Rio Volcan Apartments is a 240 unit Section 42 LIHTC property located in Albuquerque, New Mexico. The property was built in two phases; Phase I in 1996 with 9% tax credits and Phase II in 1998 with bond financing and an allocation of 4% credits. Both phases are 100% restricted for tenants earning no more than 60% of AMI with an extended use agreement that requires the owner to maintain its affordable use through 2018.
In 2006, Bridge Partners negotiated an off-market acquisition of the general partner interests in both phases. The investment thesis was to acquire the right to the balance sheet receivables due to the general partner and to improve property cash flow to accelerate the payoff of those partnership liabilities.
As both phases were owned by separate partnerships with different tax credit equity partners, the acquisition required Bridge Partners to run parallel processes to validate the value of each partnership’s receivables, complete the loan assumption process and secure housing authority consent for the assignment of partnership interest, ultimately closing two separate transactions to become the controlling general partner of each phase of the asset. Coterminous with the general partner interest closings and the final allocation of the Phase I tax credits, Bridge Partners negotiated a separate acquisition agreement to buy the Phase I tax credit equity investor’s limited partnership interest, resulting in the Bridge Partners’ investment partnership becoming the sole owner of Phase I of the property.
While the property did not have deferred maintenance at closing, the property’s historical operations were materially below the original developer’s forecasts, placing the project at risk. Bridge Partners hired third party property management with expertise in the operation of Section 42 housing and, working with that group to improve property operations, the asset’s physical plant has been maintained and improved and its affordability preserved.
Bridge Partners identified an additional opportunity to produce value for its investment partnership in 2010 when the Phase II Fannie Mae credit enhanced bond financing become eligible for prepayment. Though the Phase I agency financing was not eligible for prepayment until 2012, low interest rates together with the opportunity to consolidate ownership and place 10 year financing running through the remaining compliance period justified the partnership’s absorbing the prepayment penalty. Similar to the strategy employed on Phase I, coterminous with the refinancing and the final allocation of the Phase II tax credits, Bridge Partners’ executed a buyout of the remaining Phase II tax credit equity investor to become the sole of owner of both phases of the property.
Today, the partnership’s focus is on investing in the asset and continuing to push property operations to prepare it for alternative exit strategies- tax credit re-syndication or market conversion- at the end of the property’s extended use period.