie
- HUD permission, tenant notices, 3 yr, ROFR
- Rents really higher ?, market deep enough?
- Can you change market perception of the property (curb
appeal, reputation)
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Condo Conversion
+ Can be very profitable
+ Accomplishes goal of continued affordable housing
+ Local affordable home buyer programs help
 1st

time HB grant up to $15,000
Up to 98% loan from HFA w/subsidized closing costs
- Difficult to judge market acceptance
- Significant time consuming legal issues
- Uncertainty of current market cycle adds risk
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Sell to or Partner with Non-Profits
–
Regulations encourage sales to nonprofits
–
Can provide solutions to tougher properties
–
Increased access to grants
–
Increased access to HUD programs
–
Real Estate Tax abatements
–
Tax efficient structures for debt forgiveness
–
Potential charitable deduction
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Non Profit Recycle… using QC leverage
Victoria Manor
– 112 units elderly
– 89 allocation, PIS 1992
– 9% Credits New Const.
– Original Equity: $2.4M
– Not for Profit Sponsor
– City Soft =Affordable PO
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Competing interests
– Agency needs qualified buyer to preserve
– QC Formula: Outstanding debt; plus initial capital
contribution; plus 4% return on capital, Less
distributions
– QC calculated price = $5,760,000
– Appraised value @ Mkt = $6,475,000
– LP Return ...VS City housing needs… VS/GP mission
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Framework for Compromise
– Turn NP GP into qualified buyer = $600,000 for NP Note
– LPs received QC value = $5,750,000 (less debt)
– City received additional 50% units + extended use.
– Other benefits:
- Non Profit… no RE taxes = + $990,000 debt
- HOME funds = $500,000 + City soft $3.1m
- New Tax Credit Equity = $3,190,000
- Attractive Tax-exempt bond financing
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Victoria Manor: Result
SOURCES:
New Bond
USES:
$3,217 Acquisition Price
Deferred Dev Fee
$300 Soft Costs
Fed LIHTC - 4%
$3,186 Hard Costs
HOME Funds
Agency Loan
TOTAL
$500 Developer's Fee
$3,107 Reserves
$10,310
$6,475
$625
$1,930
$975
$305
$10,310
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Recycling with Tax Credits
+ Continued need for Affordable properties
+ Hot markets = incentives for Preservation
+ Most issues previously resolved ..NIMBY, qualified
tenants, financing
– Analyze as both 4% and 9%
– Emphasis on preservation varies by locality
– Potential benefit of assuming soft loans
– Getting the right partners – Local developer,
lender, attorney, etc.critical
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Resyndicate with 4% Credits
Cutler Vista
– Miami FL
– 216 Units
– PIS 1990 as 9%
– New construction
– Original Equity
5.1M
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Resyndicate with 4% Credits
Sources
Uses
New Bonds: 7,120
Retire 1st
3,440
SAIL:
2,500
SAIL
2,500
TC Equity:
4,800
LPs
1,800
Total:
14,420
SAIL Int.
760
Rehab
3,600
Soft/DF/Reserves
2,320
Total
14,420
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Resyndication Issues
– Public benefit – cost of preservation vs. build new
– Sentiment against credits for extended use props.
– Untangling restrictions and Rights of First Refusal
– Qualified households Vs tenants in possession
– Anti-churning rule (affiliated buyer) 10% rule
– 10 year hold rule
– Aggressive buyers vs. Preservation resources
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Helpful hints for Year 15
– Start early…Strategies should be decided in year 13, prepared
in Y14, executed in Y15
– Analyze all possible strategies in light of the local market and
capital markets
– Many new financing programs and combinations available for
preservation, but take time to implement
– Know your regulatory agreements, partnership and loan
agreements.. and approvals needed.
– Pick the right local partner to help you execute your strategy
– Patience Perseverance and Prozac
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