Market for Property Disposition at Year 15 and Earlier Katherine Alitz Boston Capital Asset...

Market for Property Disposition at Year 15 and Earlier

Katherine AlitzBoston Capital Asset Management

IPED—BostonOctober 11 – 12, 2007


Determining Value at Year 15

The perceived value of the property will dictate the disposition strategy

• Third party sale

• Resyndication

• Transfer for multiple of management fees or future cash flow



Industry trends demonstrate that almost all LIHTC properties sold remain affordable, so:

• Property operations and location are the major determinants of property value

• Property may have “value” outside the traditional measures of value (i.e. option to resyndicate)



Existing and future restrictions sometimes may affect property value

• The ability to exercise a Qualified Contract

• Extended restrictions with continued rent restrictions below 60% AMI

• Some restrictions terminate or can be terminated while others remain in place (i.e. Florida SAIL Loan LURA)



Steps to determining value:

• Gather all relevant information

• Review and analyze information

• Prepare value analysis using income approach

• Prepare resyndication model



Relevant Information:

• Audit(s)• 8609 Form(s)• Partnership agreement• Disposition agreements, if any• Use restrictions• Current loan documents



Analyze relevant information:

• LIHTC Compliance Expiration date• Current rent levels• Potential post-Compliance rent levels• Historic occupancy• Notice periods or other information

related to previous disposition agreements

• Prepayment penalties or yield maintenance provisions



Estimate value using income approach:

• Determine current annual income• Estimate annual income at prevailing

market rents• Determine NOI by reducing current

annual income and estimated annual income by average of last two years of operating expenses

• Capitalize NOI


Analysis at Current Rents

Annual Income: 800,000

Average Expenses: 600,000

NOI 200,000

Cap Rate: 9%

Value:2,222,222

Analysis at Market Rents

Annual Income: 950,000

Average Expenses: 600,000

NOI 350,000

Cap Rate: 9%

Value:3,888,889

Difference in Value is approximately $1,700,000


Income approach allows us to define value parameters:

• We now have an estimate of current value at the existing use as affordable housing

• What prevents the property from achieving market rents and thus commanding a higher value

–Continued affordability restrictions

–Physical upgrades and replacements necessary to compete in the market


A few comments about this type of analysis:

• The analysis is just an estimate to use for planning purposes

• You may never choose the right cap rate, but you can usually identify a range or use an average

• You should always consider the highest and best use for the property, but if it is a use other than rental housing, it usually jumps out


A resyndication analysis allows you to analyze potential cash proceeds generated by a resyndication of a property for LIHTC after Year 15

Resyndication analyses include the following assumptions:

• Rehabilitation costs• Subsequent funding, if any• Pricing


Sources

First Mortgage 3,000,000

Second Mortgage 600,000

LIHTC Equity 800,000

Deferred Developer Fee 50,000

Total Sources: 4,450,000

Uses

Mortgage Assumption 3,000,000

Rehab Expenses:1,000,000

Developer Fee 250,000

Total Uses:4,250,000

Sources - Uses: 200,000


Resyndication analysis allows us to recognize value outside of income approach:

• When a property has no market value, value can be created by sharing available proceeds with a new developer

• The “value” in these cases is the value of the option to resyndicate the property


A few comments about this type of analysis:

• The resyndication analysis is only as good as the sum of its assumptions

• We use the analysis to identify properties that have resyndication potential

• These properties tend to demonstrate limited value in the traditional sense


The analyses described above help formulate the disposition plan for a property

Third Party Sales

Properties that have value as indicated through the income approach to valuation

• Properties in this group may also be good resyndication candidates, but we prefer to let the market determine the ultimate disposition of the property

• Properties in this group may be transferred to an existing partner in a related party sale, but the price paid will be determined as if there were a third party arms length transaction


Resyndications

Properties that have little value as indicated through the income approach but might generate cash proceeds as a resyndication.

Transfers

Properties that are not candidates for either a third party sale or a resyndication. Management fees have some value as does any limited cash flow a property may produce. You can apply a multiplier to, or capitalize, these fees and cash flow

Qualified Contract Analysis

QCV MV

MV QVC

RV RV

QC Exercise provides the following options to Owner: QC Exercise provides the following options to Owner:

(a). If QC Buyer is found, Owner receive greater than MV for the property (a). If QC Buyer is found, Owner receives a portion of property's market value

(b). If no QC Buyer is found, Owner converts to market to achieve higher MV (b). If no QC Buyer is found, Owner converts to market to achieve higher MV

QCV MV

MV/RV RV

QCV

QC Exercise provides the following options to Owner:

(a). IF QC Buyer is found, Owner receive greater than MV for the property

(b). If no QC Buyer is found, Owner converts to market to avoid admnistrative

burden of compliance and/or future market conversion

EXERCISE QC OPTION MAYBE EXERCISE QC OPTIONQCV > MV > RV MV > QCV > RV

MAYBE EXERCISE QC OPTION DO NOT EXERCISE QC OPTIONQCV > MV AND MV = RV MV AND RV > QCV

PR

OP

ER

TY

VA

LU

E

LIKELY OUTCOME = NO QC BUYER PRODUCED W/(b) ACCRUING TO OWNER

(a)

LIKELY OUTCOME = QC BUYER PRODUCED W/ PARTIAL PAYMENT OF (a) TO OWNER

(b)

PR

OP

ER

TY

VA

LU

E

(a)

LIKELY OUTCOME = QC BUYER PRODUCED W/OWNER'S LOSS OF (a)

(b)

(a)(b)

(a)

LIKELY OUTCOME = NO QC BUYER PRODUCED W/NO ECONOMIC VALUE BUT EUA TEMINATED

Market for Property Disposition at Year 15 and Earlier Katherine Alitz Boston Capital Asset...

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