Tax Credit Portfolio Exit Strategies

IPEDOctober 11, 2007

Kevin W. Day

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It’s Year 15!

– so what does that mean?

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We’re all in this together….

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Investor/Syndicator Goals

• Close Funds soon after year 15

• Maximize Residual Value

• Responsible Transitions to new ownership

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Let Them Eat Cat Food

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Who’s driving this thing?

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Let’s look under the hood…

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• Value of real estate

• Partnership documents, regulatory agreements, financing documents, etc

What do we got?

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What can we do with this thing?

– Operate “as is”

– Convert to market or other use (pre 90 ..or QC)

– Convert to affordable condominium

– Déjà vu all over again (new tax credits)

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Qualified Contracts… Difficult to Use

QC Formula: Outstanding debt; plus initial capital contribution; plus 4%

return on capital, Less distributions

Issues:

Every state has different requirements

Burden of document compilation…15 years of Tax and Financials, loan & PA info.

Expensive Process...Consultants, Broker, Appraiser, Mkt studies, A& E, Phase 1.

Title.

Did we start yet ? Start dates subjective.

QC Formula = Fuzzy Math. Critical terms not defined

Does a Qualified Contract = a Qualified Buyer ?

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QC Issues:

Every state has different requirements

Burden of document compilation…15 years of Tax and Financials,

loan & PA info.

Expensive Process...Consultants, Broker, Appraiser, Mkt studies,

A& E, Phase 1. Title.

Did we start yet ? Start dates subjective.

QC Formula = Fuzzy Math. Critical terms not defined

Does a Qualified Contract = a Qualified Buyer ?

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Operate ‘As Is”

– Many affordable properties can compete with market w/o significant new capital

– Pool of available tenants increases (students, etc), some restrictions may go away

– Transition is seamless, no forced dislocation

– May provide the highest return for $ spent

– Strategy can be reversed

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Convert to Market: pre 90 and Future w/QC

+ No development risks… permitting, approvals (NIMBY), major construction, income stream in place

+ 15 yrs of Operational history… leasing, rents, costs

+ Many financing programs still available for Multifamily, HUD insured, Fannie, Freddie

- HUD permission, tenant notices, 3 yr, ROFR

- Rents really higher ?, market deep enough?

- Can you change market perception of the property (curb appeal, reputation)

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Condo Conversion

+ Can be very profitable

+ Accomplishes goal of continued affordable housing

+ Local affordable home buyer programs help

1st time HB grant up to $15,000

Up to 98% loan from HFA w/subsidized closing costs

- Difficult to judge market acceptance

- Significant time consuming legal issues

- Uncertainty of current market cycle adds risk

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Affordable Condo Conversion PLR

Jan 07… IRS approves conversion of Ext. Use S42

+ Great strategy to implement y 13. (esp struggling prop.)

+ Easy math

Condo Fee = Current Op costs, less turnover and interior costs

Condo Fee + Mortgage NTE.. max TC rents

Mortgage/constant = Price of unit (300/7.2K X12= 58,000)

Unit price = Debt/unit + rehab + soft costs+ profit… NTE Market

- Converter must hold unsold units…No eviction.

- New homeowners need training and support

Top loss guarantee may be needed for lenders

May need Tax abatements & community soft $

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Resyndicate with 4% Credits

Cutler Vista

– Miami FL

– 216 Units

– PIS 1990 as 9%

– New construction

– Original Equity 5.1M

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Resyndicate with 4% Credits

Sources Uses

New Bonds:  7,120 Retire 1st 3,440

SAIL:  2,500 SAIL 2,500

TC Equity:    4,800 LPs 1,800

Total:           14,420 SAIL Int. 760

Rehab 3,600

Soft/DF/Reserves 2,320

Total 14,420

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Resyndication Issues

– Public benefit – cost of preservation vs. build new

– Sentiment against extended use properties

– Untangling restrictions and Rights of First Refusal

– Qualified households Vs tenants in possession

– Anti-churning rule (affiliated buyer) 10% rule

– 10 year hold rule

– Aggressive buyers vs. Preservation resources

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Helpful hints for Year 15

– Start early…Strategies should be decided in year 13, prepared in Y14, executed in Y15

– Analyze all possible strategies in light of the local market and capital markets

– Many new financing programs and combinations available for preservation, but take time to implement

– Know your regulatory agreements, partnership and loan agreements.. and approvals needed.

– Pick the right local partner to help you execute your strategy

– Patience Perseverance and Prozac