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Tax Credits Outlook for and Beyond

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					                                                            PRESENTED 2011
                                                           SEPTEMBERTO
                                            Greystar Financial Group, Inc.




Tax Credit Investment Services




                Risk Assessment and the LIHTC
                      Program at Year 25
PRESENTED TO:
                       September 15, 2011
                                                                            PRESENTED TO




The Importance of Risk Assessment
• At any point in the past twenty-five years a bank executive could have made
  the following statement “The regulatory environment for banks is incredibly
  complex, bordering on the byzantine”
• However contrast any one of those years with where we are in 2011:
  – Dodd-Frank Wall Street Reform and Consumer Protection Act
  – Seventy-two sets of Dodd-Frank regulations
  – International Financial Reporting Standards (IFRS)
  – Implementation of the Basel III Accords (1/1/13)
• All of this has to do with getting Tier One (core) capital to be “adequate”
• Why should the affordable housing industry care about risk-weighting and
  capital adequacy?
  – Roughly 85% of the housing credit equity market is attributable to banking
      institutions, to national banks in particular and most particularly, banks that
      are “systemically important” or have global systemic importance
                                                                          PRESENTED TO




The Importance of Risk Assessment
• Reznick Group decided that the question of assessing the risk in LITC
  investments was too important to say “not my job”
• The decision to update LITC property performance data ultimately had
  several purposes
  – Our original intent was to be responsive to concerns expressed by OCC
     officials, investors and others that the recession was likely to have pushed
     up the foreclosure rate and put the already “fragile” housing credit portfolio
     at further risk
  – The major banks are now at the point where they need to independently
     risk-rate all assets in preparation for Basel III implementation
  – The performance data when extrapolated from property to fund
     performance could prove useful if we are able to engage the FASB
     concerning the appropriate accounting for LITC investments
                                                                       PRESENTED TO




The Performance Study
• The last major study of property performance covered property performance
  through calendar 2006.
• We reached out to every active syndicator and virtually every firm
  participated. The study also includes non-overlapping data provided by Bank
  of America, Citibank, JP Morgan Chase, US Bancorp and others
• Forty participants provided us with data covering a total of 16,300 properties
• The study was based on properties that were in service at 12/31/10 and thus
  the first generation of LITC properties is not included
• The study’s focus was on the operating performance of 14,700 properties that
  had achieved stabilization as of 12/31/09 and on their operating performance
  for the years 2008, 2009 and 2010
• The average property in the data-set had 77 apartments up from 64 units
  when the first comparable study was done in 2002
                                                                                      PRESENTED TO




Portfolio Composition


  Figure 2.01 Overall Portfolio Composition
                             Survey Total     Stabilized Properties % of Stabilized
  Number of Properties               16,356                 14,700           89.9%


  Number of Units                 1,191,198              1,049,723           88.1%


  Housing Credit Net Equity $ 59,949,803,149 $      49,704,360,906           82.9%


  Total Housing Credits    $ 69,112,707,921 $       56,811,046,194           82.2%
                                                                                  PRESENTED TO




Major Statistical Findings


                                       2008           2009           2010
 Median Occupancy                         96.4%          96.3%         96.6%

 Median Hard Debt Coverage Ratio              1.15           1.19       1.24

 Median Per Unit Cash Flow         $          246 $          335 $          412
                                                             PRESENTED TO




Median Occupancy
• Occupancy levels in LITC properties have been remarkably consistent
  from one year to the next without regard to the survey size and
  without regard, apparently, to economic distress
• During 2008-2010, despite a national recession and large
  employment losses in most markets, LITC occupancy actually
  increased
• Occupancy data for 2004-2006 vs. 2008-2010 (2007 has not been
  studied)

 – 2004        96.0%                  2008    96.4%
 – 2005        96.0%                  2009    96.3 %
 – 2006        96.1%                  2010    96.6%
             PRESENTED TO




Median DCR
                                                             PRESENTED TO




Debt Coverage
• The most widely-used metric for operating performance is the
  debt coverage ratio (DCR) defined as the relationship between
  net income in a given year (including required replacement
  reserve deposits) and the debt service for that period
• For LITC properties, “soft” debt is eliminated from the
  calculation
• For most of the past decade, average LITC coverage has stayed
  in the 1.13 - 1.15 range. In theory, average DCR’s should increase
  over time as rents & expenses grow, in theory, at different rates
• The properties we surveyed report DCR levels for the last three
  years of:
       1.15 in 2008, stepping up to 1.19 in 2009 and to 1.24 in 2010
                                                          PRESENTED TO




Median Debt Coverage
• For the properties we surveyed, notwithstanding largely constant
  occupancy levels, average debt coverage increased by 3.5%, to
  1.19 in 2009 and by an additional 4.2% to 1.24 in 2010
• For comparative purposes:
              E&Y Studies              Reznick Study
  2004           1.15
  2005           1.15
  2006           1.14
  2008                                   1.15
  2009                                   1.19
  2010                                   1.24
                                                           PRESENTED TO




Median Debt Coverage
• Where did the growth in coverage ratios come from?
  – Our first reaction was these numbers cannot be correct – but
    they have been scrubbed and re-scrubbed
  – The precise answer to the question of why operations have
    improved is….we aren’t sure….but we’re working on it
  – Some possible explanations:
    • While physical occupancy has been flat, economic
      occupancy may have risen due to lower turnover
    • As older LITC deals cycle out, properties financed with
      higher credit prices make the typical LITC property “equity
      heavy/debt lite”. When hard debt is lower, even incremental
      changes in operating expenses have an out-sized impact
    • There is some evidence that operating expenses began to
      stabilize & rents increased during the 2008-2010 period
                                                 PRESENTED TO




Median Per Unit Cash Flow




                            2008   2009   2010

    Per Unit Cash Flow   $ 246 $ 335 $ 412
                                                             PRESENTED TO




Cash Flow per Apartment Unit
• Cash flow per unit is the average amount of net cash flow after
  debt service has been generated per apartment unit per annum
• As with the other metrics, cash flow per unit increased at just 1%
  per annum between 2004 ($234 per unit) to 2008 ($246 per unit)
• Between 2008 and 2010 (the recession years), cash flow per unit
  grew from $246 per unit to $335 in 2009 and $412 per unit in 2010
  – Since movement in cash flows is tied to movement in debt
    coverage, it follows that cash flow improved in 2009 and 2010
  – While the growth in cash flow from $246 to $412 seems
    dramatic at first blush, remember that this is an annual figure
    which translates to roughly $13,000 at the property level
  – Higher DCR’s and cash flow were largely consistent across all
    property types, tenancy types, geographically, etc
                                       PRESENTED TO




Median DCR by Placed in Service Year
                                                  PRESENTED TO




Median Per Unit Cash Flow by Placed in Service Year
                                                                                               PRESENTED TO




Operating Performance by Investment Type




                 Median Physical Occupancy    Median Debt Coverage Ratio        Median Per Unit Cash Flow
Fund Type        2008      2009      2010     2008      2009      2010          2008         2009        2010
Direct            95.6%     95.5%     96.0%      1.08      1.12      1.19   $      120   $     270   $     371
Guaranteed        95.6%     96.6%     96.6%      1.11      1.11      1.22   $      325   $     431   $     521
Multi-investor    96.3%     96.4%     96.5%      1.15      1.20      1.24   $      240   $     340   $     415
Proprietary       97.0%     96.6%     96.9%      1.17      1.20      1.24   $      273   $     362   $     407
Public            95.8%     95.8%     95.8%      1.15      1.17      1.29   $      219   $     208   $     334
Overall           96.4%     96.3%     96.6%      1.15      1.19      1.24 $        246 $       335 $       412
                                                                                   PRESENTED TO




Operating Performance: 4% vs 9% Projects

              Median Physical Occupancy Median Debt Coverage Ratio   Median Per Unit Cash Flow
Credit Type   2008 2009 2010 2008 2009 2010                          2008 2009 2010

4% Credits     96.4% 96.3% 96.6%             1.15     1.19     1.23 $ 350 $ 432 $ 530

9% Credits     96.5% 96.4% 96.6%             1.15     1.19     1.24 $ 215 $ 322 $ 387

Overall        96.4% 96.3% 96.6%             1.15     1.19     1.24 $ 246 $ 335 $ 412
                                                                                             PRESENTED TO




Operating Performance by Development Type

                         Median Physical Occupancy Median Debt Coverage Ratio Median Per Unit Cash Flow
Development Type           2008 2009 2010 2008 2009 2010 2008 2009 2010
Historic Rehab            95.0%    94.7%   95.4%      1.05     1.14     1.16   $      5$     129   $   121
New Construction          96.7%    96.5%   96.8%      1.16     1.19     1.23   $    273 $    332   $   414
New Construction/Rehab    96.0%    95.6%   96.1%      0.88     1.05     1.17   $   (114) $   208   $   290
Rehab                     96.0%    96.3%   96.4%      1.15     1.21     1.27   $    227 $    368   $   442
Other                     91.2%    96.3%   96.8%      0.50     1.50     1.66   $   (413) $   309   $   263
Overall                   96.4% 96.3% 96.6%           1.15     1.19     1.24 $ 246 $ 335 $ 412
                                                                                            PRESENTED TO




 Operating Performance by Tenancy Type


                Median Physical Occupancy    Median Debt Coverage Ratio        Median Per Unit Cash Flow
Tenancy Type    2008      2009      2010     2008      2009       2010         2008      2009       2010
Family           96.0%     95.9%     96.0%      1.13      1.16      1.21   $      217   $    303   $   385
Senior           97.8%     97.5%     97.5%      1.20      1.26      1.30   $      317   $    417   $   466
Special Needs    97.0%     97.0%     97.0%      1.29      1.34      1.42   $      384   $    505   $   548
Other            96.1%     96.5%     96.8%      1.19      1.23      1.22   $      102   $    249   $   298
Overall          96.4%     96.3%     96.6%      1.15      1.19      1.24 $        246 $      335 $     412
                                                                       PRESENTED TO




Incidence of Underperforming Properties


2010                           % of Net Equity % of Total Properties

Below 90% Physical Occupancy              9.3%                12.4%

Below 1.00 DCR                          23.8%                 26.9%

Below $0 Per Unit Cash Flow             25.2%                 28.1%
                                                           PRESENTED TO




Underperforming Properties
• When the first E&Y study was published the industry was
  pleased with the outcome and with the foreclosure rate (.01%) in
  particular. This data:
  – Helped corporate managers better understand the risk profile
  – Helped convinced potential guarantors to enter the business
  – Convinced NAIC to change its risk-based capital charge from
    20% to 2.6%
  • However, few readers seemed to focus on the fact that 1/3 of
    all LITC properties were operating below break-even and just
    under 20% reporting physical occupancy below 90%
  • At AHIC’s request, subsequent studies focused much more
    attention on the “LITC conundrum” – a tiny foreclosure rate
    while so many properties were operating below break-even
                                                              PRESENTED TO




Historical Trend in Underperformance


                                         % of Equity
                                    2008    2009       2010
     Below 90% Physical Occupancy   11.5%     12.5%     9.3%

     Below 1.00 DCR                 31.1%     29.5%    23.8%

     Below $0 Per Unit Cash Flow    33.7%     28.3%    25.2%
                                                     PRESENTED TO




Chronic Underperformance



                              % of Net Equity
                      Below 90%              Below $0
                       Physical   Below 1.00 Per Unit
                      Occupancy      DCR     Cash Flow
                 2010        9.3%      23.8%     25.2%
     All Past 2 Years        6.0%      16.7%     17.4%
     All Past 3 Years        3.8%      13.6%     14.4%
                                            PRESENTED TO




Incidence of properties w/Severe Vacancy Issues
                                             PRESENTED TO




Incidence of Properties w/large negative coverage
                                                                             PRESENTED TO




The Cumulative Foreclosure Rate
• Survey participants reported that the cumulative number of foreclosures
between 1993 and 2010 was 98 and roughly 1/3 of these between 2008-2010
    •The reported foreclosures do not include properties financed by eight
    syndicators that are now inactive. You can’t calculate the drop-out rate
    with precision if you only survey the graduates
    •While the foreclosure rate has increased, earlier estimates were
    distorted by syndication firms “feeding” troubled properties
    • While the cumulative foreclosure rate thru 2010 was 0.62%, this metric
    does not reflect the fact that the impact to investors was often very small
    •The foreclosure rate still compares favorably with any other real estate
    asset class
                                                             PRESENTED TO




Has the inventory become more fragile?
• The bottom line is that in virtually every category, LITC
  performance improved rather than worsened during the
  recession
• Debt coverage ratios and cash flow improved incrementally in
  2009 and 2010 as the tax credit inventory of tax credit deals has
  come to be more heavily represented by “equity heavy”
  properties
• The incidence of underperforming properties in general and the
  number of chronically under-performing properties in particular
  has decreased by a significant level in recent years
• The foreclosure rate needs more analysis and we need to
  develop a way to get to accuracy in this metric
• We are also developing a severity of loss analysis to put the
  foreclosure rate in context
                                                                      PRESENTED TO




The Performance Study – Phase Two
• We are currently at work on the second phase of the study, to be published by
  year end, which will consider:
  – The causes for improved operating performance over the past three years
  – What the net impact of the average foreclosure is to a corporate investor
  – What the average development cost is to build or rehab an LITC apartment
    unit, as well as
  – An analysis of what the impact has been of the location of CRA
    assessment areas on the pricing and availability of tax credit projects
    located outside those areas

				
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