FUNDAMENTACIÓN COMUNICATIVA

Although most GPs retain ownership of their LIHTC properties at Year 15, a minority sells out. This exchange is almost always done by selling the property, although occasionally the GP interest is transferred to another organization, with the original partnership continuing to exist.

REASONS GPS SELL AROUND YEAR 15

Based on the research done for this study, GPs’ motivations for selling are varied, sometimes driven by personal reasons and sometimes by financial considerations.

The most commonly reported GP motivations for selling are—

• Retirement. The GP has been a single individual who wants to retire or a small company whose several owners want to retire from the real estate business.

• Leaving the business or change in business model. A GP may decide that it no longer wants to be engaged in LIHTC properties, perhaps because its business model has shifted to focus on other kinds of housing or real estate. In one instance, the study team was told about a small LIHTC property sold by a national for-profit to a local nonprofit because the original owner decided that it no longer wanted to deal with such small properties. In another, the founder of the real estate firm that was the GP was about to retire, and his son wanted to focus on commercial real estate.

• Outlier properties. An outlier is a property that is remote geographically from other owned real estate, per- haps its sole property in a state, so a GP’s ongoing ownership is, therefore, inefficient administratively and financially.

• Financial difficulties at the property. The property has been troubled financially, and the GP no longer wants to work on it or invest in it, or perhaps thinks another GP can operate it more effectively.

• Corporate problems. The GP or its sponsoring organization has run into corporate financial difficulties, and so is disposing of all or most of its assets. This was the case for a 123-unit property in a southeastern state. The previous sponsor was a large nonprofit that went through bankruptcy.

• GP seeking financial return. The GP is able to realize a good financial return by selling the property. One example of this was a 150+ unit senior property in a strong California market. The GP decided that the re- cent period of low interest rates on mortgages would be an ideal time to realize value, because the low rates would translate into a higher sale price, ongoing LIHTC use restrictions notwithstanding.

• LPs seeking financial return. Under the terms of some partnership agreements, syndicators or investors may be able to insist on a third-party sale if they believe the property has value, even with extended use restric- tions, in excess of its outstanding debt and more than the price the GP is willing to pay.

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MOST NEW OWNERS ARE FOR-PROFIT ORGANIZATIONS LOOKING FOR CASH FLOW AND OPERATIONAL SCALE

In recent years, a market has developed for the resale of properties reaching the end of the Year 15 tax credit com- pliance period. These properties are with for-profit owners, and the buyer also is a for-profit.21 _{The three market-} dominant brokers specializing in sale of LIHTC properties reported to the research team that the dominant business feature of the for-profit buyers for these properties is that they are very strong operators. They are able to minimize operating costs and maximize revenues, usually within the confines of extended use restrictions. Brokers describe most buyers of Year 15 properties as “conventional real estate guys” who generally rely on a conventional combination of debt plus private equity for financing. The equity comes from either their own resources or from a limited number of private business partners, without any formal syndication. Fannie Mae products are frequently mentioned as a source of new mortgage financing, although some buyers use conven- tional bank debt financing. Post-Year-15 LIHTC property buyers often use short-term debt. A popular Fannie Mae program described by one broker offers terms as short as 7 years.

Brokers and syndicators described for-profit buyers of older LIHTC properties as falling into two broad catego- ries. First, many of the organizations buying older LIHTC properties are large-scale regional or national owners who achieve economic efficiencies through economies of scale. Residential real estate is very much a business of scale—per unit operating costs decline as property size increases, so much more money can be made operat- ing a large property than a small one. Therefore, it is no surprise that most of the properties that end up sold to third parties appear to be among the largest in the LIHTC portfolio. Although more than 90 percent of LIHTC developments placed in service before 1995 have 99 or fewer units, one broker reports 100 units as the average size of Year 15 deals that they sell. Another broker publishes an annual report of their LIHTC disposi- tions group; the average size of LIHTC property sold each year between 2006 and 2009 ranged between 131 and 146 units—definitely at the larger end of the LIHTC portfolio.

The second category of for-profit buyer of LIHTC Year 15 properties consists of small, hands-on operators who own and operate modest-sized portfolios in a relatively tight geographic range. These businesses are able to achieve efficiency through close personal control and intimate knowledge of local markets and resources. Their sales are less likely to be handled by brokers and more likely to be arranged privately, either by the original owner or by the syndicator.

Some buyers who are also property managers have reportedly been willing to buy LIHTC properties solely for the chance to expand their operating portfolio, even when the properties have slim chance of generating eco- nomic benefits from cash flow or future resale value. The property price may be a multiple of management fees, since that is where the primary value is assumed to reside. Such properties tend to be smaller deals, under 50 units, located in mid- to weak-range market areas, where LIHTC rents are at or greater than market rents. Occasionally a nonprofit organization will purchase an older LIHTC property. The research conducted for this study indicates that these acquisitions have been infrequent but are not unknown. One example was a nonprofit that was ending its real estate activities and sold its only LIHTC property to another nonprofit.

21. Only rarely do nonprofit owners sell their properties. When they do sell, the new owner also is almost always a nonprofit. We learned of one case of a for-profit organization selling a property to a nonprofit organization that had access to additional subsidies for recapitalizing the property.

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Some buyers aim to refinance and recapitalize a property with a new allocation of LIHTC credits or other subsidy funds. Owners proceed with these transactions with the goal of earning developer fees and positioning the property for at least 15 more years of physical and financial health. The brokers interviewed for this study reported that a minority of buyers of older LIHTC properties are seeking to use new tax credits. We discuss what drives recapitalization, including use of LIHTC, in chapter 6.2 of this report.

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