HAND Planning and Executing a Year 15 Exit Strategy

1. HANDPlanning and Executing a Year 15 Exit Strategy June 3, 2014

2. http://bit.ly/preservinghousingcredit

3. Nearly all the properties remained affordable and are owned by the same general partner or sponsor • Majority are in good physical condition and have only limited immediate capital needs

6. KEY CHALLENGES

7. Very limited financing choices exist throughout the extended use period for properties with modest recapitalization or capital improvement needs. • Without innovative financial solutions and subsidies, these properties are in competition for limited Housing Credits and subsidy funding or will require owners to cover shortfalls.

8. Typical Partnership Purchase Option Provisions for Nonprofits • Right of First Refusal to Purchase Property: Price = debt + exit tax • Issues: • Price may exceed FMV • Reserves may not be included • Where property has “no value”, possibility to negotiate a simple assignment of LP interest for $1 • Buyout of Limited Partner – Formula of FMV of Investor Partner’s Interest • Presumes liquidation of partnership assets: all reserves at risk of distribution • If investor partner interest had little value, property with little value has its challenges • Lender approval must be obtained and may have costs

9. As guardians of public investment, the leadership of public stakeholders will be critical to the extended preservation of the Housing Credit

10. Continued affordability and strong physical condition of the Housing Credit portfolio at Year 15 is a testament to the success of the program • The challenge is how to maintain the quality and preserve these assets as they age

11. Some Successful Strategies • Aggregating smaller properties to: • Portfolio reserves – Oakland allowed a nonprofit to pool reserves • For recapitalization and/or resyndication – allows for scale; states promote 4% Housing Credits & Tax Exempt Bonds & may not allocate any 9% for resyndication • Refinancing with friendly bank with low interest loan & Lender waived Prepayment Penalties to accommodate physical improvements, replenish reserves • Public debt restructure or forgiveness – Portland gives consideration where affordability is continued & extended & allows for refinancing • Access weatherization or other utility rebates/programs • NYC program provides up to $15,000 /unit for extended affordability

12. SURVEY OF STATE ALLOCATING AGENCIES Building on Preserving Housing Credit Investment: The State of Housing Credit Properties and Lessons learned for the Extended Use Period, Enterprise is working with the National Housing Trust to gather information on if/how state housing finance agencies are addressing Housing Credit properties that are reaching the end of their initial 15 year compliance period. Some Preliminary Findings Include:

13. Most states have allocated 9% tax credits to properties that have already completed their initial 15 year compliance period • VA and MD have awarded 9% Housing Credits • VA allocated 9% credits to 34 of 167 of these properties that have applied over the last 5 years • MD has awarded 9% credits to 2 such projects (unclear how many have applied)

14. Most state QAPs do not include incentives for resyndication of Housing Credit properties & applying for additional resources • Neither VA nor MD’s QAPs include incentives

15. Most state QAPs do not provide incentives for non-for-profit developers committed to long term affordability. • VA does provide incentives: • 15% set aside for qualified nonprofits (above the 10% required by the IRS) • Housing Credit projects selling to a nonprofit after 15 years receive 60 points • Housing Credit projects agreeing to 35 years extended use receive 50 points • MD does not provide incentives

16. 4% credits and Private Activity Bonds (PABs) • VA: in the last 3 years, 15 of these projects have received 4% LIHTCs and PABs. • MD: in the last 5 years, 16 of these projects have received 4% LIHTCs and PABs. • Weatherization or utility rebates • MD has used both • “Additional resources/regulatory relief” • MD has: • Extended terms/conditions of existing public debt • Relaxed regulations/covenants like income or special populations targeting or rent covenants for distressed projects

17. qualified contracts • VA has not had any experience with Qualified Contracts. • MD has processed 2 requests for Qualified Contracts, but was unable to find an appropriate purchase in either case • MD’s current QAP requires developers to waive their ability to request a Qualified Contract

18. Enterprise Follow Up • Outreach: • Issue report of Enterprise & NHT survey of states • Webinars • Tools – • Beyond Year 15: Preserving Housing Credit Projects & Portfolio: A Guide for Nonprofits –Nancy Rase, Homes For America • http://www.enterprisecommunity.com/resources/ResourceDetails?ID=0091731 • Case Studies of Best Practices & Challenges • Projects/Portfolios by Owners Committed to Long Term Affordability • State & Local Housing Agencies

19. Lydia Tom ltom@enterprisecommunity.org 212-284-7112 www.EnterpriseCommunity.org | www.EnterpriseCommunity.com