Transcript What Can Go Wrong: Some Trouble Signs

What Can Go Wrong:
Some Trouble Signs and How to
Address Them
by
Brad Elphick, CPA, Novogradac & Company LLP
Overview
 Danger Signals
 Consequences of Danger Signals
 Responding to Danger Signals
 The Players and Value over Time
Danger Signals
• Delays in Reporting
• Lower Rental Income
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Slow Lease-up
Lower Rental Rates
High Turnover Rates
High Vacancy Rates
Danger Signals
• Higher Operating Expenses
– Larger Operating Expenses
– Missing Operating Expenses
– Lower Operating Expenses?
• Balance Sheet Items
– Unexpected GP Loans or Capital Contributions
– Unidentified Accounts
• Suspense/Other/Unlocated Differences
– Large Payables and Accrued Expenses
Danger Signals
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Receiving Forms 8823
Poor Communication
Unavailable for Site Visits
Other Projects Have Problems
– The Rumor Mill
Consequences of Danger
Signals
• Slow Lease-Up
– Tax Credit Adjusters
• 1st Year
• Year 10 to 15
• State Tax Credit Delay
– Higher Interest Costs
• Delay in lower permanent loan rate
• Delay in LP take-out equity
• Tax-Exempt Bonds – Negative Arbitrage
– GP Loans / Capital Contributions
• Interest?
• Credit for Amounts Advanced?
Consequences of Danger
Signals
• Negative Cash Flow
– Overall Financial Viability
• Cash Shortfall Funding
• State Mandated Lower Rents?
– LIHC – Minimum Gain / 704(b) Issues
– Reviewing the Numbers
Consequences of Danger
Signals
• Negative Cash Flow (cont.)
– Reviewing the Numbers
– The Original Projections
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Basic Assumptions
Net Operating Income
Taxable Income/(Loss) and Credits
Minimum Gain Calculations
Consequences of Danger
Signals
• Negative Cash Flow (cont.)
– The Revised Projections
– The Income Tax Effect of the Negative Cash Flow
• Quicker to Negative Capital Accounts
• Larger GP Loans
• Minimum Gain Problems
Consequences of Danger
Signals
• Forms 8823
– Responding to State Housing Agencies
– Responding to the Internal Revenue Service
• Mail Notices
• Field Audits
Responding to Danger Signals
• What is Causing the Problem
– Real Estate Market?
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Location
New Competition
Changes in AMGI
Expense Cost Spikes
– Property Manager?
• Corporate
• Site Manager
Responding to Danger Signals
• What is Causing the Problem
– Construction
• Design Flaw
• Construction Flaw
Responding to Danger Signals
• The Players and Value over Time
– Who will lead the response?
• Developer/Asset Manager
• Equity Investor
• Lender
Conclusion
 Danger Signals
 Consequences of Danger Signals
 Responding to Danger Signals
 Additional Questions?
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