1. Year 15: Preservation and Beyond Presented at the 2013 Virginia Housing Credit Conference

2. Table of Contents Presented at the 2013 Virginia Housing Credit Conference General Overview Developing an Exit Strategy Common Exit Strategy Options Tax Implications GP & LP – Lower Tier

3. Tax Credit Period Compliance Period Limited Partner – Exit Partnership Mandatory Extended Use Period (PIS after 1990) Additional Restricted Covenants Years 1 - 10 Years 11 - 15 Year 16 Years 16-30 Year 30+ Affordable Housing Community “The Development” Presented at the 2013 Virginia Housing Credit Conference

4. Determining Year 15  Tax Credit Period Begins the first year credits are claimed for each building “Usually” the 10 th year tax credits are claimed (unless 2/3 rd units)  Compliance Period Begins the first year credits are claimed Ends on December 31 st of the 15 th year after building(s) are “Placed In Service” (PIS) Presented at the 2013 Virginia Housing Credit Conference

5. Determining Year 15  Example : Building PIS Feb 1 st 1998 Elected to begin taking credits in 1998 Tax Credit Compliance Period Expires December 31, 2012 Year 15 = 2012  NOTE: To calculate Year 15, Add 14 years to the first year credits are initially claimed ~ if multiple buildings, compliance period ends when the last building placed in service has reached the end of its compliance period. 123456789101112131415 199819992000200120022003200420052006200720082009201020112012 Presented at the 2013 Virginia Housing Credit Conference

6. Determining Year 15  Multiple Building Developments Year 16 (aka the exit year) which is the end of the Compliance Period may be different for each building Must refer to each building’s 8609 to be sure of actual “exit year” (i.e., end of Compliance Period) Irrevocable election was initially made on Part II of the 8609 Presented at the 2013 Virginia Housing Credit Conference

7. Developing an Exit Strategy

8. Before you begin… Basic rules to follow when developing an Exit Strategy/Disposition Plan 1 st :Understand the unique elements specific to your development 2 nd :Understand the motivation and goals of your partners & stakeholders 3 rd :Know your partnership documents 4 th :Develop your “Strategic Exit Plan” in accord with your goals and the goals of your partner stakeholders Presented at the 2013 Virginia Housing Credit Conference

9.  How did your deal perform in comparison to the original projections? Will there be a taxable event upon exit (i.e., exit taxes)? Are you liable for this tax liability of the Limited Partner? Can this be mitigated and perhaps reversed? Are there Compliance Issues? Are there outstanding 8823s issued? Are there “extended use restrictions”? Details of your “ROFR” (Right of First Refusal) Details of your “Waterfall” upon dissolution Outstanding Deferred Developer Fees, Loans?  Deals to watch closely Tax exempt bond deals (4%) Historic preservation deals Underperforming deals Understand the Current Reality of your property Presented at the 2013 Virginia Housing Credit Conference

10. Exit Strategy / Disposition Plan  Begin the disposition process early Years 9 & 10 Are Deferred Developer Fees still outstanding? Years 11 & 12 Are there excessive losses or 704b issues? Have the Syndicators received all benefits? Would either party like to “Exit Early”? Years 13 & 14 What are the goals of the GP after Year 15? What are the goals of the LP after Year 15? Develop & Implement your plan based on goals Year 15 Have a “draft” of the “Buyout/Exit/Transfer” docs prepared Year 16 – Exit Year Finalize and Execute “Buyout/Exit/Transfer” docs

11.  Partnership Agreement The “Blueprint” for Year 15 Options Outlines the rights, requirements, options, duties & specific obligations  Loan Agreements May have several layers  Resolve any conflicting language Consent requirements  GP to obtain consent from interested parties/stakeholders including MSHDA  Restricted Covenants Regulatory Agreement Presented at the 2013 Virginia Housing Credit Conference

12. Analysis of Each Partnership NOTE: Every Operating Partnership is different  Analyze each operating partnership Looking for the best disposition strategy for each investment and for the Investor(s)  Key Items to Consider: Disposition Fees Transaction Costs Exit Taxes Market Conditions Early Exit?  After Year 10 but prior to Year 15

13. Presented at the 2013 Virginia Housing Credit Conference Partnership Analysis  Sponsor Type For Profit and Non-Profit  Total Benefits Received  Ending Capital Account Balance  Exit Taxes  FMV of Partnership Interest  Tax Benefits/Costs After Sale Simple Transfer Donation

14. Potential Concerns from VHDA Partnership Changes Are approvals governed by a “Resale Policy”? Level of approval may depend on the type of ownership change ~ will require a financial review of development Disposition Options may depend on what your long term plan is for the property and influence what the HFA approvals will be Re-syndication How will a re-syndication affect operations? Subsidies, repayments, HOME Funds? Refinance with Virginia Housing Development Authority (VHDA). Are there preservation programs? Is my loan eligible to prepay? Will there be prepayment penalties? Refinancing with another Lender If loan is eligible for prepayment, contact Asset Management and inform them of impending prepayment HUD Notification HUD Notification Reconciliation of Reserves Reconciliation of Reserves Presented at the 2013 Virginia Housing Credit Conference

15. Common Exit Strategy Options

16. Long Term Hold Strategy  Purchase LP interest & Continue to Operate  Acquire LP Interest through Sub LP Entity  Restructure debt? – Reserves – Taxes  Convert to Market Rentals or Condos? Re-syndication Strategy  Buy-out LP – Create new partnership Sale/Transfer Strategy  Transfer Partnership Interest/Assets to 3 rd Party Common Exit Strategy Options Presented at the 2013 Virginia Housing Credit Conference

17.  Several Commons Exit Options Qualified Contract??? Qualified Contract??? Purchase and Reuse Options  Purchase of Real Estate (i.e., buyout/right of first refusal)  Purchase Investor’s Interest (i.e., right of first refusal)  Sell to a 3 rd Party Is the property financial viable? Re-syndication Rehab minimum is $20K per unit? Presented at the 2013 Virginia Housing Credit Conference

18. Tax Implications

19.  Items to be aware of: Tax capital accounts “Tax Basis” – Capital contributed less losses and other decreases (historic tax credits) Provides the “basis” for which an investor can claim benefits Minimum gain & 704(b) provisions Amount of Nonrecourse Debt that exceeds adjusted basis of real estate. Syndicators prepare both minimum gain and 704(b) analysis on an annual basis Tax Implications

20. Tax Credit & Compliance Periods  Significance of the Tax Credit Period Balance the investment to ensure credits are allocated to the Investor  704b Excess Losses = “potential” for higher exit costs  Loss Reallocations  Significance of the Compliance Period Investors consider LIHTC a 15 year investment  Risk of Recapture due to non compliance Presented at the 2013 Virginia Housing Credit Conference

21. Potential Suggestions to Managing Exit Taxes  Improve Operations  Capitalize select Repairs & Maintenance (R&M) Items vs. Expensing them  Reallocate Losses to General Partner (GP)  Consider restructuring the partnership agreement in Years 11 – 15  Forgive soft debt Creates taxable income – increasing the Tax Capital Account Consult with your Syndicator Asset Manager PRIOR to exercising these options Presented at the 2013 Virginia Housing Credit Conference

22. Feeling Overwhelmed?  There are a lot of moving parts Start planning early There are several options to choose from  Contact your Syndicator (Asset Manager) They’ll be able to provide you with information to assist you in developing your plan  Contact your Attorney and CPA They’ll be able to assist you in putting your plan into action Presented at the 2013 Virginia Housing Credit Conference

23. Questions?