valuation of year 15 property – combined session with mainstream syndication @dozcpa
TRANSCRIPT
Valuation of Year 15 Property – Combined Session with Mainstream Syndication
@dozcpa
Introductions
• Moderator Doug Koch, Dauby O'Connor & Zaleski, LLC
• Speakers Bryan Kilbane, Red Stone Equity Partners Nancy Morton, Dauby O’Connor & Zaleksi, LLC Brian Blastick, Dauby O’Connor & Zaleski, LLC
The Market for Existing Affordable Housing Assets
• Tax Credit Housing Disposition 2nd Quarter 2014• The Q2 2014 survey continues to track six key attributes
Main value components Targeted yield Respondent characteristics Terminal or residual capitalization rate Basis point spread between conventional apartment and Y15+ terminal
capitalization rates Income and expense trending
Main Value Components & Targeted Yield
• Cash flow remains the top component• Residual value has decreased in importance at the same time
subsidies and new tax credits have increase in importance• Historically, the yield expectations or discount rates used in
modeling ranged from 5% to 11% for Class A to C apartment products. The current survey is showing a mean and median required yield of 12%, a significant reduction from 14% in 2009
• The spread between conventional and affordable properties is most likely attributable to the restrictions placed on the Y15+ properties
Interesting Trends
• Variety of Respondents• Since 2009, there has been a reduction in the both the mean and
median terminal capitalization rate. From 8.5% in 2011 to 7.4% in Q2 2014
• Basis point spread above conventional rates: From about 63 basis to 51 in Q2
• The market continues to evolve and new trends are presenting themselves. There is an increased willingness to consider year 11 to year 14 LIHTC properties. Pricing properties based upon Market rents up to 20% consider in their valuation Past 2 surveys show increasing demand and marketability of LP interests
Rehab Characteristics for Re-Syndication
• Rehabilitation: Same Sponsor and Developer Strength of development team Scope of Rehab
• Confident at $50k per unit• <$30k per unit will limit investors
• Delivery of credits• Amount of credits
Preferably more than $5M
Operational Characteristics for Re-Syndication
• Historic performance of the property• Comparisons of rent and expense projections• Analysis of the relocation budget• The market need:
Is it being repositioned? Is there heavy reliance on subsidy?
• If 4% LIHTC: What is the leverage on the property? Is there soft debt to secure long-term cash flow?
• Were reserves carried forward?
Exit Strategies and Options - ROFR
• Right of First Refusal IRC 42(i)(7)(A) provides that a project after the close of the compliance
period will not lose its federal tax benefits with respect to any qualified low-income housing building merely by reason of a right of first refusal held by the tenants or residential management corporation of the building or by a qualified nonprofit organization or government agency that purchases the property for a defined minimum price.
• Set up to purchase the real property, not the LP interest• In practice, it is used to determine the price of the LP interest
Exit Strategies – Qualified Contract
• Under IRC 42(h)(6)(F), an LIHTC project could become a market-rate project upon the owner’s written request and within one-year period beginning on the date after the 14th year of the compliance period if the housing credit agency is unable to find a qualified contract for the acquisition of the low-income portion of the building
• The qualified contract price for the low-income portion of the building may not be less than the applicable fraction of the sum of the outstanding indebtedness secured by the building, the adjusted investor equity in the building, and other capital contributions not already reflected, reduced by cash distributions from the project
• It is important to verify within the partnership to determine if more stringent requirements are provided in any agreement or in the laws of the state where the project is located
Additional Issues for Qualified Contracts
• Conversion to Market rate This is less likely with a post-1989 transaction due to the extended use
provisions The conversion will depend upon the following:
• Market factors– Amount of affordable housing available– The market rent levels– Current and future proposed developments
• Physical factors– Properties that have deteriorated significantly in the first 15 years are not likely to
be attractive for conversion
Even if the developer elects the 14 year opt out with the tax credit agency, the project is still subject to a three-year transition period
Determined Valuation
• Third Party Appraisals• Valuations in Partnership Agreements
Could be pre-determined cap rate More descriptive waterfall
• Calculating exit taxes or taxable gains Consider both federal, state and local taxes Transfer taxes, if applicable Does the Partnership Agreement require an additional adjustment
for the exit tax distribution
Potential Buyers
• General Partner Long-term plans to hold the property Potential residual value and hold for sale
• Related Party Restructuring capital or organization Converting from NFP to FP
• Residents – Scattered sites• Unrelated Third Party
Syndicator pipelines – Year 15 funds Hot market for long-term HAP Contracts
GAAP Valuation
• Determining the Value of an asset after year 15 transfer Tax Value is based on price and what you are buying
• Larger issue for NFP’s Monitoring operations for fluctuations
• Types of Valuation Methods: Appraisals Cap Rate Valuations Value based on debt assumed Other estimates
• Issues with bringing on Carrying Value Depreciation Factors
• Documenting formal procedures – with BOD approval
Questions?Doug Koch Bryan Kilbane Nancy Morton Brian Blastick
[email protected] [email protected]
[email protected] [email protected]
617.512.6787 216.820.4756 317.819.6141 317.819.6221