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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
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