Care Advised in Using Qualified Contract Option With Year-15 Properties
By Caitlin Jones & A. J. Johnson
4 min read
Tax Credit Advisor May, 2006: As housing tax credit developers approach the end of their properties’ initial 15-year compliance period, they should be wary of requesting qualified contracts in order to opt out of extended use agreements, a panel of experts warned.
Qualified Contract Problems
A growing problem is that states have begun to impose onerous fees on developers who pursue qualified contracts, said Adam Galowitz of Boston-based Recapitalization Advisors. (See related sidebar.)
“For at least a half a dozen states, it can cost a quarter of million dollars or more just to navigate through the process,” said Galowitz. “This is a real inhibitor.”
Another issue is that the qualified contract process can leave a developer in limbo if a potential buyer fails to close on a transaction, said another panelist, Harold Berk of Orion Partners, which is based in Philadelphia.
“The problem is that there is there is no obligation for a potential buyer to close,” said Berk. “You can lose the opportunity to get out of the second 15 years just because somebody has made you an offer.”
Galowitz and Berk joined Pat Sheridan of Alexandria, Va.-based Volunteers of America on a panel that discussed Year-15 issues. The panel, entitled “Getting Your Ducks in A Row: Preparing for Year 15,” was held at the National Housing & Rehabilitation Association’s 2006 annual meeting held in March in Miami Beach, Fla.
In 1989, when Congress added the 15-year extended use period for properties that receive a housing tax credit allocation after that year, it also provided an exception to the rule – the qualified contract option.
This permits developers to ask their state allocation agency to identify a buyer willing to acquire the building at a qualified contract price. If a buyer cannot be found within a year, the extended use restrictions are waived. Extended use agreements preserve the affordability of housing units established during the initial 15-year Low Income Housing Tax Credit (LIHTC) compliance period.
Due Diligence in Selling Mature Properties
The panelists urged developers not to let the difficulties of the qualified contract process become a distraction from the larger issue of how to sell or refinance post Year-15 properties.
Galowitz noted that even if a post Year-15 property includes extended use restrictions, it is more attractive to prospective buyers than during the initial 15-year credit compliance period because it is no longer subject to LIHTC recapture.
“The good news is that the techniques and issues that are going to be applicable to Y-15 are similar to the kinds of things that we have seen in affordable housing renewal programs rolling off for some time now,” said Galowitz.
He said that property owners must scrutinize partnership and limited partnership arrangements and investor inclinations, as well as the characteristics of the assets themselves.
“You have to ask yourself if the existing participants represent a fully functioning and coherent team,” Galowitz said. “Who has the ability to stop you from going forward with your transaction?” he asked. “It might be a partner, it might be a lender, it might be a subordinate lender you haven’t heard from in years: the question is how much discretion you really have.”
Galowitz noted that although general partners control the day-to-day operations of a property, they do not have the right to sell a property or refinance a loan funding the property without the consent of limited partners.
Berk said that principals in the old deal must also take care not to have more than a 10 percent interest in any new partnership arrangement. Related party acquisition credit rules limit an old deal partner to less than 10 percent of cash flow, sale and refinancing proceeds. “This is a common mistake,” he said.
A Buyer of Year-15 Properties Weighs In
As a buyer of post-Year 15 properties, Volunteers of America has a checklist of requirements in mind when it considers the growing inventory of these projects, said Sheridan.
One of those requirements is that there is agreement between general and limited partners on terms of the sale. “We want to see that there is enough money for the owners to justify them getting out of the deal, and that limited partners are satisfied,” he said. “Otherwise you can face a long negotiation process.”
He said that VOA also insists on construction contingencies of at least 10 percent, particularly on acquisition-rehabs. A construction contingency is a set percentage of the construction contract budgeted for unforeseen building or design problems identified after construction has begun. A tenant relocation plan is another “huge,” issue, Sheridan said.
“There has to be money set aside for it,” he said.
