lis 217 stemming the tide - LISC

pounded and accruing. In many cases thesenotes will consume a substantial portion of thecash proceeds realized on sale, reducing theamount available to cover the seller's exit taxliability. The amount due may even exceed theresidual equity value of the property.Transaction Impact. In cases with substantialsecondary debt, the note holder (though notusually present at the negotiating table) may bethe party actually driving the conversion, sale,or refinancing transaction. The note holder maybe able to force a market-rate conversion to satisfythe value of the note, or block the transactionby threatening foreclosure. At same time,an owner whose equity is substantially wipedout by secondary financing obligations has littleincentive to move the transaction forward.Often transactions involving large amounts ofsecondary debt become paralyzed until theinterests can be renegotiated.Public Note Holders. A public agency that holdssecondary debt on a subsidized property maybe in a position to help facilitate a preservationtransaction. For example, the public lender maybe willing to forego or defer repayment if theproject continues as affordable housing, or torecycle the funds back into the deal for apreservation purchaser.Cash FlowCash flow—the bottom line—is an importantindicator of the overall health of the propertyand may provide clues to the owner's motivations.How has the property performed historically—i.e.,over the past three years? Has cashflow been distributed to investors? Has cashflow exceeded the applicable dividend restrictions,leading to the accumulation of ResidualReceipts? (See Regulatory.)Reserve BalancesThese highly regulated, sometimes large, cashaccounts can affect an owner's motivation toconvert or sell and can be an important factor inprice negotiations.Residual Receipts. What is the account balance,and who gets the funds if the property is refinancedand/or the subsidy contract terminates?(see Regulatory) If Residual Receipts in a subsidizedproperty are substantial and will belongto the owner, there could be a high conversionrisk. If Residual Receipts are low or if they willrevert to HUD or the HFA, there is usually lessincentive to convert.Replacement Reserves. What is the account balance?These funds ultimately belong to theowner, so if they are substantial, there could bea higher conversion risk. If the property is sold,the buyer should probably expect to purchasethe Replacement Reserves, unless the seller isunsophisticated or unusually cooperative.Operating CostsA good understanding of project operating costs(historical and projected) is necessary for estimatingthe value of the property, assessing thefeasibility of a purchase, and anticipating futureoperating requirements.Historical. How much has it cost to operate theproperty over the past 3 years? How do thesecosts compare with the expenses of similarproperties?Projected. How much will it cost to operate theproperty under new, preservation-oriented ownership?Which budget line-items can be trendedfrom actual operating experience? Which lineitemsare likely to change? For example:• Utilities should be adjusted for proposedenergy efficiency improvements and/or conversionof systems.• Maintenance costs should reflect any operatingefficiencies associated with proposed renovations,as well changes in on-site staffingand contracting arrangements due to newownership and management.• Taxes and insurance may need to be adjustedbased on the new purchase price.• Management fee may be different under anew management company.• Services like security or tenant services maybe increased, decreased, or provided differentlyunder new ownership.chapter four: Researching the Property: Towards a Preservation Strategy43