Midwest Housing Equity Group


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General introductory information regarding Midwest Housing and the Low Income Housing Tax Credit. Information regarding using the Low Income Housing Tax Credit to assist in meeting CRA requirements.

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Midwest Housing Equity Group

  1. 1. Andrea FrymireExecutive Vice PresidentSouth RegionJohn WiechmannPresident / Chief Executive Officer
  2. 2. Midwest Housing Equity Group, Inc. (MHEG) was created in 1993 under thedirection of then Governor Ben Nelson. The objective was to raise equity capitalto invest into affordable rental housing throughout Nebraska. MHEG laterexpanded, starting in 2000, into Kansas, Iowa and Oklahoma. Today MHEG’sservice area includes: Arkansas, Colorado, Iowa, Kansas, Minnesota, Missouri,Nebraska, Oklahoma, South Dakota and Texas. Our mission is:Changing lives for a better tomorrowChanging lives for a better tomorrowby promoting the development and sustainabilityby promoting the development and sustainabilityof quality affordable housingof quality affordable housing ..2We look for quality affordable properties that meet our mission and standards.OUR MISSION & OBJECTIVE
  3. 3. TO DATE, MHEG HAS:- raised over $900 million in equity- developed 350 projects in rural, suburban and urban communities- created and renovated almost 10,000 units of affordable rental housing2012 HIGHLIGHTS:- Closed over $142 million in equity (28 deals)- Raised over $92 million in equity capital- $15 million in corporate organizational reservesOur developments range from 6 to over 200 units and include:- single family homes- multi-unit and multi-building complexes- duplexes- historical renovations-specialty needs developments: elderly, assisted living, transitionalhomeless facilities, and developmentally disabled residents3OUR DEDICATION & SUCCESS
  4. 4. MHEG TOTALS- 40 Funds- $905 million raised- 350 projects closed- 9,768 units createdIOWA- 7 Funds- $173 million raised- 61 projects closed- 2,058 units createdKANSAS- 10 Funds- $208 million raised- 89 projects closed- 2,342 units createdNEBRASKA- 18 Funds- $391 million raised- 162 projects closed- 3,962 units createdOKLAHOMA- 4 Funds- $133 million raised- 38 projects closed- 1,406 total units created4* Information current as of 5/2013MHEG PORTFOLIO
  5. 5. * Information current as of 5/2013Total Units Created5Total Equity Raised in Millions$905M 9,768 unitsEQUITY & PORTFOLIO GROWTH
  6. 6. - Underwriting-financial feasibility- Identifying sources of potential financing- Assist with/Reviewing applications for funding- Compliance with Section 42 and other financing sources- Accounting for construction/rehab period and then for ongoing operations- Preparation of carryover forms and cost certification- Annual audit and tax return preparation-Partnership with MDHF, a CDFI set up to offer a variety of predevelopment loans andpermanent loans- Training for development and management6BENEFITS MHEG PROVIDES
  7. 7. - Investment Test:- Affordable housing is a fundamental element under CRA.- An investment in a LIHTC Fund:- Receives positive CRA consideration provided it benefits the bank’sassessment area or the broader statewide or regional area thatincludes the bank’s assessment area.- Lending Test:- Opportunity to make construction and permanent loans on the LITHCdevelopments can assist in meeting the Lending Test.- Must be fixed rate and have a minimum term of 16 years- Generally the LTV will be less than 25%- Nonrecourse- Service Opportunities:- Providing technical assistance on financial matters for a non-profit organizationserving low or moderate income individuals’ housing needs or economicrevitalization and development needs- Voting on developments within the Fund- Serving on a Board or Committee for a non-profit syndicator, housing authority,developer, etc.- Developing and teaching financial education curricula for low or moderate incomeindividuals*Regulators do vary on the scope of inclusion. Please check with your Regulator for their interpretation. 7CRA CONSIDERATION FOR BANK INVESTORS
  8. 8. 8- Capacity Building: In addition to working with established developers andsponsors, MHEG also works with rural housing authorities, Community HousingDevelopment Organization’s, Community Action Program’s and other small developersthat are developing tax credit properties in their own communities.- Housing Where it’s Needed the Most: We fund projects that are reallyneeded but are sometimes more expensive and difficult to put together, such as smallrural properties, inner city, infill and special needs projects- No Extra Risk: By investing in smaller properties with local developers, we do notaccept any more risk than national syndicators. In fact we are able to spend much moretime on an investment and mitigate our risk.BENEFITS TO EACH STATE
  9. 9. - Geographical location- Size of investment (% of total of Fund)- Guarantees- Reserve accounts- Structure of debt to property- Experience and strength of development team, general partner and property manager- Project site-zoning, stability, accessibility- Market Study/Analysis- Title and Survey- Insurance: property, contractor (insurance and bonds)- Quarterly risk rating for life of investment- Environmental studies: Phase I mandatory, Phase II if needed-Reasonable and substantiated operating assumptions: rent levels, vacancy factors,expense estimates, level of must pay debt, and lease-up period-Construction parameters and oversight-Rent Level Analysis-Operating Expense Comparison and Analysis to MHEG’s extensive database9UNDERWRITING GUIDELINES
  10. 10. $1,000,000 Total Project Cost$ 200,000 Project Cost Not Eligible for Credits$ 800,000 Eligible Basis for Credits*x 9% Tax Credit Percentage$ 72,000 Credits Received/yearx 10 Years credits are received$ 720,000 Credits receivedx .85 Price paid for credits$ 612,000 Equity into project from MHEGAllows for low debt on project enabling developersto keep rents affordable* States may allow 130% basis boost (not shown here).10TAX CREDIT CALCULATION
  11. 11. Soft Debt / GPSoft Debt / GPEquityEquity25%*25%*Hard DebtHard Debt< 20%< 20%Tax Credit EquityTax Credit Equity55% (70% with basis55% (70% with basisboostboost))11* Funded By:− AHP− HOME− TCAP− Exchange− Developer Fee− Various Contributions− Certain GrantsTYPICAL DEAL STRUCTURE
  12. 12. What is the REAL risk?- Ownership risks of multifamily low-incomeRental housing poolsMitigated by MHEG’s investment policies,ongoingmanagement and financial oversight, as wellasMHEG’s financial strength- Compliance riskMitigated by MHEG’s continuing compliancepractices and oversight- Changes in current lawHighly improbable any law change would affectAny current investments- Reputation RiskWe take “the high road”, we know that werepresent our fund investors who are financialpillars of their communities12RISK vs. RETURNWhat do you get in Return?-Optimal Tax Planning Strategy- 10 full years of federal tax credits- 15 full years of depreciation and otherpassive deductions- Periodic Write-down of Paid in Capital- CRA Investment Credit, if applicable- Marketing and PR opportunities- Stabilizing and Investing in your localcommunities- Stable proven track record of aperforming asset class- Accurately forecasted tax benefits- Quarterly Reporting and AssetManagement update
  13. 13. WHAT ARE THE ADVANTAGES:-Pool of projects diversifies risk-Structured for strong reserves at the project and fund level, with additionalreserves at MHEG- Disciplined and conservative underwriting guidelines- Investment decisions lie with investors- MHEG professional staff manage all aspects of investment- Comprehensive quarterly reporting to fund participants – available inelectronic format- Independent financial audits performed at the project and fund level- Legal documents uniform and comprehensive- Delayed investment pay-in schedule increases yield- MHEG Fund investors could take minimal construction risk- MHEG Fund investors do not need an expert tax credit specialist on staff,MHEG’s staff provides tax credit expertise13FUND INVESTORS vs. DIRECT INVESTORS
  14. 14. After a developer presents a potential deal to MHEG, the project goes throughseveral steps to ensure the deal meets our standards and approval.- Development/Underwriting & Due Diligence Departments review project- SCRUB Meeting: internal loan and project committee examine potential project- Technical Review: technical advisors, tax lawyers & accountants assess potential project- Fund Investor Approval- MHEG Board / Investment Committee approval14PROJECT SELECTION PROCESS
  15. 15. - MHEG does not want the capital you need for normal operations.- The dollars you are considering placing with MHEG are actually dollars you owe to the IRSas a result of your successful operations.- You receive no monetary return with your payment to the IRS.- You will receive an above market return and a CRA Investment Credit, if applicable, whenyou purchase tax credits with MHEG.- Your participation benefits the community and you receive a monetary return withoutjeopardizing your normal business capital.15POINTS TO CONSIDER
  16. 16. - At the end of the 15-year tax credit compliance period, our goal is to exit the partnershipin a manner that allows the property to continue to comply with the states extendedcompliance period.- The general partner or managing member in most cases has a right of firstrefusal to purchase our interest for an amount stipulated in the IRS code.- Since the project still has restricted rents, it will not be able to refinance much additionaldebt. Our exit usually does not generate significant cash or create a tax event.Therefore, we do not include any residual value in our analysis of return to investors.(note: this narrative is greatly oversimplified, but does represent the results of a typical exit)16WHAT TO EXPECT IN THE FUTURE