The Affordable Housing industry saw its first wave of Low-Income Housing Tax Credit (LIHTC) properties approaching the end of the 15-year compliance period in 2003, giving rise to a new segment of the market. In the five years ahead, the industry will continue to see a rising tide of properties reach Y-15, but unlike earlier transactions, affordable owners have new market dynamics to evaluate and more execution options to consider. Optimizing outcomes following Y-15 requires considerable analysis. This is a strategic planning process that should start around the tenth year of a LIHTC investment and be reevaluated as the market and the owner’s financial objectives change.
Generally speaking, there are four strategies owners can leverage: holding the property; executing an investor buyout; resyndicating the property; or selling the property. There is no one-size fits all approach to determining which strategy is the best option for a particular property, as a 15-year investment will see changes in the market that require ongoing evaluation to maximize value. With the breadth of tax and regulatory implications that affect each partner of the owner, it is crucial for operators to understand their Y-15 options and to be armed with in-depth, up to date market analytics in order to determine the best long-term solution for their property and for their goals.
Investor Buyout
The most common way to recapitalization of a Y-15 LIHTC asset is a refinancing where the General Partner purchases the LIHTC investor’s interests to consolidate ownership of the property. Most of the clients we advise ahead of Y15 determine that an investor buyout is most advantageous, granting the GP the most long-term flexibility and the LIHTC investors the greatest value. Typical strategies may include refinancing with a long-term loan as part of a long-term hold strategy, or short-term refinancing with flexible prepayment options on the asset to allow the owner flexibility as it evaluates its options, including a potential sale or resyndication. Due to the historically low interest rates that we saw in 2020, many clients turned to refinancing to take advantage of these rates.
Any such investor buyout would be informed by the Limited Partnership Agreement (LPA). Ideally, the LPA includes a well-defined exit plan at initial closing. From an operator’s perspective, it is always prudent to negotiate a call option in the original partnership agreement with a tax compliance and relatively unambiguous mechanism for determining the buyout price. Ambiguity around pricing due to liquidation provisions within the partnership agreement, especially as they pertain to partner capital accounts, can make it more challenging to reach consensus between the partners as to a buyout price.
Disposition
A simple sale of the asset to a third party is a common capital event for Y-15 assets. Buyer demand is currently robust with both yield focused for-profit owners and mission driven non-profits. Even though affordability restrictions are generally required to be maintained past the initial compliance period, conventional for-profit buyers represent the largest and fastest growing contingency of bidders on Y-15 properties. In properties we’ve taken to market for clients, we’re seeing more interest than ever before in what has been a very competitive multifamily landscape.
Resyndication
If an asset meets the criteria for acquisition tax credits and a new credit award is available, a resyndication may add the most value while at the same time preserving affordability for the longest period. In this instance, the initial LIHTC partnership is liquidated, and the property is sold to a new partnership with a new tax credit allocation awarded. The new credits typically allow for significant renovation to improve the physical condition and marketability of the property.
Holding the property
Although the nature of LIHTC partnerships makes it rare, there are some cases when a cost-benefit analysis of potential exit strategies together with an evaluation of market conditions concludes it is in the best interest of the partners to hold the asset within the exiting partnership for some period beyond Y15. We’ve seen this occur most often during a period of market disruption, when partners want to delay executing capital transactions, if possible. Ultimately, in these cases when partners consider the current asset value, financing options, cashflow waterfall, tax implications, as well as various other considerations, holding a property can offer the greatest flexibility to ride out a period of uncertainty and allow partners to consider alternative strategies when market conditions improve.
Maximizing value at Y-15 necessitates deep and complex consideration to determine the right path to pursue. We advise all clients facing this transition to arm themselves with all available data and analytics, and to partner with the right resources, to help them evaluate all the potentialities of the available options—buyout, disposition, hold or resyndicate. With the right foresight, solid strategic planning and some sound advice, owners can be confident that they can structure a plan to their specific needs and circumstances and ultimately create new opportunities for long-term success.