Preserving LIHTC Properties After Year 15: Considerations for HFCs TALHFA Annual Educational Conference Cynthia Bast, Head of Affordable Housing Section Bastrop, Texas September 11, 2018

What is Year 15 and Why Do We Care Texas has > 250,000 units developed with LIHTCs (not counting 2018 9% awards) Approximately 99,000 units have passed the Compliance Period (Year 15) Preservation Opportunities for Revenues Financing Ownership Opportunities for Mission

What is Year 15 and Why Do We Care The Compliance Period Defined Section 42 of the Internal Revenue Code establishes a 15-year compliance period during which compliance must be maintained, or else tax credits can be recaptured Each building has its own compliance period Compliance period runs from January 1 of the year the building is placed in service until December 31 of the 15th year thereafter (unless an election is made to defer the start of the period)

What is Year 15 and Why Do We Care The Compliance Period Defined A multiple-building project could have compliance periods that end in different years This is typically when the investor wants to get out of the partnership There is typically some change of ownership and refinancing

What is Year 15 and Why Do We Care Possible Year 15 Scenarios Sale of property Prior to the end of the compliance period May avoid right of first refusal Could generate greater value for distribution After the end of the compliance period May be impacted by a right of first refusal May generate lower value for distribution if right of first refusal impacts available purchasers

What is Year 15 and Why Do We Care Possible Year 15 Scenarios Sale of partnership interests GP buys out the LP GP may have an option to do this Calculation of fair market value GP sells its interest May require investor approval May require lender approval

What is Year 15 and Why Do We Care Possible Year 15 Scenarios Resyndication with LIHTCs Think about threshold issues for LIHTCs Think about competitiveness for 9% LIHTCs Minimum rehab requirements for TDHCA < 20 years old = $20,000/unit > 20 years old = $30,000/unit Identity of interest/related party rules Refinance and Hold

What is Year 15 and Why Do We Care How to Decide – Things to Consider Start the conversation early Conditions today are far different than what we thought they would be 15 years ago Physical condition of the property Market conditions

What is Year 15 and Why Do We Care How to Decide – Things to Consider Economic condition of the property Capital accounts Deferred developer fee Legal matters Partnership Agreement Right of First Refusal Agreement Purchase Option Agreement Loan Documents – transfer fees and prepayment penalties

What is Year 15 and Why Do We Care How to Decide – Things to Consider Motivations GP Investor Limited Partner Developer/Special Limited Partner Additional stakeholders Private/public lenders TDHCA Residents

What is Year 15 and Why Do We Care How to Decide – Things to Consider Ultimately, the investor makes the decision unless a party has an option that is exercisable without the investor's approval Approval rights for any disposition Forced sale provisions Deferred developer fee may give the investor leverage Liquidating distributions provision may give the investor leverage Impact of Homeowner’s Rehab, Inc. v. Related Corporate v SLP, L.P. (Massachusetts Supreme Judicial Court)

What is Year 15 and Why Do We Care TDHCA's Role Transfer of property requires TDHCA approval Transfer of GP interest requires TDHCA approval Change of limited partner does not require TDHCA approval Transfers among affiliates do not require TDHCA approval

Year 15 Opportunities for an HFC Preserving its own properties Acquiring and preserving other properties 4% LIHTC projects generally will not be subject to a TDHCA ROFR 9% LIHTC projects generally will be subject to a TDHCA ROFR Tax exemption can make a material difference

Year 15 Opportunities for an HFC Financing 4% LIHTC/Bond program has turned into Texas’ primary preservation tool Approximately 46% of the units going through the 4% LIHTC/Bond program in 2018 thus far are acquisition/rehab

Year 15 Opportunities for an HFC Where can an HFC own a Property? Texas Local Gov’t Code Sec. 394.039.  SPECIFIC POWERS RELATING TO FINANCIAL AND PROPERTY TRANSACTIONS. A housing finance corporation may: (3)  purchase, receive, lease, or otherwise acquire, own, hold, improve, use, or deal in and with real or personal property or interests in that property, wherever the property is located, as required by the purposes of the corporation or as donated to the corporation; and Texas Local Gov’t Code Sec. 394.903.  LOCATION OF RESIDENTIAL DEVELOPMENT; RESIDENTIAL DEVELOPMENT SITES. (a) A residential development covered by this chapter must be located within the local government.

Year 15 Opportunities for an HFC What is the ROFR all about Derives from Section 42 of the Internal Revenue Code IRC Section 42(i)(7) Impact of tenant's right of 1st refusal to acquire property. (A) In general. No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by the tenants (in cooperative form or otherwise) or resident management corporation of such building or by a qualified nonprofit organization (as defined in subsection (h)(5)(C)) or government agency to purchase the property after the close of the compliance period for a price which is not less than the minimum purchase price determined under subparagraph (B). (B) Minimum purchase price. For purposes of subparagraph (A), the minimum purchase price under this subparagraph is an amount equal to the sum of— (i) the principal amount of outstanding indebtedness secured by the building (other than indebtedness incurred within the 5-year period ending on the date of the sale to the tenants), and (ii) all Federal, State, and local taxes attributable to such sale. Except in the case of Federal income taxes, there shall not be taken into account under clause any additional tax attributable to the application of clause (ii).

Year 15 Opportunities for an HFC Implemented into Texas law for the competitive 9% LIHTC process History of ROFRs in Texas 90 day ROFRs 2 year ROFRs 180 day ROFRs Days 1-60: CHDO Days 61-120: Non-profit organization defined by statute or tenant organization Days 121-180: Any of the above, plus any other qualified non-profit organization or government agency

Year 15 Opportunities for an HFC What is the ROFR all about ROFRs are evergreen so long as the LURA is outstanding Properties with ROFR must work with TDHCA on disposition Acquiring a property that has been posted for ROFR Minimum purchase price TDHCA's rules clarify drafting issues in the LURAs Non-profit's rights Owner's rights Priorities to "negotiate or enter into a contract"

Year 15 Opportunities for an HFC What is the ROFR all about Acquiring a property that has not been posted for ROFR but the compliance period has expired Sales to certain qualified entities are permitted Must have a CHDO Government agency cannot control a CHDO ROFR does not apply for resyndication

Time for Questions

Thank you Cynthia L. Bast Locke Lord LLP 600 Congress Avenue, Suite 2200 Austin, Texas 78701 (512) 305-4707 cbast@lockelord.com