Profits in LIHTC Sales

Transcription

1 Profits in LIHTC Sales Case Study By Stasiu Geleszinski, CCIM

2 Stasiu Geleszinski, CCIM Managing Director Stasiu Geleszinski, or Stash as those in the industry know him, acts as the managing director of Capstone s Cincinnati office. He has led the team through many types of transactions, including multi-family investment sales (conventional, affordable, and student housing), as well as development site sales throughout the Midwest. Stash holds the esteemed Certified Commercial Investment Member designation. He has been involved in the analysis, underwriting, asset management, syndication and disposition of thousands of apartment units worth more than $100M, and represented clients from across the world. Beginning his career in commercial real estate during a recent recession these challenging, formative times played a significant role in developing the tremendous work ethic, character, and never say never attitude, which so clearly encapsulates Stash, and the entire Cincinnati team, to so many in the multi-family industry.

3 Listing Agreement Look at partnership agreement Cash waterfall Who gets paid first? What is the split?

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5 Understand the Restrictions Restrictive covenant(s) Does it have soft debt? City HOME, HDAP, FHLB AHP, etc. that will need to be repaid/assigned/forgiven if it has HOME units. How many units and how long does the asset need to be maintained at a given level? There is additional compliance for HOME units: subject to special rents, recertification, and inspections.

6 Now? The future? Rent Levels Assess current rent levels vs potential rent growth. What is achievable? Evaluate rental competitors.

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8 Sales Comps Look at the sales of comparable properties in the area with similar restrictions. Are there any? Are they truly comparable? How do they match up in terms of CAP rate (if available) and price per unit?

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10 Cash Flow Run the property through a cash flow analysis. Where is it now? How has the performance been on a T12, T6, T3, and T1 basis? Where could it be? How do we build a Pro Forma that accurately reflects the view the market will take of the property s operation? What is the market demanding for cash-on-cash returns?

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12 Market Expectations How does the market s demand for cash flow compare with the sales comps pricing?

13 Financing What sort of debt can we get on this Agency, local bank, CMBS?

14 Deferred Maintenance How much deferred maintenance is there? How will that be addressed? Is it financeable or does it have to be addressed from the equity down payment of the project?

15 Pricing the Asset Where do we think pricing is going to end up? Value range Based primarily on the CAP Rate and Cash-on-Cash dictated in our Pro Forma.

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17 Marketing Timelines

18 Offering Process Registered Prospects: 129 Tours: 30 Initial Offers: 10 Best & Final: 4 Buyer: 1

19 Buyers Are they new to LIHTC? If so, they will need to submit a capacity review form to OHFA. OHFA will likely request an in-person meeting and require compliance training

20 Approval OHFA approval of the sale Even if the buyer is known and in good standing with OHFA, they will need to be approved to purchase the project from the Limited Partner/Investor Member.

21 About Capstone

22 Lessons Learned at Disposition Bob Snow National Equity Fund

23 GP reported objectives for their LIHTC projects at Y15 and beyond Taken from conversations with General Partners exiting NEF funds during the past 5 years Sample size is 584 projects in 42 states and approximately 35,600 units The information presented is Subjective. We would like to follow up on whether the initial objectives turned out to be feasible.

24 National Equity Fund Distribution of Buyout Options

25 Options Reported Hold and Operate Refinance to Recapitalize Including 4% credit projects Secure new 9% credit allocation Sell Lease Purchase unit sales and 3 rd Party arms length transactions

26 Willow Garden Reach Good Physical Condition Option 1 Hold and Operate Income sufficient to keep up with repair/replacement needs High occupancy market Project can wait to recapitalize in year 20 plus after the existing 1 st mortgage is paid off and the HOME loans mature. Page 5

27 Option 2 Refinance with/without 4% Credit Pinochle Place Good Physical Condition High occupancy market Allocation agency has gap debt available for y15 projects Fully amortizing debt lock out ends year 15 with a high rate (8.16%) refinanced in a low interest rate environment to 4.5%. Page 6

28 Option 3 New 9% Credit Allocation Harrison Apartments & Adams Homes Generally limited to preservation projects Preserving 515 rental assistance Preserving existing HAP Updating supportive housing projects to today s standards

29 NOI Dictates Options If the income to expense ratio looks like West or Columbus stay the course or refinance If the income to expense ratio looks like Harvard or RNE III preservation will require new gap debt and possibly a 9% allocation $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $- West Park Columbus Park I Harvard Park II RNE III Gross Income Operating Expense

30 National Equity Fund GP reported objectives for Y15 and beyond 53% Hold and Operate 34% Refinance or 4% LIHTC with New Gap debt 10% Sold 3% 9% recapitalization Page 9

31 Recent Unanticipated Dynamics Rental housing affordability crisis Rapidly rising rents, focus on multifamily as a real estate opportunity LIHTC portfolios trading at Year 15 and during extended use as a land-banking strategy, priced assuming flipped to market Entry of REIT and other real estate capital into market

32 Preservation Challenges: Two Main Categories From Year 15 and beyond the Extended Use period: 1. Ongoing physical and financial viability 2. Ongoing preservation of use as affordable housing

33 The Housing Credit Portfolio: The Next Preservation Battle Preservation of the Housing Credit stock is an urgent preservation focus

34 NEF Preservation Fund Because National Equity Fund is committed to preserving existing affordable housing throughout the country, we joined forces with our tax credit investors applying our extensive experience and innovative thinking to create a preservation fund focused on providing the bridge financing often essential to completing the recapitalization of a project required to maintain long-term affordability for its residents.

35 Intended uses: NEF Preservation Fund Acquire affordable housing projects Pay off existing first mortgage Restructure existing gap financing Invest in minor capital improvements to increase marketability Eligible Properties: LIHTC properties in year 12, or later of the compliance period Other affordable housing properties operating under Section 8 and various other federal programs Stabilized Single or multiple sites with at least 50 units Proven location and management

36 General Terms NEF Preservation Fund Up to a 5 year term, fixed rate, non recourse Typical loan size from $5MM to $25MM Provide financing option at up to 98% LTV. 70% LTV - Traditional First Mortgage Debt 80% LTV - Junior Tranche Debt 98% LTV - Mezzanine/Equity Financing Interest rates vary depending on capital stack and loan term Current rates range from 4.40% (1-year 70% LTV Loan) to 6.00% (5-year 98% LTV Loan) Sponsor typically contributes 10% to 20% of the mezzanine/equity portion of the financing. Interest only monthly payments on the 80% LTV portion of the loan, then a quarterly cash flow split based on the financing participation by sponsor.

37 Lessons Learned at Disposition Randall B. Shorr Attorney at Law

38 Basic Statutory Framework Section 42(h)(6)(A) No credit shall be allowed by reason of this section with respect to any building for the taxable year unless an extended low-income housing commitment is in effect as of the end of such taxable year. Section 42(h)(6)(B) Spells out 6 requirements of an extended low-income housing commitment. Section 42(h)(6)(D) Mandates at least 30 years of affordability.

39 Basic Statutory Framework Section 42(h)(6)(E) Exceptions to 30-year affordability Foreclosure Qualified Contract (spelled out in 42(h)(6)(F)) Section 42(h)(6)(E)(ii) 3-year protection: No eviction other than for good cause No increase in gross rent above that allowed under Sec. 42

40 Basic Statutory Framework Section 42(i)(7) Right of First Refusal No Federal income tax benefit shall fail to be allowable to the taxpayer a right of 1st refusal Held by Tenants (in cooperative form or otherwise) A resident management corporation of such building A qualified nonprofit organization A government agency To purchase the property at the end of the compliance period for a price not less than the minimum price (debt plus exit taxes) Revenue Ruling 95-49: An extended low-income housing commitment satisfies section 42(h)(6) even though its provisions may be suspended or terminated after the compliance period when a tenant exercises a right of first refusal to purchase a low-income building.

41 Typical Partnership Exit Right of First Refusal Provisions Only available to qualified nonprofit Only available to purchase the real estate (which does not include reserves) Conveyance Tax (including the value of assumed debt) What exactly IS a right of first refusal? Bona fide 3 rd party?? Be wary of chain arrangements (for-profits linking to the non-profit ROFR) Fair Market Value Sale ( Call Option) What is fair market value? Sometimes Real Property

42 Typical Partnership Exit Provisions Fair Market Value Sale (cont.) More often the LP Interest This is the GOLD STANDARD! The reserves stay with the partnership Typically no money changes hands (in Ohio, FMV = debt, i.e., zero equity) No conveyance fee Minimal disruption Put Option The investor s ability to require the GP to acquire the LP interest Typically a set dollar amount Best practice allow GP/Nonprofit rights to run their course first