As thousands of LIHTC properties reach Year 15 of the compliance period with physical needs and inadequate reserves to address them, growing interest among state allocating agencies in preservation and a continuing active tax credit market, re-syndication is an attractive option for owners.
The keys to preparing for a re-syndication for owners include the following:
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Start Early (Year 11):
The re-syndication process is long and comprehensive. A re-syndication, or other recapitalization, often requires multiple approvals and coordination between one or more general partners, two or more lenders, investors and several regulatory bodies. In addition to likely changes to the operating partnership, the owner will have to apply for a new allocation of tax credits, possibly source new debt, and structure a transaction with a new equity investor. It can take years to accomplish all of these steps. Aware of the investor’s inherent incentives, many tax credit developers start as early as Year 11 in preparing for a re-syndication.
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Preserve Eligible Basis:
One of the most important steps owners should take in preparing a property for a re-syndication is to strategically reserve major capital improvements for the re-syndication in order to:
1) Meet minimum rehabilitation requirements for the new allocation of tax credits and to garner interest from an equity investor
2) Maximize eligible basis in order to obtain as much equity as possible.
Managing rehab costs is an important matter for a re-syndication not only for obtaining a tax credit award and finding an investor but also for maximizing the amount of equity that the project can receive.
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Engage the Equity Investor:
Any organized and properly timed re-syndication process requires general partner and limited partner engagement. The primary motivation of most LIHTC investors is receiving the 10-year stream of tax credits (rather than investing in the underlying real estate). The investor generally wishes to exit the operating partnership upon achieving its main goal, and in many cases, it does not want to continue receiving the depreciation (losses) that stem from its ownership interest. Therefore, early discussions with the investor can be useful for general partners that are preparing for a re-syndication.
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Understand the Governing Documents:
Owners pursuing a re-syndication should understand their options during partnership changes under the governing documents, particularly the property operating partnership agreement and the loan documents. Owners should review all governing documents and determine the rights of investors and the general partner with respect to re-syndication, which should establish the basis for negotiating with the limited partner and seeking approvals from lenders and regulatory agencies.
If you need assistance strategizing a Year 15 re-syndication, contact Steve Spall (sspall@tcamre.com) or Allen Feliz (afeliz@tcamre.com) — (617) 542-1200.
*Based on Preparing for a Post-Year 15 LIHTC Property Re-syndication: An Overview, originally published in the Tax Credit Advisor, June 2012. http://www.housingonline.com/TaxCreditAdvisor.aspx