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					Affordable Housing Finance Training
Neighborhood Partnership Fund Training Series December 14, 2006 Corvallis, OR

Presenters
• Leon Laptook- Director, Community Development Law Center • Charlie Harris- Senior Housing Manager, CASA of Oregon • Shelley Cullin- Loan Officer, Oregon Housing and Community Services Department • Robin Boyce- Executive Director, Housing Development Center
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• This workshop is sponsored by the Neighborhood Partnership Fund, through a grant provided by the U.S Department of Housing and Urban Development
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Agenda
Introductions I. Overview II 9% LIHTC Project Case Study III. Housing Preservation-History, Challenges Lunch Break IV. 4% and Tax Exempt Bonds- RD Preservation Project Case Study • V. LIHTC Year 15 Case Study • Wrap-up, Evaluations, Adjourn
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• • • • • •

Low Income Housing Tax Credits
• Largest affordable housing program in the U.S. • Funds about 90,000 units annually • Started in 1987 • Operated by the IRS and administered through state housing finance agencies (Oregon Housing and Community Services Department)
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LIHTC-how it works
• In exchange for investing private equity in affordable housing projects, investors receive a credit on their federal taxes • Investors are large corporations, banks, etc. • Investors funds are pooled and invested in multiple projects by syndicators
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LIHTC Rule Book
• Section 42 of Internal Revenue Code • Supplemented by State Qualified Allocation Plan (QAP) • Penalties for failure to comply are assessed through tax code

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Types of Credits
• 9% credit- obtained through highly competitive process; raises 50-60% of project costs • 4% credit- non-competitive credit obtained with use of tax-exempt private activity bonds; raises 30-35% of project costs
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LIHTC Property Restrictions
• Tax Credits claimed over 10 year period • Tax Credit compliance period-15 years
– IRC 42 and Regulatory Agreement govern

• Extended Use period- years 16-30
– Regulatory Agreement governs

• Local Extended Use Period
– Regulatory Agreement governs
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LIHTC Projects
• Project owners are Limited Partnerships or Limited Liability Companies • LP consists of General Partner (GP) and Limited Partner (LP)
– GP has .01% ownership interest, oversees the operations of project – LP has 99.9% ownership interest, contributes equity to construct project
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LIHTC Projects
• GP guarantees
– Project will be completed, operated effectively, maintained in good condition – Investors will receive tax credits – Investor will receive other financial benefits as agreed to in Partnership Agreement – Project will be operated in compliance with IRS, OHCS and lender requirements
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Fiduciary Responsibility
• General partner has fiduciary responsibility to partnership • Limited partner has fiduciary responsibility to investors

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9% LIHTC (Sec. 42)
• • • • Eligibility and Restrictions Documents/Process Calculating Amount of Credit Guarantees

ELIGIBILITY and RESTRICTIONS
• 9% credit for new construction • 9% credit for rehab greater than 10% of unadjusted basis or $3,000 per LI unit • 4% credit for acquisition of existing bldg, provided it also meets rehab requirement • 4% credit for “federally subsidized” new construction or rehabilitation
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Project Eligibility Generally, must be permanent housing w/ lease term > 6 mos. – SRO housing OK if at least mo. to mo. lease; can have shared kitchen, bathroom – transitional housing for homeless OK if provide services & if have separate kitchen and bathroom in each unit

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• Project Eligibility (continued): – Nursing homes, mobile home parks, dorms, hospitals are not eligible – New construction must meet fair housing accessibility requirements – Units must continuously meet local codes, Section 8 HQS standards – Tenants can only be evicted for good cause
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Tenant Eligibility Income and Rent: either 20% of units at 50% AMI or 40% of units at 60% AMI • Applies at initial occupancy; • Must recertify tenants annually • T ineligible if income increases by >40%, unless next available unit rented to eligible tenant or unless all units are LIHTC units
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Tenant Eligibility (continued)

Students: unit occupied entirely by FT students ineligible, unless • married filing jointly, • single TANF parent w/ student kids, or • single parent w/ kids who aren‟t dependents of someone else for tax purposes
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Length of Compliance Period
• 15 yr compliance by IRS, with potential of credit recapture • “Extended Use” Commitment of Additional 15 yrs by OHCS (eligible applicants, tenants or OHCS can sue for compliance) • You may have committed to even longer period in your CFC app
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DOCUMENTS and PROCESS
CFC app (with Investor Letter of Interest) OHCS CFC Award Letter (forward alloc.) OHCS Offer of Tax Credit Reservation Straw Limited Partnership Agreement, Cert of LP, EIN • OHCS Reservation and Extended Use Agreement (& Hold Harmless Agreement)
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• • • •

DOCUMENTS and PROCESS (cont.) • Request for Proposals from Investors • Due Diligence • Investor Commitment Letter • Investor Limited Partnership Agreement

• Begin Construction
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DOCUMENTS and PROCESS (cont.)
• Carryover Allocation Application (by 12/1 of yr of credit allocation, with 10% Cost Certification by 6/30 of following yr) • Carryover Allocation Agreement (by 12/31 of yr of credit allocation) • Complete Construction, Place in Service (within 2 yrs of yr of credit allocation)
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DOCUMENTS and PROCESS (cont.)
• Final Application (and Cost Certification) • Recorded Declaration of Land Use Restrictive Covenants • IRS Form 8609

• Annual Compliance Monitoring
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LIHTC Calculation
1. Eligible Basis = TDC – Land, Rsvs, etc. 2. If 130% booster, multiply EB x 130% = EB 3. Qualified Basis = EB x Applicable Fraction (% of units that are LIHTC units, typ. 100%) 4. Annual LIHTC = QB x Applic. Percentage
a. Appl. % varies by month, use 8% as est.

5. Total LIHTC = Annual LIHTC x 10 yrs 6. LIHTC Proceeds = LIHTC x Investor Pay-in per dollar ($.80-$.99) x 99.9%
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Eligible Basis
EB = TDC – non-depreciable items Eligible costs: • Common areas, mgrs unit • Parking, Other facilities are eligible, provided no separate fee • Community service facility OK if in QCT and < 10% of EB of housing • SDCs are eligible
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Eligible Basis (continued)
• Not eligible:
• • • Land and land-related costs Costs related to permanent financing Issuance costs related to Tax-Exempt Bond Financing Operating and replacement reserves Commercial space Legal costs re: syndication (investor legal fees)
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• • •

Eligible Basis (continued)
Federal Subsidized Loan: If costs that are otherwise included in EB are paid for with “federal subsidies,” then those costs are only eligible for 4% credit. • “Federal Subsidy”: loan of federal funds at interest rate below AFR (4.9% as of 12/06) • Solutions: (a) FS goes to GP, which re-loans it to LP at AFR, (b) FS is used to pay for nonEB items (and tracked accordingly) or (c) exclude FS from EB
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Eligible Basis (continued)
Grants: Must exclude grants made to partnership from EB; • Solution: Grant should be made to GP and loaned to partnership
• If grant is federal funds, loan should be at AFR If grant is non-federal funds, loan can be at less than AFR Grant received by LP at any time during 15 yr compliance period will result in reduction in EB (and tax credits)
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•
•

Eligible Basis (continued)
HOME funds (grant or “below-AFR” loan): • no EB reduction if at least 40% of units are rented to tenants at 50% AMI; can‟t get 130% bonus booster

•

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Eligible Basis (continued)
Bonus Booster: If in Qualified Census Tract (QCT) or Difficult to Develop Area (DDA), can get 130% “bonus booster” • DDAs for 2007: Clatsop, Coos, Crook, Curry,
Douglas, Gilliam, Grant, Hood River, Jefferson, Josephine, Lincoln, Linn, Morrow, Tillamook, Union, Wallowa, Wasco and Wheeler Counties.
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METRO AREA QCTs
Benton County (Corvallis) 7.00, 8.02, 11.01, 11.02 Jackson (Medford-Ashland) 1.00, 2.02, 2.03, 19.00 Lane County 31.02, 37.00, 38.00, 39.00, 42.00, 48.00 Marion County (Salem) 2.00, 4.00, 5.00, 7.00, 8.00, 9.00, 10.00, 17.01 Multnomah County (Portland) 11.01, 21.00, 22.01, 22.02, 23.01, 33.01, 34.01, 34.02, 40.01, 42.00, 49.00, 51.00, 52.00, 53.00, 54.00, 55.00, 56.00, 76.00, 83.01, 96.06, 98.01 Washington County 332.00
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NON- METRO AREA QCTs
Clatsop County Jefferson County Klamath County Malheur County Union County 9503.00 9604.00 9716.00, 9717.00, 9718.00 9704.00 9707.00
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LIHTC Calculation
1. Eligible Basis = TDC – Land, Rsvs, etc. TDC $4,700,000 Less: Land (280,000) Perm Loan Fees ( 23,507) Reserves ( 75,000) Misc. (183,771) Subtotal Inelig Costs = (562,278) Eligible Basis = $4,137,722 2. If 130% booster, multiply EB x 130% = EB (Inapplicable here)
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LIHTC Calculation (cont.)
3. Qualified Basis = EB x Applicable Fraction (% of units that are LIHTC units, typ. 100%) $4,137,722 x 100% = $4,137,722 (QB) 4. Annual LIHTC = QB x Applic. Percentage a. Appl. % varies by month, use 8% as est. $4,137,722 x .08 = $331,018
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LIHTC Calculation (cont.)
5. LIHTC = Annual LIHTC x 10 yrs $331,018 x 10 = $3,310,180 6. LIHTC Proceeds = LIHTC x Investor Pay-in per dollar ($.80-$.99) x 99.9% $3,310,180 x .95 x .999 = $3,141,524 (67% of TDC) [If 130% area, proceeds = $ 4,083,981 (87%)]
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Understand Liabilities
• Operating deficit guarantee • Construction completion guarantee • Environmental indemnification • Credit adjuster (1st yr, later yrs) • Fee guarantee advance • Indemnification of partnership • Purchase limited partners interest
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Preserving and Revitalizing Oregon‟s Assisted Housing
• Of the nearly 170,000 Extremely Low Income Households in Oregon, 108,000 (64%) spend more than 50% of their income for housing. • About 23,300 Oregon households live in project based federally assisted housing. • Oregon had a net loss of 1000+ subsidized units between 1995-2003

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• Expiring Contracts, Use Agreements • Escalating market values-properties more valuable for different populations or different use • Aging owners • Owners tired of dealing with federal bureaucracy • Aging physical assets- insufficient funds/and or owner attention to maintain properties to decent standards – RD portfolio- small projects, rural locations, partial RA • Federal budget constraints and fed. commitment to fund preservation activities.
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Why the Stock of Assisted Housing is At Risk

Importance of Preserving this Assisted Housing
• Serves the poorest Oregonians; those least able to compete in private market • Once project-based assistance is lost, it will not be replaced; many generations of low-income Oregonians will be affected • Preservation, on average, is 40-50% less expensive than new construction
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Federally Assisted Housing
• Low-Income Public Housing-HUD
– 6,600 units

• “Older Assisted Housing”-HUD • “Newer Assisted Housing”- HUD and State
– 11,500 units (total older and newer)

• Rural Assisted Housing- USDA Rural Development (RD)
– 5,200 units
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Low Income Public Housing
• First federal affordable housing program • Units developed and owned by local governments and public housing authorities • Residents pay 30% of income for rent; HUD pays difference needed to operate properties • Threats: HUD payments less than cost of operations; Aging properties- large backlog of capital improvement needs. • Hope VI- redevelopment/replacement program for distressed PH properties
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Older Assisted Housing
• 1960‟s- HUD programs provided direct federally insured loans or mortgage subsidies to develop AH projects; combined with project-based Section 8 contracts to keep tenant rents at 30% of income
– Section 221(d)(3)-direct federal loan at 3% – Section 236- federal subsidizes loan interest rate down to 1% – Section 202 and 811- capital grants/loans with project based Section 8; serves special needs populations
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Older Assisted Housing- Cont‟d
• Programs require limited owner investment and provide for limited returns. Owners required to rent to LI tenants • Threats: Expiring Use Agreements; Owners deciding to opt-out; insufficient funds to maintain aging properties. • Opportunities: Mark-to Market Program, HUD‟s MF preservation program
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Mark to Market Program (M2M)
• Older Section 8 properties used above market rents („exception rents‟) as a primary subsidy mechanism • Current contracts if renewed will exceed HUD‟s budget. Congress mandated that as contracts expire rents needed to be reduced to market. • Reduction in rents, without reduction in debt service, jeopardizes property operations and FHA insured mortgage. • M2M provides restructuring tools to size debt and debt terms to market rents
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M2M Program (Cont‟d)
• Eligible properties
– Section 8 Contract and – FHA insured loan and – Rents above market

• Restructure plans developed by Participating Administrative Entities (PAEs)
– Kitsap County Housing Authority covers NW
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M2M Process
• 1. 120 days before HAP contract expiration HUD and/or Owner determines rent above market • 2. HUD refers property to PAE • 3. PAE develops restructure plan
– Third party Rent study – Third party CNA, environmental screening – PAE determines (in consultation with owner, HUD, others) market rents, rehab needs, operating expenses, new supportable debt, replacement reserves, etc
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M2M Process

(cont‟d)

• 4. PAE submits restructure plan to HUD • 5. Owner signs Restructuring Commitment • 6. Transaction closed or processing discontinued

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M2M Restructures
• Involves breaking up mortgage; new 1st sized to be supported by street rents, 2nd and 3rd if needed supported by percentage of surplus cash. • Owner required to provide 20% of capital for project rehabilitation • Owner Incentive Package
– Capital Recovery Payment for owners portion of costs- pro forma expense – Incentive Performance fees from cash flow – Cash flow split
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M2M- Role for Nonprofits
• Can acquire projects from existing owners and take project thru M2M.
– Developer fee permitted – Forgiveness of all or part of subordinate debt allowed – All owner incentives apply – Longer affordability restrictions apply -50 years

• Projects can be transferred to NP sponsors after M2M
– Debt forgiveness allowed if transfer within 3 years of M2M closing
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Mark Up to Market
• Used to facilitate transfer of HUD housing to a NP or to fund capital improvements for existing NP owned HUD property. • Applicable when project rents less than street rents (20 projects with rents below 80% FMR, 70 with rents at 80-100% FMR) • 20 year restricted use agreement • Nonprofits not entitled to distributions but may seek waiver from HUD

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Newer Assisted Housing
• 1970‟s and early 1980‟s- Section 8 New Construction, Section 8 Substantial Rehab • HUD provided rental subsidy through longterm project based Section 8 Contract • Project Development through non-federal sources- Oregon State Bond Program • Threats: same as Older Assisted Housing • Not eligible for Mark to Market program
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Preserving Newer Assisted Housing
• 6,800 units in Oregon with Section 8 contracts expiring between now and 2011. Majority funded through State Bond Program • Oregon, NJ, NY and RI first states to extensively use SHFA bonds and Section 8 to develop AH. • These states will be testing ground for the development of preservation strategies for uninsured Section 8 properties
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•

•
• • • •

Oregon Has the Tools in Place- Scale is the Issue 9% LIHTC- limited resource; QAP preservation set-aside 4% LIHTC and tax exempt bonds- plentiful resource; need for greater amount of gap financing; high transaction costs CDBG, HOME Housing Trust Fund-limited compared to other states Tax abatements Challenges: Acquisition, bridge financing strategy, multiple property transfers, involvement of national partners
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Rural Rental Housing
• RD Section 515 Program
– Started in 1961; for communities of less than 20,000 – Provided Federal loans at 1% interest (30 year loans, 50 year amortization) combined with project–based Rental Assistance (RA) to keep tenant rents at 30% of income.

• Pre-1989 loans had no prepayment restrictions
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Rural Rental Housing-Cont‟d
• 1980-1986: Prepayments of loans escalated • 1986: Congress placed moratorium on prepayments • 1988: Congress passed Emergency Low Income Housing Preservation Act (ELIHPA)- restricted rights of owners to prepay • 2004: Court of Claims awards damages to owners resulting from prepayment restrictions • 2006: Claims from 800 owners for damages • 2006: ELIHPA upheld by U.S. 9th Circuit Court of Appeals

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RD Section 515 Revitalization
• 4 main Processing Tracks
– – – – Prepayment Process (ELIHPA) Transfer of Ownership Subsequent rehab loans Restructuring Demo (thru annual NOFA)

• Principal RD regulations for Loan Processing, Servicing, Asset Management:
– 7 CFR Part 3560 – Handbooks 1,2,3 to 3560

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Prepayment Process
• Owner requests prepayment • RD offers owner incentives (equity loans, additional RA, etc.) to remain in program and continue restrictions • If owner rejects incentives, project offered to nonprofit buyers for 150 days • If no NP offer, RD determines impact on minorities • If no impact, owner prepays without restrictions • If impact, owner prepays with restrictions
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Transfer Process
• RD assessment of community need for project • Evaluation of owner eligibility • Evaluation of project capital needs • Evaluation of post transaction rents- not to exceed comparable market rents • Owner equity, project value, rents identified through market appraisal • Impact on tenants-minimizing displacement • Processing and closing • Often relies on 3rd party funding
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Subsequent Rehab Loans
• Applications submitted to RD National Office annually (November). Selections announced generally in February/ March • Selection based on needs criteriahealth/safety, code violations, accessibility, etc.
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Restructuring Demo Program
• Annual application process • Primary Tool- 20 year debt deferral
– Cash flow redirected to reserves to help met physical needs of property

• Other Tools
– – – – – Grants up to $5,000 per unit 515 rehab loan at 0%, 30 years Second mortgage paid from excess cash flow 3rd party debt/equity encouraged Transfers, consolidations permitted
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Legislative Proposals
• S. 3715- Senators Smith and Schumer
– Eliminates depreciation recapture (“exit tax”) for owners who sell assisted housing to State approved „preservation entity‟. Entity agrees to additional 30 years affordability. – Intent is to preserve and revitalize existing stock of assisted housing; provide incentive to „old‟ owners who feel stuck to move out of program; expectation that sales prices will be reduced.
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Legislative Proposals (cont‟d)
• HR 5039
– Allows RD 515 owners right to prepay – Provides tenants voucher if they choose to stay – Codifies preservation tools of RD demo programmodify debt structure, rehab loans – Likely will be brought up again next year.

• Market to Market Reauthorization
– Possible action this month in „Omnibus Reauthorization‟

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Legislative Proposals (cont‟d)
• Housing Alliance Proposal
– Increase Housing Trust Fund to $100 million
• • • • $80 million for MF housing development $10 million for homeless programs $6 million for homeownership $4 million for capacity building

– Funded by document recording fee, lottery funds, general fund and utility public purpose funds

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Attributes of Good State Preservation Policy
• Early knowledge or warning system and coordinated response:
– Meet and share knowledge – Share data – Determine properties most at risk

• Commitment at highest level, meaning hire someone to coordinate • Flexibility to meet owners/nonprofit‟s needs • Stressing the cost effectiveness of preservation • Providing an array of preservation resources
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Want More Information on Preservation
• Contact CDLC
– Lists, project info, contacts for all HUD and RD projects sorted by county/region – Program specific information- regulations, guidance, agency contacts, etc. – Public policy studies, reports, memos – Info on other groups (local and national) working on preservation issues
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LOW INCOME HOUSING TAX CREDITS – IS IT TIME TO RESTRUCTURE?
Initial Compliance Period Extended Use Period

PLUS

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Question:
• What do flossing, regular exercise, and saving for retirement have to do with Year 15 planning?

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Answer:
• They are all things best started long before you need them.
• They are all things you said you were doing (or would start tomorrow), but never did.
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We’re Here!
Total 6,573 Units in Oregon will complete Year 15 Between 2006 and 2011

OREGON UNITS COMPLETING YR 15 BY YEAR
1,600 1,400 1,200 1,000 800 600 400 200 2006 2007 2008 2009 2010 2011 COMPLETE YEAR 15
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For Profit Non-Profit

UNITS

Total of 97 Projects: 47 for-profit and 50 non-profit sponsored 2006 - 2011
OREGON PROJECTS BY YEAR OF EXPIRATION
25 20

PROJECTS

6 12 7 7 2006 8 5 2007 8 2008 10 5 2009 2010 2011 8 15 6

15 10 5 -

For Profit Non-Profit

EXPIRATION YEAR
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Year 15 Objectives
1.Position the Project to Continue to Perform & Meet your Goals Long Term Asset Management Plan

2. Exit the Investor

Disposition Plan
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Critical Timeframes/ Definitions
Initial Compliance Period – 15 Years
Tax Credit Period - 10 years,
-investor cannot exit -Investor gets credits & losses Yrs 11– 15
- LP may Exit w/ bond - No credits - Still get losses

Extended Use Period What did you – minimum 15 more years agree to?
Affordability Period set by IRS, Augmented by OHCS: Compliance Requirements Amended by OHCS
- IRS no longer receives notice of noncompliance – OHCS only

Compliance Period – Begins January 1st of the first year tax credits are taken and ends December 31st of the fifteenth year thereafter. Extended Use Agreement – An agreement between the owner and housing credit agency extending the low-income housing restrictions an additional 15 (or more) years beyond the initial Compliance Period. Federal extended use agreements are required for LIHTC projects with credit allocations after 1989, and many states impose additional extended use restrictions.
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DETERMINING YEAR 15
Year 15 Begins:
– The first year a qualified building is PIS or the year after the building was PIS (taxpayer election on Form 8609) – Determined by the first year tax credits are recorded on tax returns

Year 15 Ends:
– The last day of year 15 – May be different for different buildings – Disposition occurs in Year 16 of the last building
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1. Long Term Asset Management Plan
• Target market: Is the project serving the population you originally intended? New Needs? • Does the project cash flow?
– – – – – Adequately covering maintenance needs? Residents services and Asset Management Costs? Able to pay debt? Rent subsidy contracts expire? Long term projections?

• Will your project be competitive over the next twenty years? (investors and new lenders view of world) • Capital Needs Assessment, Reserve Balances to Meet Needs? • Financing Structure – when are your loans due? Prepayment Penalties?
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Long Term Strategies 2005 HDC Survey Results/ Steps
• Continued Use as Affordable Housing:
– “77% of the respondents goal = maintain the current income and rent restrictions (affordability) after Year 15. “

• Rehab Needs – Assess Needs:
– 82% new construction (2006 – 2011 projects) – 13% said their projects are in need of extensive rehabilitation – over 55% of the projects do not have a recent capital needs assessment, and 15% of respondents did not know if they had one

• Financial Viability:
– Prepare financial projections (3 yr actual  for 15 more years) – Evaluate Loan Terms
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2. Disposition Plan
• Goals for the Property • Plan Early: Year 11 is Best to Start • Know Your Documents • Know the Numbers • This is a Negotiation • Disposition occurs in first quarter of Year 16 (if not sooner)
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Exit Strategies
• • • • • • • Right of First Refusal to Purchase Property Buyout Option of Partnership Interest “Puts” Obligation to Purchase Qualified Contract Bargain Sale Sale to 3rd Party Early Exit
Summary Prepared by Enterprise Social Investment Corporation June 1, 2005

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Right of First Refusal
• For projects with post-1989 tax credit allocations WITH right of refusal provides purchase of property at:
 Fair Market Value or  Formula Price = Debt + Exit Taxes available for:
• • • • Tenants Resident management corporations Qualified nonprofit Government agency

 Cash reserves not clearly part of this price

• Partnership Agreements may also require credit benefits or other yield maintenance as part of purchase price
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Buyout of Partnership Interest
• Many transactions (particularly NEF and Enterprise) are utilizing this approach
– – – – Standard documents reduce legal costs No requirement to re-record loan/ other documents Reserves stay with project Consolidated Financials

• Price Negotiated: $0 upward • Road not paved yet for projects wanting to use acquisition credits in re- syndication
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Other Exit Strategies
• Qualified Contract: Right to ask OHCS to “present” to the Owner a bona fide contract signed by a prospective buyer to acquire the Owner’s project for the QC price (the “Contract”), or allow owner to terminate Extended Use Period. - Unless right has been waived - Regs = Section 42 (h)(6)(F) of IRS code - Process extensive, see OHCS website “Qualified Contract Application”
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Purchase Proposal – Formula Price
• Monitor Debt: Long Term Liability on Balance Sheet • What is an “Exit Tax”?
– Cumulative benefits (tax losses & credits taken) exceed the investor’s capital invested

– Result can be a “negative capital account” – Disposition of the investor’s LP or LLC interest (or

the property) results in a tax liability  LP  GP
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Investor’s Capital Account
Partnership Year Actual in light blue 1996 1 2 3 4 5 6 7 8 9 10 11 12 13 14
15

Fiscal Year

Capital Account Balance

Capital Account Exit Taxes

Exit Taxes with Gross Up Projected in Pink

406,546 715,239 620,463 535,474 459,890 394,980 324,540 257,310 191,351 131,076 86,563 45,161 4,830 (36,062) (79,012)
(120,386)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2011

(90,058) (66,973) (45,877) (30,297) (15,806) (1,691) 12,622 27,654
42,135

(121,579) (90,414) (61,934) (40,901) (21,338) (2,282) 17,039 37,333

56,882
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Mitigating Exit Taxes
GOAL = Reduce losses to Investor During Years 11 - 15
– Forgive debt over a period of time (creates gains) – Reduce LP interest by 1/3 (lowers losses to LP) – Capitalize rather than expense repairs (reduces operating losses) – Improve operations (reduces operating losses) – Exit Investor Early (stops depreciation/ losses to LP)

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Negotiating the Exit with LP /

Know your Investor
• What is their motivation?
– – – – Return on Investment to Date Exit tax liability expectations Reserves Initial thoughts about specific property

• What is their process?
– Internal – can be lengthy – External

• What is their expectation on timing?
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Putting Together Asset Management Plan & Disposition Plan STRATEGY:
1. Years 11 – 15 • Exit Partnership (see - Minimize exit taxes timing) - Plan for reserves - Minimize operating • Onward to: losses 2. Outline Exit Strategy/ Cost 3. Determining Need for Refinancing/ Capital: Sources & rehab Uses 4. Investigate Sources 5. Present proposal to Refinance and/ or investor Rehab Continue Operations
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IMPLEMENTATION:

What’s the Same as Other Projects?
• Most Uses (comparable to acquisition/ rehab) • Sources/ Financing Strategies:
– Refinancing – Use of Reserves for Minor Rehabs – Re-syndications require $3,000 per unit minimum rehab

• Principal Re-Payment (check for prepayment penalty) • Relocation Costs/ phasing on rehab • Sources for Major Rehabilitation OR other Capital Needs:
• Refinancing • Re-syndication: 4% BOND or 9% for rehab • Gap loans (CDBG, HOME, Other)
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What’s Different the Second Time Around?
2. Limits on Sources of Funds
• Assumption of original debt or refinance • HOME – only once w/out HUD Central approval • LIHTC – eligible for preservation,

1. Different Uses of Funds lower priority than rent subsidized projects • Acquisition price • Re-syndicating Issues - How existing ownership (equity) factors • Exit Taxes in • Handling of Reserves - Strategies to use acquisition credits
- Prohibition from changing original financing on bond deals - Timing
Affordable Housing Finance Training December 2006 87

3. Reminder RE Occupied Properties
• Resident Communications • Using Federal Funds = URA • Real operating budgets (no pretending) • Maintaining Occupancy during Rehab/ Operating Deficit Reserves • Over Income Tenants if Resyndicating
Affordable Housing Finance Training December 2006 88

What’s Different… 4. Timing in Re-syndication
Existing Partnership Owns OPTIONAL: General Partner Owns New Partnership Investor Admitted

Common Issues:
Apply for credits as sponsor  Establish a new partnership  Sign reservation as new partnership 10% test in new entity’s name


USING ACQUISITION CREDITS: use tax advisor

NOT USING ACQUISITION CREDITS
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Affordable Housing Finance Training December 2006

USING ACQUISITION CREDITS
ISSUE 1. Purchase Requirements: A. Building must be acquired by purchase from an unrelated entity B. Must be at least 10 years between acquisition and last placed in service C. Building must not have been placed in service by a related party
“For the purposes of A and C above, in general, a partnership is related to a person if that person has more than a 10% ownership in the partnership, or there is more than a 10% common ownership in the case of the two partnerships”. See report by Craig Emden, Esq.
Caution on purchase of Limited Partner’s Interest & 10 Year Rule
Affordable Housing Finance Training December 2006 90

… Using Acquisition Credits…cont.
Issue 2. Initial Compliance Period
Initial Compliance Period Extended Use Period

NO

YES
Substantial Completion Date

“Owners are not eligible to earn a tax credit for acquisition if the building previously received a low income housing tax credit for which the 15-year compliance period is still in effect…”
Guggenheim 12th Edition Tax Credits for Low Income Housing
Affordable Housing Finance Training December 2006 91

…What’s Different…If You Need Major Rehab…Major Money
Stages of Grieving:
1. 2. 3. 4. 5. Denial Anger Bargaining Depression Acceptance

Your Board & Funders

Borrowed from Elsabeth Kubler-Ross’s Five Stages of Grieving
Affordable Housing Finance Training December 2006 92

Year 15 Experience to Date
Range of Outcomes:
– Projects sold – Projects purchased by sponsor (Pre 1990: Fair Market Sales) – Replacement of LP interest for $0.00 – Re-syndication, refinance & rehabilitation

Affordable Housing Finance Training December 2006

93

Year 15 Experience to Date
• Investors typically don’t expect to get equity out of the project –
– for profit investor, see partnership agreement

• Exit taxes: ASK: some require, some don’t
– Syndicators (w/ upper tier investors) may consider overall fund performance in negotiating specific deals – Single investors may have less flexibility • Early Exit: must post bond: FNMA has on some deals
Affordable Housing Finance Training December 2006 94

EXAMPLE
• Musolf Manor (Innovative Housing) - No Acquisition Credits – hit $700K max - Transfer of ownership from existing LP to IHI a. IHI acquires for debt + exit taxes b. Uses reserves to pay exit taxes (granted $$ back) - IHI sells the building to new LP for value (uses) NOTE: appraised value > existing debt = GP equity a. New LP assumes subordinate debt b. New private loan c. GP equity  to LP (contribution, loan??) d. Grant (back from exit taxes) contributed by IHI (source) to fund reserves (use)
Affordable Housing Finance Training December 2006 95

• Leon Laptook

Presenter Contact Info

– leon.laptook@lasoregon.org – 503-471-1180

• Charlie Harris
– charris@casaoforegon.org – 503-537-0318 x 305

• Shelly Cullin
– shelly.cullin@hcs.state.or.us – 503-986-2118

• Robin Boyce
– robin@hdc1.org – 503-335-3668
Affordable Housing Finance Training December 2006 96


				
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