1.4 Philip Porter


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1.4 Philip Porter

  1. 1. National Alliance to End Homelessness National Conference - July 2011 Philip Porter, Vice President of Acquisitions
  2. 2. Highlights <ul><li>Tax credits and what can they finance </li></ul><ul><li>What motivates investors </li></ul><ul><li>Limited Partnerships </li></ul><ul><li>Equity Market Considerations </li></ul>
  3. 3. What is Enterprise All About? <ul><li>Community Development Organization providing Technical and Financial Assistance </li></ul><ul><ul><li>Enterprise Partners </li></ul></ul><ul><ul><ul><li>Native American Program </li></ul></ul></ul><ul><ul><ul><li>Green Communities </li></ul></ul></ul><ul><ul><li>Tax Credit Syndication </li></ul></ul><ul><ul><li>Structured Finance (New Markets Tax Credits) </li></ul></ul><ul><ul><li>Development </li></ul></ul><ul><ul><li>Multifamily Mortgage Finance </li></ul></ul><ul><ul><li>Community Loan Fund </li></ul></ul><ul><li>Invested over 10 billion in Equity, Loans, Grants to help develop 120,000 homes since 1982—now 1 billion annually </li></ul>
  4. 4. The Tax Credit Program <ul><li>A housing subsidy program for rental housing </li></ul><ul><li>Created in 1986 within Section 42 of the Internal Revenue Code </li></ul><ul><li>Administered by each state’s housing finance agency </li></ul><ul><li>Each state receives $2.10 per capita annually, indexed for inflation, in tax credits to allocate to projects, </li></ul><ul><li>Eligibility is based on tenant income </li></ul>
  5. 5. How Housing Tax Credits Work <ul><li>Rental units with tenants earning no more than 60% of area median income </li></ul><ul><li>Investors earn dollar-for-dollar credits against their federal tax liability </li></ul><ul><li>Investors also get tax benefits from losses </li></ul><ul><li>Generally, tax credits are received over the first 10 years of operation </li></ul><ul><li>Some tax credits are recaptured by the IRS if the project does not operate for 15 years </li></ul>
  6. 7. The General Partner <ul><li>The Sponsor/developer acts as General Partner (GP) </li></ul><ul><li>GP initiates project; often a Joint Venture </li></ul><ul><li>Applies for Tax Credits and obtains other funding </li></ul><ul><li>Oversees development team and construction </li></ul><ul><li>Oversees property management, supportive services </li></ul><ul><li>Maintains LIHTC compliance </li></ul><ul><li>GP receives fees for services performed: </li></ul><ul><ul><li>Developer Fee, Partnership Management Fee, Tenant Services Fee </li></ul></ul>
  7. 8. The Limited Partner <ul><li>The Investor/Syndicator acts as Limited Partner (LP) </li></ul><ul><li>LP provides equity ($$) in exchange for a 99.99% interest in the project </li></ul><ul><li>LP equity investment based upon Tax Benefits - Tax Credits & Tax Losses </li></ul><ul><li>Tax Losses come from </li></ul><ul><ul><ul><li>depreciation/amortization </li></ul></ul></ul><ul><ul><ul><li>mortgage interest paid or accrued </li></ul></ul></ul><ul><ul><ul><li>operating losses </li></ul></ul></ul><ul><li>Liability is limited to capital investment </li></ul>
  8. 9. What Motivates Investment? <ul><li>Regulation </li></ul><ul><ul><li>Government Sponsored Enterprise Charter - Past </li></ul></ul><ul><ul><li>Community Reinvestment Act – Past & Present </li></ul></ul><ul><li>After-Tax Return </li></ul><ul><ul><li>Declined from the 20% range in the early 90’s to a low of under 5% in 2006-2007 period. </li></ul></ul><ul><ul><li>Increased to 7-8% from 2007 through 2008 </li></ul></ul><ul><ul><li>Increased to 10-15% in 2009-2010 </li></ul></ul><ul><ul><li>Dropped back down to 5-7% in 2011 </li></ul></ul><ul><li>Mission </li></ul>
  9. 10. Low Income Housing Tax Credit Market <ul><li>Investor Market Illustration </li></ul>GSEs Yield 15% ^ ^ ^ ^ ^ ^ ^ 4% No Preference Required Geographic Preference due to CRA Banks Insurance Other Corporations
  10. 11. What Investors Want <ul><li>Investors want Yield with Low Relative Risk and Efficiency of Execution </li></ul><ul><li>Focus on what you most control: Minimize Risk </li></ul>
  11. 12. Investor’s View of Key Risks <ul><li>Real Estate </li></ul><ul><ul><li>Market – supply and effective demand </li></ul></ul><ul><ul><li>Marketability – location, amenities, features, rents </li></ul></ul><ul><ul><li>Operational Sustainability / Scale </li></ul></ul><ul><ul><li>Operating or Service Subsidies </li></ul></ul><ul><li>Development Team experience & financial capacity </li></ul><ul><ul><li>Sponsor / Guarantor </li></ul></ul><ul><ul><li>Consultants (financial, market, environmental) </li></ul></ul><ul><ul><li>Architect / Engineers </li></ul></ul><ul><ul><li>General Contractor </li></ul></ul><ul><ul><li>Property Manager </li></ul></ul>
  12. 13. Guarantees <ul><li>Completion and Lease-up: Unlimited </li></ul><ul><li>Operating Deficits: 6+ months of operating costs, replacement reserve contributions, and debt service for 5+ years </li></ul><ul><li>Tax Credit Adjusters: </li></ul><ul><ul><li>8609: Unlimited </li></ul></ul><ul><ul><li>Lease-up: Unlimited </li></ul></ul><ul><ul><li>Recapture: Varies, may be limited in amount or duration </li></ul></ul><ul><li>Repurchase: Unlimited </li></ul>
  13. 14. Guarantor Capacity <ul><li>Accountability follows Economics </li></ul><ul><li>Shell guarantees and limited corporate guarantees are out. Personal guarantees are in. </li></ul><ul><li>Rule of Thumb: $1MM Cash / Liquid Assets and $5MM Net Worth </li></ul><ul><li>Align the incentives and contracts amongst the team members – controls risk </li></ul>
  14. 15. Creating Your Team <ul><li>Are you deciding on Price? Quality? Schedule? </li></ul><ul><li>Are your partner prospects responsive, reasonable, and reliable? </li></ul><ul><li>Experience / Track record </li></ul><ul><li>Financial Capacity </li></ul><ul><li>Relationships and History </li></ul><ul><li>Staffing / Current Commitments </li></ul><ul><li>Can you imagine working through a difficult situation together? </li></ul><ul><li>Who contributes what to the partnership? </li></ul><ul><li>Are the roles and goals aligned for the period of partnership? </li></ul><ul><ul><li>Compensation </li></ul></ul><ul><ul><li>Liabilities </li></ul></ul><ul><li>Requests for Proposals, or Negotiated Outcomes </li></ul>
  15. 16. Selecting an Investor <ul><li>Know the company - determine why it is in the business and long term goals </li></ul><ul><li>Understand how it makes decisions and manages funds </li></ul><ul><li>Check references </li></ul><ul><li>Understand what “letter of interest” or “commitment” mean for each investor </li></ul><ul><li>Read the fine print and ask questions about investment process </li></ul><ul><li>Don’t focus on price alone. Consider terms as well as the likelihood of execution and the nature of the partnership </li></ul><ul><li>Don’t accept a blind bid – get a responsible party out to visit with you and see the site. </li></ul>