DETERMINE WHETHER TO PURCHASE THE PROJECT
Each sponsor must determine whether or not to purchase the project from the existing limited partnership and, if so, what tenant base will be targeted going forward, keeping in mind long term use restrictions. For all projects awarded credits after 1989, low-income use restrictions continue for an additional 15 years. Loan documents or other agreements may restrict the project for a longer period of time. In addition, sponsors should consider whether the housing’s future ownership and operation is consistent with its mission and current capacity, and evaluate the future economic viability of the project.
It is best to start evaluating organizational goals and interests two to three years before the advent of a project’s year 15. Attorneys and accountants can help review the partnership agreements and loan documents, evaluate the financial operations of the project and formulate possible new ownership entities.
DETERMINE THE PROJECT’S VIABILITY
Sponsors should consider these issues when determining a project’s future viability.
- Examine Current Operations:
Evaluate the present and potential financial operations.
- Investigate Market Trends:
Understand how the property is positioned relative to current market trends and ongoing rent restrictions.
- Consider Operating Expenses and Debt Service:
Analyze the current operations of the project and future pressure on operating expenses, including utilities and property insurance. Has the project enjoyed property tax abatement, and if so, will it continue in the future? Will net operating income after payment of operating expenses be sufficient to service the new or assumed debt?
- Identify Capital Needs:
What are the immediate and future capital requirements to maintain the housing to meet safety and sanitary standards, as well as to remain viable in the future marketplace? Are the capital needs substantial enough to suggest a resyndication strategy (i.e., applying for new 9 percent or 4 percent LIHTCs)?
PURCHASING A PROJECT
To purchase the project at the end of year 15, sponsors must develop a proposal and obtain approval from NEF, Inc. Purchase Proposal Components:
- Intended ongoing use of the project.
- Outstanding partnership debt, including its amount and nature and how to satisfy its payment or assumption.
- Proposed purchase price.
- Remaining cash assets.