lis 217 stemming the tide - LISC

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3. OWNERSHIPThe owner of a HUD-assisted property is typicallya complex entity representing divergentinterests that must be reconciled before anydecision to convert, sell, or otherwise preservethe property can be made. Tax considerations,estate planning, and a variety of other issues inaddition to property economics can influencethe decision of the ownership entity.OWNERSHIP ISSUES AT A GLANCEIssueLegal StructureManagement StructureOwner MotivationTax ConsiderationsRegulatory StatusBusiness PlanPersonal FactorsLocal LeverageImplications for Preservation StrategyDefines participants in ownership entity and their relationships.Defines respective rights and interests of participants in ownership entity.May be influenced by purpose of owner’s original investment in the housing.Taxes due on sale or under continued ownership can affect owner decisions; mayrequire mitigation strategies."HUD fatigue" or regulatory compliance issues can affect owner motivation.Useful information for predicting owner behavior.Useful information for predicting owner behavior.Useful information for influencing owner behavior.Legal StructureWhat is the legal form of ownership? Most subsidizedproperties are owned by limited partnershipsconsisting of one or more general partners(GPs) and any number of limited partners(LPs). The GPs are the principals who put thedeal together and control most of the decisions;typically one is designated as the managinggeneral partner (MGP). The LPs are investorswho bought equity shares and contributed capital(syndication proceeds) to the partnership inexchange for tax benefits. These parties havedifferent and often conflicting interests thatmust be reconciled in any transaction.A common ownership arrangement for subsidizedproperties developed or transferred duringthe past 20 years is the two-tiered limitedpartnership. The upper tier is an investmentpartnership formed by a syndicator in order toraise pooled equity capital for multiple projects.This may be a public fund involving thousandsof individual investors, or a private syndication.The lower tier is the project partnership involvingone or more local GPs. The upper tier investmentpartnership is the LP of the lower tier projectpartnership. An affiliate of the syndicatormay serve as a GP in the lower tier as well.While the partnership entity typically has title tojust the single asset, the principals may or maynot have additional holdings. Subsidized housingproperty owners range from actual singleprojectowners, to regional companies with adozen projects, to large national real estateoperators with tens of thousands of units.38Management StructureContractual Authority. Who makes decisions forthe property? In most cases, prospective buyerswill work with the MGP, who controls the dayto-daybusiness operations of the partnership.But even in partnerships where the GPs havesubstantial contractual authority, they are conchapterfour: Researching the Property: Towards a Preservation Strategy34
strained by their fiduciary duty to the LPs (consistentwith the partnership purpose and applicablelaws), so it's important to know somethingabout the LPs as well.Typically, the consent of a majority of LP interestsis required for significant decisions, suchas sale or refinancing. In a two-tiered partnership,that means consent of the upper tier partnership,which is the limited partner. A simplemarket rate conversion with no refinancing typicallyrequires no investor consent.Economic Benefits. Who gets what if the propertyis converted or sold? In a typical partnership, theGPs get 50 percent or more of the residuals fromsale or refinancing—but the LPs pay most of theexit taxes due on sale (see below) since theyhave received most of the tax benefits. And theLPs may get 50-90 percent of the cash flow afterthe 20th year, which could be significant if theproperty converts to market rate. Thus, the GPsand LPs may have conflicting interests regardingthe disposition of the property. In a two-tieredpartnership, this web of interests is even morecomplex since profits and losses are pooledacross all the projects in the fund—which meansthe fate of one project may be determined, inpart, by available options for the others.Owner MotivationWhat are the owners looking for? If they arewilling to sell, do they expect significant equityreturns or just enough cash to cover their exittaxes? What is the timing of their cash needs?Are they in a hurry or can they wait? If the GPhas a significant development deal pending, orthe LP is driven by year-end tax considerations,the seller may need to close before a nonprofitpurchaser can raise the necessary funds.Even if detailed information is lacking, a few keyfacts about the ownership history and principalscan provide important clues. In terms ofmotivation, most subsidized housing ownersfall into one or more of the following categories:Original Owners. These properties are still heldby their original owner, typically an aging localbuilder or developer who was involved with theoriginal construction. Often these owners havebought out, or are in the process of buying out,their limited partners, and partnership decisionmakingis now relatively simple. The familybusiness may be passing on to a new generation.After 20-plus years, these owners mayhave nostalgic attachments to their propertiesas well as a sense of economic entitlement thatmust be addressed. Personal and political considerationsfor this group tend to be important.Tax-Motivated Purchasers. These propertieswere bought and resyndicated prior to federaltax reform in 1986. The owners' anticipated taxbenefits never materialized, and the propertiestypically suffer from deferred maintenance dueto a lack of ongoing investment. The ownerstend to be large national operators. These ownersare often eager to sell, but their exit taxesmay exceed the available cash proceeds, especiallyif there are secondary note holders. (SeeFinancial.)Conversion-Motivated Purchasers. These propertieswere purchased more recently in anticipationof prepayment and/or market-rate conversion.The owners may have invested substantialcash in anticipation of future equity gains. Theymay have little interest or experience in subsidizedhousing or in the housing business generally.Some recent large-scale transactions inwhich entire subsidized housing portfoliosinvolving thousands of units were bought outby large non-housing conglomerates and thenquickly put on the auction block for resale mayfall into this category.Affiliated Management Companies. In additionto other motivations, many owners who alsomanage their properties value their managementfee interests beyond the dollar amount ofthe contract, especially if it is a family businessor an extensive operation. Where there is identityof interest management, owners are oftenreluctant to sell—unless they can keep managementas part of the transaction.Tax ConsiderationsAn owner's decision to prepay, convert, refinance,or sell may be driven by tax considerationsas much as cash benefits. The major taxissues affecting subsidized properties are asfollows:35 chapter four: Researching the Property: Towards a Preservation Strategy39
Page 1 and 2: LOCAL INITIATIVES SUPPORT CORPORATI
Page 3 and 4: STEMMING THE TIDEA Handbook on Pres
Page 5 and 6: CONTENTSIntroductioniChapter One 1S
Page 7 and 8: chapter oneSubsidized Housing Prese
Page 9 and 10: payments where the project would co
Page 11 and 12: The reaction to HUD's proposal was
Page 13 and 14: In addition, there are special rule
Page 15 and 16: Over the past few years, new federa
Page 17: tions. However, the nonprofit purch
Page 20 and 21: may construe the IRP as an "old and
Page 22 and 23: owner converts to non-rental use or
Page 24 and 25: 6. MARK-TO-MARKET INCENTIVESHUD/OMH
Page 26 and 27: PROFORMA 4: NONPROFIT PURCHASE WITH
Page 28 and 29: chapter threeState and Local Preser
Page 30 and 31: after refusing to accept the housin
Page 32 and 33: Owner Assessments. Assessment of th
Page 34 and 35: StrategiesAdvocates brought the own
Page 36 and 37: 3. STATE AND LOCAL FUNDING INITIATI
Page 38 and 39: chapter fourResearching the Propert
Page 40 and 41: insured projects, this date is 20 y
Page 42 and 43: 2. MARKETUltimately, the conversion
Page 46 and 47: Phantom Income. If the property is
Page 48 and 49: 4. FINANCIALProject finances will a
Page 50 and 51: FINANCIAL INFORMATION SOURCESProjec
Page 52 and 53: Most HUD-subsidized properties have
Page 54 and 55: Social IssuesWhat is the nature and
Page 57 and 58: EXHIBIT 3OPT OUT SUMMARYSTATETexasO
Page 59 and 60: EXHIBIT 4OMHAR PAE and Assigned Pro
Page 61 and 62: Total Units Assisted Units Program
Page 63 and 64: EXHIBIT 8OPT OUT STATISTICS BY STAT
Page 65 and 66: Owner Phone Agent Name Agent Addres
Page 67 and 68: Amortized Principal Interest Rate H
Page 69 and 70: Intermediary TechnicalAssistance Gr
Page 71 and 72: Tenant-Based Section 8. Rentalassis
Page 73 and 74: 16 For background on the IRP subsid
Page 75 and 76: iographiesEmily P. Achtenberg is a

lis 217 stemming the tide - LISC

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