1. Year 15 Considerations for Non-Profit Sponsors IPED CONFERENCE October 11 th, 2007 Presented by Judy Schneider SVP/ Chief Underwriter National Equity Fund jschneider@nefinc.org

2. Who is the National Equity Fund (NEF)? National Syndicator in Operation Since 1987 Invested in more than 80,000 units in over 1,500 properties located in 43 states & D.C. $5.0 billion in equity raised 98% of projects that will reach Year 15 in next 5 years are sponsored by nonprofits

3. NEFs Year 15 Experience To-Date 129 Projects sold or Approved for Sale by NEF, located in 18 States 77% are Rollovers; assume existing debt and continue operations 16% are Resyndications or Refinancings 7% were sold to third parties

4. The Year 15 Process Question: What do flossing, regular exercise, and saving for retirement have to do with Year 15 planning? 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.

5. Year 15 Basics: Determining Year 15 Tax Credit Compliance for Each Building Begins: The first year tax credits are reported on tax returns for that building. Can be either: (1) the first year a qualified building is PIS, or The year after the building was Placed in Service Tax Credit Compliance Ends: The last day of the 15 th year since credits were first claimed on the tax return May be different for different buildings Building is eligible for disposition without recapture or bond requirement on Jan. 1 of Year 16

6. Year 15 Process: Getting Organized Step 1: Know the Property Step 2: Know your partners & stakeholders Step 3: Know your documents Step 4: Develop your plan for the property and identify the organizational resources to carry out the plan

7. Project Assessment Financial Condition Will cash flow be sufficient to sustain future operations? Are there any anticipated changes in expenses, such as loss of rental subsidies or tax abatements? What are reserve balances and restrictions on use? Physical Condition Are significant capital improvements needed? Is there a current physical needs assessment? Market Conditions Is the project marketable? Is there competition from other projects?

8. Know Your Partners Stakeholders Investors Syndicators Private Lenders Public Lenders Allocating Agencies Residents

9. Know Your Limited Partner Limited Partners Process and Philosophy Stated Goals or Approaches for Year 15? Type of Fund or Investor Calculation of Exit Taxes What do your documents say? Purchase Option / ROFR Split of Sales Proceeds & Liquidation of Partnership Assets Disposition Fees What Issues Might be Negotiable?

10. Know Your Existing Debt Lender Controls on Year 15 Purchase Terms related to sale Consents to transfer ownership Use of reserves Debt Terms: Future Operations Interest rate; Refinance to Lower Rate? Maturity Dates; Can Project Support Refinance of Existing Debt? Rent/Income Restrictions Tied to Loan Term?

11. GP Options at Year 15 Juncture Sponsor Acquires and Continues Operations, Assuming all Existing Debt (or Keeps Partnership in Place and Substitutes a new L.P.) Sponsor Acquires and Rehabs through Resyndication and/or Refinancing Sponsor Acquires and Sells to Third Party Partnership Sells to Third Party Qualified Contract Homeownership: Lease-Purchase or Condominiumization

12. Resyndication Makes sense where rehab is needed Minimum rehab: 10% of acquisition cost or $3,000 investment per low income unit Investors May Require More Substantial Improvements Structure to preserve Acquisition Credit Beware of related party issues

13. Structure New Deals with Eye to Year 15 Determine goals at the outset Financing can extend the restriction period How long will rent subsidies last? Ability to pay ballooning debt Extent and durability of improvements Clarify transfer provisions in pertinent documents Review impact of state agencies scoring criteria Consider exit tax Slower depreciation elected or required Source of funds for exit tax

14. Resyndication Case Study Jefferson-Lincoln Homes Kansas City, MO

15. Background: Two separate scattered site projects, located within several blocks of each other Projects were owned by 2 partnerships with 2 different GPs; a NEF fund was the Limited Partner of both Partnerships Jefferson Apts. GP was a large for-profit developer; Lincoln Homes GP was a small CDC. Neither GP was interested in acquiring their property from the Limited Partnership

16. The Facts: Jefferson Apartments Originally completed in 1988 80 units, scattered site, combination of historic moderate-rehab and new construction Family housing with one-, two- and three- bedroom apartments Deteriorated condition. In 2003 (Year 16), 27 units were vacant (29% vacancy). HUD-Insured first mortgage from State Agency, 40 year term Accruing Interest 2 nd mortgage from City

17. The Facts: Lincoln Homes Completed in 1990 20 units in 3 adjacent buildings; Originally a substantial rehab project Family housing with 1- and 2-bedroom apartments Deteriorated condition: In 2004 (Year 15), 3 units were vacant (15% vacancy) Chronic cashflow problems 1 st Mortgage from Bank; Maturity in early 2005 (Year 16) Deferred Payment 2 nd Mortgage from City

18. The Neighborhood Central Kansas City, Missouri Very low income census tract Properties located near an area of commercial revitalization that is making a slow recovery. The housing in the surrounding area is in generally fair condition

19. Before Pictures:

20. Option 1: Do Nothing Jefferson Apartments Continuing deterioration resulted in failed HUD REAC score GP began to address issues in response to HUD inspections Continued ownership would drain GP resources Continued ownership required continued reporting to NEF Lincoln Homes 1 st mortgage maturity early in Year 16 of the compliance period; inaction would probably lead to foreclosure

21. Option 2: Sell to Third Party Jefferson Apartments GP retained realtor in Year 15 to market property NEF sought non-profit purchasers Project required extensive renovation Debt exceeded Value No buyer located Lincoln Homes Small property Debt exceeded value No buyer located

22. Option 3: Resyndicate or Sell to Third Party to Resyndicate Plusses: Resyndication could support extensive renovation Recapitalize reserves Opportunity to renegotiate soft debt Minuses: Only 4% credits would be available Additional soft funds would be needed Original GPs still not interested in continued involvement in project

23. What Happened? Local for-profit developer gained state and City support to combine the 2 projects in one new 4% Resyndication project A NEF fund became the Limited Partner of the new 100-unit project. Original state loan and bank loan paid off; New state 1 st mortgage City partially forgave 2 nd mortgages New soft money awarded to project

24. Combined New Project The Year 15 Numbers: Combined Existing Debt First Mortgage $2,022,000 City Loan, Incl. Accrued Int.$3,239,000 Total$5,261,000 Reserves $0 Capital Needs ($32,000/unit)$3,200,000 FMV of 100-Unit Property$4,500,000 Negative Capital Account, High Exit Taxes

25. Combined New Project Uses of Funds Purchase From Old Partnership $4,500,000(FMV) Repmt. of Outstanding 1 st Debt$2,022,000 Re-subordination of Soft Debt $2,278,000 Distribution to Old Partners $ 200,000 Capital Improvements $3,200,000 Financing and Soft Costs $1,755,000 Developer Fees $1,022,000 Reserves$ 393,000 Total $10,870,000

26. Combined New Project Sources of Funds Tax Exempt Bonds – Perm Loan$2,230,900 Tax Exempt B Bonds (Constr. Only) $3,660,000 Re-subordinated Soft Loans $2,278,000 State HOME Funds $ 500,000 New City Loan$ 50,000 Other New Soft Loans$ 430,000 New Limited Partner LIHTC Equity $3,605,000 State Tax Credit Equity$1,370,000 Deferred Developer Fees$ 406,100 Total $10,870,000

27. Combined New Project Tax Credit Calc ulation Acquisition Basis$ 4,170,000 (Building Portion of the FMV of the Property) Rehab Basis of $5,570,000 x 130% $ 7,250,484 Total Qualified Basis $11,420,484 X Tax Credit Rate3.43% Annual Tax Credits $ 391,722 Price / Credit $0.92 Total LP Capital (equity rounded) $ 3,605,000 Total State Credit Equity $ 1,371,030

28. Picture in 2007

29. 4% Tax Credit Resyndication Considerations Tax Exempt Bond Allocation must be at least 50% of Aggregate Basis; Supportable Permanent Debt will Likely be Less than 50%. Will Issuer do an A/B Bond Structure? 10 Year Rule for Eligibility for Acquisition Credits Cooperation from Original Second Mortgage Lender (s) to re- subordinate and /or modify loan terms will typically be necessary. Potential Tax issues from Forgiving or Restructuring Old Debt (OID; Reduction of Acquisition Basis; Forgiveness of Debt Income) Related Party Acquisition Credit Tax Issues (GPs and LPs) Small LIHTC allocations may not be attractive to syndicators / investors as stand-alone deals; Transaction costs may be prohibitive for small deals Income status of existing tenants

30. NEF CONTACTS For additional information, visit www.nefinc.org. Look for Year Dispositions/ Year 15 under the Asset Management Section Meghann Rowley Moses Dispositions Manager 312. 697.6168 mrowley@nefinc.org Judy Schneider SVP & Chief Underwriter 312.697.6139 jschneider@nefinc.org