Affordable Housing Finance Training

1
Affordable Housing Finance Training

• Neighborhood Partnership Fund Training Series
• December 14, 2006
• Corvallis, OR

2
Presenters

• Leon Laptook- Director, Community Development Law
  Center
• Charlie Harris- Senior Housing Manager, CASA of
  Oregon
• Shelley Cullin- Loan Officer, Oregon Housing and
  Community Services Department
• Robin Boyce- Executive Director, Housing
  Development Center

3

• This workshop is sponsored by the Neighborhood
  Partnership Fund, through a grant provided by the
  U.S Department of Housing and Urban Development

4
Agenda

• Introductions
• I. Overview
• II 9 LIHTC Project Case Study
• III. Housing Preservation-History, Challenges
• Lunch Break
• IV. 4 and Tax Exempt Bonds- RD Preservation
  Project Case Study
• V. LIHTC Year 15 Case Study
• Wrap-up, Evaluations, Adjourn

5
Low Income Housing Tax Credits

• Largest affordable housing program in the U.S.
• Funds about 90,000 units annually
• Started in 1987
• Operated by the IRS and administered through
  state housing finance agencies (Oregon Housing
  and Community Services Department)

6
LIHTC-how it works

• In exchange for investing private equity in
  affordable housing projects, investors receive a
  credit on their federal taxes
• Investors are large corporations, banks, etc.
• Investors funds are pooled and invested in
  multiple projects by syndicators

7
LIHTC Rule Book

• Section 42 of Internal Revenue Code
• Supplemented by State Qualified Allocation Plan
  (QAP)
• Penalties for failure to comply are assessed
  through tax code

8
Types of Credits

• 9 credit- obtained through highly competitive
  process raises 50-60 of project costs
• 4 credit- non-competitive credit obtained with
  use of tax-exempt private activity bonds raises
  30-35 of project costs

9
LIHTC Property Restrictions

• Tax Credits claimed over 10 year period
• Tax Credit compliance period-15 years
• IRC 42 and Regulatory Agreement govern
• Extended Use period- years 16-30
• Regulatory Agreement governs
• Local Extended Use Period
• Regulatory Agreement governs

10
LIHTC Projects

• Project owners are Limited Partnerships or
  Limited Liability Companies
• LP consists of General Partner (GP) and Limited
  Partner (LP)
• GP has .01 ownership interest, oversees the
  operations of project
• LP has 99.9 ownership interest, contributes
  equity to construct project

11
LIHTC Projects

• GP guarantees
• Project will be completed, operated effectively,
  maintained in good condition
• Investors will receive tax credits
• Investor will receive other financial benefits as
  agreed to in Partnership Agreement
• Project will be operated in compliance with IRS,
  OHCS and lender requirements

12
Fiduciary Responsibility

• General partner has fiduciary responsibility to
  partnership
• Limited partner has fiduciary responsibility to
  investors

13
9 LIHTC (Sec. 42)

• Eligibility and Restrictions
• Documents/Process
• Calculating Amount of Credit
• Guarantees

14
ELIGIBILITY and RESTRICTIONS

• 9 credit for new construction
• 9 credit for rehab greater than 10 of
  unadjusted basis or 3,000 per LI unit
• 4 credit for acquisition of existing bldg,
  provided it also meets rehab requirement
• 4 credit for federally subsidized new
  construction or rehabilitation

15

• Project Eligibility
• Generally, must be permanent housing w/ lease
  term gt 6 mos.
• SRO housing OK if at least mo. to mo. lease can
  have shared kitchen, bathroom
• transitional housing for homeless OK if provide
  services if have separate kitchen and bathroom
  in each unit

16

• Project Eligibility (continued)
• Nursing homes, mobile home parks, dorms,
  hospitals are not eligible
• New construction must meet fair housing
  accessibility requirements
• Units must continuously meet local codes, Section
  8 HQS standards
• Tenants can only be evicted for good cause

17

• Tenant Eligibility
• Income and Rent either 20 of units at 50 AMI
  or 40 of units at 60 AMI
• Applies at initial occupancy
• Must recertify tenants annually
• T ineligible if income increases by gt40, unless
  next available unit rented to eligible tenant or
  unless all units are LIHTC units

18

• Tenant Eligibility (continued)
• Students unit occupied entirely by FT students
  ineligible, unless
• married filing jointly,
• single TANF parent w/ student kids, or
• single parent w/ kids who arent dependents of
  someone else for tax purposes

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• Length of Compliance Period
• 15 yr compliance by IRS, with potential of credit
  recapture
• Extended Use Commitment of Additional 15 yrs by
  OHCS (eligible applicants, tenants or OHCS can
  sue for compliance)
• You may have committed to even longer period in
  your CFC app

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DOCUMENTS and PROCESS

• CFC app (with Investor Letter of Interest)
• OHCS CFC Award Letter (forward alloc.)
• OHCS Offer of Tax Credit Reservation
• Straw Limited Partnership Agreement, Cert of LP,
  EIN
• OHCS Reservation and Extended Use Agreement (
  Hold Harmless Agreement)

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DOCUMENTS and PROCESS (cont.)

• Request for Proposals from Investors
• Due Diligence
• Investor Commitment Letter
• Investor Limited Partnership Agreement
• Begin Construction

22
DOCUMENTS and PROCESS (cont.)

• Carryover Allocation Application (by 12/1 of yr
  of credit allocation, with 10 Cost Certification
  by 6/30 of following yr)
• Carryover Allocation Agreement (by 12/31 of yr of
  credit allocation)
• Complete Construction, Place in Service (within 2
  yrs of yr of credit allocation)

23
DOCUMENTS and PROCESS (cont.)

• Final Application (and Cost Certification)
• Recorded Declaration of Land Use Restrictive
  Covenants
• IRS Form 8609
• Annual Compliance Monitoring

24
LIHTC Calculation

• Eligible Basis TDC Land, Rsvs, etc.
• If 130 booster, multiply EB x 130 EB
• Qualified Basis EB x Applicable Fraction ( of
  units that are LIHTC units, typ. 100)
• Annual LIHTC QB x Applic. Percentage
• Appl. varies by month, use 8 as est.
• Total LIHTC Annual LIHTC x 10 yrs
• LIHTC Proceeds LIHTC x Investor Pay-in per
  dollar (.80-.99) x 99.9

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Eligible Basis

• EB TDC non-depreciable items
• Eligible costs
• Common areas, mgrs unit
• Parking, Other facilities are eligible, provided
  no separate fee
• Community service facility OK if in QCT and lt 10
  of EB of housing
• SDCs are eligible

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Eligible Basis (continued)

• Not eligible
• Land and land-related costs
• Costs related to permanent financing
• Issuance costs related to Tax-Exempt Bond
  Financing
• Operating and replacement reserves
• Commercial space
• Legal costs re syndication (investor legal fees)

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Eligible Basis (continued)

• Federal Subsidized Loan
• If costs that are otherwise included in EB are
  paid for with federal subsidies, then those
  costs are only eligible for 4 credit.
• Federal Subsidy loan of federal funds at
  interest rate below AFR (4.9 as of 12/06)
• Solutions (a) FS goes to GP, which re-loans it
  to LP at AFR, (b) FS is used to pay for non-EB
  items (and tracked accordingly) or (c) exclude FS
  from EB

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Eligible Basis (continued)

• Grants Must exclude grants made to partnership
  from EB
• Solution Grant should be made to GP and loaned
  to partnership
• If grant is federal funds, loan should be at AFR
• If grant is non-federal funds, loan can be at
  less than AFR
• Grant received by LP at any time during 15 yr
  compliance period will result in reduction in EB
  (and tax credits)

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Eligible Basis (continued)

• HOME funds (grant or below-AFR loan)
• no EB reduction if at least 40 of units are
  rented to tenants at 50 AMI
• cant get 130 bonus booster

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Eligible Basis (continued)

• Bonus Booster If in Qualified Census Tract (QCT)
  or Difficult to Develop Area (DDA), can get 130
  bonus booster
• DDAs for 2007 Clatsop, Coos, Crook, Curry,
  Douglas, Gilliam, Grant, Hood River, Jefferson,
  Josephine, Lincoln, Linn, Morrow, Tillamook,
  Union, Wallowa, Wasco and Wheeler Counties.

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• METRO AREA QCTs
• Benton County (Corvallis) 7.00, 8.02, 11.01,
  11.02
• Jackson (Medford-Ashland) 1.00, 2.02, 2.03, 19.00
• Lane County 31.02, 37.00, 38.00, 39.00, 42.00,
  48.00
• Marion County (Salem) 2.00, 4.00, 5.00, 7.00,
  8.00, 9.00, 10.00, 17.01
• Multnomah County (Portland) 11.01, 21.00, 22.01,
  22.02, 23.01, 33.01, 34.01, 34.02, 40.01, 42.00,
  49.00, 51.00, 52.00, 53.00, 54.00, 55.00, 56.00,
  76.00, 83.01, 96.06, 98.01
• Washington County 332.00

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• NON- METRO AREA QCTs
• Clatsop County 9503.00
• Jefferson County 9604.00
• Klamath County 9716.00, 9717.00, 9718.00
• Malheur County 9704.00
• Union County 9707.00

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LIHTC Calculation

• Eligible Basis TDC Land, Rsvs, etc.
• TDC 4,700,000
• Less Land (280,000)
• Perm Loan Fees ( 23,507)
• Reserves ( 75,000)
• Misc. (183,771)
• Subtotal Inelig Costs (562,278)
• Eligible Basis 4,137,722
• If 130 booster, multiply EB x 130 EB
• (Inapplicable here)

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LIHTC Calculation (cont.)

• Qualified Basis EB x Applicable Fraction ( of
  units that are LIHTC units, typ. 100)
• 4,137,722 x 100 4,137,722 (QB)
• Annual LIHTC QB x Applic. Percentage
• Appl. varies by month, use 8 as est.
• 4,137,722 x .08 331,018

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LIHTC Calculation (cont.)

• LIHTC Annual LIHTC x 10 yrs
• 331,018 x 10 3,310,180
• LIHTC Proceeds LIHTC x Investor Pay-in per
  dollar (.80-.99) x 99.9
• 3,310,180 x .95 x .999 3,141,524
• (67 of TDC)
• If 130 area, proceeds 4,083,981 (87)

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Understand Liabilities

• Operating deficit guarantee
• Construction completion guarantee
• Environmental indemnification
• Credit adjuster (1st yr, later yrs)
• Fee guarantee advance
• Indemnification of partnership
• Purchase limited partners interest

37
Preserving and Revitalizing Oregons Assisted
Housing

• Of the nearly 170,000 Extremely Low Income
  Households in Oregon, 108,000 (64) spend more
  than 50 of their income for housing.
• About 23,300 Oregon households live in project
  based federally assisted housing.
• Oregon had a net loss of 1000 subsidized units
  between 1995-2003

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Why the Stock of Assisted Housing is At Risk

• Expiring Contracts, Use Agreements
• Escalating market values-properties more valuable
  for different populations or different use
• Aging owners
• Owners tired of dealing with federal bureaucracy
• Aging physical assets- insufficient funds/and or
  owner attention to maintain properties to decent
  standards
• RD portfolio- small projects, rural locations,
  partial RA
• Federal budget constraints and fed. commitment to
  fund preservation activities.

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Importance of Preserving this Assisted Housing

• Serves the poorest Oregonians those least able
  to compete in private market
• Once project-based assistance is lost, it will
  not be replaced many generations of low-income
  Oregonians will be affected
• Preservation, on average, is 40-50 less
  expensive than new construction

40
Federally Assisted Housing

• Low-Income Public Housing-HUD
• 6,600 units
• Older Assisted Housing-HUD
• Newer Assisted Housing- HUD and State
• 11,500 units (total older and newer)
• Rural Assisted Housing- USDA Rural Development
  (RD)
• 5,200 units

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Low Income Public Housing

• First federal affordable housing program
• Units developed and owned by local governments
  and public housing authorities
• Residents pay 30 of income for rent HUD pays
  difference needed to operate properties
• Threats HUD payments less than cost of
  operations Aging properties- large backlog of
  capital improvement needs.
• Hope VI- redevelopment/replacement program for
  distressed PH properties

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Older Assisted Housing

• 1960s- HUD programs provided direct federally
  insured loans or mortgage subsidies to develop AH
  projects combined with project-based Section 8
  contracts to keep tenant rents at 30 of income
• Section 221(d)(3)-direct federal loan at 3
• Section 236- federal subsidizes loan interest
  rate down to 1
• Section 202 and 811- capital grants/loans with
  project based Section 8 serves special needs
  populations

43
Older Assisted Housing- Contd

• Programs require limited owner investment and
  provide for limited returns. Owners required to
  rent to LI tenants
• Threats Expiring Use Agreements Owners deciding
  to opt-out insufficient funds to maintain aging
  properties.
• Opportunities Mark-to Market Program, HUDs MF
  preservation program

44
Mark to Market Program (M2M)

• Older Section 8 properties used above market
  rents (exception rents) as a primary subsidy
  mechanism
• Current contracts if renewed will exceed HUDs
  budget. Congress mandated that as contracts
  expire rents needed to be reduced to market.
• Reduction in rents, without reduction in debt
  service, jeopardizes property operations and FHA
  insured mortgage.
• M2M provides restructuring tools to size debt and
  debt terms to market rents

45
M2M Program (Contd)

• Eligible properties
• Section 8 Contract and
• FHA insured loan and
• Rents above market
• Restructure plans developed by Participating
  Administrative Entities (PAEs)
• Kitsap County Housing Authority covers NW

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M2M Process

• 1. 120 days before HAP contract expiration HUD
  and/or Owner determines rent above market
• 2. HUD refers property to PAE
• 3. PAE develops restructure plan
• Third party Rent study
• Third party CNA, environmental screening
• PAE determines (in consultation with owner, HUD,
  others) market rents, rehab needs, operating
  expenses, new supportable debt, replacement
  reserves, etc

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M2M Process (contd)

• 4. PAE submits restructure plan to HUD
• 5. Owner signs Restructuring Commitment
• 6. Transaction closed or processing discontinued

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M2M Restructures

• Involves breaking up mortgage new 1st sized to
  be supported by street rents, 2nd and 3rd if
  needed supported by percentage of surplus cash.
• Owner required to provide 20 of capital for
  project rehabilitation
• Owner Incentive Package
• Capital Recovery Payment for owners portion of
  costs- pro forma expense
• Incentive Performance fees from cash flow
• Cash flow split

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M2M- Role for Nonprofits

• Can acquire projects from existing owners and
  take project thru M2M.
• Developer fee permitted
• Forgiveness of all or part of subordinate debt
  allowed
• All owner incentives apply
• Longer affordability restrictions apply -50 years
• Projects can be transferred to NP sponsors after
  M2M
• Debt forgiveness allowed if transfer within 3
  years of M2M closing

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Mark Up to Market

• Used to facilitate transfer of HUD housing to a
  NP or to fund capital improvements for existing
  NP owned HUD property.
• Applicable when project rents less than street
  rents (20 projects with rents below 80 FMR, 70
  with rents at 80-100 FMR)
• 20 year restricted use agreement
• Nonprofits not entitled to distributions but may
  seek waiver from HUD

51
Newer Assisted Housing

• 1970s and early 1980s- Section 8 New
  Construction, Section 8 Substantial Rehab
• HUD provided rental subsidy through long-term
  project based Section 8 Contract
• Project Development through non-federal sources-
  Oregon State Bond Program
• Threats same as Older Assisted Housing
• Not eligible for Mark to Market program

52
Preserving Newer Assisted Housing

• 6,800 units in Oregon with Section 8 contracts
  expiring between now and 2011. Majority funded
  through State Bond Program
• Oregon, NJ, NY and RI first states to extensively
  use SHFA bonds and Section 8 to develop AH.
• These states will be testing ground for the
  development of preservation strategies for
  uninsured Section 8 properties

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Oregon Has the Tools in Place- Scale is the Issue

• 9 LIHTC- limited resource QAP preservation
  set-aside
• 4 LIHTC and tax exempt bonds- plentiful
  resource need for greater amount of gap
  financing high transaction costs
• CDBG, HOME
• Housing Trust Fund-limited compared to other
  states
• Tax abatements
• Challenges Acquisition, bridge financing
  strategy, multiple property transfers,
  involvement of national partners

54
Rural Rental Housing

• RD Section 515 Program
• Started in 1961 for communities of less than
  20,000
• Provided Federal loans at 1 interest (30 year
  loans, 50 year amortization) combined with
  projectbased Rental Assistance (RA) to keep
  tenant rents at 30 of income.
• Pre-1989 loans had no prepayment restrictions

55
Rural Rental Housing-Contd

• 1980-1986 Prepayments of loans escalated
• 1986 Congress placed moratorium on prepayments
• 1988 Congress passed Emergency Low Income
  Housing Preservation Act (ELIHPA)- restricted
  rights of owners to prepay
• 2004 Court of Claims awards damages to owners
  resulting from prepayment restrictions
• 2006 Claims from 800 owners for damages
• 2006 ELIHPA upheld by U.S. 9th Circuit Court of
  Appeals

56
RD Section 515 Revitalization

• 4 main Processing Tracks
• Prepayment Process (ELIHPA)
• Transfer of Ownership
• Subsequent rehab loans
• Restructuring Demo (thru annual NOFA)
• Principal RD regulations for Loan Processing,
  Servicing, Asset Management
• 7 CFR Part 3560
• Handbooks 1,2,3 to 3560

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Prepayment Process

• Owner requests prepayment
• RD offers owner incentives (equity loans,
  additional RA, etc.) to remain in program and
  continue restrictions
• If owner rejects incentives, project offered to
  nonprofit buyers for 150 days
• If no NP offer, RD determines impact on
  minorities
• If no impact, owner prepays without restrictions
• If impact, owner prepays with restrictions

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Transfer Process

• RD assessment of community need for project
• Evaluation of owner eligibility
• Evaluation of project capital needs
• Evaluation of post transaction rents- not to
  exceed comparable market rents
• Owner equity, project value, rents identified
  through market appraisal
• Impact on tenants-minimizing displacement
• Processing and closing
• Often relies on 3rd party funding

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Subsequent Rehab Loans

• Applications submitted to RD National Office
  annually (November). Selections announced
  generally in February/ March
• Selection based on needs criteria- health/safety,
  code violations, accessibility, etc.

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Restructuring Demo Program

• Annual application process
• Primary Tool- 20 year debt deferral
• Cash flow redirected to reserves to help met
  physical needs of property
• Other Tools
• Grants up to 5,000 per unit
• 515 rehab loan at 0, 30 years
• Second mortgage paid from excess cash flow
• 3rd party debt/equity encouraged
• Transfers, consolidations permitted

61
Legislative Proposals

• S. 3715- Senators Smith and Schumer
• Eliminates depreciation recapture (exit tax)
  for owners who sell assisted housing to State
  approved preservation entity. Entity agrees to
  additional 30 years affordability.
• Intent is to preserve and revitalize existing
  stock of assisted housing provide incentive to
  old owners who feel stuck to move out of
  program expectation that sales prices will be
  reduced.

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Legislative Proposals (contd)

• HR 5039
• Allows RD 515 owners right to prepay
• Provides tenants voucher if they choose to stay
• Codifies preservation tools of RD demo program-
  modify debt structure, rehab loans
• Likely will be brought up again next year.
• Market to Market Reauthorization
• Possible action this month in Omnibus
  Reauthorization

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Legislative Proposals (contd)

• Housing Alliance Proposal
• Increase Housing Trust Fund to 100 million
• 80 million for MF housing development
• 10 million for homeless programs
• 6 million for homeownership
• 4 million for capacity building
• Funded by document recording fee, lottery funds,
  general fund and utility public purpose funds

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Attributes of Good State Preservation Policy

• Early knowledge or warning system and coordinated
  response
• Meet and share knowledge
• Share data
• Determine properties most at risk
• Commitment at highest level, meaning hire someone
  to coordinate
• Flexibility to meet owners/nonprofits needs
• Stressing the cost effectiveness of preservation
• Providing an array of preservation resources

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Want More Information on Preservation

• Contact CDLC
• Lists, project info, contacts for all HUD and RD
  projects sorted by county/region
• Program specific information- regulations,
  guidance, agency contacts, etc.
• Public policy studies, reports, memos
• Info on other groups (local and national) working
  on preservation issues

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LOW INCOME HOUSING TAX CREDITS IS IT
TIME TO RESTRUCTURE?
Initial Compliance Period
Extended Use Period
Year 1
PLUS
Year 15
Year 30
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Question

• What do flossing, regular exercise, and saving
  for retirement have to do with Year 15 planning?

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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.

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Were Here!
Total 6,573 Units in Oregon will complete
Year 15 Between 2006 and 2011
70
Total of 97 Projects 47 for-profit and 50
non-profit sponsored 2006 - 2011
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Year 15 Objectives

• Position the Project to Continue to Perform
  Meet your Goals
• 2. Exit the Investor

Long Term Asset Management
Plan Disposition Plan
72
Critical Timeframes/ Definitions
What did you agree to?
Initial Compliance Period 15 Years
Extended Use Period minimum 15 more years

• Tax Credit Period - 10 years,
• investor cannot exit
• Investor gets credits losses

• Yrs 11 15
• - LP may Exit w/ bond
• No credits
• Still get losses

Affordability Period set by IRS, Augmented by
OHCS Compliance Requirements Amended by OHCS -
IRS no longer receives notice of non-compliance
OHCS only
Compliance Period Begins January 1st of the
first year tax credits are taken and ends
December 31st of the fifteenth year thereafter.
Extended Use Agreement An agreement between the
owner and housing credit agency extending the
low-income housing restrictions an additional 15
(or more) years beyond the initial Compliance
Period. Federal extended use agreements are
required for LIHTC projects with credit
allocations after 1989, and many states impose
additional extended use restrictions.
73
DETERMINING YEAR 15

• Year 15 Begins
• The first year a qualified building is PIS or the
  year after the building was PIS (taxpayer
  election on Form 8609)
• Determined by the first year tax credits are
  recorded on tax returns
• Year 15 Ends
• The last day of year 15
• May be different for different buildings
• Disposition occurs in Year 16 of the last building

74
1. Long Term Asset Management Plan

• Target market Is the project serving the
• population you originally intended? New
  Needs?
• Does the project cash flow?
• Adequately covering maintenance needs?
• Residents services and Asset Management Costs?
• Able to pay debt?
• Rent subsidy contracts expire?
• Long term projections?
• Will your project be competitive over the next
  twenty years? (investors and new lenders view of
  world)
• Capital Needs Assessment, Reserve Balances to
  Meet Needs?
• Financing Structure when are your loans due?
  Prepayment Penalties?

75
Long Term Strategies 2005 HDC Survey Results/
Steps

• Continued Use as Affordable Housing
• 77 of the respondents goal maintain the
  current income and rent restrictions
  (affordability) after Year 15.
• Rehab Needs Assess Needs
• 82 new construction (2006 2011 projects)
• 13 said their projects are in need of extensive
  rehabilitation
• over 55 of the projects do not have a recent
  capital needs assessment, and 15 of respondents
  did not know if they had one
• Financial Viability
• Prepare financial projections (3 yr actual ? for
  15 more years)
• Evaluate Loan Terms

76
2. Disposition Plan

• Goals for the Property
• Plan Early Year 11 is Best to Start
• Know Your Documents
• Know the Numbers
• This is a Negotiation
• Disposition occurs in first quarter of Year 16
  (if not sooner)

77
Exit Strategies

• Right of First Refusal to Purchase Property
• Buyout Option of Partnership Interest
• Puts Obligation to Purchase
• Qualified Contract
• Bargain Sale
• Sale to 3rd Party
• Early Exit

Summary Prepared by Enterprise Social Investment
Corporation June 1, 2005
78
Right of First Refusal

• For projects with post-1989 tax credit
• allocations WITH right of refusal provides
  purchase of property at
• Fair Market Value or
• Formula Price Debt Exit Taxes available for
• Tenants
• Resident management corporations
• Qualified nonprofit
• Government agency
• Cash reserves not clearly part of this price
• Partnership Agreements may also require
• credit benefits or other yield maintenance as
  part of purchase price

79

Buyout of Partnership Interest

• Many transactions (particularly NEF and
  Enterprise) are utilizing this approach
• Standard documents reduce legal costs
• No requirement to re-record loan/ other documents
• Reserves stay with project
• Consolidated Financials
• Price Negotiated 0 upward
• Road not paved yet for projects wanting to use
  acquisition credits in re- syndication

80
Other Exit Strategies

• Qualified Contract Right to ask OHCS to
  present to the Owner a bona fide contract
  signed by a prospective buyer to acquire the
  Owners project for the QC price (the
  Contract), or allow owner to terminate Extended
  Use Period.
• - Unless right has been waived
• - Regs Section 42 (h)(6)(F) of IRS code
• - Process extensive, see OHCS website Qualified
  Contract Application

81
Purchase Proposal Formula Price

• Monitor Debt Long Term Liability on Balance
  Sheet
• What is an Exit Tax?
• Cumulative benefits (tax losses credits taken)
  exceed the investors capital invested
• Result can be a negative capital account
• Disposition of the investors LP or LLC interest
  (or
• the property) results in a tax liability ? LP
  ? GP

82
(No Transcript)
83
Mitigating Exit Taxes

• GOAL Reduce losses to Investor During Years 11
  - 15
• Forgive debt over a period of time (creates
  gains)
• Reduce LP interest by 1/3 (lowers losses to LP)
• Capitalize rather than expense repairs (reduces
  operating losses)
• Improve operations (reduces operating losses)
• Exit Investor Early (stops depreciation/ losses
  to LP)

84
Negotiating the Exit with LP / Know your
Investor

• What is their motivation?
• Return on Investment to Date
• Exit tax liability expectations
• Reserves
• Initial thoughts about specific property
• What is their process?
• Internal can be lengthy
• External
• What is their expectation on timing?

85
Putting Together Asset Management Plan
Disposition Plan

• STRATEGY
• Years 11 15
• Minimize exit taxes
• Plan for reserves
• Minimize operating losses
• Outline Exit Strategy/ Cost
• Determining Need for Capital Sources Uses
• Investigate Sources
• Present proposal to investor

• IMPLEMENTATION
• Exit Partnership (see timing)
• Onward to

Refinancing/ rehab
Refinance and/ or Rehab
Continue Operations
86
Whats the Same as Other Projects?

• Most Uses (comparable to acquisition/ rehab)
• Sources/ Financing Strategies
• Refinancing
• Use of Reserves for Minor Rehabs
• Re-syndications require 3,000 per unit minimum
  rehab
• Principal Re-Payment (check for prepayment
  penalty)
• Relocation Costs/ phasing on rehab
• Sources for Major Rehabilitation OR other Capital
  Needs
• Refinancing
• Re-syndication 4 BOND or 9 for rehab
• Gap loans (CDBG, HOME, Other)

87
Whats Different the Second Time Around?

• 2. Limits on Sources of Funds
• Assumption of original debt or refinance
• HOME only once w/out HUD Central approval
• LIHTC eligible for preservation, lower
  priority than rent subsidized projects
• Re-syndicating Issues
• How existing ownership (equity) factors in
• Strategies to use acquisition credits
• Prohibition from changing original financing on
  bond deals
• Timing

• 1. Different Uses of Funds
• Acquisition price
• Exit Taxes
• Handling of Reserves

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3. Reminder RE Occupied Properties

• Resident Communications
• Using Federal Funds URA
• Real operating budgets (no pretending)
• Maintaining Occupancy during Rehab/ Operating
  Deficit Reserves
• Over Income Tenants if Re-syndicating

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Whats Different4. Timing in Re-syndication
OPTIONAL General Partner Owns
Existing Partnership Owns
Investor Admitted
New Partnership

• Common Issues
• Apply for credits as sponsor
• Establish a new partnership
• Sign reservation as new partnership
• 10 test in new entitys name

USING ACQUISITION CREDITS use tax advisor
NOT USING ACQUISITION CREDITS
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USING ACQUISITION CREDITS

• ISSUE 1. Purchase Requirements
• A. Building must be acquired by purchase from an
  unrelated entity
• B. Must be at least 10 years between acquisition
  and last placed in service
• C. Building must not have been placed in service
  by a related party
• For the purposes of A and C above, in general, a
  partnership is
• related to a person if that person has more than
  a 10 ownership
• in the partnership, or there is more than a 10
  common
• ownership in the case of the two partnerships.
• See report by Craig Emden, Esq.

Caution on purchase of Limited Partners Interest
10 Year Rule
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Using Acquisition Creditscont.
Issue 2. Initial Compliance Period
Initial Compliance Period
Extended Use Period
YES
NO
Substantial Completion Date

• Owners are not eligible to earn a tax credit for
  
• acquisition if the building previously received a
  low
• income housing tax credit for which the 15-year
• compliance period is still in effect

Guggenheim 12th Edition Tax Credits for Low
Income Housing
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Whats DifferentIf You Need Major RehabMajor
Money

• Stages of Grieving
• Denial
• Anger
• Bargaining
• Depression
• Acceptance

Your Board Funders
Borrowed from Elsabeth Kubler-Rosss Five Stages
of Grieving
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Year 15 Experience to Date

• Range of Outcomes
• Projects sold
• Projects purchased by sponsor
• (Pre 1990 Fair Market Sales)
• Replacement of LP interest for 0.00
• Re-syndication, refinance rehabilitation

94
Year 15 Experience to Date

• Investors typically dont expect to get equity
  out of the project
• for profit investor, see partnership agreement
• Exit taxes ASK some require, some dont
• Syndicators (w/ upper tier investors) may
  consider overall fund performance in negotiating
  specific deals
• Single investors may have less flexibility
• Early Exit must post bond FNMA has on some deals

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EXAMPLE

• Musolf Manor (Innovative Housing)
• - No Acquisition Credits hit 700K max
• - Transfer of ownership from existing LP to IHI
• a. IHI acquires for debt exit taxes
• b. Uses reserves to pay exit taxes (granted
  back)
• - IHI sells the building to new LP for value
  (uses)
• NOTE appraised value gt existing debt GP
  equity
• a. New LP assumes subordinate debt
• b. New private loan
• c. GP equity ? to LP (contribution, loan??)
• d. Grant (back from exit taxes) contributed by
  IHI (source) to fund reserves (use)

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Presenter Contact Info

• Leon Laptook
• leon.laptook_at_lasoregon.org
• 503-471-1180
• Charlie Harris
• charris_at_casaoforegon.org
• 503-537-0318 x 305
• Shelly Cullin
• shelly.cullin_at_hcs.state.or.us
• 503-986-2118
• Robin Boyce
• robin_at_hdc1.org
• 503-335-3668