1. Preservation Strategies at Year 15: Issues and Options
NCSHA Housing Credit Connect Atlanta 2017
June 22, 2017

2. Agenda What’s Happening Out There?
Factors Affecting Owners’ Year 15 Preservation Decisions
Examples of Solutions
Preservation Fund
Refinancing
Resyndication
Conclusions

3. What’s Happening Out There?
Lots of Year 15 deals – and many owners and investors are working on exits in Year 10+
Most deals have long-term affordability restrictions
We see very few Qualified Contract transactions
In most cases, the General Partner is looking to retain control of the property, not sell it into the open market
Wants to buy the interest of the LP and keep the property
Negotiating the LP exit can take a long time
New news: Next wave of Year 15 deals will be much trickier
Loaded with subordinate debt and restrictions

4. Generalizations Can be Dangerous
It’s a big country – and a flexible program
There is tremendous variation across and within markets about all aspects of Year 15 tax credit properties
Occupancy is high almost across the board and operating performance is generally strong,
But each property has its own story
Rents and expenses at Y15 vary considerably by market, by age and size of property
When and how the deal was originally underwritten also a factor
Deal structure also important
Amount and nature of debt
Partners and their agreements with each other

5. Owner Preservation Options at Year 15
Get control of the property – usually by purchasing the investor’s interest
And then:
Continue to own and operate the property
Refinance the property to fund purchase of investor interest and capital improvements
Sell the property into a preservation fund
Sell the property into a new tax credit syndication
Many transactions combine several of these elements

6. Factors Affecting Y15 Preservation Decisions
It’s a long list
Source, length and nature of regulatory requirements
GP’s and LP’s rights under deal documents
Maturing debt, lockouts, and prepayment penalties
Capital accounts and tax issues
HAP contracts and other subsidies
Consents and approvals required for any transaction
Economics -- is there value in the property and if so how is it shared
Physical condition/capital needs
Will focus today on four key issues
Affordability
Operating margin
Physical condition
Capital structure

7. Affordability: Tale of Two Markets
The difference between tax credit and markets rents varies enormously
Difference has implications for Y15 preservation
Strong Market
Weak Market

8. Rents Vs Expenses Operating margins also vary considerably
Property type, size and market are factors, as is strength of original underwriting and changes over 15 years
Implications for Year 15
Margin determines how much debt and new equity a property can support
Lower margins  less debt and equity  fewer options for Year 15

9. Physical Condition
Property condition varies widely – by age, climate, tenancy, operating margin
Implications for Year 15:
Affects both uses and sources

10. Capital Structure Ability to Support New Financing
Important details:
How much debt vs value of property
Type of type
When it’s due
The deal with the investor
Implications for Y15:
Sources needed for a recapitalization
Ability of property to support new financing

11. Preservation Fund Solution
27 year-old property coming up on year 15, 15 more years of restrictions
Preservation Fund solution worked because:
Minimal capital needs
Proven performer, low risk cash flow
Low interest rates
Room to support more debt  better levered IRR for new investor
Preservation fund return requirement lower than standard private equity
Key Facts
Well-maintained, benign climate
Rents just below tax credit maximums
Expense ratio of 42%
Mortgage debt at 58% of value
LP already exited

12. Refinancing Solution
17 year-old property, two years past initial compliance period, 13 more years of restrictions
Refinancing solution worked because:
Minimal to moderate capital needs
Improvement in rental market  ability to support more debt
Proven performer, low risk cash flow
Low interest rates
New 70% LTV loan sources sufficient to refinance existing debt, buy back LP interest and address capital needs
Key Facts
Well-maintained, rents at LIHTC max
Some deferred maintenance, but not enough to support resyndication
Expense ratio of 43%
Existing debt at 39% of value
LP seeking buy-out of its interest

13. Resyndication Solution?
14 year-old property coming up on year 15, 15 more years of restrictions
Resyndication would be a good solution to
Maintain long-term affordability in a high demand market
Address significant deferred maintenance and Preservation
But any solution will require relief from subordinate lender
Debt exceeds value by over $3M
Subordinate loan comes with extra rent restrictions
Key Facts
Deferred maintenance as a result of large families, low set-asides that constrain revenue
Rents at maximums allowed
Expense ratio of 62%
Mortgage debt at 150% of value

14. Getting Ready Year 15 transactions are very complex
We recommend owners start the planning well before Year 15
Many owners and syndicators are reorganizing themselves to get ahead of Year 15 transactions, or have already done so
Next wave: subordinate lenders addressing requests from Year 15 partnerships to modify debt to allow a refinancing or redevelopment

15. Preservation Strategies at Year 15: Issues and Options
NCSHA Housing Credit Connect Atlanta 2017
June 22, 2017