Apartment Finance 2009 4.09 Rev Kephart
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Apartment Finance 2009 4.09 Rev Kephart

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    Apartment Finance 2009 4.09 Rev Kephart Apartment Finance 2009 4.09 Rev Kephart Presentation Transcript

    • April 15, 2009 1
    • History & Overview HUD/FHA Low Income Housing Tax Credits Private Activity Bonds Opportunities 2
    • HUD/FHA History & Programs 3
    •  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
    • Current Active Programs Sec. 221(d)(3) – Apartments for Non Profit Sponsors – New Construction & Substantial Rehabilitation 5
    • Current Active Programs Sec. 221(d)(4) – Apartments for Profit-motivated Sponsors – New Construction & Substantial Rehabilitation 6
    • Current Active Programs Sec. 223(f) - Purchase and Refinance of Apartments Profit Motivated Sponsors Existing Properties Only Moderate Rehabilitation 7
    • Current Active Programs Sec. 231 – Apartments for senior citizens Non Profit and Profit Motivated Sponsors New Construction & Substantial Rehabilitation 8
    • Current Active Programs Sec. 232 - Assisted Living Facilities and Nursing Homes Non Profit and Profit Motivated Sponsors New Construction and Substantial Rehabilitation 9
    • Current Active Programs Sec. 242 – Critical Access Hospitals Non Profit and Profit Motivated Sponsors New Construction & Substantial Rehabilitation 10
    • Why HUD/FHA? Why Now? 11
    • Why HUD/FHA? Little to No Bank Lending Traditional Outlets Closed National availability Protection from competition Attractive Features 12
    • + FEATURES: Construction and Permanent Financing Long Term (35-40 years) High Loan to Value/Cost (85%- 90% Potential) 13
    • + FEATURES: Fixed Rate No Income Restrictions Assumable Non-Recourse! 14
    • -FEATURES: Davis-Bacon Wage Rates Prepayment Lockout Bureaucratic Inflexibility/Processes Processing Time* 15
    • - FEATURES: Processing Time* Two Stage Process: First Stage – PreApplication is Free Can take 90 days (See Paul Campbell article) 16
    • - FEATURES: Processing Time* Two Stage Process: Second Stage – Firm App costs 30bp Can take 240 days for prep, review and closing 17
    • -FEATURES: No Developer’s Fee Project size - at least 75-100 units Need Equity $ Cash-out only twice a year 18
    • Why Now? Flat to negative home sales Tightening credit for home buyers 19
    • Why Now? Increasing demand for affordable rental units Changing demographics 20
    • 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
    • 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
    • Changing Demographics There are more people at lower income levels than there are at higher incomes. People/$ 23
    • Changing Demographics Supply/ Price The more income, the broader range of choices from the supply of housing. 24
    • Changing Demographics Supply/ Price People/$ 25
    • Sec. 221(d)(4) Underwriting 1.11 Debt Service Coverage Ratio Combination Construction and Permanent Loan Construction Period + 40 Years Term 26
    • Sec. 221(d)(4) Underwriting Market interest rate (10 year Treasury +/- 350 bp) Formulaic Replacement Reserve Deposit 27
    • Sec. 221(d)(4) Underwriting Maximum Loan is the Least of: HUD Statutory Limits 90% of Replacement Cost Amount Supportable by Net Income 28
    • Case Study Denver, Colorado 225 Units New Construction Urban Infill Site 29
    • 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
    • Case Study 24,000 SF Commercial 25% Other non-residential Gross SF = 249,625 31
    • 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
    • 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
    • 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
    • Case Study  Int.Rate: 6.30%  Mortgage Ins. Prem. .45%  GNMA Fee: .25%  40 yr. Amort. Factor: .518%  Debt Serv. Constant: 7.518% 35
    • Case Study  Loan = $3,303,653/7.518%  Loan = $39,114,000 36
    • Case Study Cost: $51,978,103 Insured Loan: $39,114,000 Equity: $10,147,089 37
    • HUD Value-added for Equity Independent market study Third-party review of plans Financial Underwriting of all parties 38
    • HUD Value-added for Equity Construction monitoring Independent audit of costs Potential for conversion – contingent liability elimination 39
    • Sec. 223(f) Underwriting 1.17 Debt Service Coverage Ratio Permanent Loan Term: Up to 35 Years Moderate rehab can be included 40
    • Sec. 223(f) Underwriting Loan is LEAST of 85% of Value Or Amount supportable by Net Income Or 85% of Costs 41
    • 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
    • LOW INCOME HOUSING TAX CREDITS A Brief Introduction 43
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • And for our example, that loan would have to be a conventional, taxable bank loan. (difficult to obtain today…) 59
    • + 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
    • -Features  Competitive (demand is 6/1)  Limited supply (state volume cap)  Complex program  Has significant contingent liabilities - including major penalties for non- compliance 61
    • -Features  Usually a long-term hold required – little potential for gain on sale or conversion 62
    • 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
    • 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
    • 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
    • PRIVATE ACTIVITY BONDS A Brief Introduction 66
    •  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
    •  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
    • • 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
    • • “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
    • • 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
    • • 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
    • •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
    • •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
    • +Features • Below market interest rate • Ability to do mixed income project • Enhanced marketability • Less competition than for Tax Credits 75
    • -Features • See tax credit negatives • High fixed transaction costs • Limited market for tax credits • Can be complex • Usually 10 year lockout on refinance 76
    • 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
    • HUD www.hud.gov/offices/hsg/mfh/map/ maphome.cfm TAX CREDITS www.novoco.com PRIVATE ACTIVITY BONDS www.ncsha.org 78
    • HANDOUTS Case Studies HUD Program Descriptions HUD MAP Lender Directory Paul Campbell Article 79
    • RODGER HARA Principal Community Builders Realty Services 1129 Cherokee St. Denver, CO 80204 720.323.0253 rodger.hara@comcast.net 80