*Multi-family Housing Preservation and Revitalization Program … · USDA Rural Development *Critical to Rural Infrastructure *Basic Facts: 515/514 Portfolio (1-1-08) • 16,500 Properties

*Multi-family Housing Preservation and Revitalization Program

“MPR” USDA Rural Development

*Critical to Rural Infrastructure

*Basic Facts: 515/514 Portfolio (1-1-08)• 16,500 Properties with 458,090 Units (28 units avg. size)• $11.6 Billion Outstanding Principal (2.4% delinquent)• 30% Properties in Counties with Declining Income

• The tenants who we serve:– $10.2K Annual Average Income ($8.3K for RA)– 62 % receive RA– 15 % receive HUD project or tenant based subsidy or other – 23% receive no deep tenant subsidy

• Tenant Households headed by:– 59% Elderly 24% Handicapped or disabled– 72% Female 30% Tenant turnover– 30% Minority

*Where the MFH program is headed

• Build new units using cost effective Section 538 guarantees.

• Protect existing tenants by renewing all expiring rental assistance.

• Revitalize existing portfolio – Use MPR and other available resources to preserve needed housing.

*Key Revitalization challenges:• Nature of the portfolio

– Aging – earliest projects form the 60’s– Small properties– Rural Markets– Not enough RA– Aging of physical structure is project specific

• Nature of ownership entities– Aging owners and entities– Conflicting interests within ownership– Tax consequences for selling or not selling

• Cloud of Prepayment statute– Franconia – Damages to owners possible– Tucker Act Settlement – 731 projects going thru process– Goldhammer – APA violation to not follow regulation

• Limited pool of purchasers and funding resources• Tightening Federal budget for traditional subsidized housing

*Key Revitalization Study findings• Comprehensive Property Assessment (CPA) found:

– Irreplaceable rural rental housing option– Portfolio in good shape, but aging and reserves under funded – Addressing now is more cost effective

• Study also said (Portfolio breaks into 3 segments)• 10% in great markets – expensive to preserve• 10% in bad markets – not feasible to preserve• 80% in the middle – feasible to preserve

– Just using rent increases and “more” RA is too expensive– We need new cost effective revitalization tools– Reinvent program delivery for smarter & faster decisions

*The MFH Revitalization Strategy• Goal – “Extend and enhance properties that continues to

serve affordable rental needs.”• Road map for revitalization from CPA

– Protect tenants that leave program (Vouchers)– Create and fund restructuring process and tools– New long term commitment

• Strategy to get a revitalization program in place– Proposed legislation (HR 5039 – now HR 4002)– Demonstrations of the key concepts (vouchers –

2006-2008 and restructuring – 2005-2008) – Results: THEY WORK!

*The Revitalization Strategy • Components of all deals

– Project is needed in market– Post transaction Owner is eligible

• Basic Feasibility Thresholds– CNA to determine capital needs, timing and funding– Underwriting to determine feasibility and tools– Seller payments are market focused

• Market value for equity loan• CRCU limit for equity payment• CRCU test before any MPR tools

– Consider impact on tenants• Long Term Deal

– USDA’s funding commitment– Owners operational commitment

*Access to revitalization resources

• MPR (Revitalization Demonstration program)– Access point to Agency rehab loan funds– Simple (stay in owners)– Complex (transfers)– Portfolio Sales (more than one)

• Transfer– With Agency funding – With third party funding

*Key Revitalization access point issues

• MPR – Must be selected through NOFA process– All project loans to be deferred are pre-1992

• Transfer– Seller payment through 3rd party funds (maybe 538)

• Prepayment process– Must apply through statutory prepayment process– Seller payment through Agency funds and RA

*Restructuring Tools (06/07 Demo results)

1) Partial or full 515 Deferral ($48M/$56M)2) “Bullet” aka “Soft-second” loans ($4.5M/$2.8M) 3) Grants ($.2M/$.5M)4) 515 Loan @ zero percent interest ($.3M/$2.6M)5) Payment to owner of some costs (CNA from reserve)6) Forgiveness of 515 Debt ($0/$0)7) Re-amortization of 515 Debt (yes/yes)8) Subordination of 515 Debt (yes/yes)9) Consolidation of 515 projects (yes/yes)10) Other RD funds (Section 538/515) ($8.8M/$25M+)11) Third party funds ($1.8M LIHTC/$45M)

“Simple” 16 family units (7 RA) - Tower City, North Dakota Stay in non-profit owner – built in two phases 74 and 79

• Sources: $53.4 K MPR bullet $172 K MPR zero pct and $11.6 K MPR H&S grant

$5 K local grant

• Uses: $237 K Rehab (to reserve) $ 0 Equity, and $5 K Soft

• $27.7 K - 20 year CNA per unit • $9.2 K deferred RD ds, $8.9 K new ds • Reserve deposit: $3.2K to $9.2K• Rents:

Pre-MPR $301Post-MPR $332

“Complex” – 74 family units (64 RA) – Rogers, Connecticut Transfer (w/acquisition, rehab and consolidation) - $7.8 M TDC

• $2.8 M Existing RD debt• Sources: $2.9 M tax credit equity,

$2.1 M 3% HFA loan • Uses: $2.1 M Rehab,

$ .9 M Equity, and $2.0 M Soft

• $20.5 K - 20 year CNA • $72 K Annual RD debt service • Reserve deposit: $30K to $51K• Rents: CRCU $625, $775, $900• Pre-Transfer $480, $580, $705• Post-Transfer $500, $700, $825 • w/MPR deferral, $465, $620, $765

SC MFH Portfolio Transfer• 23 Projects in the transfer, 3 consolidations• 15 project in MPR Portfolio transaction, 3 consolidations• Long term A&B Bonds, 4% LIHTC w/Subordination of RD

lien position• Converted to Short Term A Bonds $15,812,000 & $1,948,070 B

Bonds, 4%LIHTC $16,968,347, 515 Sub. Loans$15,812,000• RD515 funds to provide permanent financing at favorable terms• Savings: reduce debt service from long term Bonds @5.75%, 30

yrs to RD 1%, 50 yrs. Reduce debt service $567,247/yr; RA savings $248,100/yr

• Rents reduced (average) $45/U/Mo. Rents maintained @CRCU• MPR will further provide cost savings to the properties to save

RA and protect tenants from excessive rent increase.

New Mexico USDA Rural Development

CARMEN N. LOPEZ MULTI-FAMILY HOUSING

[email protected]

(505) 761-4941MPR Website:

http://www.rurdev.usda.gov/rhs/mfh/MPR/MPRHome.htm

• 515 mortgage subordination and tax credit re- syndication to reposition properties.

• 9% LIHTC are possible with strict adherence to “old and cold”

• Bond transactions combining multiple sites have been closed repeatedly

Preservation Tools

• We have seen a number of “non- Preservation” preservations, sometimes called 4010s.

• Use transfer process.

Preservation Tools

• Will have guidance on ”tiered” rents for LIHTC properties

• Approval requirements will be clarified

• New 30 year RUP required

• CRCU rents will probably continue to be the standard

• Equity can be paid by non-RD sources or from RD sources with appraisal

• 20 year CNA

Preservation Tools

USDA transfer Handbook, HB-3-3560, Chapter 7

• Revision underway to conform to transfer bill, H.R. 3873

– Will be single comprehensive application

– Will be timeframe for RD review• 1 property – 45 days

• 2-10 properties – 90 days

• 11 or more properties – 120 days

Preservation Tools

• Handbook – HB-3-3560 – Chapter 15– Apply to prepay– Must be “complete” – but completeness can vary by office– Must demonstrate “ability to prepay” with loan commitment or

assets

• You can receive “incentives” – equity take-out loan– From RD – 1% interest rate but little money and long wait– Obtain yourself – must locate and educate lenders

ELIHPA

ELIHPA

• You may be able to prepay with a “life -estate” use restrictions for current residents– If housing determined to be unnecessary– If no adverse impact on minority persons

• And/Or you can offer for sale to a non-profit, at apprised value– Must offer for 6 months– If non profit makes offer, have up to 24 months to close– If neither happens, can prepay

– The Emergency Low Income Housing Preservation Act of 1987 (“ELIHPA”).

– Even if your documents say you can prepay; ELIHPA says you can’t - - not without asking.

– ELIHPA sparked lawsuits, including Franconia, resulting in damages payments to owners

ELIHPA

Richard Michael Price

Nixon Peabody LLP

401 Ninth Street

Suite 900

Washington, DC 20004

Telephone: (202) 585-8716

Facsimile: (202) 585-8080

E-Mail: [email protected]

David Beacham PACIFIC HOUSING ADVISORS, INC.

2008 Summer Institute – NH&RASanta Fe, New MexicoJuly 25, 2008

Section 515 Case Study:

Three RD Preservation Projects in Imperial County, CA

New Regulation 3560 made effective February 25, 2005

Intended to replace all regulations governing:Section 515 rural rental housingSection 514 and 516 farm labor housingSection 521 rural rental assistance programs

Chapter 15 provides guidance on transfers (acquisitions) of existing RD properties

USDA RD Regulation 3560

Transfers Under 3560

Property transfers (acquisitions) are similar to approving a new loan. RD must ensure that the transferee meets the same eligibility criteria and has the financial capacity and management experience to be a project borrower.

The transferee contributes additional funds for repair or rehabilitation, and RD agrees to recognize a higher initial investment for purposes of determining the allowable Return on Investment (limited dividend)

Transfers involve rehabilitation as approved by RD, and as identified by a Capital Needs Assessment

Transfers Under 3560 (cont’d)

Existing RD loan may be reamortized over 50 years (subject to remaining useful economic life)

Interest remains at 1% effective rate

Existing RD loan may be subordinated to new debtSubordinated RD loan plus new loan may not exceed appraised value

Third source of funds: low income housing tax credit equity

Transfers Under 3560 (cont’d)

RD is not obligated to provide Rental Assistance (RA) for projects with less than 100% RA, as under a prepayment incentive offer

Comparable rents are established using an RD-approved market value appraisal

Comparable Rents for Comparable Units = “CRCU”

Basic rents may not exceed CRCU (but existing rents may be adjusted upward to CRCU)

Transfers Under 3560 (cont’d)

Immediate and long-term repair and rehabilitation needs are identified by a capital needs assessment

Reserve requirements for the housing project will be reviewed by RD and adjusted to cover the cost of addressing the property's capital needs.

Planned rehabilitation is taken into account

RD may approve the release of the current replacement reserve amount to the transferor provided the transferee agrees to deposit the amount to cover the project's immediate needs into a new reserve account at closing

Transfers Involving LIHTC

RD represents new layer of regulation and approval

Projects characterized by very low senior debt relative to subordinated RD loanIf bond-financed, “over-funded” construction loan is common, to allow 50% test to be met

New tax credit equity is basis for ROI calculationRegulation 3560 allows for up to 8% ROIEconomic cash flow generally very low, however

Portfolio aggregation possibleSubject to State QAPSubject to lender and investor requirements

CASE STUDY

THREE RD PRESERVATION PROJECTS IN IMPERIAL COUNTY

Imperial County Portfolio

Cottonwood Apartments, 32 units built in 1989, located in Calipatria, Imperial County, CaliforniaRedondo I Apartments, 36 units built in 1988, located in Westmorland, Imperial County, CaliforniaRedondo II Apartments, 32 units built in 1990, located in Westmorland, Imperial County, California (adjacent to Redondo I)

TOTAL OF 100 UNITS IN THREE PROJECTS

RD 515 Profile

Cottonwood20 year RD use period ended September, 200923/32 units with HCD RCHP contract4/32 units with RHS RAExisting RD 515 loan of $43,366/unit

Redondo I20 year RD use period ended September, 200832/36 units with RHS RAExisting RD 515 loan of $39,971/unit

Redondo II20 year RD use period ended September, 201032/32 units with RHS RAExisting RD 515 loan of $43,706/unit

LIHTC Profile

El Centro MSA

2006 AMGI $50,800

DDA (was in 2006, but is no longer in 2007)

Current rent @ 102% of maximum LIHTC rent

Appraised land value $5,500 per unit

80% at 60% AMGI, balance at 20% AMGI (driven by CDLAC points)

Purchase Profile

Cottonwood$51,424 purchase price/unit$10,087 seller equity/unit5.83% cap rate on Purchaser NOI

Redondo I$62,877 purchase price/unit$24,881 seller equity/unit6.53% cap rate on Purchaser NOI

Redondo II$62,878 purchase price/unit$19,172 seller equity/unit7.42% cap rate on Purchaser NOI

Purchase Profile (cont’d)

Seller kept replacement reserves of $503,852

Purchase price determined as development residual

Rents reduced by $8/unit (on average) due to CRCU > existing rents

Vacancy assumption = 5.0% (prior year was 5% for Redondo and 7% for Cottonwood)

Expenses at $3,990/unit including reserves of $514/unit (reduction from prior year approximately $1,200)

Rehab of $21,140/unit including contractor OH&P

Deposit to reserves of $507,500TCAC $170,000RD 80,000LIHTC Investor 250,000Lender 7,500

Development Pro Forma

Development Pro Forma (cont’d)

SourcesPermanent Bond Loan @ 5.82% interest (all in) $ 2,600,000

Subordinated & Assumed 515 Loan @ 1.00% interest 4,225,232

LIHTC Equity @ $1.01 (Federal only) 3,469,494

Deferred Developer Fee 24,449

Total Sources $10,319,175

Development Pro Forma (cont’d)

UsesLand + Buildings $ 5,921,255

Renovation Costs 2,114,039

Third Party Reports 106,955

Financing Placement (including COI) 188,274

Other Fees and Costs 305,591

Reserves 507,500

Developer Fee 1,175,560

Total Uses $10,319,175

Rehab of $21,140 per unit provided:RoofsWindowsCabinets & CountertopsHVACLandscaping

Cash flow at $97,899/year with 5% vacancy (top of waterfall)

Non-deferred developer fee of $1,151,112, paid over 18 months

NOTE: This is the Low Hanging Fruit, not the norm!

Development Outcome

Brunswick House Apartments 1100 Peach Orchard Lane Brunswick, MD

A USDA Rural Development Section 515

52 Unit Senior Housing Preservation Project

Volunteers of America – Project Sponsor

SOURCES OF FUNDS

4% Low Income Housing Tax CreditsTax Exempt BondsRental Housing Production Program FundsUSDA Rural Development Transfer & Assumption of Mortgage – Marked down to 1% interestTransfer of HUD Section 8 HAP Contract on 100% of the units, 20 year HAP ContractTotal Development Costs -$5,954,011

SOURCES

Source From AmountA. Equity Limited Partner $1,471,000

B. Permanent Debt Tax Exempt Bond $1,690,000

USDA RD Sec 515 $1,111,072

C. Other Debt Rental Housing Production Program

$1,500,000

D. Other Sources Existing Reserves & Escrows

$122,432

GP Equity $147

Construction Period Income

$59,360

TOTAL $5,954,011

SCOPE OF WORK

$40,386 per unit hard construction costsNew elevatorNew fire sprinkler systemNew roofNew floor coveringsNew entry and unit doors & framesHVAC system upgradesNumerous other upgrades and improvements

USESA Acquisition Costs $2,019,504

B Construction/Rehabilitation $2,100,053

C Professional Fees & Other Soft Costs $422,145

D Financing Costs – Construction Loan Only $162,000

D Financing Costs – Permanent – Includes Bond Cost of Issuance of $135,858

$337,287

F Developer Fees $602,406

G Tax Credit & Syndication Costs $32,616

H Start Up Costs, Reserves & Escrows – Includes operating reserve of $182,000

$278,000