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1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
1.4 Philip Porter
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1.4 Philip Porter

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  • 1. National Alliance to End Homelessness National Conference - July 2011 Philip Porter, Vice President of Acquisitions
  • 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. 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. 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. 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. &nbsp;
  • 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>
  • 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 &amp; 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>
  • 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 &amp; 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>
  • 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
  • 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>
  • 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 &amp; 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>
  • 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>
  • 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>
  • 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>
  • 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>

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