What Can Go Wrong:Some Trouble Signs and How to

Address Themby

Brad Elphick, CPA, Novogradac & Company LLP

Overview Danger Signals Consequences of Danger Signals Responding to Danger Signals The Players and Value over Time

Danger Signals

• Delays in Reporting• Lower Rental Income

– Slow Lease-up

– Lower Rental Rates

– High Turnover Rates

– High Vacancy Rates

Danger Signals

• Higher Operating Expenses– Larger Operating Expenses

– Missing Operating Expenses

– Lower Operating Expenses?

• Balance Sheet Items– Unexpected GP Loans or Capital Contributions

– Unidentified Accounts• Suspense/Other/Unlocated Differences

– Large Payables and Accrued Expenses

Danger Signals

• Receiving Forms 8823• Poor Communication• Unavailable for Site Visits• Other Projects Have Problems

– The Rumor Mill

Consequences of Danger Signals• Slow Lease-Up

– Tax Credit Adjusters• 1st Year• Year 10 to 15• State Tax Credit Delay

– Higher Interest Costs• Delay in lower permanent loan rate• Delay in LP take-out equity• Tax-Exempt Bonds – Negative Arbitrage

– GP Loans / Capital Contributions• Interest? • Credit for Amounts Advanced?

Consequences of Danger Signals• Negative Cash Flow

– Overall Financial Viability• Cash Shortfall Funding

• State Mandated Lower Rents?

– LIHC – Minimum Gain / 704(b) Issues

– Reviewing the Numbers

Consequences of Danger Signals• Negative Cash Flow (cont.)

– Reviewing the Numbers

– The Original Projections• Basic Assumptions

• Net Operating Income

• Taxable Income/(Loss) and Credits

• Minimum Gain Calculations

Consequences of Danger Signals• Negative Cash Flow (cont.)

– The Revised Projections

– The Income Tax Effect of the Negative Cash Flow• Quicker to Negative Capital Accounts

• Larger GP Loans

• Minimum Gain Problems

Consequences of Danger Signals• Forms 8823

– Responding to State Housing Agencies

– Responding to the Internal Revenue Service• Mail Notices

• Field Audits

Responding to Danger Signals

• What is Causing the Problem– Real Estate Market?

• Location• New Competition• Changes in AMGI• Expense Cost Spikes

– Property Manager?• Corporate• Site Manager

Responding to Danger Signals

• What is Causing the Problem– Construction

• Design Flaw

• Construction Flaw

Responding to Danger Signals

• The Players and Value over Time– Who will lead the response?

• Developer/Asset Manager• Equity Investor• Lender

Straight 8% Transaction

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years

Bldg Cost

LIHC Value

NOI Cap Value

Debt Balance

Credi t Recap.

Credi t Recap (w/ int.)

www.taxcredithousing.com

Conclusion

www.taxcredithousing.com

Danger Signals Consequences of Danger Signals Responding to Danger Signals Additional Questions?