CohnReznick LLP

P o w e r e d b y

March 29, 2016

An Introduction to the LIHTC Equity Market & Overview of Recent LIHTC Property Performance

T a x C r e d i t I n v e s t m e n t S e r v i c e s

CHAPA Young Professionals Brown Bag Lunch Series

W h o W e A r e CohnReznick LLP is a national accounting, tax, and advisory firm with one of the largest and most experienced tax credit practices in the country. Tax Credit Investment Services (“TCIS”) is a dedicated business unit within CohnReznick that provides strategic advisory and due diligence services to help clients make informed decisions on acquiring and managing tax-advantaged investments. Working with commercial real estate, compliance, and corporate tax personnel, TCIS provides advisory services related to equity market conditions, investment options, investment due diligence, regulatory requirements, and investment impacts to financial statements. Our core services include: Market education and industry research Tax credit and investment strategies Investment due diligence Portfolio reviews (tax benefit, investment performance, etc.) and benchmarking Organizational assessment System and process improvement

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T a x C r e d i t I n v e s t m e n t S e r v i c e s The TCIS Team is comprised of a multi-disciplinary group of professionals including CPAs, attorneys, financial analysts and other professionals with real estate, banking and public sector experience, well-versed in all realms of the tax credit equity market. TCIS is well regarded in the industry for: • Having authored over 600 investment due diligence reports for tax credit

investors since the early 1990s; experience with multi-investor, proprietary and secondary market transactions;

• Having authored numerous affordable housing industry studies and spoken

frequently at industry conferences and events; • Being sought after by the bank regulators and GAO to provide industry data and

insights;

• Publishing a bi-monthly monitor of the LIHTC equity market trends and pricing in the Tax Credit Advisor magazine;

• Having designed the industry’s first and only third-party application to automate

the financial reporting for tax credit investments.

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R e p r e s e n t a t i v e P u b l i c a t i o n s

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H o w t h e P r o g r a m W o r k s

A Developer applies to state housing agency for LIHTC for their development

Multiple applications are reviewed by the State Housing Agency in competition for each LIHTC allocation

The State Housing Agency award credit allocations to Developers with the highest scoring projects according to the Qualified Allocation Plan

Syndicators bid to acquire Developer’s LIHTC projects – developers weigh the price offered, speed of execution and existing syndicator relationships through the bidding process. Capital from Investors is also raised to finance the projects’ development

Investors provide equity, Developers can build with less debt and Syndicators receive fees for setting up the transaction, and ongoing asset management.

Reduced debt burden allows for lower rents to low income tenants

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H o w t h e P r o g r a m W o r k s

Once a developer receives an allocation of housing credits from the agency, he begins entertaining offers of interest from investors and syndicators.

The term “syndicator” refers to a firm that raises capital from housing credit investors through investment partnerships that deploy the capital by making investments in multiple LIHTC projects. As an intermediary, the syndicator is compensated for raising the capital, making the property investments and asset managing the property investments for a fifteen-year holding period

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Roughly 75% of the annual LIHTC equity market is raised by syndication firms. Wells Fargo, Bank of America and US Bancorp are the largest direct investors – investors that perform ongoing asset management of acquired assets without engaging a syndicator.

$[VALUE]

2015 Equity Market for LIHTC Investments (in billions)

Syndicated Direct

$3.8

$9.7

March 29, 2016

H o w d o i n v e s t o r s c h o o s e i n v e s t m e n t v e h i c l e s ?

• Direct investment – Investor owns a 99% LP interest in an operating partnership with the developer as GP and no third party intermediary. A few large investors have full time staff to underwrite & asset manage such investments. This option would be difficult to execute otherwise.

• Fund investment – Investors acquire LP interests in an investment fund organized by a syndicator/Fund GP. The syndicator finds and underwrites investments in a series of operating partnerships

Multi-investor Funds – typically 5-10 corporate LP’s, investors can typically review about 70% of the fund’s property investments before committing

Single Investor (Proprietary) Funds – same idea with an experienced investor keeping more control e.g. veto rights on property selection

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P o r t f o l i o C o m p o s i t i o n S i n c e 2 0 0 0

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53.9% 56.2%

68.3% 78.7% 74.6%

85.8% 80.1% 82.4%

51.4%

30.3%

51.6%

62.8% 59.6% 69.0% 69.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Gross Equity Percentage of Fund Type Since 2000

Multi Investor Proprietary

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S i z e o f t h e M a r k e t : 2 0 1 5

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$3.8B

$3.9B

$3.5B

$2.3B $0.3B

Syndicated vs. Direct Equity Volume (2015)

Group 3 - ten syndicators

Group 4 - six syndicators

Six direct investors

Group 2 - seven syndicators Group 1 - five syndicators

T h e R o l e o f a S y n d i c a t o r

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To accommodate the demand for housing credits and to take advantage of economies of scale, a syndicator typically acquires equity interests in a number of property partnerships.

A syndicator provides a limited amount of initial capital to the developer to secure the property investment, with the intention of syndicating the future stream of benefits generated by the properties to fund investors in exchange for their equity investment.

The syndicator originates potential property investments, underwrites their risks and rewards, provides ongoing asset management of the property partnerships, and provides the investors with periodic investment updates, audited financial statements and income tax reporting information

Syndicators are compensated for their services through a variety of fee payments (‘the load”) which average 5-7% of gross equity, and receives reimbursement for some of their marketing and underwriting expenses

March 29, 2016

S y n d i c a t o r S e l e c t i o n C r i t e r i a Investors choose syndication partners based on a number of factors including – • Prior portfolio performance

• Yield achievement relative to projected yield • Timeliness of credit delivery • Property occupancy, debt coverage ratio and per unit cash flow • Incidence of portfolio foreclosure

• Ease of investor closing • Experience of senior management • Organizational operational stability • Asset management sustainability • Ability to secure investments in desired markets (for CRA or other reasons)

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I n v e s t o r M o t i v a t i o n s

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Investor Motivations

Favorable risk-adjusted return

Positive consideration

under the Community

Reinvestment Act

Tool to manage the company’s

effective tax rate

Cross-selling opportunities

Corporate social

responsibility / public relations

March 29, 2016

G r o w t h & C o m p o s i t i o n o f t h e H o u s i n g T a x C r e d i t P r o g r a m

• The continued and increasing influence of commercial banks coupled with the increase in the price of housing credits has rebuilt the equity market for housing tax credit investments since 2008-2009

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Years Market Size Investors Yields 1986-1992 $1 Billion Individuals 20%+ 1993-1999 $2 Billion Corporations 11% - 18% 2000 $4 Billion Corporations 10% 2001-2007 $9 Billion Corporations 4.5% - 7% 2008-2009 $5 Billion Bank Investors 8% - 10% 2010 $10 Billion Banks, insurance companies 10% - 12% 2011-2012 $11 Billion Banks and other corps 6% - 8% 2013-2015 $12-14 Billion Predominantly banks 4.5% - 7%

March 29, 2016

C o m m u n i t y R e i n v e s t m e n t A c t

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• Enacted in 1977 to reverse “redlining” by banks

C o m m u n i t y R e i n v e s t m e n t A c t

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• National banks are examined by the regulators on three year cycles for

their compliance with these goals based on a lending test, investment test and service test

• Objectives are principally tied to low-moderate income areas where

the banks take deposits – called “Assessment Areas” • In order to receive “positive consideration” under the investment test,

potential projects must meet the definition of qualified community development investments. LIHTC projects automatically qualify.

• Housing credit investments are a perfect solution because their track

record is outstanding and whether they are financed as “direct” or “Fund” investments, they can be matched precisely with areas that they need to supply debt or equity capital.

March 29, 2016

S t a t e o f t h e C u r r e n t M a r k e t • Based on data collected by CohnReznick LLP from all active syndicators and six

direct investors, it is estimated that investors collectively funneled at least $13.8 billion into the housing credit investment market in the last year, making 2015 a record volume year in the history of the housing credit program.

• The incidence of sub-5.00% investor yields on national funds has taken a strong hold since September 2015 as housing credit prices continue to remain above the $1.00 mark in many markets.

• Despite diminishing yields and soaring housing credit prices, investors, especially those incentivized by the Community Reinvestment Act, continued to demonstrate robust appetite for housing credit investments.

• Low risk asset class in mature market with participation by Fortune 500 companies • Low regulatory risk

• Credit made permanent in 1993 • Considered to be a public welfare investment; favorable regulatory

treatment

• Consistent 10-year history of after-tax return in the 5.50%-7.50% range

• Low foreclosure and recapture risks

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H i s t o r i c a l H o u s i n g C r e d i t P r i c i n g a n d Y i e l d

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H o u s i n g C r e d i t Y i e l d v s . 1 0 - Y e a r T r e a s u r y

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4.76%

5.19%

6.82%

9.17%

10.61%

6.82%

6.17%

7.23% 6.96%

5.88% 4.78%

4.66%

3.78% 3.36% 3.23%

2.99%

1.76%

1.92%

2.54%

2.10%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Gro

ss E

quity

Pric

e

Year of Investment Average annual values (not monthly)

Housing Tax Credit Yield vs. 10-Year Treasury

Quarterly Effective IRR 10 Year Treasury Rate

C u r r e n t F u n d s

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March 29, 2016

O v e r v i e w o f R e c e n t L I H T C P r o p e r t y P e r f o r m a n c e

S t u d y B a c k g r o u n d

The first study began in 2000 when 6,250 properties were surveyed.

Over 21,000 properties surveyed in 2015; representing approximately 70% of “actively managed” LIHTC properties and 90% of those placed in service in the last five years

Data contributed by 35 participants, including 32 syndicators and 3 direct investors

Focused on the 2013-2014 operating performance of nearly 16,000 stabilized properties

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K e y P e r f o r m a n c e M e t r i c s Physical occupancy – the number of occupied units divided by total

number of revenue-producing units in a given property. Economic occupancy – annual collected rent (net of vacancies,

concessions and bad debt) divided by annual gross potential rent.

Debt coverage ratio (DCR) – net operating income (after required replacement reserve contribution) divided by mandatory debt service payments.

Per unit cash flow – the cash flow available after making mandatory debt service payments and required replacement reserve contributions, divided by the total number of units within the property.

Incidence of underperformance – properties operating with <90%

physical occupancy, <1.00 DCR, or negative per unit cash flow.

The incidence of project foreclosures.

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P o r t f o l i o P e r f o r m a n c e - O c c u p a n c y

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• Occupancy levels in LIHTC properties have been remarkably consistent from one year to the next; stayed at 96%+ and reached a historical high of 97.5% in 2014.

• The spread between physical and economic occupancy has decreased to just

90 basis points.

March 29, 2016

P o r t f o l i o P e r f o r m a n c e - O c c u p a n c y

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96.2%

96.7% 97.0%

98.1% 98.2% 98.4% 98.4%

95.0%

95.5%

96.0%

96.5%

97.0%

97.5%

98.0%

98.5%

99.0%

2008 2009 2010 2011 2012 2013 2014

Median Physical Occupancy - US vs. MA

Median US Physical Occupancy Median MA Physical Occupancy

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Port fo l io Performance – DCR/Cash Flow • Improved financial performance sustained

– DCR hovered between 1.13 and 1.15 for a significant portion of the last decade, before rising to 1.21 in 2009

– 2010 marked the first year when none of the states operated below 1.00 DCR

– Strong financial performance was observed across every segment and nearly every participant’s portfolio

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P o r t f o l i o P e r f o r m a n c e - D C R

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1.17 1.17 1.27

1.33 1.43

1.34 1.37

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2008 2009 2010 2011 2012 2013 2014

Median DCR - US vs. MA

Median US DCR Median MA DCR

March 29, 2016

P o r t f o l i o U n d e r p e r f o r m a n c e

• Incidence of underperformance continues to decline

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5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2008 2009 2010 2011 2012 2013 2014

Below 90% Physical Occupancy Below 1.00 Debt Coverage RatioBelow $0 Per Unit Cash Flow

March 29, 2016

C u m u l a t i v e F o r e c l o s u r e R a t e

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0.07% 0.09%

0.11%

0.16% 0.18% 0.21% 0.21% 0.24%

0.31%

0.38%

0.45%

0.53%

0.56% 0.59% 0.66%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Foreclosure Rate by Equity Foreclosure Rate by Number of Properties

March 29, 2016

Survey respondents reported that 133 properties were foreclosed since their inception, translating into a cumulative foreclosure rate of 0.66% as of 2014.

A n n u a l L I H T C F o r e c l o s u r e R a t e v s . C o n v e n t i o n a l M u l t i f a m i l y

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

LIHTC Foreclosure Ratio FDIC Insured Multifamily Delinquency Ratio

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I n c i d e n c e o f F o r e c l o s u r e b y L e v e r a g e R a t i o

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0

5

10

15

20

25

30

0%-15% 16%-30% 31%-45% 46%-60% 61%+

March 29, 2016

A r e L I H T C i n v e s t m e n t s r i s k f r e e ?

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Housing credit projects are actually very fragile by design, primarily due to: – Rent restrictions – Section 42 mandates that state housing credit agencies allocate

just enough credits to make the project feasible. So…housing credit properties can get into trouble when:

– When rents can’t be raised due to negative AMI growth – When projects are over-leveraged – When replacement reserves aren’t funded and maintenance is

deferred – Operating expenses spike

Additionally, housing tax credit properties must conform to

statutory and compliance requirements.

March 29, 2016

Q u e s t i o n s ?

T H A N K Y O U !

Cindy Fang, Senior Manager 617-603-4524 Cindy.Fang@CohnReznick.com Matt Barcello, Manager 617-603-4514 Matthew.Barcello@CohnReznick.com

Regan St. Pierre, Manager 617-603-4518 Regan.St.Pierre@CohnReznick.com Corinna Liu, Senior Associate 857-264-3851 Corinna.Liu@CohnReznick.com