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Extra Credit: Considering Resyndication

Published by Brian Carnahan and Jon Welty on Sunday, June 1, 2014

Journal cover June 2014   Download PDF

Many owners of low-income housing tax credit (LIHTC) properties explore “resyndication” or seek a new allocation of credits to preserve an existing LIHTC property. The new allocation of credits can help with rehabilitation and upgrades to make an older property more marketable and sustainable. Preparing for and resyndicating a property, however, requires planning and due diligence, as the process involves both development and compliance issues. Below are suggestions for successfully resyndicating a property and a few points to consider.

  • Plan to include the state housing finance agency (HFA) as early as possible in the planning process. The HFA may be able to offer insight into the likelihood of a property receiving credits.
  • Review the qualified allocation plan (QAP) for particular incentives and requirements for resyndication. Some QAPs consider older tax credit properties “preservation” properties and offer additional points or consideration, while others do not. There may also be issues related to amenities, accessibility and green standards. Have building codes changed during the 15-year period? Will the building need expensive retrofits? Can the resyndicated property meet all of the requirements in the QAP? If not, are there waivers or other opportunities to submit the application?
  • Other funding sources can affect the resyndication plan. Does the property have additional funding sources that have a long period of affordability? (HOME program funds, for example.) If the property is new construction, it will have to meet an affordability period of a minimum of 20 years. Each source of gap financing, be it a federal or state source, has specific compliance requirements. It is critical to include private and public lenders in conversations regarding the refinance, as their consent is required for a resyndication to occur.
  • Will any aspects of the resyndicated property conflict with the property? For example, is a higher minimum set-aside selected for the new project? Do new rent and income limits conflict with any gap financing requirements or the current restrictive covenant or land use restriction agreement? Did the owner agree to any specific requirements in the first allocation that might be problematic? Determine whether the new proposed property will place the “old” property “out of compliance” with any funder before seeking a new allocation of tax credits.
  • How will property reserves and real estate value be transferred? The investors in a property may seek to receive their share of a property’s reserves, as they are assets of the project. Additionally, if there is inherent real estate value in the property, the investors might also seek a portion of the value.
  • To demonstrate existing market demand, the property should be occupied. A survey of residents may help determine desirable new amenities and make the property more attractive to future tenants. Additionally, qualifying residents should not be taken lightly. The property must continue to be treated as an LIHTC property when it enters its extended use period. Some HFAs have relaxed the compliance requirements during the extended use period. Managers and owners of properties planned for resyndication should generally ignore guidance that relaxes extended use rules. As appropriate, residents should be certified or recertified, the student rule should be enforced and owners should still maintain the property to the best of their ability. The HFA may elect to do a pre-award site visit, so continued maintenance of the physical assets and file compliance is critical.
  • If a resyndication occurs, how will it affect current residents? Is there a planned reduction in units? Will rehabilitation temporarily displace residents? Temporary and permanent relocation can be costly, and so the budget should incorporate these expenses.
  • Will all of the current property be part of a new development? Will only select buildings be part of the new development? This can be a factor when the units or buildings are scattered. It can increase the compliance and monitoring burden, and it can increase the risk of losing credits and other funding through compliance errors. The developer needs to be mindful of maintaining the acquisition credits for the resyndication of the properties. The owner should seek legal and accounting guidance to ensure the transfer of the property will not cause a loss of credits.
  • Track buildings closely. Will there be changes to unit sizes? For example, will units be expanded or combined? The HFA may expect the same number of units or amount of floor space to be maintained through the life of a property. The Internal Revenue Service (IRS) has suggested states allow greater flexibility during extended use periods; therefore, it is worth exploring necessary changes to the character of the units or buildings. Note: Building Identification Numbers (BINs) for the property should remain the same. The IRS has stated publicly on a number of occasions that once a BIN is assigned, it is the identification number for the building as long as it exists. This is mainly an issue for the HFA, but the owner/manager should be aware of this requirement.
  • Budget and operating info (taxes, insurance, utilities) and current occupancy (income profile of existing tenants) will be important in considering whether the resyndication will provide increased operating efficiencies and cost savings. Will the rehabilitation cause the property to be more competitive in the market place? Does the market support higher rents and a sustainable occupancy rate?
  • A physical needs assessment should be completed to determine the useful life of the property’s components (roof, HVAC, hot water tanks, flooring, etc.) including when and if items need to be replaced. How many of these items will be included in the budget of the new property? Which will be funded later? Additionally, a cost benefit analysis should be completed to verify that the cost of resyndication is worth the cost of the additional compliance period and requirements. In many circumstances the fixed costs (legal, accounting, agency fees, etc.) of completing a tax credit property, exceed the benefits of the tax credits. In these cases, it is prudent to investigate a cash-out refinance of the first mortgage, gap funding from the city or state or other grant programs to raise the necessary capital to rehabilitate a property without the additional burden of tax credit compliance.
  • When planning to resyndicate, do not hold vacant units back as a means of improving the chance for selection in the funding round. The HFA may penalize the owner for this negative step. Additionally, the owner may harm himself if the resyndication attempt is not successful as applying for credits is not without costs and the owner will still face the costs of “turning” units.

Resyndication is a viable option for many properties. Given the competitive nature of the LIHTC program, developers have to plan and complete the appropriate due diligence. With the right planning an old LIHTC property can become a new property, continuing to provide quality housing for at least another 15 years.

Brian Carnahan, HCCP, is director of the Ohio Housing Finance Agency’s Office of Program Compliance, where he oversees the compliance monitoring of tax credit, HOME and Section 8 communities. He can be reached at [email protected]. Jon Welty is a vice president at Ohio Capital Corporation for Housing where he manages investor relations, Year 15 Dispositions and the lending operations of Ohio Capital Finance Corporation, a CDFI.

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