Analysis of a Troubled Deal Keith Broadnax Joshua Ghena David Helm Josh White
Identifying a Troubled Deal How to Spot and Fix Problem Deals
Introduction to Presenters Josh Ghena- Lansing MI Director Special Assets- DE, IN, MI, WI Oversees a portfolio of troubled deals and active workouts Manages action plans and workouts for troubled deals Ensures credit delivery through operational problems Specialization in Urban Planning and affordable housing policy Dave Helm - Indianapolis IN Special Assets- Indianapolis Oversees a mixed portfolio of troubled and stabilized properties Manage action plans for troubled deals Certified Property Manager (CPM ) designation Specialization in property operations Josh White Detroit MI Special Assets- Detroit Oversees a portfolio of troubled deals and active workouts Ensures credit delivery through resolution of operational problems Experience asset managing deals in receivership Received MBA from Northwood University 3
Introduction to Presenters Keith Broadnax Indianapolis IN Senior Vice President - Business Development IL, IN Originator of Low Income Housing Tax Credits and multi-family debt Significant experience as an underwriter of multi-family developments Serves on the boards of the Indiana Affordable Housing Council, Prosperity Indiana, Coalition for Homeless Intervention & Prevention (CHIP) and Hamilton County Area Neighborhood Development (HAND) Bachelor s Degree from Northern Kentucky University Master s Degree in Urban and Regional Planning from Ball State University 4
Introduction to Cinnaire Who We Are Cinnaire is a full-service community development financial partner that supports community stabilization and economic development by developing and nurturing partnerships with investors and mission-focused organizations. We provide creative loans, investments, and best-in-class services to partners. What We Do Over $3.5 billion in community impact Over $350 million in community development loans Over 650 housing developments under asset management For more information visit www.cinnaire.com 5
The Role of Asset Management Why do we asset manage? Ensure project and partners deliver the expected outcomes To have one point of contact for all things deal related Tasked with managing projects and solving problems How do we asset manage? Foster relationship with each partner Be the technical expert on all things deal related Commit to being creative When do we asset manage? From before closing to disposition Asset Management touches the entire lifecycle of a deal The amount of involvement is determined by deal performance 6
This Session HOW THIS WILL WORK START OF SESSION Facilitators will present Asset Management best practices for working with a troubled asset Review the case study contained in the handouts Break into groups to discuss the major problems and solutions Convene with large group to present the problems and solutions Large group discussion on the problems and potential solutions END OF SESSION 7
Learning the Deal What do you need to know? Who are the stakeholders and partners What responsibilities and obligations are held by each group What assumptions have been made by underwriting Is the property meeting those assumptions Property performance in real-time Where do you look for answers? Contracts and agreements Permanent loan documents Original project descriptions and summary Underwritten pro-forma and 20 year cash flow statement Current operating reports and financial statements 8
Understanding Property Performance Regularly review performance Collect monthly operating information Close scrub of quarterly financials Detailed review of year end audit Look for trends Approach Compare actual performance to budget Compare current information to prior year same period Compare current operations to historic performance Compare actual performance to projected performance Compare deal performance to similar projects 9
Measuring Property Performance What to Measure- Balance Sheet Cash on hand Accounts Payable Tenant Receivables What to Measure- Operations Year over year change in GRP Vacancy and collections Repairs and maintenance expenditures Operating expenses per unit Debt Service Coverage Ratio (DSCR) 10
Warning Signs of Troubled Deal Red Flags Unresponsive partners Inconsistent or poor reporting Negative trends in back to back quarters Large swings in recent performance Large variations compared to historical performance Unanticipated site issues Construction delays Develop a Rating System Cinnaire has a list of a dozen characteristics Each characteristic is assigned a letter grade Produce a weighted score for each property Properties C or lower are turned over to the Special Asset Group Track performance over the life of the deal 11
Fixing a Deal Understanding the desired outcome Identify the stakeholders Understand the risks and priorities of each stakeholder Know responsibilities and obligations of each stakeholder Established a shared vision for the desired outcome A successful workout does not have to fix all the problems Know the goal - a successful workout can be minimizing loss Finding Solutions Get stakeholders to the table Identify the problem(s) Establish benchmarks Develop a timeline Create an action plan 12
The Underlying Problem Four Types of Problems Partners Revenue Expenses Debt Three Options Fix it Feed it Flush it 13
14 Break into Groups
Priority of Challenges 1) Sewer backups in basements and county officials condemning 4 buildings 2) Failed REAC inspection 3) Finding a experienced management company that ownership could agree upon 4) Achieving proforma rents 5) Deal with General Partner issues 15
How to address each of the Challenges Sewer backups in basements and county officials condemning 4 buildings 1. Eliminate the back ups and implement preventative maintenance plan 2. Have 4 buildings removed from the City s condemned list 16
How to address each of the Challenges Failed REAC inspection 1) Cinnaire asset manager trained in REAC inspections performed a pre-reac to assist staff in preparation 2) Engage new management agent experienced with HUD financed deals and capable of addressing 1 st REAC findings to obtain a passing score 3) Asset Manager verify findings identified on pre-reac and 1 st REAC were completed prior to final REAC 4) Follow up with Lender 17
Priority of Challenges Find an experienced management company that ownership could agree upon Need experienced management agent that is well versed in the following: 1) LIHTC 2) HUD Financed properties 3) REAC Inspections 4) Turning around troubled assets 5) Experience meeting reporting requirements of the Investor Limited Partner 6) Ensure managements contract is performance based 18
Priority of Challenges Achieving pro-forma rents 1) Review property managements action plan for leasing vacant units 2) Meet monthly with property management to ensure occupancy and collections are improving 3) Monitor rent roll monthly to ensure rental increases are being implemented at recertification 19
Cinnaire is a full-service CDFI partner that supports community stabilization and economic development by developing and nurturing partnerships with investors and mission-focused organizations. We provide creative loans, investments, and best-in-class services to partners. cinnaire.com 844-4CINNAIRE
Directions Review the following information and answer the following 2 questions as a group. 1. What are the all the problems and prioritize them? 2. How do you address each priority? The Villas Project Description The Villas was an acquisition/ rehabilitation family project located northeast of downtown on a major east-west transit and commercial corridor. The Villas consists of 6 residential buildings and will include the construction of a new community building. The common building includes computer and meeting rooms, a full-service kitchen, restrooms, and the leasing offices. This development is in an established area with access to public transportation, commercial services, and restaurants. This project underwent extensive rehab and unit reconfiguration with rehab costs exceeding $41,000 per unit. The scope of the rehab included major demolition of unit interiors and reconfiguration of some units. The existing 214 units were reduced to 168 units, eliminating one bedroom units and reconfiguring to add four bedroom units. The existing boiler system was eliminated and electric point of use electric water heaters were installed. The scope also includes P-tac heating/cooling units which are efficient and cost effective. The electrical system was completely upgraded from the current 60 amp service to a minimum of 100 to 120 amp depending on unit requirements. The General Partner in this project is a for profit developer. It originally consisted of an out of state general contractor and his business partner who was familiar with LITHC development. Before construction on the rehab started the partner with LIHTC experience exited the partnership leaving the remaining member as sole GP with no LIHTC experience. While the property has experienced multiple years with cash flow deficits the GP has continued to fund those deficits well beyond the operating deficit guaranty but recently the GP has stopped making advances to the partnership. As the project struggled the GP has changed management companies twice and is now self-managing. During that self-managing period the project failed a REAC inspection. An audit by the Inspector General found several issues with the accounting procedures that resulted in compliance issues with the lender. Four of the seven buildings were recently condemned by the city because of extensive sewer backups in the basements. This has resulted in substantial vacancy. The property is not operating as anticipated in the proforma. Project Strengths a. Unit sizes larger than other area affordable housing projects. b. Good access residential location. c. Residential market improving. d. Providing much needed affordable housing for the area. e. GP has been willing to fund deficits exceeding his Operating Deficit Guarantee 1
Other Project Information: a. Placed in service in 2008 b. Two-bedroom units: 80 c. Three-bedroom units: 72 d. Four-bedroom units: 16 e. Total Number of Units: 168 f. Total Number of LIHTC units: 158 g. Percentage of Affordable Units: 94% h. Total Number of Market-Rate Units: 10 i. Total Number of Special Needs Units: 18 (9 Homeless, 9 Disabled) j. Total PUPY: $4,407 (not including Replacement Reserves) k. First year Replacement Reserve (per unit): $300 per unit l. Total Development Cost: $12,332,113 ($75,405/unit) m. Annual LIHTC Credits: $742,839 n. Adjacent Land Usage: a. North: Commercial Development b. South: Multi Family Residential (Cooperative) c. East: Mobile Home Park d. West: Multi Family Senior Assisted Living Pro-Forma Revenue vs. Actual Unit Description 2 Bedroom 2 Bath 3 Bedroom 2 Bath 4 Bedroom 2 Bath 2 Bedroom 2 Bath 3 Bedroom 2 Bath 4 Bedroom 2 Bath 2 Bedroom 2 Bath 3 Bedroom 2 Bath 4 Bedroom 2 Bath 2 Bedroom 2 Bath 3 Bedroom 2 Bath Target AMI Number BR Number Units Pro- Forma Rental Rates 2016 Pro- Forma Gross Rent Potential 2016 Actual Rental Rates 2016 Actual Gross Rent Potential 30% 2 10 318 38,160 321 38,520 30% 3 8 358 34,368 375 36,000 30% 4 2 389 9,336 393 9,432 40% 2 18 452 97,632 350 75,600 40% 3 15 514 92,520 536 96,480 40% 4 3 563 20,268 582 20,952 50% 2 40 587 281,760 410 196,800 50% 3 36 669 289,008 490 211,680 50% 4 9 736 79,488 761 82,188 60% 2 8 598 57,408 625 60,000 60% 3 8 695 66,720 650 62,400 2
4 Bedroom 2 60% 4 1 760 9,120 349 Bath 4,188 2 Bedroom 2 Mkt 2 4 598 28,704 650 Bath 31,200 3 Bedroom 2 Mkt 3 5 695 41,700 550 Bath 33,000 4 Bedroom 2 Mkt 4 1 760 9,120 761 Bath 9,132 Total 168 1,155,312 967,572 Proforma Expenses vs. Actual Actual 2016 Proforma 2016 Operating Amount $/Unit Amount $/Unit Exp. Admin 281,035 1,673 213,613 1,271 Utilities 152,825 910 97,031 578 Maintenance 150,493 896 315,789 1,880 Insurance 97,073 578 56,446 336 Sub Total 681,426 4,056 682,879 4,065 Taxes 58,980 351 178,457 1062 Total 740,406 4,407 861,336 5,127 Debt Structure HUD 223(f) Loan, $4,080,000 35 yr. term, int.= 4.85% Maturity Sept 1, 2045 $20,203 /month $243,436 /year Guarantees Owners will guarantee Construction Completion, Tax Credit Delivery, Operations, and Repurchase Requirement. The operating deficit guaranty is limited to $250,000 and to 3 years after breakeven operations. Market Information Pre Development The unemployment rate was 5.8 percent in January 2004 and declined to 4.3 percent in October 2007, signaling signs of significant improvement in the local economy. The area exhibited positive employment growth in nine out of the past 13 years, with significant growth in 2004 and 2005. This data suggests that the local economy appears to be fully recovered from the national recession that lasted between 2001 and 2003. 3
The relative strength of the local rental market, the broad income targeting of the proposal, an updated product with numerous modern amenities, the inclusion of three and four bedrooms within the unit mix, and the extremely long waiting list at a similar LIHTC property all provided positive influences on the estimated absorption period. Employment Data 2008 5.8% 2012 9.2 2009 9.4 2013 9.2 2010 12.2 2014 6.2 2011 10.7 2015 5.9 2012 9.2 2016 4.7 What do you need to know? Who are the stakeholders and partners What responsibilities and obligations are held by each group What assumptions have been made by underwriting Is the property meeting those assumptions Property performance in real-time Where do you look for answers? Contracts and agreements Permanent loan documents Original project descriptions and summary Underwritten pro-forma and 20 year cash flow statement Current operating reports and financial statements 4
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Occupancy Trending Report Occupancy % --> Total Units LIHTC Units Overall Average 3/31/2017 2/28/2017 1/31/2017 12/31/2016 11/30/2016 10/31/2016 9/30/2016 8/31/2016 7/31/2016 6/30/2016 5/31/2016 4/30/2016 168 159 87% 90% 89% 91% 91% 89% 86% 84% 83% 86% 83% 84% 82% 3/31/2016 2/29/2016 1/31/2016 12/31/2015 11/30/2015 10/31/2015 9/30/2015 8/31/2015 7/31/2015 6/30/2015 5/31/2015 4/30/2015 77% 76% 75% 73% 74% 71% 83% 68% 82% 96% 93% 91% 3/31/2015 2/28/2015 1/31/2015 12/31/2014 11/30/2014 10/31/2014 9/30/2014 8/31/2014 7/31/2014 6/30/2014 5/31/2014 4/30/2014 91% 94% 89% 94% 93% 94% 93% 96% 95% 96% 99% 98%
Risk Rating Analysis Asset Manager Overall Rating Date 12/31/2014 03/31/2015 06/30/2015 09/30/2015 12/31/2015 3/31/2016 6/30/2016 9/30/2016 12/31/2016 Prior Year End ALPHA Overall Rating C C C C C C C C C Prior Year End Numeric Overall Rating 2.45 2.45 2.45 2.45 2.45 2.45 2.45 2.45 2.45 Prior Qtr ALPHA Overall Rating C C C C C C C C C Prior Qtr Numeric Overall Rating 2.30 2.30 2.30 2.30 2.30 2.3 2.3 2.3 2.3 Current Qtr ALPHA Overall Rating C C C C C C C C D Current Qtr Numeric Overall Rating 2.30 2.30 2.20 2.45 2.45 2.45 2.95 3 3.05 DCR C C B C C C C C C Cash Flow C C B D D D F F F Economic Occupancy/ Market B B C C C C D D D Cash Analysis F F F F F F F F F Accounts Receivable Analysis A A C A A A C D C Accounts Payable Analysis C C C C C C D D D Reserves C C C C C C C C C Physical C C C B B B C C C GP/Sponsor/Management B B A B B B B B C Program Compliance B B B B B B B B B Insurance/Taxes A A A A A A A A A Reporting A A A A A A B B B Recapture/Foreclosure A A A A A A B B B Tax Credit Delivery A A A A A A A A A Other Rating C