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November 2009

Financial Integrity of a Rental Property – Whose Responsibility?. November 2009. 2010 North Carolina Affordable Housing Conference September 17, 2010 Jill Odom, CAHEC. Question - Who’s Responsible for achieving and Maintaining Financial Integrity?. Answer.

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November 2009

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  1. Financial Integrity of a Rental Property – Whose Responsibility? November 2009 2010 North Carolina Affordable Housing Conference September 17, 2010 Jill Odom, CAHEC

  2. Question - Who’s Responsible for achieving and Maintaining Financial Integrity?

  3. Answer …Anyone with a vested interest in the property. This would include: • The owner • The management agent • The syndicator/investor • The lender(s) • The State allocating agency • Who else? Financial Integrity cannot be achieved without a coordinated team effort

  4. Integrity 1.The state or quality of being entire or complete; wholeness; entireness; unbroken state; 2. Moral soundness; honesty; freedom from corrupting influence or motive; -- used especially with reference to the fulfillment of contracts, the discharge of agencies, trusts, and the like; 3. Unimpaired, unadulterated, or genuine state; entire correspondence with an original condition; purity. Syn: Honesty; truthfulness, veracity, reliability, honor.

  5. What is Financial Integrity? – From the Investor’s perspective

  6. Financial Integrity • Synonymous with Financial Stability, or Financial Viability • The ability of a property to achieve or exceed all of the financial projections relating to its development and operational phases • Adhering to or exceeding expectations with regard to timing and delivery of projected tax credits • Maintaining property performance standards in accordance with IRC regulations, Federal, State and local laws • The ability to generate revenue and absorb costs with minimal variances using a realistic and achievable budget.

  7. Tools for determining Financial Integrity • AHIC Watchlist Criteria • Development Phase, including lease-up • Construction Delays over 3 months • Construction cost overruns exceeding15% of contract or contingency reserves spent • Leasing delays over 3 months • First mortgage closing delays over 3 months • Mechanics Liens • Revenue & Expense variances • Any change in qualifying units • Litigation • Bankruptcy

  8. Tools for determining Financial Integrity • AHIC Watchlist Criteria • Operational Phase • High Receivables/High Vacancies • Debt Coverage • Unpaid real estate taxes • Insurance coverage • Mortgage or guarantee delinquency or default • Deferred Maintenance or extraordinary repairs not budgeted • Physical Inspection/Physical Deterioration • Significant life-safety issues • Unauthorized debt • Required Deposits and adequate funding of reserves • GP Removal/replacement • GP/management agent failure to perform • Litigation or Bankruptcy

  9. Tools for determining Financial Integrity • Industry Best Practices – Risk Rating Policies • Development Phase • Construction/Lease-Up Schedules • Financial (sources and uses) • Construction Loan status • Permanent Loan status • Program Compliance • General Contractor • GP/Sponsor/Management • Recapture risk

  10. Tools for determining Financial Integrity • Industry Best Practices – Risk Ratings • Stabilized Phase • Debt Service Coverage • Occupancy • Benefits (tax credit and losses) • Reserves • Physical issues • GP/Sponsor/Management • Program Compliance • Insurance/Taxes • Reporting • Recapture/Foreclosure risk

  11. Tools for determining Financial Integrity • LIHTC Program regulations • Contracts • LIHTC Application and Awards letters • Partnership Agreements • Management Agreements • Guarantee Agreements • Loan Documents • IRS 8823 Audit Guide

  12. Tips to Achieving and Maintaining Financial Integrity

  13. Tips to Attain Financial Integrity • To the Owner • Be aware of the terms and conditions of your agreements and contracts – insuring that they are reasonable and achievable • Timing is EVERYTHING! • Use realistic and achievable revenue and expense assumptions – Voodoo math can cripple a project • Communication is CRITICAL – share the important details with your entire team, especially your property management agent

  14. Tips to Maintain Financial Integrity • To the Management Agent The success or failure of the first year of operations almost always determines the long-term viability of the project • Hold a “kick off” meeting with your owners (and syndicator) – to confirm all the specifics of a new property • Set-asides • Rent/utility schedules • Tax Credit delivery/lease-up schedule • Review marketing plan • Reserves: Funding amounts and timing • Review budget • Review all promises made in the TC application and pertinent terms of the partnership agreement (ie: reporting requirements)

  15. Tips to Maintain Financial Integrity • To the Management Agent • Use a “By the Book” methodology of management • Know which housing program handbooks are applicable and which regulations to follow for determining initial and continued compliance • HUD 4350.3 Handbook • 8823 Audit Guide • State Allocating Agency guidelines and requirements • Landlord/Tenant laws • Fair Housing Laws • Local Codes • ADA/Accessibility & design requirements • Know your market and advertise pro-actively. • Focus on lease enforcement and resident retention • Recruit experienced site staff: provide on-going training, support and motivation!

  16. Questions or Comments?Jill Odom, CAHECjodom@cahec.com

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