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Every Battle is Won Before it is Fought. Planning for Year 15

Every Battle is Won Before it is Fought. Planning for Year 15. Presenter: Dan Mendelson, President, DTM and Assoc. Inc. OBJECTIVES OF HAND YEAR 15 SESSION. Understand background on Year 15/Exits and current Market Conditions-early exits, debt, etc.

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Every Battle is Won Before it is Fought. Planning for Year 15

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  1. Every Battle is Won Before it is Fought. Planning for Year 15 • Presenter: • Dan Mendelson, President, DTM and Assoc. Inc.

  2. OBJECTIVES OF HAND YEAR 15 SESSION • Understand background on Year 15/Exits and current Market Conditions-early exits, debt, etc. • Discuss key issues/factors to help you think about exits, assets and how to approach portfolios or single properties. • Touch on Role of Public Sector Lenders in the “deal” and the process. • Learn how to develop an action plan.

  3. THE YEAR 15/EXIT PROCESS • Step 1: Know the Properties and Portfolio • Step 2: Know your partners and stakeholders • Step 3: Know your documents and Section 42 • Step 4: Develop your plan(s)

  4. THE PROPERTY- WORKBOOKS AND/OR SUMMARY

  5. PARTNERS AND STRUCTURE OF LIHTC INVESTMENTS • Investments are sold through Limited Partnerships and LLC’s • Partnership Agreements control dispositions, providing: • Transfer restrictions and price • Consent requirements • Financial hurdle: Benefits or Return • Distribution of Proceeds • Liquidation and Dissolution

  6. Investor $ Equity Fund LP = Investor(s) 99.99% GP = .01% $ Project LP =Syndicator NNEHIF 99.99% GP = Developer/Sponsor .01%

  7. TYPES OF INVESTORS Types of Investor vary: • Direct Investors • Syndicators (“Intermediaries”) • Single Corporate Investor Funds • Multiple Corporate Investor Funds • Multiple Individual Investor Funds Types of Syndicators vary: • National for-profit • National nonprofit • Regional (mostly nonprofit)

  8. PARTNERS MATTER – THOUGHTS? • Different Investors/Syndicators have different goals and constraints. • And this has and will continue to change! • EVERYONE is looking for Value/Cash these days. Money goes in different pockets! Value is a changing definition. • What’s Your Partner Thinking these days? M&Ms? • 70-85% of properties have no value- LP exit is the easiest part of the equation.

  9. ONE SYNDICATOR’S OBJECTIVES • Deliver Expected Investor Benefits • Exit investor in Year 16 • Transfer to Nonprofit Sponsors • Works with the sponsor to develop its Year 15 transition plan • Preserve affordability • Minimize displacement of low-income residents • Preserve project viability • May provide equity to resyndicate the project with new tax credits • May provide debt to refinance the project

  10. THE “OTHER”STAKEHOLDERS • Residents • General Partners/Sponsors/Developers • Private Lenders • Public Lenders • Allocating Agencies • The IRS • HUD

  11. KNOW THE PROGRAM-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 • Most investors are ready to dispose of their interest in year 16 • Greater willingness to dispose between years 11-15

  12. PURCHASE AND REUSE OPTIONS Purchase of Real Estate or Investor’s Interest: • Sponsor Acquires • Continue Operations As Is • Rehabs through Resyndication and/or Refinancing • Sells to Third Party (may convey fee title or GP interest) • Partnership Sells to Third Party • Homeownership (Lease-Purchase)

  13. SALE TO THIRD PARTY May occur when: • Investor and General Partner cannot come to terms • General Partner does not exercise the Right of First Refusal or Buyout Option • General Partner wants out of the project • Market exists for GP stake

  14. EARLY EXIT • Investor can dispose of its interest prior to Year 16, provided: • LIHTC compliance is maintained • Early outs are generally not feasible for multiple investor funds, but ask your syndicator

  15. RESYNDICATION OPPORTUNITY IN YOUR MARKETS? • Makes sense where rehab is needed • Minimum rehab: • 20% of acquisition cost or • $6,000 investment per low-income unit • Need to Structure to preserve Acquisition Credit • Problems if buyers and sellers are related parties- need to work with lawyers at exit to protect acquisition credit • 9% credits unlikely in many states- DC, Maryland, Virginia? • 4% Credits (3.18%)Work in some projects but might need a portfolio- combining small properties generally bond costs are too expensive • OID rules and existing below market loans

  16. PUTTING IT ALL BACK TOGETHER- THE PLAN • The GP Perspective • Does the GP have the desire and capacity to purchase the project? • Investor Perspective • Is the Investor flexible with sale or transfer? • Were Investor benefits realized? • Capital Account Balance • Are there exit taxes? • If so, are there sufficient funds to pay exit taxes?

  17. PUTTING IT ALL BACK TOGETHER- THE PLAN • Physical Condition • Are significant capital improvements needed? • Is there a current Capital Needs Assessment (CNA)? • Market Conditions • Is the project marketable? • Is there competition from other projects?

  18. PUTTING IT ALL BACK TOGETHER- THE PLAN Mortgages • Are balloon loans or deferred interest payments due at or immediately after Year 15? • Does existing debt exceed fair market value? • Are lenders flexible with transfer of debt? • Can debt be refinanced or forgiven? • Are there sources for soft debt?

  19. ACTION PLAN FOR PURCHASERS YEARS 1-13: • Create a closing binder with all critical documents-loans, extended use, partnership agreement etc. • Annual Review of operating performance and update projections- including capital account. Portfolio Approach (see template) • Update capital needs- who gets the reserves? • Review and project capital account, exit taxes and LP valuation • Develop strategic plan: • Through Year 15 • After Year 15

  20. ACTION PLAN FOR PURCHASERS YEAR 10-14: • Determine Likely Purchase Price • Per Option or Right of First Refusal • Does the price make sense? • Early exit possible? • Explore Sources of Funds to Meet Purchase Price and Capital Needs: • Resyndication • Refinance: Conventional debt or soft loans • Reserves • Combinations

  21. Even After You Negotiate Still Work to Do… YEARS 14-15: • Consult with Accountant and Attorney • Meet with Syndicator • Negotiate Purchase Price • Sign Letter of Intent • Obtain Lender Approvals • Obtain Regulator Approvals (State, HUD if applicable) • Draft Legal Agreements

  22. ACTION PLAN FOR PURCHASERS YEAR 16: • Close on purchase in 1st quarter of year 16 • File amended Certificate of Limited Partnership • (if applicable) • File tax return and provide final K-1 to Limited Partner(s) • Execute an amendment to the Partnership Agreement, signed by withdrawing and new partners

  23. YEAR 1 – BACK TO THE FUTURE • Do Financial and Business Analysis as part of the syndication investor/syndicator selection process… • Things for you to consider: • General Partner Structure • Cash Flow and Residual Splits-90/10 • Puts and Calls, Triggers- Liquidation Avoidance • Reserve Releases or Tie Ups • Prepayment Abilities on Mortgages, Refinancing approvals post Compliance Period • Lender or third Party approvals of changes in Ownership • Exit Taxes, depreciation and pricing?

  24. Dan Mendelson Chief Broker CCA Mortgage 33 S. Gay Street, Suite 200 Baltimore, MD 21202 410-685-6005 dmendelson@ccadev.com CCA Mortgage

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