Download Preparing for a Post-Year 15 LIHTC Property Re

The Jameshouse
Jamestown, North Dakota
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Preparing for a Post-Year 15
LIHTC Property Re-Syndication
An Overview
E
very year thousands of low-income housing tax
credit properties reach Year 15 of their initial tax
credit compliance period and are faced with
extensive physical needs but inadequate reserves to
address them. For many general partners, re-syndication
of their LIHTC property is an attractive option, particularly today given a robust tax credit equity market and
state allocating agencies wishing to preserve existing
affordable rental housing projects.
Following is some advice for GPs (owners) interested
in pursuing this recapitalization strategy, to best position
themselves and their property for a successful re-syndication:
I. Start Early
The re-syndication process is long and comprehensive, and a successful outcome requires early analysis,
preparation, and substantial coordination.
A re-syndication or other recapitalization usually
22 Tax Credit Advisor | June 2012
By Allen Feliz, TCAM
requires multiple approvals and coordination between one or more GPs, two or
more lenders, equity providers (i.e. syndicators, investors), and several regulatory bodies. In addition to likely changes
to the property’s operating partnership,
Allen Feliz
the owner will need to obtain new housing tax credits (9%, 4%), an appraisal of the property, a
market study, and possibly new debt, as well as structure
a new transaction with an equity provider. This can take
years to accomplish.
Prudent GPs should start preparing early for a postYear 10 or -Year 15 re-syndication opportunity. Many
developers begin as early as Year 11.
Beginning in Year 10, it can be beneficial for the
owner’s asset manager to: review the property’s current
performance and prepare development projections and
recapitalization strategies; identify the property’s shortRe-Syndication, continued on page 24
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Preservation Transactions & Opportunities
Careful planning is essential. Owners should strategically plan major capital improvements for the re-syndication in order to (1) meet the minimum requirements
and long-term physical and financial needs; assess reserve
for per-unit rehab costs to qualify for a new allocation of
fund balances; review and project future capital account
tax credits and to garner interest from syndicators
balances and any future exit taxes; and develop a strateand/or direct investors, and (2) maximize the costs that
gic plan for operating the property through Year 15. The
will go into LIHTC eligible basis to raise as much equity
GP (or their representative) should also review the curas possible.
rent governing documents (particularly property operatFederal LIHTC program rules provide that in an
ing partnership and loan documents) to identify the
acquisition/rehab project, with certain exceptions, the
owner’s available options for the property and the necminimum amount of rehab expenditures required to
essary steps for a re-syndication [more in Part IV below].
qualify for 4% housing credits for acquisition
The owner’s knowledge of the property
costs – and for rehab expenses to qualify as
and specifics of the partnership agreement,
The
owner’s
a separate new building for 9% tax credits –
plus preparation prior to Year 15, will heavily
is the greater of (1) 20% or more of the
influence the fate of the re-syndication
knowledge of the
adjusted basis of the building, or (2) an
process. While the GP may not be able to
average of $6,200 per low-income unit. The
affect any meaningful changes to the partner- property and specifics
time span for counting rehab expenses is a
ship or the property’s financial structure
of the partnership
24-month period selected by the operating
before Year 11, timely and thoughtful prepaagreement,
plus
partnership.
ration will assure adequate time to execute
Many state allocating agencies, however,
the re-syndication successfully and minimize
preparation prior to
require a higher level of rehab in their qualierrors and unpleasant surprises.
Year 15, will heavily
fied allocation plan (QAP) or LIHTC program
rules. For instance, the Utah Housing
II. Preserve Capital Improvements
influence the fate
Corporation requires minimum average perDuring the preparation stage the owner
of
the
re-syndication
unit rehab costs of $50,000 for projects built
should assess the property’s present physical
before 1940; $35,000 for those constructed
condition and specific major physical improveprocess.
during 1940-1970; and $25,000 for properments needed now or anticipated by the time
ties built between 1971 and 1997. The
of a re-syndication. The owner should correct
Georgia Department of Community Affairs, on the other
any current minor physical deficiencies to maintain the
hand, requires at least $25,000 in hard costs per unit,
property’s occupancy level and curb appeal.
excluding the costs of new community buildings and
For example, if a re-syndication is planned but a
community building additions.
project is only in Year 12 or 13 and has a leaky roof, the
Equity providers have similar – sometimes more
GP should explore ways to immediately repair the roof
stringent – per-unit rehab thresholds.
and prevent further damage, but not go so far as to
Managing rehabilitation costs is critical to maximizreplace the entire roof. Similarly, if a property in Year 11
ing the amount of equity generated in a re-syndication.
has become less energy efficient – and new windows
By maximizing rehab costs and the amount of equity
and a new heating system would improve its long-term
raised, the owner can minimize the amount of new debt
efficiency – perhaps window sealants can provide a
needed for redevelopment.
short-term fix instead. This would enable the GP to delay
the replacement of windows until a comprehensive renoIII. Engage the Limited Partner
vation of the property, in order to include these costs in
Any organized and properly timed re-syndication
the LIHTC eligible basis amount needed for a re-syndicarequires the GP to engage the limited partner (i.e. a syntion. GPs preparing for a re-syndication should therefore
dicated fund or direct investor). The primary motivation
employ a strategy that delays major capital improveof most LIHTC investors is receiving the 10-year stream
ments until the re-syndication without compromising the
of tax credits. Investors usually wish to exit the operating
project’s physical or financial health in the meantime.
Re-Syndication, continued from page 22
Re-Syndication, continued on page 26
24 Tax Credit Advisor | June 2012
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Preservation Transactions & Opportunities
Re-Syndication, continued from page 24
partnership after achieving this and not continue to
receive tax losses during Years 11-15. Accordingly, it can
be useful for GPs interested in re-syndicating their project
to initiate early discussions with the limited partner to
determine whether they intend to sell their partnership
interest at Year 15 or wish to participate in a re-syndication and stay on.
In general, investors prefer a clean break and not to
be part of two overlapping tax credit partnerships, for tax
and other reasons. GPs often prefer to purchase the LP’s
interest themselves so that they can have more control
over the new tax credit partnership formed for a re-syndication. But they should be prepared to identify a thirdparty buyer for the limited partner’s interest if this will not
be the case.
IV. Understand the Governing Documents and
Applicable Regulations
Restructuring the property’s operating partnership to
facilitate a re-syndication begins with the exit of the original limited partner and ends with the admission of a new
limited partner in the new tax credit partnership formed
for the re-syndication.
Owners pursuing a re-syndication should understand
what they can do regarding changes to the existing partnership under the governing documents, particularly the
operating partnership agreement and the loan documents. As part of the early initial preparations (Part I
above), the owner (or its representatives) should review all
of the governing documents and determine the rights of
the limited partner, GP, lenders, and regulatory bodies –
in the present transaction and with regards to a re-syndication. This will establish the basis for negotiations by the
GP with the limited partner and for seeking approvals
from lenders and regulatory agencies. For example, owners should understand how the project’s operating
reserves would be treated in the event of a recapitalization or capital transactions; operating agreements can
differ on this.
The limited partner’s exit and the purchase of the
project by the new tax credit partnership must be properly timed for a post-Year 15 re-syndication. The owner must
budget sufficient time to accommodate the exit of the old
limited partner, the admission of the new limited partner,
the preparation and submission of an application for 9%
26 Tax Credit Advisor | June 2012
tax credits (or bond financing with 4% credits), and
obtaining any new debt or soft or bridge funds.
If 9% tax credits are planned, the new partnership
should not purchase the property prior to the year in
which it will receive the carryover allocation, because
placing the project in service before the year in which tax
credits are allocated can disqualify it for 4% tax credits
for acquisition costs.
Understanding the perspective of the lender(s) is critical at this juncture. For example, if the property has soft
debt, the GP must determine whether the debt must be
paid off at re-syndication or can be forgiven or assumed.
Owners should also find out the answers to: Are the
lenders flexible with transfer of debt? Are balloon loans
or deferred interest payments due at or immediately
after Year 15? Does existing debt exceed fair market
value? Guided by their accountants/legal counsel, owners (and/or third-party buyers) will have to negotiate with
the current limited partner on the purchase price for their
partnership interest, document the transaction, and
obtain consents.
How to structure the sale of the old limited partner’s
interest and to structure the new operating partnership
depends in part on the particular preferences of the GP,
as well as being constrained by certain accounting and
federal tax rules. For example, The Community Builders
(TCB), a national nonprofit developer, prefers to keep the
property partnership in existence after the limited partner exits so it doesn’t have to consolidate the liabilities
and operating activity of the property on TCB’s balance
sheet. TCB typically accomplishes this by identifying
another appropriate party to hold the limited partner’s
interest pending re-syndication.
In today’s LIHTC world, re-syndication may be a
good option for many properties and GPs. Knowing
whether this is viable, and guiding a project through a
re-syndication, requires early analysis and solid preparation to assure that the outcome is successful. TCA
Allen Feliz is Director for TCAM, a Boston-based independent
investment manager, providing asset management and advisory services to owners of real estate and renewable energy
assets. TCAM’s clients include owners, lenders, investors, guarantors, and syndicators. They are banks, investment banks,
insurance companies, corporations, foundations, state allocating agencies, housing finance agencies and authorities, syndicators and developers. Feliz may be reached at 617-717-6071,
[email protected].
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