1. 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

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

3. 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)

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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)

12. 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

13. 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

14. 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

15. Year 15 Opportunities for an HFC
Where can an HFC own a Property?
Texas Local Gov’t Code Sec.    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.    LOCATION OF RESIDENTIAL DEVELOPMENT; RESIDENTIAL DEVELOPMENT SITES.
(a) A residential development covered by this chapter must be located within the local government.

16. 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).

17. 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 : Non-profit organization defined by statute or tenant organization
Days : Any of the above, plus any other qualified non-profit organization or government agency

18. 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"

19. 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

20. Time for Questions

21. Thank you Cynthia L. Bast Locke Lord LLP
600 Congress Avenue, Suite 2200
Austin, Texas
(512)