LIHTC Exit Strategies

IPEDApril 27, 2007

Stephen D. Roger

2

Expirations 2002-2007

The “first generation” of expiring product is different

– More urban, more project subsidies

– More rehab, less new construction

– More public debt

– Capitalization

- 25% need workout-type solutions

- 50% marginal value unless repositioned

- 25% significant value

3

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

4

Let Them Eat Cat Food

live area(click “control+g” to view live area guides)

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5

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

6

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

7

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

8

Decision to go to QC

Value as Unrestricted

Value as Restricted

Property ValueQC Price more than Unrestricted

YES

Restricted More than QC Price less than Unrestricted

MAYBE

QC Price less than RestrictedNO

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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

10

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)

11

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

12

Condo Conversion

Bayamon Country Club, Bayamon PR

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Condo Conversion

– Sponsor – April Industries/Centerline

– 300 Units

– PIS 1989 as 9%

– Original Capital Structure

- Tax Credit Equity $3.1m

- 221(d)(3) HUD mortgage $5.1m

- HoDAG grant $6.0m (20 yr grant due April 2007)

– 100% Subsidized with multiple rental programs, restrictions until 2007?

14

Condo Conversion w/LP Participation

* To be split with LPs based on actual sales price

Sources Gross Sales 18,900 (63,000/unit)

Uses

To LPs (2005) $1,000 To LPs (2006) 1,500 To LPs (2009) 1,500 Pay 1st & 2nd 4,100 Hard costs 3,900Soft costs 1,200Est Profit 5,700*Total $18,900

_______ Total $18,900

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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

16

Non Profit Recycle… using QC leverage

Victoria Manor

– 112 units elderly

– PIS 1992

– New construction

– Original Equity: $2.4M

– Not for Profit Sponsor:

St James Church

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Competing interests VS QC

– 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 housing needs… VS/GP mission

18

QC: Framework for Compromise

– Turn NP GP into qualified buyer = $600,000 for Acq/Rehab

– LPs received value = QC price $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

- Tax-exempt bond financing 6.00% 35 yrs

19

Victoria Manor: Result

SOURCES: USES:

New Bond $3,217 Acquisition Price $6,475

Deferred Dev Fee $300 Soft Costs $625

Fed LIHTC - 4% $3,186 Hard Costs $1,930

HOME Funds $500 Developer's Fee $975

Agency Loan $3,107 Reserves $305

TOTAL $10,310 $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

21

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