2.3 lessons learned project and partnership dispo final · •read lura closely – what ami levels...
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June 12, 2018 www.novoco.com
Lessons Learned:
Project and Partnership Dispositions and Buy Outsfor the 2018 NH&RA Asset Management Conference
H. Blair KincerPartner, Bethesda
[email protected] & Company LLP
240.235.1704
Value of LIHTC Property at (or near) Year 15
Purpose of Valuation -Review Partnership
Agreement
Dissolution of Partnership
Buyout of Interest (GP, LP)
Partnership Agreement Valuation Stipulations – Who,
What, How
June 12, 2018 www.novoco.com
Value of LIHTC Property at (or near) Year 15
Internal Property Valuation
Problems – GP & LP value may be
substantially different
Many partnership agreements require an independent appraisal
Market Value – Underlying Real Estate Asset first
More supportable for legal proceedings
Unbiased third party opinion of value, subject
to the scope of work
June 12, 2018 www.novoco.com
Value of LIHTC Property at (or near) Year 15
How do you Value at Year 15?
Market Value –assuming continued
affordability restrictions
Market Value –assuming Market Rate
(hypothetical)
Market Value – assuming 3 year conversion from
affordable to market rate (Qualified Contract –
voids LURA)
June 12, 2018 www.novoco.com
Partnership Agreement Stipulations
• Prior 12 months Income (Gross, Net, PGI, NOI?)
• MAI (pitfalls?)
• If its not a Buyout – are stipulations applicable?
• Others?
June 12, 2018 www.novoco.com
Components to Real Estate Value
•Are existing rents (ie contract rents) too high/low compared to market? •Read LURA closely – what AMI levels restricted for 15 years – LURA post 15 years may not be as deeply
income targeted•Are there any specifications in the partnership as to how income is handled?•Voucher Income?
Potential Gross Income
•How are other properties in the area performing?
Vacancy
•Compare to both historical and comps (includes Replacement Reserves)
Operating Expenses
•Should be based on current sales activity in the market
Capitalization Rate
•Should be market oriented in that the value needs to rely on both historical operations as well as typical operations in the “market”
•Analysis of historical operations alone is insufficient
Cautions
June 12, 2018 www.novoco.com
Issues to Consider
Abatement or PILOT termination. Impact of reassessment
on sale
Cashflow restrictions per regulatory
agreement
Changing liability insurance requirements.
Immediate repairs/capital needs.
What scenario is being valued per scope of work - investment value vs. Fair Market Value, (restricted scenario vs unrestricted
scenario? Mark up or down to market of HAP
contract
New potential sources of income (wireless/offline commercial, etc). Is
nonprofit operator holding rents below market?
June 12, 2018 www.novoco.com
Issues to Consider
Will Direct Capitalization work or should Yield Capitalization be used?
Direct Cap (converting 1 year of NOI into value)
when property is stabilized & income & expenses are expected to have regular patterns over time. Risk-for deals with large soft debt may show no value after you subtract soft debt.
Yield Cap (Discounted Cash Flow)
when property has irregular income patterns (tax abatement wears off), property is not stabilized, large fluctuations in income as property converts from LIHTC to Market Rate, cash flow restrictions per reg. agreement, ground lease payments, (benefit to stay in deal long term if below market debt, etc).
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Discounted Cash Flow Analysis
• Appropriate discount rate?
• Appropriate reversionary cap rate?
• Typical holding period?
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Discounted Cash Flow Analysis
• How to Determine Discount Rate– PwC Survey averages
– Current Cap Rates Plus Growth Factor for investment horizon
(250 to 350 basis points higher)
• Reversionary Cap Rate– Current Cap Rates
– Length of the holding period
– Minimum of 50 basis points higher than going-in cap rates
– Factor is added for (longer) holding period as well as smaller pool of potential purchasers
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Liquidation Vs. Going Concern
Liquidation Scenario• Unwinding partnership
• No discount for control, marketability
• Buy out terms
Going Concern Scenario• Partnership Continues
• It is a Partial Interest
• Will have discount for lack of control and marketability (LOCM) which means a lower value.
• Do buy out terms indicate deductions for LOCM?
• Appropriate discount dictated by risk, size, location, etc.
June 12, 2018 www.novoco.com
June 12, 2018 www.novoco.com
Lessons Learned:
Project and Partnership Dispositions and Buy Outsfor the 2018 NH&RA Asset Management Conference
H. Blair KincerPartner, Bethesda
[email protected] & Company LLP
240.235.1704
Lessons Learned:
Project and PartnershipDispostions and Buy Outs
Katherine AlitzBoston Capital
NH&RAJune 12, 2018
Capital Transaction Distribution1992 20162006
1. Due to LP (fees and loans)
2. Due to GP (fees and loans)
3. LP Invested Amount *
4. 50% LP / 50% GP Split
1. Due to LP (fees and loans)
2. Due to GP (fees and loans)
3. LP Invested Amount
4. 10% LP / 90% GP Split1. Due to LP (fees and loans)
2. Due to GP (fees and loans)
3. LP Invested Amount
4. 15% LP / 85% GP Split* Invested Amount = LP Capital Contribution ÷ Investment Factor
Lessons Learned
Dispositions Negotiations Reality CIRCA 2006
• LP cannot force or control the disposition of older (pre‐2000) properties
• GPs resisted disposition efforts where all of the proceeds are paid to LP as return of capital
• LP willingness to re‐negotiate distributions has significantly increased the number of dispositions
Lessons Learned
Dispositions Negotiations Reality CIRCA 2018
• LP exercises more control over disposition of properties
• Most dispositions are transfers of LP Interest to GP
• Negotiations revolve around value of the property and deferred development fees
• In some cases positive LP capital accounts and controlling distributions upon dissolution differ from capital transaction distributions
Lessons Learned
2006 Case Study1st Street Apartments
1992 Waterfall (Actual) 2006 Waterfall (Typical)
Fees Due to LP 60,000
Due to GP 1,707,000
LP Invested Amount 6,033,0007,800,000
Residual Proceeds 0
LP Residual (50%) 0
GP Residual (50%) 0
Cash Proceeds = 7,800,000
Fees Due to LP 60,000
Due to GP 1,707,000
LP Invested Amount 07,800,000
Residual Proceeds 6,033,000
LP Residual (15%) 904,950
GP Residual (85%) 5,128,050
Lessons Learned
2006 Case Study1st Street Apartments
Fees Due to LP 60,000Due to GP 1,707,000LP Invested Amount 5,000,000
6,767,000
Residual Proceeds 1,033,000
Cash Proceeds = 7,800,000
LP Proceeds 5,369,900GP Proceeds 2,430,100
LP 69% / GP 31%
Negotiated Distribution
LP Proceeds 6,093,000GP Proceeds 1,707,000
LP 78% / GP 22%
Per Partnership AgreementActual Distribution
LP (30%) 309,900GP (70%) 723,100
1,033,000
Lessons Learned
2017 Case StudyA Street Apartments
2000 Waterfall (Actual) 2017 Waterfall (Typical)
Fees Due to LP 195,000
Due to GP 1,278,3701,473,370
Residual Proceeds 5,928,630
LP Residual (35%) 2,075,020
GP Residual (65%) 3,853,610
Cash Proceeds = 7,402,000
Fees Due to LP 195,000
Due to GP 1,278,3701,473,370
Residual Proceeds 5,928,630
LP Residual (10%) 592,863
GP Residual (90%) 5,335,767
Lessons Learned
2017 Case StudyA Street Apartments
Due to LP 195,000Due to GP 1,278,370
1,473,370
Residual Proceeds 5,928,630
Cash Proceeds = 7,402,000
LP Proceeds 2,270,020GP Proceeds 5,131,980
LP 31% / GP 69%
Negotiated Distribution
Per Partnership AgreementActual Distribution
LP (35%) 2,075,020GP (65%) 3,853,610
LP Proceeds 2,270,020GP Proceeds 5,131,980
LP 31% / GP 69%
Lessons Learned
2017 Case StudyB Street Apartments
1999 Waterfall (Actual)
Fees Due to LP 0
Due to GP 110,000
LP Invested Amount 1,400,0001,510,000
Residual Proceeds 0
LP Residual (20%) 0
GP Residual (80%) 0
Cash Proceeds = 1,510,000*
*Assumed using estimated pre‐QC Value and GP Offer of $1.4 for LP Interests.
Lessons Learned
2017 Case StudyB Street Apartments
Due to LP 0Due to GP 0LP Priority Return 1,400.000
1,400,000
Residual Proceeds 2,817,000
Cash Proceeds =4,217,000
LP Proceeds 2,808,500 GP Proceeds 1,408,500
LP 67% / GP 33%
Negotiated Distribution
LP Proceeds 3,068,200GP Proceeds 1,148,800
LP 73% / GP 27%
Per Partnership AgreementActual Distribution
LP (50%) 1,408,500GP (50%) 1,408,500
Lessons Learned
2017 Case StudyC Street Apartments
Waterfall (Capital Transactions)
Waterfall (Dissolution)
Fees Due to LP 5,000
Due to GP 349,000
> LP Capital or LP Tax 0354,000
Residual Proceeds 4,898,000
LP Residual (10%) 490,000
GP Residual (90%) 4,408,000
Cash Proceeds = 5,252,000
Positive LP Capital 3,362,792
Residual Proceeds 1,889,208
LP Residual (10%) 188,918
GP Residual (90%) 1,700,265
Lessons Learned
2017 Case StudyC Street Apartments
Due to LP 0Due to GP 0LP Priority Return 0
0
Residual Proceeds 5,252,000
Cash Proceeds = 5,252,000
LP Proceeds 1,838,200GP Proceeds 3,413,800
LP 35% / GP 65%
Negotiated Distribution
LP Proceeds 3,551,715GP Proceeds 1,700,285
LP 63% / GP 37%
Per Partnership AgreementActual Distribution
Lessons Learned
2017 Case StudyC Street Apartments
Re‐‐Negotiated Distribution
• GP Requested 35/65 Split after payment of GP Sales Prep Fee of $390,00
• 3rd Party Sale scheduled for late 2017 fell through
• Purchaser withdrew forfeited $550,000 Deposit
• GP maintained forfeited deposit to be split 10/90 as not liquidating event
• LP and GP agreed that GP would keep majority of deposit as “sales prep fee” ($350,000 based on new sales price) and relist property for sale under same previously agreed residual split of 35%/65%
Lessons Learned
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Public Series Institutional Funds Private Credit
Funds Liquidated/Redeemed
Through 2017 2018
Lessons Learned
Year 15 StrategiesLessons Learned
June 12, 2018 National Housing & Rehabilitation Association2018 Asset Management SymposiumBethesda, MDPresenter:Sean Barnes, Sr. Disposition Manager, Asset Management
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EXIT STRATEGIES: POSSIBLE SCENARIOS
Right of First Refusal to purchase property
Buyout option to purchase partnership interest
Purchase within compliance period (“Early Exit”)
“Puts”: Obligation to Purchase Sale to 3rd party
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RIGHT OF FIRST REFUSAL
Formula Price = Debt plus Exit Taxes
Issues with Right of First Refusal: Is a bona-fide 3rd party offer required? Reserves not included Transaction costs Formula Price may exceed fair market
value
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BUYOUT OPTION OF PARTNERSHIP INTEREST
Typically, option price is greater of:
Fair Market Value of Partnership Interest (defined as sale of property and liquidation of partnership)
Or Unpaid Benefits plus Exit Taxes
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CASE STUDIES
Exit of Limited Partner:Alternative Strategies
1. Non Profit ROFR w/o Equity2. Non Profit ROFR w/ Equity
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STUDY#1:Non-Profit ROFR with No Equity
PROJECT OVERVIEW
54 units
Located in suburbs of Baltimore, MD.
Serving seniors 62 and over
30%, 50% and 60% AMI
PIS 4/30/2002
LIHTC compliance period expired 2016
Extended Use Restrictions expire 2041
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STUDY#1:Non-Profit ROFR with No Equity
NEGOTIATION POINTSGP holds the Right of First Refusal to purchase property for debt + exit taxes. LP potentially would receive $111,857.
GP offers to assume limited partners interest citing limitation on value:
Large surplus cash loan
The project cannot be recapitalized – restrictions on re-syndication
Large prepayment penalty - the project cannot be refinanced.
Significant capital needs, > $700K.
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STUDY#1:Non-Profit ROFR with No Equity
PARTNERSHIP ECONOMICSProperty NOI $144,731Cap Rate 6.8%Property Value $2,128,397Plus
Operating Reserves $77,037Replacement Reserves $109,554T&I Escrows $15,794Cash in Bank $59,777
$262,162Less
AP/Current Accruals $6,575Fees Payable $6,872Debt $2,956,748
$2,970,195
Net Assets $(579,636)
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STUDY#1:Non-Profit ROFR with No Equity
PROJECT ECONOMICSProperty Value $2,128,397Projected Debt $2,956,748Other Liabilities $13,447Cash & Reserves $262,162
Capital Account Balances Residual Splits (LPA)GP $111,857.50 50% 80%LP $111,857.50 50% 20%Total $223,715 100% 100%
SCENARIO Property Value
Assets (sale proceeds + net assets)
LP Proceeds per Residual Split
LP Proceeds per Capital Accounts
Sale of Property/Dissolution 2,128,397$ (579,636)$ ‐ ‐$ Buyout Option 2,128,397$ (579,636)$ ‐ ‐$ ROFR Dissolution 2,956,748$ 223,715$ 111,857.50$
Negotiated Sale Amount Debt
FINANCIAL SUMMARY
VALUATION SUMMARY
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STUDY#1:Non-Profit ROFR with No Equity
VIEW FROM THE FUND Business Purpose: includes long term
preservation after fund exit Investor benefits delivered Fund IRR exceeds target Partnership Agreement provides ROFR
disposition in Y16 Assign limited partner interest to GP
for debt GP assumes all assets and liabilities
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STUDY#2:Non-Profit ROFR with Equity
PROJECT OVERVIEW
221 units
Serving seniors 60 and over or disabled
30%, 50% and 60% AMI
PIS 9/15/2003
LIHTC compliance period expired 2017
Extended Use Restrictions expire 2048
This is an active, current negotiation.
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STUDY#2:Non-Profit ROFR with Equity
NEGOTIATION POINTS
Project has significant equity in the real estate.GP has a ROFR to purchase property for debt plus taxes.Large cash and reserve balances – lender restrictions.Long-term preservation ownerNo economic or mission incentive to pay off mortgage to exit the LP
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STUDY#2:Non-Profit ROFR with Equity
PARTNERSHIP ECONOMICSProperty NOI $757,329Cap Rate 6.0%Property Value $12,622,156Plus
Cash and Reserves $1,833,431
LessAP/Current Accruals $ 349,661Debt $8,825,028
Net Assets $5,280,898
Important points to note: Large cash and reserve balance Significant equity in real estate ($3,797,128)
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STUDY#2:Non-Profit ROFR with Equity
ROFR CALCULATIONProperty Sale (debt + taxes) $8,825,028Less: Wind-up Costs 25,000Less: Debt 8,825,028Equals Sale Proceeds $(25,000)Plus Cash/Reserves 1,833,431Less: AP/Accruals/Fees 349,661
Total Proceeds*: $1,458,770
*Per liquidation provision, proceeds shall be distributed in accordance with capital accounts. In this case the GP has essentially a $0 capital account – entire amount would go to LP.
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STUDY#2:Non-Profit ROFR with Equity
Impact of Lender Restrictions & Regulations on LP valuePublic purpose lender – mission to preserve affordable housing.
Partnership resources cannot be used to buyout a limited partner.
Favorable below-market financing (1%) - GP has no economic incentive to refinance.Extended land use agreement restricts rent through the year 2048 – partnership will need resources for capital needs.
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STUDY#2:Non-Profit ROFR with Equity
ROFR CALCULATIONProperty Sale (debt + taxes) $8,825,028Less: Closing Costs 25,000Less: Debt 8,825,028Equals Sale Proceeds $(25,000)Plus Cash/Reserves 1,833,431Less: AP/Accruals/Fees 349,661
Total Proceeds $1,458,770Lender Restrictions (1,458,770)Distributable Proceeds: $0