1. Every Battle is Won Before it is Fought. Planning for Year 15 Presenter: Dan Mendelson, President, DTM and Assoc. Inc. 1

2. OBJECTIVES OF HAND YEAR 15 SESSION –Understand background on Year 15/Exits and current Market Conditions-early exits, debt, etc. –Discuss key issues/factors to help you think about exits, assets and how to approach portfolios or single properties. –Touch on Role of Public Sector Lenders in the “deal” and the process. –Learn how to develop an action plan. 2

3. THE YEAR 15/EXIT PROCESS –Step 1: Know the Properties and Portfolio –Step 2: Know your partners and stakeholders –Step 3: Know your documents and Section 42 –Step 4: Develop your plan(s) 3

4. THE PROPERTY- WORKBOOKS AND/OR SUMMARY 4

5. PARTNERS AND STRUCTURE OF LIHTC INVESTMENTS Investments are sold through Limited Partnerships and LLC’s Partnership Agreements control dispositions, providing: Transfer restrictions and price Consent requirements Financial hurdle: Benefits or Return Distribution of Proceeds Liquidation and Dissolution 5

6. Investor Equity Fund LP = Investor(s) 99.99% GP =.01% Project LP =Syndicator NNEHIF 99.99% GP = Developer/Sponsor.01% $ $ 6

7. TYPES OF INVESTORS Types of Investor vary: Direct Investors Syndicators (“Intermediaries”) –Single Corporate Investor Funds –Multiple Corporate Investor Funds –Multiple Individual Investor Funds Types of Syndicators vary: National for-profit National nonprofit Regional (mostly nonprofit ) 7

8. PARTNERS MATTER – THOUGHTS? Different Investors/Syndicators have different goals and constraints. And this has and will continue to change! EVERYONE is looking for Value/Cash these days. Money goes in different pockets! Value is a changing definition. What’s Your Partner Thinking these days? M&Ms? 70-85% of properties have no value- LP exit is the easiest part of the equation. 8

9. ONE SYNDICATOR’S OBJECTIVES Deliver Expected Investor Benefits Exit investor in Year 16 Transfer to Nonprofit Sponsors Works with the sponsor to develop its Year 15 transition plan Preserve affordability Minimize displacement of low-income residents Preserve project viability May provide equity to resyndicate the project with new tax credits May provide debt to refinance the project 9

10. THE “OTHER”STAKEHOLDERS Residents General Partners/Sponsors/Developers Private Lenders Public Lenders Allocating Agencies The IRS HUD 10

11. KNOW THE PROGRAM-SIGNIFICANCE OF YEAR 15 Initial compliance period expires at the end of Year 15 –Can transfer ownership in year 16 without recapture –Tax credit transactions are envisioned by investors as 15-year investments –Most investors are ready to dispose of their interest in year 16 –Greater willingness to dispose between years 11-15 11

12. PURCHASE AND REUSE OPTIONS Purchase of Real Estate or Investor’s Interest: –Sponsor Acquires Continue Operations As Is Rehabs through Resyndication and/or Refinancing Sells to Third Party (may convey fee title or GP interest) –Partnership Sells to Third Party –Homeownership (Lease-Purchase) 12

13. SALE TO THIRD PARTY May occur when: Investor and General Partner cannot come to terms General Partner does not exercise the Right of First Refusal or Buyout Option General Partner wants out of the project Market exists for GP stake 13

14. EARLY EXIT Investor can dispose of its interest prior to Year 16, provided: LIHTC compliance is maintained Early outs are generally not feasible for multiple investor funds, but ask your syndicator 14

15. RESYNDICATION OPPORTUNITY IN YOUR MARKETS? Makes sense where rehab is needed Minimum rehab: –20% of acquisition cost or –$6,000 investment per low-income unit Need to Structure to preserve Acquisition Credit –Problems if buyers and sellers are related parties- need to work with lawyers at exit to protect acquisition credit –9% credits unlikely in many states- DC, Maryland, Virginia? –4% Credits (3.18%)Work in some projects but might need a portfolio- combining small properties generally bond costs are too expensive –OID rules and existing below market loans 15

16. PUTTING IT ALL BACK TOGETHER- THE PLAN The GP Perspective Does the GP have the desire and capacity to purchase the project? Investor Perspective Is the Investor flexible with sale or transfer? Were Investor benefits realized? Capital Account Balance Are there exit taxes? If so, are there sufficient funds to pay exit taxes? 16

17. PUTTING IT ALL BACK TOGETHER- THE PLAN Physical Condition Are significant capital improvements needed? Is there a current Capital Needs Assessment (CNA)? Market Conditions Is the project marketable? Is there competition from other projects? 17

18. PUTTING IT ALL BACK TOGETHER- THE PLAN Mortgages Are balloon loans or deferred interest payments due at or immediately after Year 15? Does existing debt exceed fair market value? Are lenders flexible with transfer of debt? Can debt be refinanced or forgiven? Are there sources for soft debt? 18

19. ACTION PLAN FOR PURCHASERS YEARS 1-13: Create a closing binder with all critical documents-loans, extended use, partnership agreement etc. Annual Review of operating performance and update projections- including capital account. Portfolio Approach (see template) Update capital needs- who gets the reserves? Review and project capital account, exit taxes and LP valuation Develop strategic plan: Through Year 15 After Year 15 19

20. ACTION PLAN FOR PURCHASERS YEAR 10-14: Determine Likely Purchase Price Per Option or Right of First Refusal Does the price make sense? Early exit possible? Explore Sources of Funds to Meet Purchase Price and Capital Needs: Resyndication Refinance: Conventional debt or soft loans Reserves Combinations 20

21. Even After You Negotiate Still Work to Do… YEARS 14-15: Consult with Accountant and Attorney Meet with Syndicator Negotiate Purchase Price Sign Letter of Intent Obtain Lender Approvals Obtain Regulator Approvals (State, HUD if applicable) Draft Legal Agreements 21

22. ACTION PLAN FOR PURCHASERS YEAR 16: Close on purchase in 1st quarter of year 16 File amended Certificate of Limited Partnership (if applicable) File tax return and provide final K-1 to Limited Partner(s) Execute an amendment to the Partnership Agreement, signed by withdrawing and new partners 22

23. YEAR 1 – BACK TO THE FUTURE Do Financial and Business Analysis as part of the syndication investor/syndicator selection process… Things for you to consider: General Partner Structure Cash Flow and Residual Splits-90/10 Puts and Calls, Triggers- Liquidation Avoidance Reserve Releases or Tie Ups Prepayment Abilities on Mortgages, Refinancing approvals post Compliance Period Lender or third Party approvals of changes in Ownership Exit Taxes, depreciation and pricing? 23

24. CCA M ORTGAGE Dan Mendelson Chief Broker CCA Mortgage 33 S. Gay Street, Suite 200 Baltimore, MD 21202 410-685-6005 dmendelson@ccadev.com 24