HTC Underwriting Negotiating Issues

Transcription

1

2 HTC Underwriting Negotiating Issues MODERATOR Matt Meeker Novogradac & Company LLP PANELISTS Bill MacRostie MacRostie Historic Advisors LLC Nathan Ware BakerHostetler Jon Burckin Enhanced Capital Forrest Milder Nixon Peabody LLP Robert Jacobs RCJ Consulting

3 NPS Issues Assessing Risk of Part 2 Conditions Pro Forma vs. High Hurdle Conditions Part 1 for Individual Listing in National Register vs. Actual Listing in NR as Condition of Closing

4 NPS Issues (continued) Functionally-Related Complex Issues Affecting Timing of Part 3

5 Underwriting Criteria for HTC Deals Project underwriting Developer underwriting

6 Project Underwriting Will the project work? Reasonable development costs Sufficient sources to pay development costs Reasonable income and expenses producing cash flow to pay the investor its agreed upon return Ability to refinance project at reasonable interest rates months from closing Significant HTC experience for development team, principally contractor, architect and NPS consultant Amount of the HTC

7 Developer Underwriting Is the development team sufficient for the project? Experience of the developer in HTC deals Developer experience with specific project type Net worth and net liquidity of the developer and the guarantor team Guarantors are US citizens with assets and liquidity in the US

8 HTC Underwriting Negotiating Issues Investor Term Sheets and Loan Terms & Conditions

9 Investor Term Sheets Structure (Master Tenant vs. Single Tier) Pricing Trade offs between Pricing per Credit and Preferred Return/Put amounts Pay-in Schedules Trade offs between Pricing and Pay-in Schedule Reserve Requirements Standstill or SNDA Requirements Due Diligence costs/needs and Reporting Requirements

10 Loan Terms and Conditions Construction Loans Term of Loan and extension options Length of interest only period Reserves and other Lender requirements SNDA or Standstill discussion/negotiation

11 Loan Terms and Conditions Permanent Loans (refinancing of Construction Loan) HTC Investor Consent Maintenance of SNDA or Standstill Agreement Covenants and Loan Maturity Developer ability to utilize excess proceeds

12 Loan Terms and Conditions Bridge Loans on Remaining HTC Equity Advance Rates Fees and Interest Rates Guarantors and Security Lender Rights Due Diligence

13 At Risk Allocation of nonrecourse financing General rule under sec. 49(a)(1)(A) Nonqualified nonrecourse financing Qualified commercial financing The 80 percent test

14 At Risk Most projects involve multiple sources and multiple uses How to allocate one specific source to one specific use

15 At Risk Project uses Acquisition Exp. = $2 M Rehabilitation Exp. = $8 M Total costs = $10 M Project sources Equity = $2 M Nonrecourse financing = $8 M Total sources = $10 M

16 Direct Comparison At Risk $8 M nonrecourse financing / $ 8 Rehab exp = 100% FAIL Pro Rata Method ($8 M rehab exp/$10 M total costs) * ($8 M nonrecourse financing) = $6.4 M $6.4 M nonrecourse financing / $8 M rehab exp = 80% PASS Direct tracing $6 M nonrecourse financing / $8 M rehab exp = 75% PASS

17 Original Use Sec. 50(d)(5) allows for pass through of the HTC / former sec. 48(d)(1) Sec provides conditions to making election Sec (b)(7) defines original use

18 Original Use Multiple placed in service dates In service rehabilitation

19 What is a substantial rehabilitation? 24/60 Month Period in which the QREs are greater than the basis at the start of the period. Once passed, you include expenses back to the beginning of the rehab and forward to the end of the year. In a subsequent year, the computation can be done again. E.g., basis at 12/31/15 is $1M, and QREs are $2M each in 2016, 2017, and So, at the end of 2017, QREs in past 24 months are $4M, and basis at start of period was $1M. At the end of 2018, QREs in past 24 months are $4M, and basis at start was $3M.

20 Variability and the commensurate test A few Rev Proc Tests that tax lawyers worry about -- An investor s interest must constitute a bona fide equity investment with a reasonably anticipated value commensurate with the investor s overall percentage interest in the partnership. An investor s Partnership interest is a bona fide equity investment only if that reasonably anticipated value is contingent upon the Partnership s net income, gain, and loss, and is not substantially fixed in amount. How much variability do you have to show in the investor s cash return? Can you have distributions of capital to MM without violating the commensurate rule?

21 Permissible Guarantees Rev. Proc provides that the following are permissible guarantees : for the performance of any acts necessary to claim the 47 rehabilitation credits for the avoidance of any act (or omissions) that would cause the Partnership to fail to qualify for credits or would result in a recapture No person involved in any part of the rehabilitation transaction may directly or indirectly guarantee or otherwise insure the Investor's ability to claim the 47 rehabilitation credits, the cash equivalent of the credits, or the repayment of any portion of the Investor's contribution due to inability to claim the 47 rehabilitation credits in the event the Service challenges all or a portion of the transactional structure of the Partnership.

22 Reasonableness opinions Rev Proc provides: The value of the Investor s Partnership interest may not be reduced through fees (including developer, management, and incentive fees), lease terms, or other arrangements that are unreasonable as compared to fees, lease terms, or other arrangements for a real estate development project that does not qualify for 47 rehabilitation credits. Sometimes referred to as the no monkey business test.

23 Maintaining the value of the investor s partnership interest and the role of reasonableness opinions Type of opinions Developer Fees Management Fees Incentive Fees Lease terms Other Arrangements? Timing Illustrations of Fees, etc. 23

24 Investing before the building is placed in service Rev Proc provides: The Investor must contribute a minimum unconditional amount (the Investor Minimum Contribution) to the Partnership before the date that the Building is placed in service. The Investor Minimum Contribution equals 20 percent of the Investor s total expected capital contributions required under the agreements relating to the Partnership as of the date the Building is placed in service. What about buildings that are already in service? How do you pass this test? A rehab building is not placed in service for purposes of Section 47 until the substantiality test is passed. Does this apply to placed in service test of the revenue procedure?

25 HTC Underwriting Negotiating Issues MODERATOR Matt Meeker Novogradac & Company LLP PANELISTS Bill MacRostie MacRostie Historic Advisors LLC Nathan Ware BakerHostetler Jon Burckin Enhanced Capital Forrest Milder Nixon Peabody LLP Robert Jacobs RCJ Consulting