year 15: preservation and beyond

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Year 15: Preservation and Beyond Presented at the 2013 Virginia Housing Credit Conference

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Year 15: Preservation and Beyond. Presented at the 2013 Virginia Housing Credit Conference. Table of Contents. General Overview Developing an Exit Strategy Common Exit Strategy Options Tax Implications GP & LP – Lower Tier. Presented at the 2013 Virginia Housing Credit Conference. - PowerPoint PPT Presentation

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Year 15:

Preservation and Beyond

Presented at the 2013 Virginia Housing Credit Conference

Table of Contents

Presented at the 2013 Virginia Housing Credit Conference

• General Overview

• Developing an Exit Strategy

• Common Exit Strategy Options

• Tax Implications

• GP & LP – Lower Tier

Tax Credit Period

Compliance Period

Limited Partner – Exit Partnership

Mandatory Extended Use Period (PIS after 1990)

Additional Restricted Covenants

Years 1 - 10

Years11 - 15

Year 16

Years16-30

Year 30+

Affordable Housing Community“The Development”

Presented at the 2013 Virginia Housing Credit Conference

Determining Year 15

Tax Credit Period Begins the first year credits are claimed for

each building “Usually” the 10th year tax credits are

claimed (unless 2/3rd units) Compliance Period

Begins the first year credits are claimed Ends on December 31st of the 15th year after

building(s) are “Placed In Service” (PIS)

Presented at the 2013 Virginia Housing Credit Conference

Determining Year 15 Example:

Building PIS Feb 1st 1998 Elected to begin taking credits in 1998 Tax Credit Compliance Period Expires

December 31, 2012 Year 15 = 2012

NOTE: To calculate Year 15, Add 14 years to the first year credits are initially claimed ~ if multiple buildings, compliance period ends when the last building placed in service has reached the end of its compliance period.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Presented at the 2013 Virginia Housing Credit Conference

Determining Year 15

Multiple Building Developments Year 16 (aka the exit year) which is the end

of the Compliance Period may be different for each building

Must refer to each building’s 8609 to be sure of actual “exit year” (i.e., end of Compliance Period)

Irrevocable election was initially made on Part II of the 8609

Presented at the 2013 Virginia Housing Credit Conference

Developing an Exit Strategy

Before you begin…

Basic rules to follow when developing an Exit Strategy/Disposition Plan

1st: Understand the unique elements specific to your development

2nd: Understand the motivation and goals of your partners & stakeholders

3rd: Know your partnership documents 4th: Develop your “Strategic Exit Plan” in

accord with your goals and the goals of your partner stakeholders

Presented at the 2013 Virginia Housing Credit Conference

How did your deal perform in comparison to the original projections?

Will there be a taxable event upon exit (i.e., exit taxes)? Are you liable for this tax liability of the Limited Partner? Can this be mitigated and perhaps reversed? Are there Compliance Issues? Are there outstanding 8823s issued? Are there “extended use restrictions”? Details of your “ROFR” (Right of First Refusal) Details of your “Waterfall” upon dissolution Outstanding Deferred Developer Fees, Loans?

Deals to watch closely Tax exempt bond deals (4%) Historic preservation deals Underperforming deals

Understand the Current Reality of your propertyUnderstand the Current Reality of your property

Presented at the 2013 Virginia Housing Credit Conference

Exit Strategy / Disposition Plan Begin the disposition process early

Years 9 & 10 Are Deferred Developer Fees still outstanding?

Years 11 & 12 Are there excessive losses or 704b issues? Have the Syndicators received all benefits? Would either party like to “Exit Early”?

Years 13 & 14 What are the goals of the GP after Year 15? What are the goals of the LP after Year 15? Develop & Implement your plan based on goals

Year 15 Have a “draft” of the “Buyout/Exit/Transfer” docs

prepared Year 16 – Exit Year

Finalize and Execute “Buyout/Exit/Transfer” docs

Partnership Agreement The “Blueprint” for Year 15 Options Outlines the rights, requirements,

options, duties & specific obligations Loan Agreements

May have several layers Resolve any conflicting language

Consent requirements GP to obtain consent from interested

parties/stakeholders including MSHDA

Restricted Covenants Regulatory Agreement

Presented at the 2013 Virginia Housing Credit Conference

Presented at the 2013 Virginia Housing Credit Conference

Analysis of Each PartnershipNOTE: Every Operating Partnership is differentNOTE: Every Operating Partnership is differentAnalyze each operating partnership

Looking for the best disposition strategy for each investment and for the Investor(s)

Key Items to Consider: Disposition Fees Transaction Costs Exit Taxes Market Conditions Early Exit?

After Year 10 but prior to Year 15

Presented at the 2013 Virginia Housing Credit Conference

Partnership Analysis

Sponsor Type For Profit and Non-Profit

Total Benefits Received Ending Capital Account Balance Exit Taxes FMV of Partnership Interest Tax Benefits/Costs After

Sale Simple Transfer Donation

Potential Concerns from VHDAPartnership Changes

• Are approvals governed by a “Resale Policy”?• Level of approval may depend on the type of ownership

change ~ will require a financial review of development• Disposition Options may depend on what your long term

plan is for the property and influence what the HFA approvals will be

Re-syndication• How will a re-syndication affect operations?

• Subsidies, repayments, HOME Funds?• Refinance with Virginia Housing Development Authority

(VHDA). Are there preservation programs? Is my loan eligible to prepay? Will there be prepayment penalties?

• Refinancing with another Lender• If loan is eligible for prepayment, contact Asset

Management and inform them of impending prepayment• HUD NotificationHUD Notification• Reconciliation of ReservesReconciliation of Reserves

Presented at the 2013 Virginia Housing Credit Conference

Common Exit Strategy Options

Long Term Hold Strategy Purchase LP interest & Continue to Operate Acquire LP Interest through Sub LP Entity Restructure debt? – Reserves – Taxes Convert to Market Rentals or Condos?

Re-syndication Strategy Buy-out LP – Create new partnership

Sale/Transfer Strategy Transfer Partnership Interest/Assets to 3rd

Party

Common Exit Strategy OptionsCommon Exit Strategy Options

Presented at the 2013 Virginia Housing Credit Conference

Several Commons Exit Options Qualified Contract???Qualified Contract??? Purchase and Reuse Options

Purchase of Real Estate (i.e., buyout/right of first refusal)

Purchase Investor’s Interest (i.e., right of first refusal)

Sell to a 3rd Party Is the property financial viable?

Re-syndication Rehab minimum is $20K per unit?

Presented at the 2013 Virginia Housing Credit Conference

Tax Implications

Items to be aware of: Tax capital accounts

“Tax Basis” – Capital contributed less losses and other decreases (historic tax credits)

Provides the “basis” for which an investor can claim benefits

Minimum gain & 704(b) provisions Amount of Nonrecourse Debt that

exceeds adjusted basis of real estate. Syndicators prepare both minimum gain

and 704(b) analysis on an annual basis

Tax Implications

Tax Credit & Compliance Periods

Significance of the Tax Credit Period Balance the investment to ensure credits are

allocated to the Investor 704b

Excess Losses = “potential” for higher exit costs Loss Reallocations

Significance of the Compliance Period Investors consider LIHTC a 15 year

investment Risk of Recapture due to non compliance

Presented at the 2013 Virginia Housing Credit Conference

Potential Suggestions to Managing Exit Taxes

Improve Operations Capitalize select Repairs & Maintenance (R&M)

Items vs. Expensing them Reallocate Losses to General Partner (GP) Consider restructuring the partnership

agreement in Years 11 – 15 Forgive soft debt

Creates taxable income – increasing the Tax Capital Account

Consult with your Syndicator Asset Manager PRIOR to exercising these options

Presented at the 2013 Virginia Housing Credit Conference

Feeling Overwhelmed? There are a lot of moving parts

Start planning early There are several options to choose from

Contact your Syndicator (Asset Manager) They’ll be able to provide you with

information to assist you in developing your plan

Contact your Attorney and CPA They’ll be able to assist you in putting your

plan into action

Presented at the 2013 Virginia Housing Credit Conference

Questions?