Download - Year 15: Preservation and Beyond
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
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
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
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