NC Housing Finance Agency Qualified Contract Policies

1. NC Housing Finance Agency Qualified Contract Policies IPED, Year 15 and BeyondOctober 11, 2007Presented by Mark Shelburne

2. Presentation Overview Introduction Quick description of NCHFA’s process for qualified contracts (as yet untested) Explanation of a representative allocating agency’s position Attempt to debate two of the nation’s top LIHTC experts and much of the audience

3. NCHFA Process for QCs Developed in conjunction with Georgia, Virginia, and outside counsel Replicated in whole or part by several other agencies (e.g. Alabama, Oregon) No specific policies on pricing Consider qualified contracts to be adversarial Instead hope to work with owners on more constructive solutions

4. Submitting a QC request Owners must first submit preliminary request to see if eligible QC application itself includes 10 required due diligence items One year period starts only when owner has met all submission requirements

5. Required due diligence items In order to determine the QC price: • first year 8609s, • all partnership tax returns, • all project financial statements, • loan documents for all secured debt, • partnership agreement(s),

6. Required due diligence items Basic real estate items: • physical needs assessment, • appraisal, • market study, • title report, and • Phase I environmental

7. Other criteria Must secure waiver of right of first refusal Some properties ineligible if substantially out of compliance Extended use restrictions remain in place if the agency presents a bona fide QC for the required amount

8. Positions on QC Issues Premise behind criteria above was carefully following Section 42 despite its problems Code creates unreasonable, unfair results: • QC price that is substantially > market value • buyers backing out of closing But each side should accept these outcomes if they expect the beneficial aspects

9. Calculation of QC price Taking into account restrictions in valuing the non-low income portion reflects reality Agree with treating land as non-low income Excluding its value from debt, equity and other capital prevents double counting Refinancing should count as either debt or cash distribution Uncertain how to reduce value after sale offer

10. Inadequate documentation Owners were on notice of QC price elements How to document components is fairly clear Expectation of this right carries corresponding duty to keep records Need all years, not just most recent Agencies have no ability to investigate selective reporting

11. Statutory requirement Code allows termination of restrictions if the “agency is unable to present... a [QC]” Code allows 1 year to do so; use of “a” QC means all done after presenting the first Buyer’s unreasonableness (i.e. not bona fide) means contract was not presented Seller’s behavior is irrelevant No requirement that the deal actually closes; owners bear that risk

12. Determining “bona fide” Terminating the ability to end restrictions is based on an offer being bona fide Definition can be extremely difficult due to transactional complexities However these also existed in 1989, and yet Congress was undeterred Code has other important but vague terms, such as “good cause”

13. Reaching outcomes No reason to federalize dispute resolution; adequately guided by state law Hopefully will be an infrequent issue In most cases, agencies, owners and others should find alternatives to the QC process Will gather good ideas from this event