Strategies for Investor Exits

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5 min read

Preparing for the end of the credit period

As a developer, you know that the best time to think about what could happen with a particular LIHTC property at the end of the tax credit compliance period was when you negotiated the investment documents.

But, back then, it may have seemed like the odds were in your favor. Maybe your tax credit investor was offering you $1.05 per dollar of credit and a quicker burn off on your guaranty. Maybe you were anticipating earning a sizable developer’s fee. Maybe you were already dreaming about the closing dinner (paid for by your investor) and, of course, your retirement after you bought out the investor for next to nothing or sold the properties for a bundle just as you turned 60! There was no way that bad news was around the corner.

Unfortunately, that was then and this is now. Year 15 is approaching and you are realizing it may not be as easy as you expected to get what you want. You need a strategy and there are two important places to start:  First, determine your desired outcome. Are you looking to sell or are you just trying to disassociate yourself from your investor? Can the project be re-syndicated? Second, know how your investment or loan documents affect your ability to act unilaterally. How you approach your investor is dependent on the language, or lack of language, in your partnership agreement. When you look at your investment documents, ask yourself the following questions:

  • Can the investor really force a sale or is it just that you cannot sell without limited partner (LP) consent?
  • Can you refinance? Who gets the proceeds?
  • Are there any provisions about third-party offers?
  • Are there ways to reduce the LP’s capital account?

Now, eyes wide open and ears full of Year 15, you are combing through closing binders and thousands of pages of partnership documents. A number of your properties are nearing the end of the ten year credit period. More still are between Years 11 and 14. You have only a few investors, all national players. The investment documents are surprisingly similar and the results disheartening. In some agreements, you have no purchase option to buy the investor’s interest. In others, you do not have the authority to sell any property except with the LP’s consent. In yet a third set of agreements, a sale is permitted, but the LP gets “capital back” plus “exit taxes.” What you thought was an 85/15 split is more like 50/50 once capital accounts are balanced in a liquidation. And, you have agreements which include a “forced sale” provision where your investor can dictate if and when a sale will be pursued.

Retirement seems further away and you find it deeply troubling that the investor, who already received what it was most interested in (the tax credits), still has the upper-hand. What can you do about it?

Focus on the forest, not the trees. Instead of searching for solutions property-by-property, break down your portfolio into investor groups and think of each investor group as an opportunity for a coordinated solution. Even within investor groupings, there are multiple options.  For some properties in your portfolio, the best approach may be a re-syndication. This may seem like a “kick the can down the road” solution, but, in reality, working with your investor may result in more favorable “exit” language for the re-syndicated development. For other properties, the solution may be a property sale, a refinance, or a buyout of the LP’s interest in the partnership.

Do your homework. When you go to your investor, you should know what your agreements allow you to do and what the result of those actions could be. You should know what happens with transaction proceeds on a sale, property-by-property, at full market value and have a full analysis of each property’s capital needs. Contrast the sales analysis with a review of your refinancing language and waterfall. Can you create proceeds sufficient to both pay the investor its required share under the LPA and in addition enough to buy its interest? Refinancing takes advantage of a low interest rate environment and can generate more proceeds, but comes with potential hurdles as well. You must consider whether your debt instruments allow for prepayment or if you are “locked out.” Once you have surveyed possible outcomes, you will be ready to narrow that list down to the options that work for you.

Know what you want. When you are ready to go to your investor, have a plan and an ask. Write down what you want, or wish you had, and negotiate towards it. Some of the most successful dispositions evolve.  Start small and let the deal grow, especially with syndicators that are invested in more than a couple of your properties. Pick a property with a high potential to raise refinancing proceeds or an easy-to-execute sale to find out if the existence of un-earmarked liquidity might lead to a broader discussion of your portfolio.

Remember that your investor is your partner. When you approach the LP with your plan, treat the investor like the partner they are, rather than an adversary. Just as the terms of your documents are critical to your options, so too is your investor’s reaction to your plan. Try to anticipate, and address, what they want out of the deal.  But, be flexible: absorb information gathered from an investor’s critique of your plan and switch gears if necessary. Eventually, investors want to exit deals too and most try hard to get to “yes” with their developers. You may not have complete control under your existing documents but you have greater chances of reaching a result that works for you if you have a long-term vision for your portfolio and can articulate the role your investor can play in it. Strong relationships are crucial to success in this industry. Both you and your investors have an interest in protecting yours.

For over 35 years, John has concentrated his practice in the development of real estate projects. While his clients have come from a broad range of diverse industries, most of John’s day-to-day representation involves housing. John’s clients have built, owned and/or managed hundreds of thousands of multi-family housing units, including housing for the men and women who serve in our armed forces. John has extensive experience in complicated financing structures including syndication of State and Federal Low Income Housing Tax Credits, State and Federal Historic Credits, New Market Tax Credits, Brownfields Credits, energy-related credits and other state credits. Working with owners, lenders investors, industry groups, as well as municipal, state, federal, governmental and regulatory agencies to obtain approvals and support for proposed developments, John’s skills and experience have earned him the reputation as a lawyer who “gets the deal done.” John currently serves on the Board of Directors of Preservation Massachusetts and the National Housing & Rehabilitation Association (NH&RA). He assisted in drafting laws and regulations dealing with affordable housing properties to better facilitate the advancement of his clients’ projects, including the preservation law, enacted in 2009, in the Commonwealth of Massachusetts (Chapter 40T – An Act Preserving Publicly-Assisted Affordable Housing). John continues to serve on the advisory committee which provides advice and recommendations relative to the implementation of Chapter 40T. He also serves, or has served, on the boards of a number of local community banks, hospitals and other social organizations.