As a LIHTC project crosses from the credit period into the remaining few years of the compliance period, the sponsor group will be considering how to close out the current agreement with the tax credit investor. In a best-case scenario, the exit provisions would have been thoroughly vetted on the front-end, the project would have performed close to expectations, all parties would still be in agreement on terms, and it would be just a matter of following the procedures to close out the deal. But in reality, the buyout process is often lengthy and complicated.
To make things even more complicated, the sponsor group should also be considering what to do with the project once current obligations to the tax credit investor have been satisfied. One option is to re-syndicate the project – that is, to generate a new credit stream by rehabilitating the property. Typically a new tax credit investor is admitted in this scenario, though in some instances it may be beneficial to negotiate an arrangement with the current investor.
There are a number of factors to consider. One is economic feasibility: will updating units allow for closer to maximum rents, or increase occupancy? Likewise, the anticipated costs for rehabilitation will come into play. Are any required improvements sufficient to meet the minimum threshold for substantial rehabilitation? It should be kept in mind that some investors have a higher threshold for per-unit rehabilitation for properties in which they invest; likewise, some housing agencies may require a higher threshold than under code and regulations.
During the last few years of the original compliance period, if the need for significant improvements arises, the sponsor group may need to balance keeping up the project or maintaining curb appeal with holding off on the improvements so as to include in future credit basis. As for the credits themselves, how difficult would it be to get a new allocation of 9% credits? This may be easier in areas where the housing agency prioritizes preservation of existing affordable housing. Alternatively, would tax exempt bonds with 4% credits be sufficient to fund the improvements?
At the Sherbert Group, we take a life-cycle approach to LIHTC projects. We can assist you in preparing to unwind a project in Year 15, and in analyzing options for Year 16 and beyond. But ideally we would be involved in Year 0, working to structure the deal upfront to allow for a more streamlined unwind. And as we work alongside you during the compliance period, we can help you to evaluate the performance of the project and tee up as much as possible in advance of discussions around investor exit.
The Sherbert Group would be excited to look at your project – at any stage of its life-cycle. If you have any questions about topics in this newsletter, please let us know by emailing Aaron Mayer at amayer@sherbertconsulting.com.