lihtc exit strategies iped february 21 2008 stephen d roger l.
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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

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investor syndicator y 15 goals
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
let them eat cat food
Let Them Eat Cat Food

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

all text, images, or artwork must appear within these guidesalways view guides when aligning elements

status of centerline public funds
Status of Centerline Public Funds
  • FundSoldUnder ContractTotal
  • Liberty I 77% 10% 87%
  • Liberty II 85% 0% 85%
  • Liberty III 71% 18% 89%
  • Freedom 100% 0% Closed
  • Patriot 86% 12% 98%
  • Independence I 11% 14% 89%
  • Since 2005, Capital Transactions team has sold 143 properties from the Public Fund portfolios, with an additional 24 under contract.
tax credit property sale issues
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
year 15 exit strategies
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
year 15 exit strategies qc impact
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
qualified contracts difficult to use
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 ?
decision to go to qc
Decision to go to QC

Property Value

QC Price more than Unrestricted


Value as Unrestricted

Restricted More than QC Price less than Unrestricted


Value as Restricted

QC Price less than Restricted


operate as is
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
convert to market pre 90 and future w qc
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)

condo conversion
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

sell to or partner with non profits
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
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

Non Profit Recycle… using QC leverage
competing interests
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
framework for compromise
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
recycling with tax credits
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
resyndicate with 4 credits
Cutler Vista

Miami FL

216 Units

PIS 1990 as 9%

New construction

Original Equity 5.1M

Resyndicate with 4% Credits
resyndicate with 4 credits20
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

resyndication issues
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
helpful hints for year 15
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