CREA Edge - October 2018

CREA Edge - October 2018

EDGE Communications from the

Portfolio Management Frontline

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October 30, 2018

INVESTMENTS & THE TAX CUTS AND JOBS ACT

by: Kevin Kuruzar, Senior Vice President - Fund Management

immediately further investment in LIHTC. The other three changes continue to affect CREA’s portfolio in some fashion today. The change in the corporate tax rate was the headliner and had the most obvious and detrimental impact from an IRR perspective. Developers felt the immediate decrease in pricing and investors suffered significant hits to the IRRs of their existing portfolios. The reduced tax rates were quickly implemented in CREA’s models and new IRRs were calculated for CREA’s investor portfolio by January 2018, with updated IRRs included in quarterly reports published in March 2018. Federal LIHTC investors experienced detrimental results of ceased Yorktown Continental is an existing senior development, originally constructed in 1973, that was rehabilitated in Edina, Minnesota, Yorktown consists of 264 total units in a 12-story high rise, featuring an open common area, cafe and exterior gazebo and gardening area. Of the total units, 262 are one-bedroom, and two are two-bedroom units. All units have one bathroom. PROPERTY HIGHLIGHT: YORKTOWN CONTINENTAL

varying degrees across the board. However, state-only LIHTC investors experienced increased yields due to the inverse relationship between the value of state tax credits and the federal income tax rate. The interest deduction limitation and its impact on depreciation was somewhat lost in the shuffle as investors first and foremost wanted to know the impact of the new tax rate. After the dust settled and we approached midyear, CREA confirmed our interpretation of the new interest limitation rules with other industry experts and came to a consensus of exactly how the future projections of eachof our investments

The Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. Three primary impacts to the LIHTC industry were the reduction in the effective corporate tax rate, the interest deduction limitation and its impact on real property depreciation, and the implementation of 100% bonus depreciation on sitework and personal property assets. A fourth change, the Base Erosion and Anti- Abuse Tax (“BEAT”), affected some large multinational corporations that are LIHTC investors, reducing their appetite for tax credits and tax losses. The BEAT impact to CREA was simply that some investors with foreign investments and operations

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ON THE LOOKOUT

EMPLOYEE SPOTLIGHT: BROOKE SOLIS

by: Ben Riesmeyer , Asset Manager

Being an Asset Manager requires diligence inmanydifferentdisciplines. From physical inspections to financial reporting an Asset Manager may have to wear several different hats. That being said, sometimes we have to break out of our traditional work routine and monitor things that we can’t control or foresee.

Brooke Solis, Senior Vice President – Asset Management, oversees all aspects of Asset Management. Brooke has been active in the affordable housing industry for 16 years, beginning her career in 2002 with Dauby O’Connor & Zaleski, LLC before serving as Senior Accountant for a company that owned a portfolio of assisted living facilities.

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P2, P3 TCJA AND INVESTMENTS, CONT P2, P3 ON THE LOOKOUT P4 PROPERTY SPOTLIGHT

P5 MEET OUR TEAM P6, P7 EMPLOYEE SPOTLIGHT P8 AWARDS & KUDOS

P8 REPORTING DEADLINES P8 GOOD TO KNOW

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INVESTMENTS & THE TAX CUTS AND JOBS ACT, CONTINUED

depreciation was 50% of these assets. Just as impactful to the industry is that bonus depreciation is now available for acquired property for the first time, also at 100%. This has magnified the industry’s focus on utilizing cost segregation studies to support higher allocations of acquisition and development costs to sitework and personal property to maximize immediate deductions. CREA is feeling this impact on the pre-closing side as we structure new investments. Portfolio Management has been heavily involved in the pre-closing projections of bonus depreciation and tracking how we intend to support our allocations and which properties will have cost segregation studies performed. Florence had a devastating direct impact on North Carolina and significantly impacted Abbington Oaks, one of our transactions with Rea Ventures in Wilmington. In situations such as these we rely on the diligence of our local general partners and management agents to communicate the damage andworkwith us to create a plan of action. Abbington Oaks mostly suffered from wind damage to siding, as well as interior flooding and water damage from heavy rain. The local General Partner provided us with pictures and numerous updates as the hurricane impacted the area. At this point, our Asset Management team worked with the Syndications north as Maine, as far south as Florida, and as far west as Wisconsin.

The change in the tax rate was the most impactful to investors yet was the easiest aspect of tax reform to implement in projections, update IRRs, and assess across the portfolio.

be sharing projections of personal property and sitework allocations and assumptions we have made about bonus depreciation, as well as how we believe the allocations can

would need to be altered. Almost every partnership is faced with a choice to either accept a reduction in allowable interest deductions or extend depreciation on real property to a longer life. From an IRR perspective, either choice is adverse compared to the old rules and it is a matter of choosing the lesser evil. Making broad generalizations of whether one choice over another across entire funds or the portfolio is not prudent. It was, and will continue to be, necessary to evaluate each property-level projection individually to determine the best course of action. CREA has updated the projections for every partnership and is making the election that maximizes IRR. Investors were shown these Natural disasters impact our nation in many different ways. As a national syndicator, CREA has transactions in 47 states, and our Asset Management team must be aware of increased risk of occurences around the country. Our monitoring of natural disasters starts with identifying an event that could potentially impact transactions in the portfolio, and lasts all the way through restoration. In my time as the storm chaser, or point person for tracking these events, I have encountered wild fires, mudslides, hurricanes, tornadoes and floods. When we identify a natural disaster that may impact the CREA portfolio, we use a mapping software to compare the projected path of

resulting decreases in actual IRR for the first time within quarterly reports issued in September 2018. Developers may not feel the impact on deals closed prior to 2018, but it is affecting yields and perhaps pricing going forward. CREA continues to monitor all existing investments and is on the alert for any clarifying guidance to be issued by the IRS. The current interpretation is that electing out of the interest limitation results in reverting from 27.5-year depreciable life on real property to the Alternative Depreciation System’s (“ADS”) life as dictated by the year the real property was placed in service. This means that all real property placed in service prior to 2018 has reverted to a 40- year depreciable life in our portfolio the disaster to the locations of our transactions. Using this method, we are able to identify properties that are at risk. Properties can be either directly or indirectly affected by the event. Direct impact refers to the properties in the path of the event, such as properties within the fire perimeter or in the path the fire or storm may travel. Indirect impact refers to properties that may be affected by residual damage, such as flooding from hurricane related storms or smoke damage from a fire. Tracking the natural disaster is the easy part. The hard part is when a transaction in the portfolio is impacted by an event. Thankfully, our stellar team at CREA and developer relationships

projections if that was deemed more advantageous than significant loss of interest deductions. CREA’s hope is the IRS issues clarifying guidance that states real property placed in service prior to 2018 is exempt from using the ADS life, or that the required ADS life shall be 30 years which is the new ADS life for assets placed in service after 2017. The third major change is the only one that is potentially beneficial for federal LIHTC investor IRRs. Immediate expensing of 100% of rehab/newconstructionsiteworkand personal property is now available for all deals where the construction contract was signed after September 27, 2017. The previous bonus

Ironically, it is the other two less- impactful aspects of tax reform that have required s i g n i f i c a n t time and effort from Portfolio M a n a g e m e n t .

be supported. We will be providing cost segregation studies if we have them or pointing out that the general partner is obligated to provide them if

“CREA continues to monitor all existing investments and is on alert for any clarifying guidance to be issued by the IRS.”

We will be communicating with all lower-tier accountants prior to the upcoming tax season to indicate to them whether we expect to elect out of the interest deduction limitation or whether we intend to accept the ADS life on real property instead. We will team to notify the investors about the damage and update the investors as to remedies and repairs. A few weeks after the damage occurred, another member of the Asset Management team made the trip down to Wilmington, NC to see the progress since the impact of Florence. Upon arrival, the CREA team witnessed all the work done only within one month of Florence. Demolition of the damaged units had occurred, mold remediation completed and all that remained was drywall and flooring installation. From learning of a potential storm to confirmation of damage through the repairs and restoration process, natural disasters can have a huge impact. As Asset Management, it is

that is the case. We will be doing this not just for the upcoming 2018 tax season, but for the next several years. We feel this is the way to ensure we are optimizing investment benefits and acting in the best interests of our investors. our responsibility to ensure things are back to normal, and there is no adverse impact on the investment. Relying on technology, the steadfast attention of our team and our partners, we have created a system that helps us be aware of natural disasters and their impact. While we won’t ever be able to stop them, we can do our best to identify their impact and implement a process to quickly remedy their impact.

ON THE LOOKOUT WITH BEN RIESMEYER, CONTINUED

help our transactions recover, even when the worst happens. *Ben is a real person. But, this picture is not. It’s just a representation of our imagination. In late August and early September of 2018HurricaneFlorencewreakedhavoc on the United States. Initial impact was felt in North & South Carolina, with flooding and inclement weather as far

BEFORE

AFTER

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MEET OUR MOST RECENT NEW HIRES!

PROPERTY SPOTLIGHT: YORKTOWN CONTINENTAL, CONTINUED

Edina is located 11 miles southwest of Minneapolis, in a thriving community with a strong demand for affordable housing. With its easy access to the Minneapolis-St. Paul metro area, Yorktown residents benefit from a diverse economy that includes Fortune 500 companies and convenience to nearby retail, educational facilities and key recreational parks.

unique offerings and experiences for residents, including: • Monday-Friday, a non-profit cooks for and offers lunch for a donation (if able) to residents. • A community garden (pictured below) is avalable to residents to grow vegetables. • Organized by another non-profit, buses pick up residents and take them to nearby shopping every Friday. • Residents pay it forward by

ranks at a national syndicator, from senior accountant to Director of Tax Accounting. His main responsibilities revolved around tax-related issues for the firm’s entire portfolio of lower-tier entities and funds. Joining CREA ‘s Sarasota office, Frank serves as VP, Fund Management. Outside of work, Frank enjoys working on cars, bowling, being outdoors, and spending time with his wife, 1-year old twins, Frank and Lauren, family and friends.

furniture pieces and give them a new life, frequenting Goodwill and garage sales to find treasures.

PROPERTY QUICK FACTS Location : Edina, MN Units : 264 Construction : Rehab in Place Resident : Family

Carrie Daniel, VP - Asset Management

Carrie graduated from Indiana State University in 2008 with a degree in Accounting and Business Administration. Her career began at Dauby O’Connor & Zaleski, LLC (DOZ). After almost 10 years in public accounting, Carrie decided it was time to see the other side of affordable housing and joined the CREA Asset Management team in June 2018. Carrie and her husband, Steve, reside with their son, Aaron, in Fishers, Indiana. When she’s not chasing her toddler around, she enjoys spending time with family and friends, watching sports and catching up on shows/movies that aren’t related to Mickey Mouse.

Community : Suburban Developer : Yorktown Developer, LLC

Omar Rosas, Fund Analyst

organizing an auction of donated items each fall and raise money to donate to a charity of their choosing.

Omar began his professional career working for State Farm while attending UNLV full-time. After graduating with a Bachelor of Science degree in Finance, he relocated to Indianapolis, Indiana where he worked as a Private Client Banker at JP Morgan Chase Bank. During this time, Omar was also enrolled in the Master of Science in Accounting program at the IU Kelley School of Business and interned at Dauby O’Connor & Zaleski, where he was first introduced to the affordable housing industry. Upon completion of his internship, Omar joined CREA as a Fund Analyst and earned his master’s degree that same summer. Omar enjoys backpacking through National Parks and has set out to hike through a newone each year in hopes of visiting all the North American National Parks before retirement.

Yorktown Continental also has

Katelyn Neary, Asset Manager

Katelyn Neary graduated from Ball State University with a Master’s degree concentrated in Residential Property Management. She has been involved in real estate for five years, most recently working as a Portfolio Analyst at Herman & Kittle (local Indianapolis affordable housing developer). Katelyn has a passion for affordable housing and enjoys volunteering her time to bring awareness to those in need, especially within the Indianapolis community. She currently serves on the board for Habitat for Humanity of Hamilton County. In her free time, she enjoys investigating with her Persian cat, Columbo (named after the tv detective Peter Falk). She loves a good football game (college or NFL), but prefers when the Colts win! She also likes to restore old

Frank Lewis Jr, VP - Fund Management

Originally from the west coast of Florida, Frank attended the University of Central Florida, where he earned a degree in accounting. Frank got his start in the LIHTC industry in 2008, working for a small public accounting firm in South Carolina that specialized in affordable housing. After six years, Frank and his wife, Brooke, decided to make the move back to Florida to be close to family. Back in Florida, Frank worked his way up the

Find our full team online here.

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know their deals intimately, but occasionally an issue arises that requires significant time to reach resolution. In these instances, whether it’s litigation or a troubled asset, our AM group is able to transition the property to Special Assets who specializes in problem resolution and has the ability to dedicate significant time to one asset. The asset manager is then able to continue to provide quality service to their assigned portfolio. Every month, we meet and review our portfolio and discuss any assets that are ready to transition into or out of Special Assets. We go over the Special Assets transactions as a company in detail so that Asset Managers can easily follow the progress of their transaction. Once an asset is ready to transfer back tous, the Asset Manager will meet with Special Assets to go over any updates, final solutions and be brought up to speed on all aspects of the transaction. You’ve been with CREA for 8 years. What was and is the draw to CREA for you? What is your favorite thing about working here? Initially I was drawn to CREA because of a friend of mine, who had a very similar work experience and background, worked at CREA and always spoke so highly of it. Today, I love working at CREA because of the people, growth and challenge. The people at CREA are passionate, intelligent, driven but laid back, and also know how to make work fun. As I have matured in my role at CREA, the types of daily challenges and learning experiences presented have continued to evolve and keep me engaged. CREA is growing and it’s been amazing to be

a part of this ride. I am excited to see what the future holds! When you aren’t busy working, what do you enjoy doing? My kids are 9 and 11, so my husband and I are enjoying this busy phase of our lives filled with their activities such as football, basketball, cheerleading and piano, to name a few. We know the time we have with them is short so the last few years we have been focusing on traveling and creating fun family experiences with our kids. We also have a 5-month-old Goldendoodle puppy named Oreo who has captured our hearts. My husband and I are also very involved with

EMPLOYEE

SPOTLIGHT:

BROOKE

SOLIS,

CONTINUED

in recent years? We are fortunate that technology and CREA are both growing quickly. As our portfolio grows, we have made it a priority to constantly reevaluate and refine our processes to create efficiencies. We are currently working with our IT group to automate processes that we have historically performed manually. A big process we are working on right now is utilizing robots and automation to improve our processes around first year tenant file management, lease- up, initial tenant file qualification, and credit delivery. We are working with our online >Page 1 Page 2-3 Page 4-5 Page 6-7 Page 8

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