December 7, 2015

Three Approaches to Year 15

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After all the information is compiled and evaluated, it’s time to develop property-specific strategies in accordance with board approved policies. Three common approaches to the Year 15 issue are summarized below. These options are all not mutually exclusive of one another and may be combined.

Refinance

  • If a property has minimal rehabilitation needs and the capital needs projections do not show a need for major capital work over the five – 10 years following the end of the initial 15-year compliance period, refinancing debt may be an option.
  • The viability of refinance is dependent on the strength of the property operations and the differential between the property’s mortgage interest rate and current rates in the market.
  • When interest rates dropped in 2012 and 2013 to below 4 percent, refinance was an attractive option. Projects financed in the mid- to late 1990s had interest rates in the 9 - 9.5 percent range. The significant rate reduction allowed organizations to generate capital without increasing debt service payments and in many instances debt service payments were reduced.

Buyout of Limited Partner

  • The buyout is a formula calculation of the fair market value of the investor partner’s interest. For a property with limited value, this may be the best approach for negotiating the exit of the partner.
  • Since most mortgages give the lender the right to approve changes in ownership of 10 percent or more, a buyout will require the approval of lenders.
  • This process can take time, and some lenders charge a fee to process approval of a change in partners.

Right of First Refusal (ROFR)

  • Like the buyout, this approach gives the nonprofit sole ownership of the property. If a property has market value, resyndication potential, good cash flow, in other words is strong, the ROFR is the best approach.
  • The price is fixed, and the standards are clear. The advantages include every advantage listed above for each of the other options.
  • The disadvantage is that the nonprofit will need to pay for closing costs associated with a transfer of real estate, but with a strong property there will be options for recovering this investment over a short period.
  • If a property is not financially strong, there is little incentive for the nonprofit to exercise the ROFR. The nonprofit would be assuming the obligations of all the existing debt, which presumably is not being repaid, and would have to pay closing costs with limited potential for recovery. At some point, the property will need rehabilitation, and there will be significant challenges to securing financing.

There are additional approaches, including combining properties, assigning interest, forgiving debt, re-syndicating and even doing nothing. These are discussed in more depth in the final report. To learn more about preparing for Year 15, read the full report:

Year 15 planning can be complex. Enterprise can help with disposition strategies for LIHTC properties.