HAND Planning and Executing a Year 15 Exit Strategy

HANDPlanning and Executing a Year 15 Exit

Strategy

June 3, 2014

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http://bit.ly/preservinghousingcredit

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• Nearly all the properties remained affordable and are owned by the same general partner or sponsor

• Majority are in good physical condition and have only limited immediate capital needs

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KEY CHALLENGES

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• Very limited financing choices exist throughout the extended use period for properties with modest recapitalization or capital improvement needs.

• Without innovative financial solutions and subsidies, these properties are in competition for limited Housing Credits and subsidy funding or will require owners to cover shortfalls.

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Typical Partnership Purchase Option Provisions for Nonprofits

Right of First Refusal to Purchase Property: Price = debt + exit taxIssues:

• Price may exceed FMV• Reserves may not be included

Where property has “no value”, possibility to negotiate a simple assignment of LP interest for $1

Buyout of Limited Partner – Formula of FMV of Investor Partner’s Interest• Presumes liquidation of partnership assets: all reserves at risk of distribution• If investor partner interest had little value, property with little value has its challenges• Lender approval must be obtained and may have costs

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As guardians of public investment, the leadership of public stakeholders

will be critical to the extended preservation of the Housing Credit

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• Continued affordability and strong physical condition of the Housing Credit portfolio at Year 15 is a testament to the success of the program

• The challenge is how to maintain the quality and preserve these assets as they age

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Some Successful Strategies

• Aggregating smaller properties to:• Portfolio reserves – Oakland allowed a nonprofit to pool reserves • For recapitalization and/or resyndication – allows for scale; states

promote 4% Housing Credits & Tax Exempt Bonds & may not allocate any 9% for resyndication

• Refinancing with friendly bank with low interest loan & Lender waived Prepayment Penalties to accommodate physical improvements, replenish reserves

• Public debt restructure or forgiveness – Portland gives consideration where affordability is continued & extended & allows for refinancing

• Access weatherization or other utility rebates/programs

• NYC program provides up to $15,000 /unit for extended affordability

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Building on Preserving Housing Credit Investment: The State of Housing Credit Properties and Lessons learned for the Extended Use Period, Enterprise is working with the National Housing Trust to gather information on if/how state housing finance agencies are addressing Housing Credit properties that are reaching the end of their initial 15 year compliance period.

Some Preliminary Findings Include:

SURVEY OF STATE ALLOCATING AGENCIES

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Most states have allocated 9% tax credits to properties that have already completed their initial 15 year compliance period

• VA and MD have awarded 9% Housing Credits• VA allocated 9% credits to 34 of 167 of these properties that have applied over the last 5 years • MD has awarded 9% credits to 2 such projects (unclear how many have applied)

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Neither VA nor MD’s QAPs include incentives

Most state QAPs do not include incentives for resyndication of Housing Credit properties & applying for additional resources

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• VA does provide incentives: • 15% set aside for qualified nonprofits (above the 10% required by the IRS)• Housing Credit projects selling to a nonprofit after 15 years receive 60 points• Housing Credit projects agreeing to 35 years extended use receive 50 points

• MD does not provide incentives

Most state QAPs do not provide incentives for non-for-profit developers committed to long term affordability.

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• 4% credits and Private Activity Bonds (PABs)• VA: in the last 3 years, 15 of these projects have received 4% LIHTCs and PABs. • MD: in the last 5 years, 16 of these projects have received 4% LIHTCs and PABs.

• Weatherization or utility rebates • MD has used both

• “Additional resources/regulatory relief” • MD has:

• Extended terms/conditions of existing public debt • Relaxed regulations/covenants like income or special populations targeting or

rent covenants for distressed projects

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QUALIFIED CONTRACTS

• VA has not had any experience with Qualified Contracts.

• MD has processed 2 requests for Qualified Contracts, but was unable to find an appropriate purchase in either case

• MD’s current QAP requires developers to waive their ability to request a Qualified Contract

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Enterprise Follow Up

• Outreach: • Issue report of Enterprise & NHT survey of states• Webinars

• Tools – • Beyond Year 15: Preserving Housing Credit Projects & Portfolio: A

Guide for Nonprofits –Nancy Rase, Homes For Americahttp://www.enterprisecommunity.com/resources/ResourceDetails?ID=0091731

• Case Studies of Best Practices & Challenges• Projects/Portfolios by Owners Committed to Long Term Affordability• State & Local Housing Agencies

www.EnterpriseCommunity.org | www.EnterpriseCommunity.com

Lydia Tomltom@enterprisecommunity.org

212-284-7112