November 2009
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Financial Integrity of a Rental Property – Whose Responsibility?. November 2009. 2010 North Carolina Affordable Housing Conference September 17, 2010 Jill Odom, CAHEC. Question - Who’s Responsible for achieving and Maintaining Financial Integrity?. Answer.

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November 2009

Financial Integrity of a Rental Property – Whose Responsibility?

November 2009

2010 North Carolina Affordable Housing Conference

September 17, 2010

Jill Odom, CAHEC


Question who s responsible for achieving and maintaining financial integrity

Question - Who’s Responsible for achieving and Maintaining Financial Integrity?


Answer

Answer

…Anyone with a vested interest in the property.

This would include:

  • The owner

  • The management agent

  • The syndicator/investor

  • The lender(s)

  • The State allocating agency

  • Who else?

    Financial Integrity cannot be achieved without a coordinated team effort


Integrity

Integrity

1.The state or quality of being entire or complete;

wholeness; entireness; unbroken state;

2. Moral soundness; honesty; freedom from corrupting

influence or motive; -- used especially with reference to

the fulfillment of contracts, the discharge of agencies,

trusts, and the like;

3. Unimpaired, unadulterated, or genuine state; entire

correspondence with an original condition; purity.

Syn: Honesty; truthfulness, veracity, reliability, honor.


What is financial integrity from the investor s perspective

What is Financial Integrity? – From the Investor’s perspective


Financial integrity

Financial Integrity

  • Synonymous with Financial Stability, or Financial Viability

    • The ability of a property to achieve or exceed all of the financial projections relating to its development and operational phases

    • Adhering to or exceeding expectations with regard to timing and delivery of projected tax credits

    • Maintaining property performance standards in accordance with IRC regulations, Federal, State and local laws

    • The ability to generate revenue and absorb costs with minimal variances using a realistic and achievable budget.


Tools for determining financial integrity

Tools for determining Financial Integrity

  • AHIC Watchlist Criteria

    • Development Phase, including lease-up

      • Construction Delays over 3 months

      • Construction cost overruns exceeding15% of contract or contingency reserves spent

      • Leasing delays over 3 months

      • First mortgage closing delays over 3 months

      • Mechanics Liens

      • Revenue & Expense variances

      • Any change in qualifying units

      • Litigation

      • Bankruptcy


Tools for determining financial integrity1

Tools for determining Financial Integrity

  • AHIC Watchlist Criteria

    • Operational Phase

      • High Receivables/High Vacancies

      • Debt Coverage

      • Unpaid real estate taxes

      • Insurance coverage

      • Mortgage or guarantee delinquency or default

      • Deferred Maintenance or extraordinary repairs not budgeted

      • Physical Inspection/Physical Deterioration

      • Significant life-safety issues

      • Unauthorized debt

      • Required Deposits and adequate funding of reserves

      • GP Removal/replacement

      • GP/management agent failure to perform

      • Litigation or Bankruptcy


Tools for determining financial integrity2

Tools for determining Financial Integrity

  • Industry Best Practices – Risk Rating Policies

    • Development Phase

      • Construction/Lease-Up Schedules

      • Financial (sources and uses)

      • Construction Loan status

      • Permanent Loan status

      • Program Compliance

      • General Contractor

      • GP/Sponsor/Management

      • Recapture risk


Tools for determining financial integrity3

Tools for determining Financial Integrity

  • Industry Best Practices – Risk Ratings

    • Stabilized Phase

      • Debt Service Coverage

      • Occupancy

      • Benefits (tax credit and losses)

      • Reserves

      • Physical issues

      • GP/Sponsor/Management

      • Program Compliance

      • Insurance/Taxes

      • Reporting

      • Recapture/Foreclosure risk


Tools for determining financial integrity4

Tools for determining Financial Integrity

  • LIHTC Program regulations

  • Contracts

    • LIHTC Application and Awards letters

    • Partnership Agreements

    • Management Agreements

    • Guarantee Agreements

    • Loan Documents

  • IRS 8823 Audit Guide


Tips to achieving and maintaining financial integrity

Tips to Achieving and Maintaining Financial Integrity


Tips to attain financial integrity

Tips to Attain Financial Integrity

  • To the Owner

    • Be aware of the terms and conditions of your agreements and contracts – insuring that they are reasonable and achievable

    • Timing is EVERYTHING!

    • Use realistic and achievable revenue and expense assumptions – Voodoo math can cripple a project

    • Communication is CRITICAL – share the important details with your entire team, especially your property management agent


Tips to maintain financial integrity

Tips to Maintain Financial Integrity

  • To the Management Agent

    The success or failure of the first year of operations almost always determines the long-term viability of the project

    • Hold a “kick off” meeting with your owners (and syndicator) – to confirm all the specifics of a new property

      • Set-asides

      • Rent/utility schedules

      • Tax Credit delivery/lease-up schedule

      • Review marketing plan

      • Reserves: Funding amounts and timing

      • Review budget

      • Review all promises made in the TC application and pertinent terms of the partnership agreement (ie: reporting requirements)


Tips to maintain financial integrity1

Tips to Maintain Financial Integrity

  • To the Management Agent

    • Use a “By the Book” methodology of management

      • Know which housing program handbooks are applicable and which regulations to follow for determining initial and continued compliance

        • HUD 4350.3 Handbook

        • 8823 Audit Guide

        • State Allocating Agency guidelines and requirements

        • Landlord/Tenant laws

        • Fair Housing Laws

        • Local Codes

        • ADA/Accessibility & design requirements

    • Know your market and advertise pro-actively.

    • Focus on lease enforcement and resident retention

    • Recruit experienced site staff: provide on-going training, support and motivation!


Questions or comments jill odom cahec jodom@cahec com

Questions or Comments?Jill Odom, [email protected]


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