Other Year 15 OptionsMODERATOR PANELISTS
Mark ShelburneNovogradac & Company LLP
John NunneryPNC Real Estate
Bob SnowNational Equity Fund
Rebecca ArthurNovogradac &Company LLP
Stephen RogerAffordable HousingPreservation Advisors
PNC Real Estate, Tax Credit Capital National purchaser of federal and
state low income, historic, and new market tax credits
Distribution platform includes syndicated funds, separate accounts and direct purchases (PNC account)
$9B in equity under management, 130,000+ units
Balance sheet and Agency lending, predevelopment equity, and acquisition loans on a select basis
Formed Preservation Investments in 2013 as a way to provide capital (debt and equity) into the Year 15 space through our existing platform
Completed 3 fund investments, started marketing our next fund earlier this year
PNC Preservation Investments Opportunity: provide debt and equity
financing that can compete with non-LIHTC/affordable buyers to slow the loss of affordable units
Natural extension of the tax credit platform
Underwriters, closers, fund managers, lending capability, LIHTC knowledge base, LIHTC developer and investor base
First 3rd party fund investments in 2012
New line of business started in 2013 2013 Internal approvals 2014 SEC approvals 2015 First PNC-sponsored
fund closing
2016 Additional investors, acquisitions
2017 Launched PNC Fund 2
PNC Preservation Investments NHP-Urban Atlantic Fund ($50M)
Closed in August 2012 Acquired 9 properties, sold 1 1,319 units CT, MD, OH
PNC Preservation Fund 1 ($100M) First closing December 2015 Final closing September 2016 Fully invested by January 2017 Acquired 13 properties, sold 1,
started LIHTC on 2
1,960 units MA, IL, FL, AL, UT, VA, CT, MS
PNC Preservation Fund 2 ($150-175M est.)
What Is Preservation? Acquisition of at-risk properties
Expiring LIHTC, Section 8 Properties with contractual
restrictions
Intended disposition into LIHTC or affordable transaction
Extension, i.e., Preservation of affordability
What is NOT Preservation. Ownership of affordable
housing without the intent to preserve affordability
Renovation or historic preservation
Renewal of a Section 8 contract
Workforce housing Naturally occurring affordable
housing
Multi-Investor LIHTC vs PNC Preservation Funds
LIHTC PreservationCredits and Losses Form of Return Cash
Yes Construction Risk No
Yes Leasing Risk Yes, but Limited (Stabilized)
Yes Developer Risk No
Yes, but limited Operating Risk Yes
Yes Compliance Risk Yes, sometimes
Yes CRA Eligible Yes
7-8% Net Pre-Tax1 (Tax Reform?) Returns 11%-12% Net Pre-Tax1
Under 10% PNC Co-Investment Up to 25%
15 Years or longer Fund Life Approximately 10 Years
15 Years Asset Hold Period 3-5 Years
National, CRA, Secondary, Tertiary Markets National, CRA, Secondary
Acquisitions LIHTC or Subsidized, less than 20%
market rate Contractual affordability restrictions
no naturally affordable Expiring affordability within 15 years,
prefer after year 15 but have completed year 11 deals
GP and LP interests, 100% ownership Stable/predictable performers, no
retenanting, no significant deferred maintenance
Acquisition of partnership interests or fee simple
New PNC balance sheet debt structured to match the asset strategy (assumptions are possible)
Generally 11%-13% net IRRs Not a Value-Add Fund Not looking to
do significant immediate repairs and push rents charged to low income residents, interim hold to get to a LIHTC transaction in order to renovate
Can work as either a 9% or 4% transaction at exit
Developer RoleDevelopers are a source of opportunities for fund investment Off market deals some are from the
management portfolio
Existing portfolio looking to cash out but retain some control (sell but retain the option to repurchase)
For deals that are developer sourced: PNC executes the PSA, funds all costs Developer provides 3rd party
management for the fund
Developer gets an option to purchase the property at FMV
No equity required from the developer and no guarantees
Developer applies/reapplies for credits/bond cap, solicits offers for LIHTC equity and debt, sources soft financing (if required), and closes
Developer becomes the GP and the fund exits the transaction
Island Terrace Apartments Chicago 240 units including 1/3 HAP, 1/3 vouchers,
Chicago Housing Trust subsidies Acquired in April 2015 for $19M Brought in new 3rd party mgmt Reduced expenses significantly (payroll and
utilities) Improvements to security and hot water
system Recently appraised for $24.9M LIHTC process started Syndication in 2018 1 block south of the Obama Presidential
Library site Across the street from a proposed Tiger Woods
PGA course
227 units, 100% HAP 3 property portfolio ($104M) Acquired in Dec 2015 for $47M Retained existing management No major capital improvements LIHTC (4%) process started LIHTC syndication in mid 2018 Current HAP rents $400 below comparables
(RCS)
RCS adjustment in early 2018 GPR increase of approx. $1M is possible
New Port Antonio Apartments Boston
Bolton North ApartmentsBaltimore
209 units Long term Section 8 contract Acquired by NHP-UA Fund in August
2013 for $22.5M
Uniquely structured to avoid tax complications
Negotiated a real estate tax reduction Received a bond allocation from the
state of MD
Received an allocation of 4% tax credits Closed August 2017
Contact Information
John N. NunnerySenior Vice President
PNC Real Estate23B 1 Market
Beaufort, SC 29906Tel: (843) 644-5649
[email protected]
Option 1 Do Nothing Willow Garden Reach Good Physical Condition Surplus cash able to keep
up with repairs
Ability exits to recapitalize through a refinance in year 25 when the exiting mortgages are paid off.
Continued ownership supports GP through fees
10/12/2017 Page 14
Option 2 Refinance
Pinochle Place
Good Physical Condition Good Market with high rents
and high occupancy and healthy NOI.
Fully amortizing debt lock out ends year 15 with a high rate (8.16%) refinanced in a low interest rate environment to 4.5%.
Continued ownership supports GP through fees
10/12/2017 Page 15
Option 34% LIHTC and New Soft debt
Harrison Apartments & Adams Homes Local developer gained state and City support to combine the 2
projects in one new 4% Resyndication project Original state loan and bank
loan paid off New state 1st mortgage City partially forgave 2nd mortgages New soft money awarded to project
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NOI Dictates Options
If the income to expense ratio looks like West or Columbus stay the course or refinance
If the income to expense ratio looks like Harvard or RNE III will need gap loans and/or another LIHTC allocation
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$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
West Park Columbus Park I Harvard Park II RNE III
Gross Income Operating Expense
Distribution of Buyout Options (NEF Funds)
Option Distribution for NEF Projects in Year 14...
Sponsor intentions for Y16 and beyond
53% Hold and Operate
34% Refinance or 4% LIHTCwith New Gap debt
10% Sold
3% 9% recapitalization
Recent Marketplace Dynamics Create Options and Challenges
Rapidly rising rents, focus on multifamily as a real estate opportunity
LIHTC portfolios trading at Year 15 and during extended use as a land-banking strategy, priced assuming flipped to market
Entry of REIT and other real estate capital into market
Page 22
Bob Snow
National Equity Fund
[email protected]
614-397-3968
Page 23
mailto:[email protected]
Investor/Syndicator- Y-15 issues LPs want the $ they are entitled to under the documents LP/Syndicator has a fiduciary obligation to create value. Mitigate recapture risk and other liabilities Squeezed by Investor demands Where is my money and Pay
me for consent. LP/Syndicator may have huge accrued loans and fees. LP feels they must drive the dispo process for max. value. LP has more experience creating value (closed hundreds) LP sees a nationwide demand and Greater Fool buyers.
GP/Sponsor Y-15 Issues GP delivered the Tax Creditswhich is why the LP invested. GPs believe they have preformed and lived up to commitments. GPs are emotionally invested its their property, their community. GPs see the operational problems, not the value. Think the LP should exit (for cheap) so they can figure out what to do with the
property.
Are horrified when the LP trys to force an exit and extract maximum value and proceeds.
Are horrified to find that the syndicator is owned by new investors who want disposition $.. not new TC business.
Y-15 Current issues
GPs getting rich on property sales (25M GP deal). LP/Investors getting rich on residuals (written down to 0 by yr.
11). Syndicators have tens of millions of accrued fees and loans. Newco investors buy syndicators for disposition residuals. Syndicator margins on acquisitions decline, Dispo profits up. LPs realize Capital Accounts can deter
