WELCOME Multifamily Housing Seminar: Trends & Topics for Developers and Owners

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1 WELCOME Multifamily Housing Seminar: Trends & Topics for Developers and Owners May 8, 2013 TAX ABATEMENT FOR HOUSING INCENTIVES May 8, 2013 Charles Renner Husch Blackwell LLP 1

2 Tax Abatement/Exemption Chapter 99 Statutory Cite: & Benefit: 100% Abatement for 10 years Requirements: Must be a constitutional charter city with an LCRA Must be a blighted area Requires LCRA approval and designation of Developer by LCRA Special Considerations: Generally, no PILOTs are paid. Instead, taxes are calculated based on the pre-redevelopment assessed value of the property Assessor not prohibited from increasing the assessed value other than the new construction/rehabilitation 2

3 Chapter 353 Statutory Cite: Benefit: 100% Abatement for up to 25 years (typically 10 years 100% and 15 years 50%) Requirements: Property must be transferred to an Urban Redevelopment Corporation for a moment in time Must be a blighted area Special Considerations: 8% earnings limitation per annum Continue to pay taxes on base value of land (exclusive of improvements) Most municipalities require PILOTs = base value of improvements Phased/delayed projects risk increase in base Chapter 100 Statutory Cite: Benefit: 100% exemption (typically between years) on real and personal property taxes 100% sales tax exemption on building materials Requirements: Must transfer property to a municipality for the term of the exemption Special Considerations: Belt and Suspenders Challenges with Assessor if imposing a CID/TDD special assessment in order to monetize the benefit of the exemption Educating Lenders Can use other political subdivisions (LCRA, PIEA, CID, and TDD) for property tax exemption (psuedo Chapter 100) 3

4 Impact of Special Districts vs. Tax Abatement Neighborhood Improvement Districts Statutory Cite: Benefits: Special Assessment Requirements: Within a city or county Public Improvements Special Considerations Not a separate legal entity (controlled by the city or county) Obligations are quasi-general obligations of the city or county No provision for adding or removing property at a later date Special assessment can be based on any reasonable method of assessment and different classes of property can be assessed different Total amount of obligations cannot exceed 10% of the assessed valuation of all taxable tangible property within the city or county 4

5 Community Improvement Districts Statutory Cite: Benefits: Special Assessment Property Tax Sales and Use Tax Business License Tax Requirements: Public Improvements Private Improvements if within a blighted area Special Considerations Special assessment can be based on any reasonable method of assessment and different classes of property can be assessed different Political Subdivision v. Non-profit Transportation Development Districts Statutory Cite: Benefits: Special Assessment Property Tax Sales and Use Tax Requirements: Transportation Improvements Special Considerations Ownership of improvements Municipality appoints an advisor to the board Different classes of property can be assessed different 5

6 Blight Blight Definitions Chapter 99 An area which, by reason of predominance of defective or inadequate street layout, insanitary or unsafe conditions, deterioration of site improvements, improper subdivision or obsolete platting, or the existence of conditions which endanger life or property by fire and other causes, or any combination of such factors, retards the provision of housing accommodations or constitutes an economic OR social liability or a menace to the public health, safety, morals, or welfare in its present condition and use Chapter 353 That portion of the city within which the legislative authority of such city determines that by reason of age, obsolescence, inadequate or outmoded design or physical deterioration have become economic AND social liabilities, and that such conditions are conducive to ill health, transmission of disease, crime or instability to pay reasonable taxes 6

7 Blight Definitions TIF/MODESA (almost identical to Ch. 99) An area which, by reason of the predominance of defective or inadequate street layout, unsanitary or unsafe conditions, deterioration of site improvements, improper subdivision or obsolete platting, or the existence of conditions which endanger life or property by fire and other causes, or any combination of such factors, retards the provision of housing accommodations or constitutes an economic OR social liability or a menace to the public health, safety, morals, or welfare in its present condition and use CID (1) Same definition as TIF/MODESA; OR (2) Has been declared blighted or found to be a blighted area pursuant to Missouri law including, but not limited to, Chapter 353, the TIF Act, or the LCRA law Questions? 7

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9 Bank Financing for Multifamily Projects How does a deal get done? Financials Stage 1 Plan Vs Dream Personal Business Debt Schedules Budgets Plans 1

10 Stage 2 Bank Goals and Analysis Construction Bank insures completion and/or credits issued Does it make sense? Cost/unit Market Vacancy Development Team CPA Attorney GC Bonding/GMP Management Company Investors Stage 2 Analysis Developer Experience Current construction/lease up on other projects Completed projects performance Underperforming Strong Performers wrap to new project initially? Global Analysis Personal debt, business debt schedule 2

11 Market Study Stage 2 Analysis Project AMI Mixes 30%, 60% AMI Enhanced Units Vacancy market and tax credit Location Competition Age Projected Rents can you get it? Stage 2 Analysis Perm Debt Debt/Door Sensitivity Analysis Rate Shocking Break Evens Interest Rates Vacancy Rental Rates 3

12 Investor Stage 2 Analysis Equity Cash Letters of Credit Issuer Equity Timing vs Construction Time Line Developer Cash Cash flowing projects Loan Report Stage 3 Approval Strengths/weaknesses/mitigating factors Attempt to model reality Counter Offer/Stipulations 4

13 On Time On Budget Change Orders Inspections Draws Stage 4 Construction Misc Phasing Amenities Packages Guarantor Release Third Constituency Examiners/Auditors 5

14 Communication Conclusion Much unhappiness has come into the world because of bewilderment and things left unsaid. Dostoevsky 6

15 Gershman Permanent Financing: Navigating the Waters By: Ron Weis Gershman Understand what has happened 1

16 Gershman Prior to Multiple sources for permanent financing Rates 6.0% 7.0% Aggressive underwriting, quick turnarounds Financing chasing deals New construction at a high pace putting pressure on occupancies After Wall Street CMBS almost totally goes away. Investors are burnt by defaults and delinquencies. Strong regulatory response: Fannie & Freddie troubles Underwriting so tight that lending dramatically slows New construction almost ceases Deals chasing scarce financing: supply & demand Gershman Results of slow economic recovery FHA and GSEs Fannie Mae & Freddie Mac become the dominant sources Rates drop: 10 year T note rate drops as the Fed intervenes and the market seeks security. CMBS make slow progress Tight, conservative underwriting Cap rates drop in response to low rates and demand for existing product: rent increases and high occupancies New construction returns as occupancies rise. Occupancies and low rates attract equity. Risk mitigation becomes key to successful underwriting 2

17 Gershman Getting ready to finance Think like a lender Analyze strengths & weaknesses Document the strengths Document and be prepared to mitigate weaknesses Ask questions, ask for help Be ready to prepare a detailed package. Be over prepared anticipate all the questions, even if you think the answers are self evident Gershman Identify possible perceived risks Think like a lender Rents & expenses vs. the market area Physical condition/property age Handicap accessibility Leverage Borrower 3

18 Gershman Getting Permanent Financing Risk Mitigation Rents & expenses vs. the market area Underwrite to market rents or lower Expenses based upon market, not historical LTV and debt service coverage above the minimum Change in management agent Physical condition/age Required repairs & escrows for repairs Reserves Shorter term Renovations & updates Handicap accessibility Required repairs & escrows for repairs Reserves Gershman Borrower Experience Partner with experience Management agent with experience Financial strength REO/Debt schedule & demonstrating that maturing debt or interest rate resets will be accommodated Partner with strength Financial & operational history Tell the story with supporting documentation Independent & strong management agent Demonstrate that things have changed Have a plan that is being implemented Partner with strength 4

19 Gershman Trump Cards Equity Cash Gershman FHA Insured Mortgage Programs New Construction Non recourse 40 year term & amortization Assumable Interest only during construction 83% of mortgagable costs or 1.20 DSCR (special terms for affordable projects) Tax abatement can be used to increase the loan Refinancing/Acquisition Non Recourse 35 year term & amortization Assumable 83% LTV, 1.20 DSCR, or 100% of the transaction cost. (special terms for affordable projects) Tax abatement can be used to increase the loan 5

20 Gershman FHA Tax Credit Pilot Program Separate staff for processing Priority given to affordable projects At least 90% of the units with LIHTCs Three types projects are eligible: Newly constructed, stabilized projects Projects with at least 90% of the units with Section 8 rental assistance Projects that have completed the 15 year compliance period and are receiving new credits. The program allows use of the 223(f) refinancing program with projects having up to $40,000 per unit in renovations. Davis Bacon not required. 6

21 May 8, 2013 S. Shawn Whitney Husch Blackwell LLP 37 Affordable Housing Tax Credits Low Income Housing Tax Credit Section 42 of the Internal Revenue Code Chapter 135 of the Missouri Revised Statutes Credit is a dollar for dollar tax reduction on Federal and State Income Tax 9% of qualified basis annually for ten years annually for existing or new buildings that is not federally subsidized 4% of qualified basis for ten years for new construction or substantial rehabilitation with tax exempt bond financing Credit Amount is based upon cost of constructing or rehabilitating housing developments Objective: To provide investor equity to lower/eliminate debt service to allow for lower rents ( Qualified Basis ) Projects Subject to MHDC Compliance Requirements 1

22 Historic Tax Credits Historic Tax Credit Section 47 of the Internal Revenue Code 20% Federal Investment Tax Credit for QRE s for Certified Historic Structure 10% federal credit for restoring buildings built pre-1936 Must be allocated to member/limited partners proportionately (typically through master lease structure) Rehabilitation must be in accordanance with Secretary of Inferior Standards Chapter 253 of Missouri Revised Statutes 25% of QRE s Freely transferrable (subject to income tax on sale) Also must be built in accordance with Secretary of Inferior Standards Can be layered with LIHTC Objective: increase adaptive reuse of historic buildings in urban areas Syndication Syndication is the process by which the owner of an affordable housing/historic building project admits an equity investor into the ownership entity allowing the investor to claim the credits in exchange for providing equity to the project. Investors are owners of the property as members/limited partners of the ownership entity (can be two tiered structure for HTC via master lease) Investors receive other economic and tax benefits from ownership Investors require a certain amount of control, disclosure/reporting, and removal rights. 2

23 Investor Considerations Project Team (important to have experienced architect, general contractor, accountant, property manager, and lawyer) Investor will require a loan commitment Investor will perform significant due diligence on the developer and underlying real estate (personal financials, REO schedule, environmental, title, zoning, etc.) Creating a Project to Attract Investors Economic Benefits to be evidenced by CPA prepared projections. Investors consider: Amount of credits (more expensive projects attract greater number of investors) Depreciation (losses passed through to the investor) Cash flow Location of Project (affordable) Community Reinvestment Act (banks receive credit for participation in CRA developments) Higher equity pricing for CRA developments (20% to 30% premium) Difficult to Developer Areas (DDAs) and Qualified Census Tracts (QCTs) areas where the need is greatest for affordable housing, but which can be the most difficult to develop. distressed areas, the LIHTC can be claimed for 130% (instead of the normal 100%) of the project s total cost excluding land costs. 3

24 Attracting Investors Cont. Project Feasibility Experienced developer (built and managed other LIHTC/HTC projects) Strong guarantors Strong project (low loan to value/no debt) Strong market (need evidenced by market study) Searching for Investors Relationships are key components Investors with working knowledge of development/key team members allows for better deal terms and less fact finding. Hire professionals with strong relationships within equity markets Consider investor reputation before selection (past deals/ due diligence/ integrity) Key Terms to Negotiate on Letter of Intent Key terms to negotiate within Investor Letter of Intent Pricing (but not always most important) Pay in schedule - Time value of money (discount future payment by interest rate paid on construction loan) Annual asset management fee/ Preferred Return (essential to create economic substance) Costs (whose paying investors costs for due diligence and professional fees) Kick out clause in LOI Reserves (how much and when reserves can be used) Income allocation provisions (whose taking re-characterization of income risk) Risk arises when state limited partner receives an allocation of credit Tax opinion (shift burden back on investor s counsel) Adjusters (timing/credit surplus/deficit) Cash flow waterfall Guarantees (limit duration and amount) Exit strategies (Put & Call provisions) 4

25 Changing Landscape of Investment HTC Deal Structure: Limited guarantees (operating deficit guaranty may burn off after meeting financial forecast/number of years) Investors should provide money upfront (20% initial capital contribution at admission) Projections will be highly scrutinized (must show potential profit to investor) Investors will be looking at the economics of the deal closer instead of just relying on the financial strength of the developers Continued Put/Call price would be determined by independent appraisal (Fair Market Value of Interest). Preferred return payable from cash flow and not guaranteed Projections will be highly scrutinized (must show potential profit to investor) Split of residual cash flow actual expectation of cash flow to investor. Tax Credit Guaranty limited to percentage of investment amount 5

26 Questions? S. Shawn Whitney 901 St. Louis St., Suite 1800 Springfield, MO Direct: (417) Fax: (417)

27 An Overview of Value Trends and Appraisal Issues in Multi-Housing Presented by Stephen Cosby, MAI, MRICS Managing Director CBRE Valuation & Advisory Services CBRE Valuation & Advisory Services United States Valuation & Advisory Services 9 Regions in USA 60 offices Over 400 Appraisal Professionals Nationwide Northern California Pacific Northwest Intermountain North Central New England Northeast Southern California South Central Southeast CBRE Page 49 1

28 CBRE Valuation & Advisory Services Appraisal Services Assessment & Consulting Services Line of Services Financial & Tax Reporting Services CBRE Page 50 CBRE Valuation & Advisory Services Our Clients Investment and commercial banks Corporations Pension funds Investors REITs Government agencies All CBRE reporting conforms to to The Appraisal Institute USPAP FIRREA FNMA/FHLMC International Standards as applicable Clients and Reporting CBRE Page 51 2

29 CBRE Valuation & Advisory Services CBRE VAS Multi-Housing Assignments CBRE Page 52 CBRE Valuation & Advisory Services CBRE VAS Multi-Housing Contacts CBRE Page 53 3

30 CBRE Valuation & Advisory Services The Health of the Apartment Market CBRE Page 54 CBRE Valuation & Advisory Services The Health of the Apartment Market CBRE Page 55 Source: Reis 4

31 CBRE Valuation & Advisory Services Effect of Class on Rent Source: Reis CBRE Page 56 CBRE Valuation & Advisory Services Effect of Class on Vacancy Source: Reis CBRE Page 57 5

32 CBRE Valuation & Advisory Services Kansas City Apartment Market CBRE Page 58 CBRE Valuation & Advisory Services Kansas City Apartment Market - Submarkets CBRE Page 59 6

33 CBRE Valuation & Advisory Services Kansas City Apartment Market - Submarkets CBRE Page 60 CBRE Valuation & Advisory Services National Trends 2001-Present - Apartments Source: Real Capital Analytics CBRE Page 61 7

34 CBRE Valuation & Advisory Services Kansas City Apartment Market Sales Source: Real Capital Analytics CBRE Page 62 CBRE Valuation & Advisory Services Kansas City Apartment Market - Sales CBRE Page 63 8

35 CBRE Valuation & Advisory Services 8.00% 7.00% 6.00% 5.00% 4.00% Agency 10-Year Mortgage Rates FNMA DUS 10 year Rate All In Rate 10 Year Treasury 3.00% 2.00% Gross 1.00% 3/14/2008 9/30/2008 4/18/ /4/2009 5/23/ /9/2010 6/27/2011 1/13/2012 7/31/2012 2/16/2013 CBRE Page 64 CBRE Valuation & Advisory Services Agency 10-Year Mortgage Rates CBRE Page 65 9

36 CBRE Valuation & Advisory Services Basic Formulas for Direct Capitalization Where: I = Income (NOI) V = Value R= Rate F = Factor What is a Cap Rate I= R x V R = I / V V = I / R CBRE Page 66 CBRE Valuation & Advisory Services BAND OF INVESTMENT Mortgage Interest Rate 4.25% Mortgage Term (Amortization Period) 30 Years Mortgage Ratio (Loan-to-Value) 75% Mortgage Constant Equity Dividend Rate (EDR) 10% Band of Investment Mortgage Requirement 75% x = Equity Requirement 25% x = % Indicated OAR: 6.90% Compiled by: CBRE CBRE Page 67 10

37 CBRE Valuation & Advisory Services Avg. Cap Rate Garden Apartments Source: Real Capital Analytics/St. Louis Federal Reserve Bank CBRE Page 68 CBRE Valuation & Advisory Services Valuation - LIHTC VALUATION Total Per Unit Land Value $85,000 $1,771 Cost Approach - Conventional $1,900,000 $39,583 Sales Comparison Approach - Conventional $2,200,000 $45,833 Income Capitalization Approach - Conventional $1,900,000 $39,583 Cost Approach - LIHTC $1,150,000 $23,958 Income Capitalization Approach - LIHTC $1,150,000 $23,958 Insurable Value $2,750,000 $57,292 CONCLUDED MARKET VALUE Appraisal Premise Interest Appraised Date of Value Value As Is - Conventional Fee Simple Estate January 4, 2013 $1,900,000 As Is - LIHTC Fee Simple Estate January 4, 2013 $1,150,000 Compiled by CBRE CBRE Page 69 11

38 CBRE Valuation & Advisory Services Federal LIHTC Sales CBRE Page 70 CBRE Valuation & Advisory Services Valuation HAP Contract VALUATION - Market Total Per Unit Land Value $550,000 $3,986 Market Value As Is On February 19, 2013 Cost Approach $1,800,000 $13,043 Sales Comparison Approach $1,850,000 $13,406 Income Capitalization Approach $1,800,000 $13,043 Market Value As Stabilized On November 19, 2013 Cost Approach $3,950,000 $28,623 Sales Comparison Approach $4,000,000 $28,986 Income Capitalization Approach $3,950,000 $28,623 Insurable Value (Replacement Cost) $6,200,000 $44,928 CONCLUDED MARKET VALUE Appraisal Premise Interest Appraised Date of Value Value As Is - Market Fee Simple Estate February 19, 2013 $1,800,000 As Stabilized - Market Fee Simple Estate November 19, 2013 $3,950,000 As Is - HAP Contract/Restricted Rents Fee Simple Estate February 19, 2013 $3,250,000 As Stabilized - HAP Contract/Restricted Rents Fee Simple Estate November 19, 2013 $5,400,000 Compiled by CBRE CBRE Page 71 12

39 Thank you Stephen Cosby, MAI, MRICS Managing Director CBRE Valuation & Advisory Services 438 E Millsap Ste 204 Fayetteville, AR W Capitol 15th Floor Little Rock, AR T x. 3 F steve.cosby@cbre.com 13