Year 15:

1
Year 15 Preservation and Beyond
Presented at the 2013 Virginia Housing Credit
Conference
2
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
3
Affordable Housing CommunityThe Development

• Tax Credit Period
• Compliance Period
• Limited Partner Exit Partnership
• Mandatory Extended Use Period (PIS after 1990)
• Additional Restricted Covenants

Years 16-30
Year 30
Years 1 - 10
Years 11 - 15
Year 16
Presented at the 2013 Virginia Housing Credit
Conference
4
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
5
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
6
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 buildings 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
7
Developing an Exit Strategy
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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
9
Understand the Current Reality of your property

• 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

Presented at the 2013 Virginia Housing Credit
Conference
10
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

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• 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
12
Analysis of Each Partnership

• NOTE Every Operating Partnership is different
• Analyze 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
13
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

Presented at the 2013 Virginia Housing Credit
Conference
14
Potential Concerns from VHDA

• Partnership 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 Notification
• Reconciliation of Reserves

Presented at the 2013 Virginia Housing Credit
Conference
15
Common Exit Strategy Options
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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

Presented at the 2013 Virginia Housing Credit
Conference
17

• Several Commons Exit Options
• Qualified Contract???
• Purchase and Reuse Options
• Purchase of Real Estate
• (i.e., buyout/right of first refusal)
• Purchase Investors 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
18
Tax Implications
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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

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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
21
Potential Suggestions to Managing Exit Taxes

• Improve Operations
• Capitalize select Repairs Maintenance (RM)
  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
22
Feeling Overwhelmed?

• There are a lot of moving parts
• Start planning early
• There are several options to choose from
• Contact your Syndicator (Asset Manager)
• Theyll be able to provide you with information
  to assist you in developing your plan
• Contact your Attorney and CPA
• Theyll be able to assist you in putting your
  plan into action

Presented at the 2013 Virginia Housing Credit
Conference
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Questions?