Apartment Equity/Sub-debt financing

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Posted by Robert on February 24, 2004 at 12:42:19:

I closed the first phase of a two phase purchase transaction in late December 2003. I acquired a limited partner interest in 6 low income housing tax credit (LIHTC) properties at year-end using a hybrid/tax-advantaged structure that will provide the underlying property with ad valorem tax abatement under state tax law. At receipt of tax abatement on each property in phase two, I am obligated to fund the remaining purchase of the limited partner interest in each partnership. This non-basis limited partnership interest receives the majority of cash flow on each property through the end of the tax credit period. Residual interest is complicated given the restrictions in the LIHTC program, although the limited partnership agreement does provide the non-tax credit limited partner with some preferred-distribution rights at sale. I expect confirmation of tax abatement from the respective taxing authorities on each property within 45 to 75 days (April through June 2004). Holding period will be in excess of 7 to 10 years.

The portfolio of properties is comprised of mid 1990’s constructed multifamily properties totaling 1,500 units in primary and secondary cities. I am the asset manager, fiduciary to the first lien mortgage holder and to the tax credit holder(s) in each partnership. In past deals, I have raised money as straight equity with preferred payments, splits and back-end residual interest. I have straight-equity quotes on this deal as well, but given the complexity of the LIHTC business, significant cash flow coverage and my liability exposure in each partnership, I would like to raise the money as sub-debt, amortize it off over the holding-period and keep the majority of back-end cash flow and residual. As such, I am looking to raise the $3.4 million needed for the funding of phase II through the issuance of a high-yield note secured by the interest received in each partnership.

Does anyone know of a funding program, company or other source that would be interested in this type of transaction? I have another 1,200 units under agreement for 2004 and would like to find a reputable and consistent source of sub-debt funding.

Thanks for your comments.

Robert

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