Apartment Finance 2009 4.09 Rev Kephart

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Apartment Finance 2009 4.09 Rev Kephart

  1. 1. April 15, 2009 1
  2. 2. History & Overview HUD/FHA Low Income Housing Tax Credits Private Activity Bonds Opportunities 2
  3. 3. HUD/FHA History & Programs 3
  4. 4.  FederalHousing Administration – creation by Congress under National Housing Act of 1934  Two mortgage insurance programs created to stimulate economy - Section 203 – Home Ownership - Section 207 - Apartments 4
  5. 5. Current Active Programs Sec. 221(d)(3) – Apartments for Non Profit Sponsors – New Construction & Substantial Rehabilitation 5
  6. 6. Current Active Programs Sec. 221(d)(4) – Apartments for Profit-motivated Sponsors – New Construction & Substantial Rehabilitation 6
  7. 7. Current Active Programs Sec. 223(f) - Purchase and Refinance of Apartments Profit Motivated Sponsors Existing Properties Only Moderate Rehabilitation 7
  8. 8. Current Active Programs Sec. 231 – Apartments for senior citizens Non Profit and Profit Motivated Sponsors New Construction & Substantial Rehabilitation 8
  9. 9. Current Active Programs Sec. 232 - Assisted Living Facilities and Nursing Homes Non Profit and Profit Motivated Sponsors New Construction and Substantial Rehabilitation 9
  10. 10. Current Active Programs Sec. 242 – Critical Access Hospitals Non Profit and Profit Motivated Sponsors New Construction & Substantial Rehabilitation 10
  11. 11. Why HUD/FHA? Why Now? 11
  12. 12. Why HUD/FHA? Little to No Bank Lending Traditional Outlets Closed National availability Protection from competition Attractive Features 12
  13. 13. + FEATURES: Construction and Permanent Financing Long Term (35-40 years) High Loan to Value/Cost (85%- 90% Potential) 13
  14. 14. + FEATURES: Fixed Rate No Income Restrictions Assumable Non-Recourse! 14
  15. 15. -FEATURES: Davis-Bacon Wage Rates Prepayment Lockout Bureaucratic Inflexibility/Processes Processing Time* 15
  16. 16. - FEATURES: Processing Time* Two Stage Process: First Stage – PreApplication is Free Can take 90 days (See Paul Campbell article) 16
  17. 17. - FEATURES: Processing Time* Two Stage Process: Second Stage – Firm App costs 30bp Can take 240 days for prep, review and closing 17
  18. 18. -FEATURES: No Developer’s Fee Project size - at least 75-100 units Need Equity $ Cash-out only twice a year 18
  19. 19. Why Now? Flat to negative home sales Tightening credit for home buyers 19
  20. 20. Why Now? Increasing demand for affordable rental units Changing demographics 20
  21. 21. Changing Demographics Almost Four of Ten Senior Citizens Plan on Working Until They Die Bankrate retirement poll finds savings rate low, expectations high Source: Bankrate.com April 23, 2007 21
  22. 22. Changing Demographics Increasing numbers of households that make too much for affordable rental, too little to purchase. “Good credit? Home loans no longer a sure thing.” USAToday Headline 10/31/2008 22
  23. 23. Changing Demographics There are more people at lower income levels than there are at higher incomes. People/$ 23
  24. 24. Changing Demographics Supply/ Price The more income, the broader range of choices from the supply of housing. 24
  25. 25. Changing Demographics Supply/ Price People/$ 25
  26. 26. Sec. 221(d)(4) Underwriting 1.11 Debt Service Coverage Ratio Combination Construction and Permanent Loan Construction Period + 40 Years Term 26
  27. 27. Sec. 221(d)(4) Underwriting Market interest rate (10 year Treasury +/- 350 bp) Formulaic Replacement Reserve Deposit 27
  28. 28. Sec. 221(d)(4) Underwriting Maximum Loan is the Least of: HUD Statutory Limits 90% of Replacement Cost Amount Supportable by Net Income 28
  29. 29. Case Study Denver, Colorado 225 Units New Construction Urban Infill Site 29
  30. 30. Case Study 35 0 BR Units – 540 SF 50 1 BR Units – 640 SF 40 1 BR Units – 740 SF 40 1 BR Units – 880 SF 30 2 BR Units – 1,020 SF 30 2 BR Units – 1,140 SF 30
  31. 31. Case Study 24,000 SF Commercial 25% Other non-residential Gross SF = 249,625 31
  32. 32. Case Study Land: $5,900,000 Construction: $37,575,039 Financing: $4,134,145 Legal, Org., Audit: $180,000 BSPRA: $4,188,918 Total Costs: $51,978,103 32
  33. 33. Case Study 0 BR Units – 540 SF - $1,100 1 BR Units – 640 SF – $1,250 1 BR Units – 740 SF - $1,350 1 BR Units – 880 SF - $1,550 2 BR Units – 1,020 SF - $1,850 2 BR Units – 1,140 SF - $2,000 33
  34. 34. Case Study  Gross Income: $4,501,180  Vacancy Rate: 7%  Operating Exp: $881,400  Net Oper. Inc.: $3,267,517  Avail. For D.S.: $3,303,653 34
  35. 35. Case Study  Int.Rate: 6.30%  Mortgage Ins. Prem. .45%  GNMA Fee: .25%  40 yr. Amort. Factor: .518%  Debt Serv. Constant: 7.518% 35
  36. 36. Case Study  Loan = $3,303,653/7.518%  Loan = $39,114,000 36
  37. 37. Case Study Cost: $51,978,103 Insured Loan: $39,114,000 Equity: $10,147,089 37
  38. 38. HUD Value-added for Equity Independent market study Third-party review of plans Financial Underwriting of all parties 38
  39. 39. HUD Value-added for Equity Construction monitoring Independent audit of costs Potential for conversion – contingent liability elimination 39
  40. 40. Sec. 223(f) Underwriting 1.17 Debt Service Coverage Ratio Permanent Loan Term: Up to 35 Years Moderate rehab can be included 40
  41. 41. Sec. 223(f) Underwriting Loan is LEAST of 85% of Value Or Amount supportable by Net Income Or 85% of Costs 41
  42. 42. Sec. 223(f) Underwriting Case Study: Value = $7,000,000 Loan supportable by NOI = $7,151,400 85% of Transaction Costs= $5,950,000 Purchase Price = $7,000,000 Equity = $1,092,475 42
  43. 43. LOW INCOME HOUSING TAX CREDITS A Brief Introduction 43
  44. 44. Created in 1986 – Ullman Act Section 42 of the of the Internal Revenue Code provides low- income housing tax credits New construction Acquisition/rehabilitation of low- income housing. 44
  45. 45. The “LIHTC Credit” is a dollar- for-dollar reduction of federal tax liability. Owners also receive deductions for ordinary tax losses - real estate taxes, depreciation and interest. 45
  46. 46. Available for 10 years beginning with the first year of occupancy. The Credit is designed to be equal to 70 percent of the costs of constructing new low-income housing -- the “9% credit” or… 46
  47. 47. Or...30 percent of the costs of acquiring existing housing or developing housing with some other federal subsidies (tax- exempt financing, HOME and CDBG funds) 47
  48. 48. The “9% credit” is obtained through competition; demand greatly exceeds supply.  The “4% credit” is obtained through the use of private activity bond financing. Both are reserved/approved by state agencies 48
  49. 49. Who gets the Credits? Sponsors get the credits & form entities in which they are the General/Managing Partner. Sponsors can be public or private corporations, LLLP’s, LLLC’s, LP’s, housing authorities, etc. 49
  50. 50. Who gets the Credits? Sponsors find an Investor to buy the credits, and… Negotiate a partnership agreement that stipulates pay-in schedule and roles/responsibilities 50
  51. 51. Who gets the Credits? The Investor becomes a limited partner/member and takes a 99.99% interest in the partnership. Losses and Credits flow through to the Investor in that proportion; income at a 10%/90% ratio. 51
  52. 52. The Income Restrictions: quot;20/50 testquot; or quot;40/60 test.quot; 20% of the Units have tenants whose income is 50% of the area median or 40% of the Units have tenants whose income is 60% of the area median. 52
  53. 53. How Are Credits Calculated?  On the basis of affordability and eligible costs. Land, permanent loan costs and certain other fees cannot be included in eligible basis. 53
  54. 54. How Are Credits Calculated? Credits are a function of % of affordable units  If a project proposed 100% Low income occupancy and the Eligible Basis was $1,000,000, then the Qualified Basis would be $1,000,000. 54
  55. 55. How Are Credits Calculated? Annual credit % is set at 9.0% under the HERA of 2008 Annual credit for $1MM is $90,000. (1.00 X $1,000,000 X .090 = $90,000.) 55
  56. 56. How Are Credits Calculated? Annual amount is available for 10 years Project must remain compliant with affordability Total value of the credits is $900,000 (10 X $90,000) 56
  57. 57. Investors pay a discounted price (less than 100%). Location, type of project, type of credits, amount of losses and other variables determines price Today - range of $.65 to .$70 – from among a very limited universe of buyers. 57
  58. 58. So for our example, if the price were $.70, the credits could raise $630,000. $.70 X $900,000 = $630,000 With a $1,000,000 cost, the loan would need to be $370,000. 58
  59. 59. And for our example, that loan would have to be a conventional, taxable bank loan. (difficult to obtain today…) 59
  60. 60. + Features  “Free” equity  Low Loan to value  Meets a societal need  Can be a vehicle for grant funds  Can ease zoning/plan/permit approval 60
  61. 61. -Features  Competitive (demand is 6/1)  Limited supply (state volume cap)  Complex program  Has significant contingent liabilities - including major penalties for non- compliance 61
  62. 62. -Features  Usually a long-term hold required – little potential for gain on sale or conversion 62
  63. 63. Summary LIHTC is 4% Credit or a 9% Credit. 9% Credit - used for new construction with no “federal subsidies.” Loans must be taxable The Credit is taken over 10 years. 63
  64. 64. Summary Not all costs are eligible for credits Limited universe of buyers Eligible projects must be “rent restricted” and “income restricted” for at least 15 years. 64
  65. 65. Summary Sponsors form limited partnerships and investor limited partners contribute capital at a discount (+/- $.70 / $1 today) Sponsor/GP can own project after 15 years – LP buyout/assume debt 65
  66. 66. PRIVATE ACTIVITY BONDS A Brief Introduction 66
  67. 67.  Lower Interest Rates – promotes feasibility  Cheapest access to capital for non- profit and governmental programs  Aggressive underwriting for affordable projects  Ability to combine with soft funds – HOME, CDBG, etc 67
  68. 68.  Governmental Bonds ◦ Libraries, City Bldgs, Housing Auths.  Qualified 501(c)(3) Bonds ◦ Non Profit – Multi-Family ◦ Bank qualified bonds  Qualified Private Activity Bonds ◦ Single Family & Multi - Family 68
  69. 69. • Single Family Mortgage Revenue Bonds and Mortgage Credit Certificates • Residential rental projects for new construction or acquisition/rehab of housing for persons with low to moderate incomes (60% AMI) 69
  70. 70. • “Qualified Residential Rental Project” – Ullman Bill – Tax Reform Act of 1986 Section - 42(d) of Tax Code • Low-income set asides: 20% @ 50% or 40% @ 60% • Qualified project period 70
  71. 71. • Allocation of Private Activity Bond issuance authority to states • New construction or acquisition and rehabilitation but not refinance • For-profit and Non-profit borrowers • 30 – 40 year permanent loans BMIR 71
  72. 72. • State, County and Local Gov’t units, Housing Authorities, may be a conduit issuer, depending on state law. • Eligible to receive 4% Section 42 tax credits (not subject to state credit cap and not automatic) 72
  73. 73. •Bond financing must pay for 50% of the project costs. •Construction may be financed with bond proceeds at times •Bond proceeds must be used for project purposes before the end of the 1st year of the 10-year credit period. 73
  74. 74. •HUD/FHA Mortgage Insurance may be used to provide a “Credit Enhancement” for bonds to bring down the interest rate – bonds would carry a AAA rating. •Sale of tax credits may help raise equity $. 74
  75. 75. +Features • Below market interest rate • Ability to do mixed income project • Enhanced marketability • Less competition than for Tax Credits 75
  76. 76. -Features • See tax credit negatives • High fixed transaction costs • Limited market for tax credits • Can be complex • Usually 10 year lockout on refinance 76
  77. 77. Access to Financing for New Construction and Acq/Rehab Long Term Ownership Fee Income from Management Potential for Gain on Sale Potential for Conversion Response to Social Need 77
  78. 78. HUD www.hud.gov/offices/hsg/mfh/map/ maphome.cfm TAX CREDITS www.novoco.com PRIVATE ACTIVITY BONDS www.ncsha.org 78
  79. 79. HANDOUTS Case Studies HUD Program Descriptions HUD MAP Lender Directory Paul Campbell Article 79
  80. 80. RODGER HARA Principal Community Builders Realty Services 1129 Cherokee St. Denver, CO 80204 720.323.0253 rodger.hara@comcast.net 80

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