New and Underused HUD FHA Preservation Strategies You Should Know About Wednesday, November 28, 2018

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1 New and Underused HUD FHA Preservation Strategies You Should Know About Wednesday, November 28, 2018 Curtis H. Johnson, Jr., Moderator CCUSA Vice President, Housing Strategy

2 The Housing Community of Practice- Increase & maintain affordable housing supply Goal: Develop and implement a national strategy(s) to help member agencies: 1. finance renovations of existing properties; 2. new construction of shelters; and 3. temporary and permanent housing for vulnerable persons.

3 Webinar Goals Learn about changes to HUD's preservation programs and benefits to non-profits owners. Changes eliminate certain take-out prohibitions. Non-profit owners can maintain ownership with a new long-term Section 8 HAP contract rents that permit distribution of surplus cash. This panel of HUD preservation experts will present strategies and updates on the HUD 202 PRAC to RAD initiatives.

4 Future Housing Webinars 1. Healthy Housing- Affordable Service Enriched Housing Promotes Good Health (Federal Reserve Bank) Thursday, December 13, 2018 at 4:00pm EST 2. Democracy in Housing (National Association of Real Estate Brokers-CCUSA MOU) Wednesday, December 19, 2018 at 3:00pm EST

5 Webinar Logistics The webinar is recorded and made available later on the website in the members only portal. Your phone line or computer speakers are muted. You may use the Chat feature for comments or questions during the presentation. We will have time for Q & A at the end and will open the lines at that time. All questions not addressed during the webinar will receive an response.

6 Welcome! Panel Curtis Johnson Moderator Linda Pellegrino Rockport Mortgage Corporation Tony Savarese CS-Pre John Staso CS-Pre / JAS Consulting

7 Did You Know? Recent changes to HUD s preservation programs allow not-for-profit owners to obtain the same benefits as for-profit owners. Modifications to HUD s policies permit unrestricted distribution and equity take-out. Non-profit owners can maintain 100% ownership and control. Benefits include a new twenty (20) year Section 8 HAP contract at market comparable or post-rehab market comparable rents.

8 Key Pieces to the Puzzle Understanding restrictions contained within underlying regulatory agreements, use agreements, mortgage note, original HAP Contract. Determining where current rents are relative to market comparable rents. Identifying near term and long term capital improvement needs. Clarifying overall objectives of owner and sponsor.

9 Case Study #1 Large Family Property New York, NY The Real Estate This property was originally developed under the HUD 236 program in 1974 and was decoupled and substantially rehabilitated in 2010 under HUD s 221(d)(3) program. The 600 unit property benefits from LMSA Project-Based Section 8 Contracts on 90% of its units. Deal Summary This 223(f) transaction provided equity take-out proceeds of approximately $65,000,000 allowing the nonprofit owner to provide supportive services for residents as well as a set aside for development of additional housing units. Section 221(d)(3) loan was prepaid and Section 236 IRP was terminated to eliminate distribution prohibition and instead allow nonprofit owner to distribute all cash flow, estimated at $4.5M per year. $170 Million Loan 35 Year Term $65 Million in Equity Out Extended affordability by executing new 20-year Section 8 Contracts at market rents with 15-year Preservation Tail, for a total Section 8 commitment of 35 years. HUD approved 223(f) loan in 58 days.

10 The Real Estate Case Study #2 Large Senior Citizen Property - Revere, MA A 266-unit Section 202 affordable housing building for the elderly and disabled. The property was refinanced with Rockport under HUD Notice in 2011 using the Section 223(f) Program, at which time the $5.1M Flexible Subsidy Loan was subordinated, deferred and amortized. All units covered under Old Reg. Section 8 Contract; rents well below market. Deal Summary The non-profit owner increased Section 8 rents to market comparable levels and executed a new 20-year Section 8 Contract with a 17-year preservation tail, for a total Section 8 Contract commitment of 37 years. Owner paid off the existing Section 223(f) / 202 mortgage and flexible subsidy loan with the new Section 223(f) loan supported by the new Mark-Up-To-Market rents. The payoff of the mortgages eliminated the prohibition on distributions. $38 Million Loan $20 Million Equity Out Unlimited Annual Distributions Unrestricted cash flow and non-profit equity proceeds will be used to fund supportive services and additional affordable housing initiatives. HUD approved loan and new Section 8 rents in 42 days.

11 Case Study #3 Medium Senior Citizen Property - Manhattan, NY The Real Estate A 151 unit Section 202 direct loan from HUD; mortgage note required HUD permission to prepay. All units covered under New Reg. Option 4 HAP Contract; rents well below market. 100% Section 8. Deal Summary This 223(f) transaction provided equity take-out proceeds of approximately $37,590,000 after providing nonprofit owner with fund to complete capital improvements including new kitchens, new baths, and handicapped accessibility modifications. Phase 1 involved prepaying 202 mortgage note with bridge loan to eliminate debt service savings requirement per HUD prepayment requirements. New 20 year HAP contract at current rents. $50 Million Loan $37.5 Million Equity Out Unlimited Annual Distributions Phase 2 involved new Section 223f loan based on market rents without debt service savings requirement. Identity of Interes ( IOI ) sale to affiliated non-profit controlled for-profit to eliminate dividend restriction. Extended affordability by executing another 20-year Section 8 Contract at market rents with 19-year Preservation Tail, for a total Section 8 commitment of 39 years.

12 The Real Estate Case Study #4 Medium Senior Citizen Property - Weymouth, MA Developed by the current nonprofit owner under HUD s Section 236 program in Aged building systems, common areas and unit interiors were in need of substantial rehabilitation. The property benefits from LMSA Project-Based Section 8 Contract on 154 of its 199 units; rents were well below market prior to refinancing. Section 236 loan matured and Flex Sub loan was outstanding. Deal Summary Funded over $100,000 in hard cost per unit in needed improvements and replacements, focusing on energy efficiency, increased supportive services, and site enhancements. Obtained 38 units of project-based vouchers through a new 15-year Section 8 contract with the local PHA via Notice , resulting in a total of 192 or 97% of the units at the property having long-term project-based rental subsidy. $37 Million 221(d)(4) Loan $21 Million of Repairs 40 Year Loan Obtained Mark Up to Market/Chapter 15 post-rehabilitation Section 8 rent increase and extended affordability by executing a new 20-year Section 8 Contract with 19-year Preservation Tail, for a total Section 8 contract commitment of 39 years. 221(d)(4) Appraisal used as reconciling study for MUM rents. HUD approved 223(f) loan and new Section 8 rents in 49 days.

13 Case Study #5 Small Senior Citizen Property Harlem, NY The Real Estate A 76-unit elderly property developed under the Section 202 Direct Loan Program, was refinanced under Section 223(f) in 2008, and is subject to a Section 202 Use Agreement. The property needed capital improvements and the owner sought to generate funds for additional development related activities. 100% of units covered under New Reg. Hap contract; rents below market levels. Deal Summary New $11.9 Million Section 223(f) Loan for 35 years nonrecourse and fully amortizing. Terminated the existing Section 8 Contract and executed a new 20-year Mark-Up-To- Market Renewal Contract. The new contract included the Preservation Exhibit, extending the property s affordability through Completed over $3.1 million in repairs and renovations as part of the transaction. $2.1 Million in equity out to be used in accordance with nonprofit s 501(c)(3) charter. Owner did not want to sell to IOI affiliated nonprofit controlled for-profit entity, so New Reg distribution prohibition remains in place. $11.9 Million Loan $3.1 Million in Repairs $2.1 Million Equity Out

14 Case Study #6 Sale to Affiliated For-Profit - Newton, MA The Real Estate Section 202 loan note allowed prepayment without HUD approval. The property contains 146 one-bedroom units with 99 units covered by a New Reg Project-Based Section 8 HAP contract with rents at below market levels. Remainder of units covered by a PRAC. Deal Summary IOI sale to an affiliated for-profit. Increased rents to market comparable levels under the Mark-Up-To Market Program, and financed the project using the Section 223(f) Program. Eliminated the prohibition on distributions; can distribute 100% cash flow. The appraisal commissioned by Rockport served as the HUD-reconciling Rent Comparability Study. LIHTC transaction contemplated in five years, so debt divided into four tranches. $31.9 Million Acquisition $25.8 Million 223(f) Loan $14.6 Million in Repairs Planned for Year 5 Owner will be able to pay down the mortgage as needed to meet the 50% test. In year 5, the 223f will be assumed by a new LIHTC entity with rehabilitation financed by a Section 241(a) supplemental loan not subject to Davis Bacon Wage Rates. HUD approved loan and new Section 8 rents in 52 days.

15 Case Study #7 Use of FHA & LIHTC Beverly, MA The Real Estate 110-unit Section 202 property with 100% project-based New Reg Section 8, refinanced in 2003 under FHA Section 221(d)(4) program and Subject to Section 202 Use Agreement. The property needed about $30,000/unit of capital improvements, and the owner sought to generate initial and on-going fundsfor additional development related activities. Deal Summary Utilized HUD s 223(f) LIHTC Program enhancements, including a band of investment cap rate to maximize loan proceeds, which combined with tax credit proceeds, funded approximately $3.1 million in capital improvements. Completed a Mark-Up-To-Market Section 8 Renewal Request on behalf of new IOI mortgagor, obtained increased Section 8 rents and a new 20-Year Section 8 HAP Contract, generating additional cash flow to fund more social services for the elderly residents while extending the affordability period of the project. $10 Million Loan $4.6 Million of Tax Credit Equity Unlimited distribution The new HUD 223(f) loan and tax credit proceeds to the non-profit seller provided a source of funds for new affordable housing development. Owner can now distribute 100% of cash flow.

16 Case Study # 8 Use of Developer Fee New York, NY The Real Estate A six-story, 69-unit senior citizen building located in New York City also subject to a NY Department of HPD Regulatory Agreement effective June The transaction was a refinance of an existing direct HUD 202 loan funded in The new FHA 223 (f) fixed-rate mortgage was approximately $10,098,000. In conjunction with this transaction, the project entered into a new twenty (20) year HAP Contract. Deal Summary The Sponsor used approximately $1,205,000 of the financing to make capital improvements to the property, and escrowed $552,000 to fund future unit interior renovations. The property also benefited from an Article XI real estate tax exemption with an original term of 40 years through The owner deferred part of the developer fee to fund more capital improvements and it is now reflected as a note payable on the property s balance sheet and paid-down annually. The original loan carried an interest rate of 8.375%. All achieved with no additional monthly debt service payment. $10 Million Loan $1.3 Million Total Developer Fee Deferred Developer Fee Funded Additional Scope of Work New 20-Year HAP Contract

17 Rents, the Critical Rent Increase Process, and Extending the Section 8 HAP Contract Resident s share of rents not increased only HUD subsidy. Residents continue to pay 30% of their income. Whether rents are below, at, or above market, twenty (20) year extension of HAP Section 8 contract can be accomplished. What to do about above market rents? If rehab is contemplated, new rents can be based on post-rehab rent levels. What are post-rehab rents? Section 8 renewal process is handled simultaneously with refinancing.

18 HUD PRAC to RAD Update New legislation passed to allow for conversion of PRACs to Projectbased Vouchers or Project-Based Section 8 under RAD 2; HUD implementing guidance due out shortly. No new funding provided so HUD is encouraging owners to seek budgetbased rent increases to increase reserves PRIOR to conversion. Owners can use equity proceeds from other Section 202 Direct Loan Project refinancing transactions to help fund PRAC Projects. Creativity will be key given challenges of disbursed ownership, location, need for continuation of supportive services, etc.

19 Questions, Answers and Thank You! A leading, national provider of multifamily and healthcare financing solutions, Rockport Mortgage Corporation specializes in channeling the collective resources and functional expertise of its team s members to assist clients in navigating the complexities of real estate finance, and the HUD/FHA-insured finance programs. Linda Pellegrino lp@rockportmortgage.com CS-Pre provides pre-development funding in combination with development services to non-profits for the preservation and development of affordable housing. As part of Catholic Charities USA s affordable housing ministry, CCUSA entered into a memorandum of understanding with CS-Pre to provide Catholic Charities member agencies and their housing affiliates with access to pre-development capital. Tony Savarese tsav@ajsav.com John Staso john@jashousingconsultants.com

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