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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
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
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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 • 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 ? • 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
Decision to go to QC Property Value QC Price more than Unrestricted YES Value as Unrestricted Restricted More than QC Price less than Unrestricted MAYBE Value as Restricted QC Price less than Restricted NO
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 + 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 + 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
Condo Conversion • Bayamon Country Club, Bayamon PR
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?
Condo Conversion w/LP Participation Uses To LPs (2005) $1,000 To LPs (2006) 1,500 To LPs (2009) 1,500 Pay 1st & 2nd 4,100 Hard costs 3,900 Soft costs 1,200 Est Profit 5,700* Total $18,900 Sources Gross Sales 18,900 (63,000/unit) _______ Total $18,900 * To be split with LPs based on actual sales price
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
Victoria Manor 112 units elderly PIS 1992 New construction Original Equity: $2.4M Not for Profit Sponsor: St James Church Non Profit Recycle… using QC leverage
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
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
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
Cutler Vista Miami FL 216 Units PIS 1990 as 9% New construction Original Equity 5.1M Resyndicate with 4% Credits
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 • 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 • 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