CREA Edge - October 2018

EDGE Communications from the

Portfolio Management Frontline

PAGE 1

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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