Every Battle is Won Before it is Fought.

Planning for Year 15

Presenter:Dan Mendelson, President, DTM and Assoc.

Inc.

1

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.

2

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)

3

THE PROPERTY- WORKBOOKS AND/OR SUMMARY

ProjectProperty 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 4

PARTNERS AND STRUCTURE OF LIHTC INVESTMENTS

• Investments are sold through Limited Partnerships and LLC’s

• Partnership Agreements control dispositions, providing:

• Transfer restrictions and price• Consent requirements• Financial hurdle: Benefits or Return• Distribution of Proceeds• Liquidation and Dissolution

5

Investor

Equity Fund

LP = Investor(s) 99.99%

GP = .01%

ProjectLP =Syndicator NNEHIF 99.99%

GP = Developer/Sponsor .01%

$

$

6

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)

7

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.

8

ONE SYNDICATOR’S OBJECTIVES

• 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

9

THE “OTHER”STAKEHOLDERS

• Residents• General

Partners/Sponsors/Developers• Private Lenders• Public Lenders• Allocating Agencies• The IRS• HUD

10

KNOW THE PROGRAM-SIGNIFICANCE OF YEAR 15

Initial compliance period expires at the end of Year 15

– 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

11

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)

12

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

13

EARLY EXIT

Investor can dispose of its interest prior to Year 16, provided:

• LIHTC compliance is maintained

Early outs are generally not feasible for multiple investor funds, but ask your syndicator

14

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

15

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?

16

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?

17

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?18

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 projections- including 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

19

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

20

Even After You Negotiate Still Work to Do…

YEARS 14-15:

• 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

21

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

22

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:

• 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?

23

CCA MORTGAGE

Dan MendelsonChief Broker

CCA Mortgage33 S. Gay Street, Suite 200Baltimore, MD 21202410-685-6005

dmendelson@ccadev.com

24