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Tax Credit Portfolio Exit Strategies IPED October 11, 2007 Kevin W. Day

Tax Credit Portfolio Exit Strategies IPED October 11, 2007 Kevin W. Day. It’s Year 15! – so what does that mean?. We’re all in this together…. Investor/Syndicator Goals. Close Funds soon after year 15 Maximize Residual Value Responsible Transitions to new ownership.

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Tax Credit Portfolio Exit Strategies IPED October 11, 2007 Kevin W. Day

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  1. Tax Credit Portfolio Exit StrategiesIPEDOctober 11, 2007Kevin W. Day

  2. It’s Year 15! – so what does that mean?

  3. We’re all in this together….

  4. Investor/Syndicator Goals • Close Funds soon after year 15 • Maximize Residual Value • Responsible Transitions to new ownership

  5. Let Them Eat Cat Food live area(click “control+g” to view live area guides) all text, images, or artwork must appear within these guidesalways view guides when aligning elements

  6. Who’s driving this thing?

  7. Let’s look under the hood…

  8. What do we got? • Value of real estate • Partnership documents, regulatory agreements, financing documents, etc

  9. What can we do with this thing? • Operate “as is” • Convert to market or other use (pre 90 ..or QC) • Convert to affordable condominium • Déjà vu all over again (new tax credits)

  10. Qualified Contracts… Difficult to Use • QC Formula: Outstanding debt; plus initial capital contribution; plus 4% return on capital, Less distributions • Issues: • Every state has different requirements • Burden of document compilation…15 years of Tax and Financials, loan & PA info. • Expensive Process...Consultants, Broker, Appraiser, Mkt studies, A& E, Phase 1. Title. • Did we start yet ? Start dates subjective. • QC Formula = Fuzzy Math. Critical terms not defined • Does a Qualified Contract = a Qualified Buyer ?

  11. QC Issues: • Every state has different requirements • Burden of document compilation…15 years of Tax and Financials, loan & PA info. • Expensive Process...Consultants, Broker, Appraiser, Mkt studies, A& E, Phase 1. Title. • Did we start yet ? Start dates subjective. • QC Formula = Fuzzy Math. Critical terms not defined • Does a Qualified Contract = a Qualified Buyer ?

  12. Operate ‘As Is” • Many affordable properties can compete with market w/o significant new capital • Pool of available tenants increases (students, etc), some restrictions may go away • Transition is seamless, no forced dislocation • May provide the highest return for $ spent • Strategy can be reversed

  13. Convert to Market: pre 90 and Future w/QC + No development risks… permitting, approvals (NIMBY), major construction, income stream in place + 15 yrs of Operational history… leasing, rents, costs + Many financing programs still available for Multifamily, HUD insured, Fannie, Freddie - HUD permission, tenant notices, 3 yr, ROFR - Rents really higher ?, market deep enough? - Can you change market perception of the property (curb appeal, reputation)

  14. Condo Conversion + Can be very profitable + Accomplishes goal of continued affordable housing + Local affordable home buyer programs help • 1st time HB grant up to $15,000 • Up to 98% loan from HFA w/subsidized closing costs - Difficult to judge market acceptance - Significant time consuming legal issues - Uncertainty of current market cycle adds risk

  15. Affordable Condo Conversion PLR • Jan 07… IRS approves conversion of Ext. Use S42 • + Great strategy to implement y 13. (esp struggling prop.) • + Easy math • Condo Fee = Current Op costs, less turnover and interior costs • Condo Fee + Mortgage NTE.. max TC rents • Mortgage/constant = Price of unit (300/7.2K X12= 58,000) • Unit price = Debt/unit + rehab + soft costs+ profit… NTE Market • - Converter must hold unsold units…No eviction. • - New homeowners need training and support • Top loss guarantee may be needed for lenders • May need Tax abatements & community soft $

  16. Cutler Vista Miami FL 216 Units PIS 1990 as 9% New construction Original Equity 5.1M Resyndicate with 4% Credits

  17. Resyndicate with 4% Credits Sources Uses New Bonds:  7,120 Retire 1st 3,440 SAIL:  2,500 SAIL 2,500 TC Equity:    4,800 LPs 1,800 Total:           14,420 SAIL Int. 760 Rehab 3,600 Soft/DF/Reserves 2,320 Total 14,420

  18. Resyndication Issues • Public benefit – cost of preservation vs. build new • Sentiment against extended use properties • Untangling restrictions and Rights of First Refusal • Qualified households Vs tenants in possession • Anti-churning rule (affiliated buyer) 10% rule • 10 year hold rule • Aggressive buyers vs. Preservation resources

  19. Helpful hints for Year 15 • Start early…Strategies should be decided in year 13, prepared in Y14, executed in Y15 • Analyze all possible strategies in light of the local market and capital markets • Many new financing programs and combinations available for preservation, but take time to implement • Know your regulatory agreements, partnership and loan agreements.. and approvals needed. • Pick the right local partner to help you execute your strategy • Patience Perseverance and Prozac

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