Maximizing Opportunities and Avoiding Pitfalls in Year 15 Dispositions
Typically, the disposition of a Low-Income Housing Tax Credit (LIHTC) occurs after the initial year 15 compliance period has passed, however dispositions can occur at any time after the 10-year credit period has expired. Because Dominium emphasizes creating long-term value for investors, residents, and community partners, Dominium has a history of owning and operating properties for long periods of time—sometimes even decades. Consequently, Year 15 dispositions are a phenomenon that Dominium deals with often. After 15 years of owning a LIHTC property, the credit stream has expired, and the Limited Partner may be ready to exit—so what happens now?
There are a number of scenarios that a partnership may face as the end of year 15 draws near. Once the credit stream has been exhausted, the partnership begins to take on new challenges. Instead of simply operating the asset and ensuring delivery of the credits, the partnership needs to begin to position itself to take on any number of value events:
Limited Partner Puts/Calls/Negotiations
The relationship you have with your limited partners is vital as you near the end of the tax credit life cycle. Have you pre-negotiated the limited partner’s exit with either a put or a call option? Does the other party have certain rights or limitations on rights that would affect the value of their interest? Do you know what the intentions of the investor are? Some are willing to exit any time after the credit stream has expired while others require to remain in the deal until year 15 and aren’t comfortable exiting with a recapture indemnification in place. Each investor is different and understanding what the return was your partner expected when a deal was made is key to understanding expectations on the back end. That being said, sometimes interests are sold or transferred and you might find yourself in a situation with a new partner and different expectations.
Qualified Contract
This is generally a pretty simple discussion. Did you, or the developer, waive the qualified Contract option or agree to a longer initial compliance period in the initial tax credit application for additional points to earn an award? If not, does converting to market rate add additional value to the property? Does it hurt the property? Do you risk damaging any Agency relationships by pulling the property out of the program? Do you know the calculated Qualified Contract value compared to fair market value before submitting a QC app? All of these are valuable questions to ask before pulling the trigger.
Applying with the state agency for a qualified contract (a purchase agreement with a qualified buyer) is a process where you request the state agency to market your property for sale for a period of 12 months in attempts to find a buyer willing to purchase your property and keep it in the LIHTC program for a price calculated using a predetermined formula. Just make sure you understand the value of your property first. If the fair market value of your property is equal to $75,000 per unit but the qualified contract price only comes to $50,000 per unit, you can rest assured that you’ll have multiple offers. Not only that, but you’ll have to sell your property for less than fair market value. Engaging an accounting firm familiar with the process early on is always a wise decision.
Disposition/Re-syndication/Refinance
This is by far the most open-ended option, and has an endless number of outcomes. The decision to sell, re-syndicate, or refinance and hold the property for cash flow can be the most difficult. This is by far the most open-ended option, and has an endless number of outcomes.
Each organization has its requirements and expectations for resyndications but this is typically the ideal scenario. You realize the benefits of selling an asset by releasing equity to the selling partnership while obtaining an additional tax credit award, recapitalizing and rehabilitating the property, and keeping it in your portfolio. Resyndications are like having an internal pipeline.
Refinancing is also another option that is typically available assuming your exiting loan allows for it and you can obtain the consent of the existing partner or have already acquired their interest. Refinancing may not allow you to pull 100% of the available equity out of a property but may allow funds to make necessary repairs or maybe even simply provide a distribution to existing partners. You also avoid Uncle Sam and the repercussions of the dreaded gain on sale.
Lastly, you have the option to simply sell the property. Often times this is the last resort as it’s essentially the death of an asset in the long 15+ year life cycle of a LIHTC property. Before deciding to market a property for sale, make sure you have a solid understanding of not only how the proceeds that result from the sale will be distributed between the partners, but the resulting tax implications to each partner as well. Often times this prohibit some partners from consenting to a sale, or they may require some “additional incentive” prior to providing their consent.
At the end of the day, the decision to Resyndicate, refinance, or sell will be made based on many factors that will vary from organization to organization, person to person, and often times day to day. The best thing to do is look at each of the scenarios, weigh all of the benefits and make the decision that’s right for you.
