Year 15 Overview

1
Year 15 Overview June 12, 2008 Presented by
Tony Lyons National Equity Fund
2
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.
• 5.5 billion in equity raised
• 98 of projects that will reach Year 15 in next 5
  years are sponsored by nonprofits

3
NEFs 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

4
Goals Adopted by NEFs Disposition Committee

• Uphold Fiduciary Responsibility to Investors
• Achieve at least Targeted Rate of Return
• Wind up Funds in Timely Fashion
• Minimize Impact of Exit Taxes
• Report to Investors on Disposition Activity and
  Anticipated Exit Taxes
• Minimize displacement of current low-income
  tenants
• Promote long-term continued low-income use of the
  property
• Promote purchase of properties by NEFs
  Non-Profit Partners
• Maintain Positive Community Relations

5
Investor

Equity Fund LP Investor(s) 99.99 GP .01
(NEF, Inc.)

Project LP Equity Fund 99.99 GP
Developer/Sponsor .01
6
Fiduciary Responsibility

• The General Partner has a fiduciary
  responsibility to the partnership
• The limited partner has a fiduciary
  responsibility to the investors

7
LIHTC BASICS

• LIHTC authorized by Section 42 of the Tax Reform
  Act of 1986
• Provides housing affordable to households earning
  below 50 or 60 of area median income
• Investors benefit from
• Tax credits taken over 10 years (generally)
• Loss benefits
• Cash flow and Residuals
• Requires investors to hold the investment for 15
  years (but can exit early by posting a bond)
• Most investors are ready to dispose of their
  interest in year 16

8
Significance of Year 15

• Initial compliance period expires at the end of
  Year 15
• Can transfer ownership in year 16 without
  recapture
• Tax credit transactions are envisioned by
  investors as 15-year investments

9
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

10
Determining Year 15

• Tax Credits allocated in 1991
• Building Placed in Service (PIS) in 1992
• Elected to begin taking credits in 1992
• Tax Credit Compliance Period expires 12/31/06
• Year 15 is 2006
• Transfer ownership without recapture in 2007

11
Year 15 Process Getting Organized

• Step 1 Information Gathering
• Property
• Partners stakeholders
• Documents
• Step 2 Develop your plan for the property
• Step 3 Identify the organizational resources to
  carry out the plan

12
Right of First Refusal

• Omnibus Budget Reconciliation Act of 1989 allowed
  the sale of LIHTC projects through Right of First
  Refusal to certain qualified groups at a bargain
  price
• Formula Price Debt plus Exit Taxes

13
Right of First Refusal

• Formula Price is available to
• Tenants
• Resident management corporations
• Qualified nonprofits
• Government agencies

14
Project Assessment

• Physical Condition
• Are significant capital improvements needed?
• Is there a current physical needs 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?
• Market Conditions
• Is the project marketable?
• Is there competition from other projects?

15
Know Your Partners

• Stakeholders
• Residents
• Investors
• Syndicators
• Private Lenders
• Public Lenders
• Allocating Agency

16
Know Your Limited Partner

• Limited Partners 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?

17
Know Your Debt Documents

• What are the lender controls related to
• Sale of property
• transfer of ownership
• Use of reserves
• Rent/Income Restrictions Tied to Loan Term?

18
Exit Taxes

• What is an Exit Tax?
• Cumulative tax losses exceed the investors
  invested capital
• Result is a negative capital account
• Disposition results in a tax liability
• Also adjust for Historic Tax Credit (if
  applicable)

19
Exit Tax Example

• Limited Partner interest sold to General Partner
  in January 2006
• Sale price equals debt exit taxes
• The capital account balance for the LP is
  (500,000)
• LPs federal tax rate is 35
• (500,000 x 35) 175,000 exit tax
• Apply gross up factor 1 tax rate (1 35
  1.35)
• Grossed up exit tax would be 236,250 (175,000 X
  1.35 236,250)

20
Ways to Manage Exit Taxes

• From years 11-15
• Forgive debt
• Reduce LP interest by 1/3
• Capitalize rather than expense repairs
• Improve operations

21
Options for Paying Exit Taxes

• New loan sufficient to pay off existing debt and
  pay exit taxes
• Resyndication with purchase price by new
  Partnership sufficient to pay exit taxes
• Apply cash reserves to payment of exit taxes

22
GP Options at Year 15 Juncture

• 1) Sponsor Acquires and Continues Operations,
  Assuming all Existing Debt (or Keeps Partnership
  in Place and Substitutes a new L.P.)
• 2) Sponsor Acquires and Rehabs through
  Refinancing
• 3) Sponsor Acquires and Rehabs through
  Resyndication
• 4) Qualified Contract
• 5) Sale to Third Party as Rental or
  Homeownership Lease-Purchase or
  Condominiumization

23
Sponsor Acquires and Continues Operations

• Purchase of the Limited Partner Interest
• Sale of the Real Estate and Dissolution of the
  Partnership

24
Refinance

• Some rehab, but not enough to resyndicate
• High interest rate on first mortgage?
• Balloon payment looming?
• Ability to resubordinate lower debt

25
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
• Will the State provide new tax credits?
• Structure to preserve Acquisition Credit
• Beware of related party issues

26
Qualified Contract

• So-called Opt-out provision
• Applicable to projects with post-1989 allocations
  with extended use restrictions
• Owner may submit a request to the Allocating
  Agency to sell the property
• State must locate a buyer at formula purchase
  price
• If buyer is not found within one year, extended
  use restrictions are TERMINATED

27
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

28
NEF CONTACT
Tony Lyons VP-Northeast Region 212-455-9323 tlyons
_at_nefinc.org

• For additional information, visit www.nefinc.org.
  
• Look for Year Dispositions/ Year 15 under the
• Asset Management Section