This slideshow is the financial presentation that was delivered at the 2014 Annual Meeting of Shareholders of Mutual Redevelopment Houses, Inc. (Penn South).

1. Mutual Redevelopment Houses. Inc.
Financial Presentation
Walter Mankoff, Treasurer
October 26, 2014

2. TODAY’S PRESENTATION
•Focus today is on new and future financial
developments.
•HVAC financing
• J-51 benefits
•Refinancing in 2021
•Last year’s results are amply covered by the
Annual Report.
• Full CPA audited report
• Cash flow projections for Fiscal Year ended June 30,
2015
• Treasurer’s Report

3. HOLDING THE LINE ON EXPENSES
•One current item is presented because
of its importance.
•Operating expense has been kept in
line for the 6th year.
•Increased expense since 2011 is solely
due to higher interest cost on our
borrowing for the HVAC project.

4. $36,000,000
$33,000,000
$30,000,000
$27,000,000
$24,000,000
$21,000,000
$18,000,000
$15,000,000
$12,000,000
$9,000,000
$6,000,000
$3,000,000
$0
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015 (Est.)
TOTAL OPERATING EXPENSE
Operating Expense Except Interest Interest

5. HOW HAVE WE KEPT EXPENSES IN LINE?
•Our management team has done a superb job.
•They were not distracted by the burdens of
the HVAC project
•How?
• Inventory control
• Bidding on purchases as well as contracts
• Doing more work in-house
• Quality supervision

6. HVAC

7. Original HVAC Budget Was Far Too Low
•The $95 million budget was prepared by
expert consultants and contractors. We
had no reason to doubt it.
•Reasons for underestimate:
•Never done before in occupied apartments
•Residents needed more help
•Too much work to do in 3 years
•It paid to do additional ground floor work
while ceilings were down

8. PROJECTED COST TO COMPLETE PROJECT
• Larger, more qualified contractors $ 26.1 million More
• Greater Penn South costs $ 5.5 million more
• Legally required environmental
monitoring $ 1.1 million more
• Addition of fourth year $ 5.0 million more
•Added scope – lobbies,
ground floor $ 5.4 million more
_________________
Total $ 43.1 million more

9. DECISION: BORROW $45 MILLION MORE
•The 2011 mortgage had a provision for
expansion if more funds were needed.
•FNMA and Wells Fargo agreed to lend us
the $45 million if we increase carrying
charges to cover the increased debt
service.
•AFL-CIO Housing Investment Trust bought
the $45 million interest-only mortgage with
a very advantageous interest rate of 3.89%.

10. HOW TO PAY FOR THE $45 MILLION LOAN
•The additional annual interest payment
of $1.75 million required a carrying
charge increase of 8% which took effect
July 1, 2014.
•This brought total HVAC project cost to
approximately $145 million.
•The funds on hand are sufficient to
complete the project.

11. TOTAL PROJECTED COST OF HVAC PROJECT
HARD COSTS (CONSTRUCTION)
Asbestos removal $11,458,418
Purchase fan coil units from TRANE $7,684,210
Pipe, pump and fan coil replacement $102,640,243
Ceiling and lobby restoration $3,088,370
Other $1,084,607
SOFT COSTS
Design and engineering $2,488,257
Environmental monitoring $2,394,941
Owner's Representative $2,518,087
MRH HVAC costs: payroll, lost rent, etc. $9,284,600
Other consultants and contingency $1,800,145
GRAND TOTAL: $144,441,878

12. UNDER BUDGETING SAVED US $8 MILLION
• The Board and Management have been criticized by
some cooperators for not borrowing $140 million up
front. We did not know the full amount of project cost in
2011, but had we known we would have thrown away $8
million.
•Wells Fargo required escrowing sufficient funds to
complete the project. If the budget were $45 million
more, we would have been required to borrow and
escrow these funds up front.

13. HOW WE SAVED $8 MILLION
•We would have paid interest for 3 years on funds
we didn’t need until 2014 at the 4.56% interest
rate. Total extra cost = $6.1 million
•We would have paid interest for 7 years on the $45
million at the 2011 loan rate of 4.56% instead of the
2014 rate of 3.89%. Total extra cost = $1.9 million.
GRAND TOTAL SAVED
$6.1 MILLION + $1.9 MILLION = $8 MILLION

14. J-51 BENEFITS

15. J-51 HELPS KEEP HOUSING AFFORDABLE
•J-51 is a City program that provides real estate
tax credits to help pay for major capital
improvements.
•Specific benefit amounts are provided for each
kind of work. The benefits are called Certified
Reasonable Costs (CRC). Quarterly tax credits
in a standard program are given for 90% of CRC
over a 12 year period.
•Over the years, Penn South has been granted
J-51 benefits totaling $6 million for projects
such as windows, elevator modernization,
construction of gas fired generating plant, etc.

16. J-51 FOR HVAC
• In planning the HVAC project we explored J-51
possibilities. This was difficult to do because the law had
expired on December 31, 2011 and was not renewed by
the State until January 2013 and by the City until
December.
•We anticipated receiving about $5 million in tax credits
based on estimates of the amount of work to be done.
The benefits were increased under the new law and we
started getting actual data as work was completed.
• The HVAC project alone would now have a CRC of $6.2
million, a 90% tax credit of $5.5 million and an annual tax
credit of $461,000.

17. J-51 BENEFITS FOR THE HVAC PROJECT
J-51Benefits J-51Benefits
For
2,820 Units Per Unit
J-51 for HVAC project
• Asbestos removal $1,919,183
• Piping $3,795,286
• Pipe Insulation $ 435,573
• Total Certified Reasonable Cost (CRC) $6,150,042 $2,181
• 90% of CRC $5,535,038
• Annual J-51 abatement (over 12 years) $ 461,253

18. ENHANCED J-51 BENEFITS
•In reading the new J-51 rules early this
year we discovered the possibility of more
than doubling the anticipated benefit.
•If certain kinds of work were done, and
the Certified Reasonable Cost per
apartment unit was at least $2,500, the
project would become what is defined as a
Moderate Rehabilitation.

19. HOW TO GROW OUR J-51 BENEFITS
•Government assisted Moderate Rehabs receive
tax credits equal to 150% of CRC instead of the
standard 90%. Our HDC and 8A loans would
qualify us if we could increase the HVAC unit
CRC of $2,181 to $2,500. The additional work
did not have to be part of the HVAC project.
•We immediately thought of our power plant
where aging equipment would have to be
replaced in the next few years and where J-51
benefits would apply.

20. POWER PLANT J-51
• First on the replacement list were the two Kewanee
boilers we installed in 1986. They were near the end of
their useful life and increasingly inefficient. We also
need larger boilers for future use. We must expand our
chiller capacity and plan to install electric chillers that
would no longer provide the supplemental heating we
get from our present heater/chillers.
•Next to be explored were the electric distribution
panels on the mezzanine that funnel power to our
buildings. They are over 50 years old and a failure could
leave several buildings in the dark.

21. CLOSING THE GAP!
• Not in the power plant but qualifying for J-51
was the Local Law 11 facade work we did on our
buildings in the last few years and a new house
water tank we plan for the top of Building 5.
•Adding the Certified Reasonable Cost of these
items to the HVAC total fills the gap and qualifies
us for the enhanced Moderate Rehab benefit.
•The enhanced J-51 benefit pays for the boilers
and the electric distribution panels.

22. FILLING THE GAP
Benefits For Benefits
2,820 Units Per Unit
Total HVAC Certified Reasonable Cost (CRC) $6,150,042 $2,181
CRC for Other Major Capital Improvements
2 1,000 HP Boilers $481,406
Electronic Boiler Controls $25,000
Electric Distribution panels $319,200
Local Law 11 work $267,988
House tank, Building 5 $34,500
Total HVAC & Other CRC $7,278,136 $2,581
Fan Coil Units $2,007,923
GRAND TOTAL -- CRC $9,286,059
150% OF CRC $13,929,089
Annual J-51 Abatement (over 12 years) $1,160,757

23. JUNE 30, 2015 DEADLINE
• A major complication to the J-51 filing process is the
fact the law expires on June 30, 2015. Benefits are
available under the present law only for projects
completed and approved by the Building Department
before that date.
• The timing urgency will require our boilers to be
replaced in the wintertime requiring temporary
boilers to keep buildings warm.
• Our elected officials must work to see that J-51 is
extended to preserve affordability.

24. HOW WE PAY FOR THE BOILERS
•Reserve funds that would have been available for
chiller replacement in 2016 will have to be used this
year for the boilers and electric distribution panels.
We have arranged a $5 million credit line with the
Amalgamated Bank to provide funds for the chiller
replacement.
•We will pay interest only until July 2016. We then
start paying down the principal on the loan using J-
51 tax credits. In 2021 we will refinance the balance
on the loan.

25. REFINANCING IN 2021

26. REFINANCING IN 2021
•Our long-term debt matures in 2021 and the
outstanding balance will have to be refinanced.
•Unless we have surplus funds and can reduce the
balance, we will have to refinance $131 million:
• Balance on $134 million borrowed in 2011 $82 million
• Balance on $45 million borrowed in 2014 $45 million
• Balance on $5 million borrowed in 2014 $ 4 million
Total $131 million

27. LOOKING AHEAD TO 2021
• There have been concerns voiced about the impact
of the refinancing on our financial status and our
affordability.
• With our traditional due diligence approach to
issues we have carefully examined what may
happen in 2021.
• The charts that follow show what our research
found:
• Unless interest rates in 2021 are double-digit, simply
refinancing will cost less than we are now paying on our
loans.
•We can use the shortfall to borrow additional funds for
new projects without increasing cost to cooperators

28. COST TO REFINANCE $131,000,000 IN 2021
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
20 YEAR AMORTIZATION
Current Debt Service
New Debt Service
4% 5% 6% 7% 8% 9% 10%

29. COST TO REFINANCE $131,000,000 IN 2021
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
30 YEAR AMORTIZATION
Current Debt Service
New Debt Service
4% 5% 6% 7% 8% 9% 10%

30. IMPORTANCE OF DEBT REDUCTION
• We don’t know what the financial situation will be
in 2021.
• How high interest rates will be
• What major projects will be pending and how much will
they cost
• What reserves will be on hand
•Regardless of the situation it is critical that every
effort be made to reduce debt by choosing the most
aggressive amortization schedule possible. Our
history proves the value of this policy

31. A WISE CHOICE
• Our 2011 experience is an ideal example. We opted
for 20 year amortization instead of 30. Had we not
made this wise choice, we might not have been able
to borrow the additional $45 million we need to
finish the HVAC project. If we had a 30 year
amortization schedule we would be refinancing a
$175 million balance in 2021, not $131 million.
•Refinancing a $175 million balance would call for a
significant increase in carrying charges if interest
rates exceeded 5%. That would put the co-op and
our affordability at risk.

32. BORROWING FOR MAJOR CAPITAL PROJECTS
• While Penn South has tried over the years to finance
capital projects with assessments rather than operating
funds or loans, many major projects have been financed
fully or in part with the help of loans.
• Cogeneration retrofit in 1986 and gas plant addition in 2000.
• Electric conduit replacement in 1987 and again in 2003.
• Roofs, and asbestos removal from public areas in 1987.
• Window replacement in 1996.
• Elevators in 1990 and 2003.
• Garage in 2000.
• Power house chillers in 2000.
• HVAC in 2011 and 2014.

33. MAXIMUM ADDITONAL BORROWING IN 2021
WITHOUT INCREASING COST TO PENN SOUTH
We hope to defer new major projects, not now on our
drawing board, until 2021. We have explored the amount of
additional funds we can then borrow without increasing the
debt service cost to our co-op. The data suggest that
substantial additional borrowing will be possible.
INTEREST 20 YEAR AMORTIZATION 30 YEAR AMORTIZATION
4% $44,000,000 $89,000,000
5% $29,000,000 $69,000,000
6% $19,000,000 $44,000,000
7% $4,000,000 $29,000,000
8% $14,000,000

34. TheEnd!