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 database company to create dashboards for our quarterly reporting processes to improve the qualityofourquarterlyreport reviews. We are also researching new site visit applications so that we can more efficiently and effectively conduct site visits and provide reporting while we are still out in the field. In 2019, we will be launching the presence of our first Asset Manager in a Regional office. Samantha Theising, Assistant Vice President in our Stabilization group is planning to move to our Portland office in early 2019. We are excited about this opportunity for our Asset Management team to be closer to our west-coast clients. CREA now has a separate Special Assets group. How does your asset management group collaborate with this group as the properties transition to and from SA and AM? The creation of the Special Assets group has played an important role in the ability for our restructure to be successful. Our Asset Managers
J o i n i n g CREA’s Asset Management department in 2010, Brooke started as
One of the biggest changes we have made is restructuring our department into Development and Stabilized groups. This has allowed our asset managers to focus on becoming experts in a specific area with a goal to better serve our clients. We have also formalized our annual compliance review process. We have created a new Compliance role within our Asset Management group. This person performs the annual tenant file compliance reviews for all of our properties that are less than 120 units. We then outsource the annual compliance review to our 3rd party consultant for our larger properties. We have spent the rest of our time identifying areas where we can create efficiencies or add value and have started working on several projects. How have these changes been received both by your team and your clients? We have been getting positive feedback from clients and our Acquisitions team members who work closely with our clients. Our new structure lines up closely with how many of our developer clients are structured. We are focused on improving communication internally and externally and the feedback we have received has all been positive. The CREA team members have also enjoyed the shift to Development and Stabilized groups. We were able to focus on each asset manager’s strengths and passion and line those up with their new roles.
an Asset Manager. As her career at CREA continued, she took on more responsibility by supervising staff, working on problem assets, creating policies, procedures and department efficiencies with a growing portfolio. Some of her major accomplishments include incorporating a variety of improvements inCREA’s drawprocess, implementing Asset Management worksheets into the post-closing models, policies and procedures such as Audit and Tax Return Procedures, Expected Cash Flow Distributions, standardized reporting and revamping of the lower-tier quarterly reports and review process. By leading most of the significant Asset Management department changes and process improvements, it was a natural trajectory for Brooke as she moved into her new role as SVP. From Napolean Dynamite dance moves to her beloved 90’s fashion, learn about what make Brooke stand out as a CREA employee: Congratulations on your new role! What changes have you made to the AM department in the past 6 months? Thank you! It’s been a very exciting year and we have made some big changes, but also spent time refining our internal processes within Asset Management and how we interact with other departments.
and everyone had to follow it, what would it be? Find something to laugh about and share it with others. What was your favorite 90s fashion fad? Just one? There’s too many good ones to only mention one. Flannels, vests, turtlenecks, Dr. Marten’s, overalls with one strap down, platform sandals and neon windbreakers. But if I HAVE to pick just one, it has to be Hammer pants. If you could only choose one song to play every time you walked into a room for the rest of your life, what would it be? I love music, so this is really hard. One of my all-time favorites is PYT by Michael Jackson. Now, let’s dance! If you could choose your age forever, what age would you choose and why? The age I am today, because life is good.
our church family and are currently serving in a leadership role for our local Great Banquet community.
RANDOM QUESTIONS!
What’s your biggest kitchen fail? The first time we had Thanksgiving at our house with my husband’s family, we decided to smoke a turkey in my brother-in-law’s electric smoker. He didn’t tell us that there was a water pan on the inside that needed filled. The turkey caught on fire and when we cut into it, it was almost exactly like the Griswald Christmas turkey in the National Lampoon’s Christmas Vacation movie. What’s your signature dance move? I get all my best moves from Napoleon Dynamite.
How do you manage and keep up with the growth that CREA has seen
If you could make a rule for a day
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AWARDS & KUDOS
Franklin Mill – Plan NH Award “Built in 1895, the old mill complex is on the National Park Service’s Register of Historic Places, and has been transformed into 45 affordable one- and two- bedroom apartments in downtown Franklin. ‘This was an amazing transformation of a decayed shell into a crown jewel, and is a catalyst for the revitalization of downtown Franklin,’ said one juror.” - NH Business Review
NorthHarrison Senior: IHCDAExcellence inAffordable Housing Awards - Senior.
“North Harrison Senior Apartments was created to provide proper senior housing with lower monthly rent and utility costs, while creating an inviting atmosphere where friends socialize and help each other out. This community is located in a walkable area to other necessities, provides educational opportunities for both work and personal enrichment, and assists in finding necessary social services to help the residents live independently for as long as possible.” - IHCDA
OCT 31 REPORTING DEADLINES
For our General Partners: • Engagement letters: Submit by 10/31/18 to your assigned Asset Manager or audits@creallc.com • 3rd Quarter Reporting: Submit by 10/31/18 to your assigned Asset Manager and a copy to crea@integratec.biz
For our LimitedPartners: • 3rd Quarter Reports will be issued by 12/15/18
DEC 15
GOOD TO KNOW
CREA’s 2018 Tax Season Guidelines have been distributed to all of our GP and accountant contacts. Happy Reading!
Insurance certificates for all properties can now be sent to insurance@creallc.com
Any properties that are not operational in 2018, get a jump start on tax season and request an audit waiver now!
CREA will be communicating to every partnership accountant whether the partnership should elect out of the interest deduction limitation or accept the limited interest deductions. Additionally, CREA will indicate where we are expecting significant placed in service activity and sharing projections of basis allocations, whether a cost segregation study is expected, and our assumptions of bonus depreciation.
CREA, LLC / 30 S. MERIDIAN ST, STE 400 MARKETING@CREALLC.COM / CREALLC.COM
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