Market for Property Disposition at Year 15 and Earlier
Katherine AlitzBoston Capital Asset Management
IPED—BostonOctober 11 – 12, 2007
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
The perceived value of the property will dictate the disposition strategy
• Third party sale
• Resyndication
• Transfer for multiple of management fees or future cash flow
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
Industry trends demonstrate that almost all LIHTC properties sold remain affordable, so:
• Property operations and location are the major determinants of property value
• Property may have “value” outside the traditional measures of value (i.e. option to resyndicate)
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
Existing and future restrictions sometimes may affect property value
• The ability to exercise a Qualified Contract
• Extended restrictions with continued rent restrictions below 60% AMI
• Some restrictions terminate or can be terminated while others remain in place (i.e. Florida SAIL Loan LURA)
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
Steps to determining value:
• Gather all relevant information
• Review and analyze information
• Prepare value analysis using income approach
• Prepare resyndication model
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
Relevant Information:
• Audit(s)• 8609 Form(s)• Partnership agreement• Disposition agreements, if any• Use restrictions• Current loan documents
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
Analyze relevant information:
• LIHTC Compliance Expiration date• Current rent levels• Potential post-Compliance rent levels• Historic occupancy• Notice periods or other information
related to previous disposition agreements
• Prepayment penalties or yield maintenance provisions
Market for Property Disposition at Year 15 and Earlier
Determining Value at Year 15
Estimate value using income approach:
• Determine current annual income• Estimate annual income at prevailing
market rents• Determine NOI by reducing current
annual income and estimated annual income by average of last two years of operating expenses
• Capitalize NOI
Market for Property Disposition at Year 15 and Earlier
Analysis at Current Rents
Annual Income: 800,000
Average Expenses: 600,000
NOI 200,000
Cap Rate: 9%
Value:2,222,222
Analysis at Market Rents
Annual Income: 950,000
Average Expenses: 600,000
NOI 350,000
Cap Rate: 9%
Value:3,888,889
Difference in Value is approximately $1,700,000
Market for Property Disposition at Year 15 and Earlier
Income approach allows us to define value parameters:
• We now have an estimate of current value at the existing use as affordable housing
• What prevents the property from achieving market rents and thus commanding a higher value
–Continued affordability restrictions
–Physical upgrades and replacements necessary to compete in the market
Market for Property Disposition at Year 15 and Earlier
A few comments about this type of analysis:
• The analysis is just an estimate to use for planning purposes
• You may never choose the right cap rate, but you can usually identify a range or use an average
• You should always consider the highest and best use for the property, but if it is a use other than rental housing, it usually jumps out
Market for Property Disposition at Year 15 and Earlier
A resyndication analysis allows you to analyze potential cash proceeds generated by a resyndication of a property for LIHTC after Year 15
Resyndication analyses include the following assumptions:
• Rehabilitation costs• Subsequent funding, if any• Pricing
Market for Property Disposition at Year 15 and Earlier
Sources
First Mortgage 3,000,000
Second Mortgage 600,000
LIHTC Equity 800,000
Deferred Developer Fee 50,000
Total Sources: 4,450,000
Uses
Mortgage Assumption 3,000,000
Rehab Expenses:1,000,000
Developer Fee 250,000
Total Uses:4,250,000
Sources - Uses: 200,000
Market for Property Disposition at Year 15 and Earlier
Resyndication analysis allows us to recognize value outside of income approach:
• When a property has no market value, value can be created by sharing available proceeds with a new developer
• The “value” in these cases is the value of the option to resyndicate the property
Market for Property Disposition at Year 15 and Earlier
A few comments about this type of analysis:
• The resyndication analysis is only as good as the sum of its assumptions
• We use the analysis to identify properties that have resyndication potential
• These properties tend to demonstrate limited value in the traditional sense
Market for Property Disposition at Year 15 and Earlier
The analyses described above help formulate the disposition plan for a property
Third Party Sales
Properties that have value as indicated through the income approach to valuation
• Properties in this group may also be good resyndication candidates, but we prefer to let the market determine the ultimate disposition of the property
• Properties in this group may be transferred to an existing partner in a related party sale, but the price paid will be determined as if there were a third party arms length transaction
Market for Property Disposition at Year 15 and Earlier
Resyndications
Properties that have little value as indicated through the income approach but might generate cash proceeds as a resyndication.
Transfers
Properties that are not candidates for either a third party sale or a resyndication. Management fees have some value as does any limited cash flow a property may produce. You can apply a multiplier to, or capitalize, these fees and cash flow
Qualified Contract Analysis
QCV MV
MV QVC
RV RV
QC Exercise provides the following options to Owner: QC Exercise provides the following options to Owner:
(a). If QC Buyer is found, Owner receive greater than MV for the property (a). If QC Buyer is found, Owner receives a portion of property's market value
(b). If no QC Buyer is found, Owner converts to market to achieve higher MV (b). If no QC Buyer is found, Owner converts to market to achieve higher MV
QCV MV
MV/RV RV
QCV
QC Exercise provides the following options to Owner:
(a). IF QC Buyer is found, Owner receive greater than MV for the property
(b). If no QC Buyer is found, Owner converts to market to avoid admnistrative
burden of compliance and/or future market conversion
EXERCISE QC OPTION MAYBE EXERCISE QC OPTIONQCV > MV > RV MV > QCV > RV
MAYBE EXERCISE QC OPTION DO NOT EXERCISE QC OPTIONQCV > MV AND MV = RV MV AND RV > QCV
PR
OP
ER
TY
VA
LU
E
LIKELY OUTCOME = NO QC BUYER PRODUCED W/(b) ACCRUING TO OWNER
(a)
LIKELY OUTCOME = QC BUYER PRODUCED W/ PARTIAL PAYMENT OF (a) TO OWNER
(b)
PR
OP
ER
TY
VA
LU
E
(a)
LIKELY OUTCOME = QC BUYER PRODUCED W/OWNER'S LOSS OF (a)
(b)
(a)(b)
(a)
LIKELY OUTCOME = NO QC BUYER PRODUCED W/NO ECONOMIC VALUE BUT EUA TEMINATED