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Year 15 Considerations for Non-Profit Sponsors
IPED CONFERENCEOctober 11th, 2007
Presented by Judy Schneider
SVP/ Chief UnderwriterNational Equity Fund
Who is the National Equity Fund (NEF)?
National Syndicator in Operation Since 1987
Invested in more than 80,000 units in over 1,500 properties located in 43 states & D.C.
$5.0 billion in equity raised
98% of projects that will reach Year 15 in next 5 years are sponsored by nonprofits
NEF’s Year 15 Experience To-Date
129 Projects sold or Approved for Sale by NEF, located in 18 States
77% are ‘Rollovers’; assume existing debt and continue operations
16% are Resyndications or Refinancings
7% were sold to third parties
The Year 15 Process
Question: What do flossing, regular exercise, and
saving for retirement have to do with Year 15 planning?
Answer: They are all things best started long
before you need them.
They are all things you said you were doing (or would start tomorrow), but never did.
Year 15 Basics: Determining Year 15
Tax Credit Compliance for Each Building Begins: • The first year tax credits are reported on tax
returns for that building. Can be either: • (1) the first year a qualified building is PIS, or• The year after the building was Placed in Service
Tax Credit Compliance Ends:• The last day of the 15th year since credits were first
claimed on the tax return• May be different for different buildings• Building is eligible for disposition without recapture
or bond requirement on Jan. 1 of Year 16
Year 15 Process: Getting Organized
Step 1: Know the Property
Step 2: Know your partners & stakeholders
Step 3: Know your documents
Step 4: Develop your plan for the property and identify the organizational resources to carry out the plan
Project Assessment
Financial Condition• Will cash flow be sufficient to sustain future operations?• Are there any anticipated changes in expenses, such as
loss of rental subsidies or tax abatements? • What are reserve balances and restrictions on use?
Physical Condition• Are significant capital improvements needed?• Is there a current physical needs assessment?
Market Conditions• Is the project marketable?• Is there competition from other projects?
Know Your Partners
Stakeholders Investors Syndicators Private Lenders Public Lenders Allocating Agencies Residents
Know Your Limited Partner
Limited Partner’s Process and Philosophy• Stated Goals or Approaches for Year 15?• Type of Fund or Investor• Calculation of Exit Taxes
What do your documents say?• Purchase Option / ROFR• Split of Sales Proceeds & Liquidation of
Partnership Assets• Disposition Fees
What Issues Might be Negotiable?
Know Your Existing Debt
Lender Controls on Year 15 Purchase• Terms related to sale• Consents to transfer ownership• Use of reserves
Debt Terms: Future Operations• Interest rate; Refinance to Lower Rate?• Maturity Dates; Can Project Support
Refinance of Existing Debt?• Rent/Income Restrictions Tied to Loan Term?
GP Options at Year 15 Juncture
Sponsor Acquires and Continues Operations, Assuming all Existing Debt (or Keeps Partnership in Place and Substitutes a new L.P.)
Sponsor Acquires and Rehabs through Resyndication and/or Refinancing
Sponsor Acquires and Sells to Third Party
Partnership Sells to Third Party
Qualified Contract
Homeownership: Lease-Purchase or Condominiumization
Resyndication
Makes sense where rehab is needed
Minimum rehab:• 10% of acquisition cost or $3,000 investment
per low income unit• Investors May Require More Substantial
Improvements
Structure to preserve Acquisition Credit• Beware of related party issues
Structure New Deals with Eye to Year 15
Determine goals at the outset• Financing can extend the restriction period• How long will rent subsidies last?• Ability to pay ballooning debt• Extent and durability of improvements • Clarify transfer provisions in pertinent documents• Review impact of state agencies scoring criteria
Consider exit tax • Slower depreciation elected or required• Source of funds for exit tax
Resyndication Case Study
Jefferson-Lincoln Homes Kansas City, MO
Background:
Two separate scattered site projects, located within several blocks of each other
Projects were owned by 2 partnerships with 2 different GP’s; a NEF fund was the Limited Partner of both Partnerships
Jefferson Apts. GP was a large for-profit developer; Lincoln Homes GP was a small CDC. Neither GP was interested in acquiring their property from the Limited Partnership
The Facts: Jefferson Apartments
Originally completed in 1988 80 units, scattered site, combination of historic
moderate-rehab and new construction Family housing with one-, two- and three-
bedroom apartments Deteriorated condition. In 2003 (Year 16), 27
units were vacant (29% vacancy). HUD-Insured first mortgage from State Agency,
40 year term Accruing Interest 2nd mortgage from City
The Facts: Lincoln Homes
Completed in 1990 20 units in 3 adjacent buildings; Originally a
substantial rehab project Family housing with 1- and 2-bedroom apartments Deteriorated condition: In 2004 (Year 15), 3 units
were vacant (15% vacancy) Chronic cashflow problems 1st Mortgage from Bank; Maturity in early 2005
(Year 16) Deferred Payment 2nd Mortgage from City
The Neighborhood
Central Kansas City, Missouri Very low income census tract Properties located near an area of commercial
revitalization that is making a slow recovery. The housing in the surrounding area is in generally fair condition
Before Pictures:
Option 1: Do Nothing
Jefferson Apartments Continuing deterioration resulted in failed HUD
REAC score GP began to address issues in response to HUD
inspections Continued ownership would drain GP resources Continued ownership required continued reporting
to NEF
Lincoln Homes 1st mortgage maturity early in Year 16 of the
compliance period; inaction would probably lead to foreclosure
Option 2: Sell to Third Party
Jefferson Apartments GP retained realtor in Year 15 to market property NEF sought non-profit purchasers Project required extensive renovation Debt exceeded Value No buyer located
Lincoln Homes Small property Debt exceeded value No buyer located
Option 3: Resyndicate or Sell to Third Party to Resyndicate
Plusses: Resyndication could support extensive renovation Recapitalize reserves Opportunity to renegotiate soft debt
Minuses: Only 4% credits would be available Additional soft funds would be needed Original GP’s still not interested in continued
involvement in project
What Happened?
Local for-profit developer gained state and City support to combine the 2 projects in one new 4% Resyndication project
A NEF fund became the Limited Partner of the new 100-unit project.
Original state loan and bank loan paid off; New state 1st mortgage
City partially forgave 2nd mortgages
New soft money awarded to project
Combined New ProjectThe Year 15 Numbers:
Combined Existing Debt
First Mortgage $2,022,000 City Loan, Incl. Accrued Int. $3,239,000 Total $5,261,000
Reserves $0
Capital Needs ($32,000/unit) $3,200,000
FMV of 100-Unit Property $4,500,000
Negative Capital Account, High Exit Taxes
Combined New Project Uses of Funds
Purchase From Old Partnership $4,500,000(FMV)Repmt. of Outstanding 1st Debt $2,022,000Re-subordination of Soft Debt $2,278,000Distribution to Old Partners $ 200,000
Capital Improvements $3,200,000Financing and Soft Costs $1,755,000Developer Fees $1,022,000Reserves $ 393,000
Total $10,870,000
Combined New Project Sources of Funds
Tax Exempt Bonds – Perm Loan $2,230,900Tax Exempt ‘B’ Bonds (Constr. Only) $3,660,000Re-subordinated Soft Loans $2,278,000State HOME Funds $ 500,000New City Loan $ 50,000Other New Soft Loans $ 430,000New Limited Partner LIHTC Equity $3,605,000State Tax Credit Equity $1,370,000Deferred Developer Fees $ 406,100
Total $10,870,000
Combined New Project Tax Credit Calculation
Acquisition Basis $ 4,170,000
(Building Portion of the FMV of the Property)
Rehab Basis of $5,570,000 x 130% $ 7,250,484
Total Qualified Basis $11,420,484
X Tax Credit Rate 3.43%
Annual Tax Credits $ 391,722
Price / Credit $0.92
Total LP Capital (equity rounded) $ 3,605,000
Total State Credit Equity $ 1,371,030
Picture in 2007
4% Tax Credit Resyndication Considerations
Tax Exempt Bond Allocation must be at least 50% of Aggregate Basis; Supportable Permanent Debt will Likely be Less than 50%. Will Issuer do an A/B Bond Structure?
10 Year Rule for Eligibility for Acquisition Credits
Cooperation from Original Second Mortgage Lender (s) to re-subordinate and /or modify loan terms will typically be necessary.
Potential Tax issues from Forgiving or Restructuring Old Debt (OID; Reduction of Acquisition Basis; Forgiveness of Debt Income)
Related Party Acquisition Credit Tax Issues (GP’s and LP’s)
Small LIHTC allocations may not be attractive to syndicators / investors as stand-alone deals; Transaction costs may be prohibitive for small deals
Income status of existing tenants
NEF CONTACTS
For additional information, visit www.nefinc.org.
Look for Year Dispositions/ Year 15 under the
Asset Management Section
Meghann Rowley MosesDispositions Manager312. [email protected]
Judy SchneiderSVP & Chief [email protected]
