LSV has been pretty busy putting this fiscal year to bed, so I am a day late (and maybe a dollar short). But hey, this is the public feed. Ending this month on a bit of a lighter note.
On The Desk . . .
In the course of reviewing a fairly complex new construction deal that involves some public housing redevelopment, an aggressive and somewhat onerous (for the investor) exit arrangement is being negotiated. For obvious reasons, I can’t get into the details. But for now, let’s just say the usual hot buttons around how the property or the limited partner’s interest gets valued, the concept of fair market value and what the tax consequences of the disposition will be are all on the table.
When people ask what practicing law is like, I answer that it is kind of a combination of architecture, engineering and, occasionally, philosophy. Donning my philosopher’s hat, I want to step back a bit from the tax technicalities as well as the optics of dealing with a housing authority and a non-profit partner. I think everyone in the industry understands those dynamics at this point. And I am also leaving aside the well-known “aggregator” issue. Those are not the investors I am referring to here. But philosophically, what are LIHTC investments at their core? And who gets to decide? What gets lost in the public policy concerns is that most large, regular investors view LIHTC investments generally as true equity investments in real estate projects made through a partnership structure with the concomitant risks and benefits to that type of investments. These are not bonds (an oft-cited comparison) even if they economically perform like that. Nor are these investments grants, loans or even “purchases” of tax credits. They are equity capital. The “private” part of the much bruited public-private partnership model of LIHTC investments.
For a partnership to exist in the first place under federal tax law, one attribute that must be present is the meaningful potential for some upside value (beyond the credits themselves). Economically, once you start to strip away sharing in upside value as part of the original negotiation, you may place some unnecessary stress on the position that the investor is investing in a true partnership. In my view, a passive investor should not be asked to take on that sort of unnecessary tax risk upfront.
Drafting agreements to ignore or greatly minimize important general tax principles like liquidation provisions, capital accounts and fair market value actually may place the tax ownership of the investor’s partnership interest itself in some jeopardy. In other words, does the investor really own anything of substance here if all of the back-end value has been stripped away? The stronger the set of restrictions on how an interest is to be valued and what can be realized, the more the investor’s tax ownership of the interest may be eroded. Again, it is not appropriate for an institutional investor to be expected to take on this sort of tax risk as a matter of course for what amounts to no additional upside.
I realize these may not be popular views. And I have not researched this possibility of a tax ownership problem either (although I may). The industry seems to have arrived at a sort of uneasy ceasefire over some of the more contentious exit right issues. But investors stress about the back-end consequences at least as much as developers do even if the causes of that stress are different.
On The Horizon . . .
The Tax Relief for American Families and Workers Act is slowly crawling through Congress, and just passed the House last night. A very cynical wise professor once told me that it is helpfully instructive to ignore the title of a law as that is just a diversion from the main event in the legislation. All snickering aside, there is a little bit of truth to that. It faces a tougher path in the Senate since it requires 60 votes because of some of procedural requirements being used to push this package through faster than usual. But for our purposes, the bill does contain an expansion of the total credit amount (restoring the 12.5% increase of the state credit ceiling) as well as lowering the bond-financed threshold from 50% to 30%. Both wise market-expanding changes that will bring more equity into the market and allow more projects to get off the ground.
I had to chuckle the other day though when a counterpart suggested that we could somehow underwrite the anticipated decrease to the bond threshold in a current set of projections as a way to mitigate 50% test risk. That was a new one to me. I basically ignored that, but I had to applaud the effort.
Down Time
Listening To . . .
As a huge fan of The Allman Brothers Band, I am currently on a quest to find the most lively version of "In Memory of Elizabeth Reed.” Fellow travelers, read on. Fifty three years ago yesterday, this was the scene at the Fillmore West in San Francisco. The Fillmore East shows (and those Liz Reed numbers in particular) and the resulting live album get most of the attention, and rightly so. But so far, this version has it all. The original vision of the band at its musical peak in my view.
Another candidate brought to my attention by Bob Beatty at Long Live the ABB was the Stony Brook show from September 1971, about a month before Duane died. I am reconsidering my opinion above . . .
A personal favorite of mine will always be the forty-one minute epic from the at the Fox Theatre in 2004 with Warren Haynes and Derek Trucks at the helm. A much different sound . . .
Still wrestling with this.
Reading . . .
From the local library, I recently picked up The American Canon by Harold Bloom. A chronological walk through American literature from Emerson onward. A great survey of our leading literary lights by one of the nation’s most prolific critics. Bloom isn’t without controversy on a personal or professional level. But he knows this subject forward and backward. If you are looking for a book recommendation, Bloom catalogues some timeless selections. A few authors I had not thought about in quite some time, but merit further consideration.