Year 15 Considerations for Non-Profit Sponsors IPED CONFERENCE October 11 th , 2007 Presented by Judy Schneider SVP/ C

1. Year 15 Considerations for Non-Profit Sponsors IPED CONFERENCE October 11th, 2007 Presented by Judy Schneider SVP/ Chief Underwriter National Equity Fund jschneider@nefinc.org

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 propertieslocated 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

3. 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

4. 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.

5. 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

6. 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

7. 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?

8. Know Your Partners Stakeholders • Investors • Syndicators • Private Lenders • Public Lenders • Allocating Agencies • Residents

9. 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?

10. 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?

11. 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

12. 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

13. 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

14. Resyndication Case Study Jefferson-Lincoln Homes Kansas City, MO

15. 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

16. 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

17. 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

18. 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

19. Before Pictures:

20. 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

21. 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

22. 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

23. 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

24. 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

25. Combined New Project Uses of Funds Purchase From Old Partnership $4,500,000(FMV)Repmt. of Outstanding 1st Debt $2,022,000 Re-subordination of Soft Debt $2,278,000 Distribution to Old Partners $ 200,000 Capital Improvements $3,200,000 Financing and Soft Costs $1,755,000 Developer Fees $1,022,000 Reserves $ 393,000 Total $10,870,000

26. Combined New Project Sources of Funds Tax Exempt Bonds – Perm Loan $2,230,900 Tax Exempt ‘B’ Bonds (Constr. Only) $3,660,000 Re-subordinated Soft Loans $2,278,000 State HOME Funds $ 500,000 New City Loan $ 50,000 Other New Soft Loans $ 430,000 New Limited Partner LIHTC Equity $3,605,000 State Tax Credit Equity $1,370,000 Deferred Developer Fees $ 406,100 Total$10,870,000

27. 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

28. Picture in 2007

29. 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

30. NEF CONTACTS Judy Schneider SVP & Chief Underwriter 312.697.6139 jschneider@nefinc.org Meghann Rowley Moses Dispositions Manager 312. 697.6168 mrowley@nefinc.org For additional information, visit www.nefinc.org. Look for Year Dispositions/ Year 15 under the Asset Management Section