Housing 101: Getting Started Development Finance Basics

Housing 101: Getting Started Development Finance Basics 23 rd Annual Statewide Housing Conference February 26, 2014 1

Challenges to Developing Affordable Housing Costs the same to develop whether rents are affordable or market rate Special needs housing may cost more Rent revenue must be sufficient to cover operating expenses and debt service Direct relationship between development costs and rent level 2

Options to Achieve Affordable Rents Reduce development costs Reduce operating expenses Subsidize rents (vouchers) Subsidize development costs 3

Development Subsidy s Impact on Affordable Housing Development Low-cost development funding enables rents to be affordable to more people Affordability is ensured for the long term Deed Restrictions limit incomes and rents One source may unlock the door to other private, local, state and federal resources 4

24 Unit Apartment Building $175,000 x 24 units = $4,200,000 Total Cost Traditional Financing Equity $1.26 million (30%) Debt $2.94 million (70%) $189,391 Debt Service (5%, 30 year) $120,000 Operating Expense $100,800 Return on Equity (8%) $410,191 Needed Annual Revenue = $1,424 Average Monthly Rent per Unit 5

24 Unit Apartment Building $175,000 x 24 units = $4,200,000 Total Cost Traditional Financing Equity $1.26 million (30%) Debt $2.94 million (70%) Development Subsidy Equity $1.26 million (30%) Soft Debt/Grant $1.26 mil. (30%) Debt $1.68 million (40%) $189,391 Debt Service (5%, 30 year) $120,000 Operating Expense $100,800 Return on Equity (8%) $410,191 Needed Annual Revenue $108,223 Debt Service (5%, 30 year) $120,000 Operating Expense $100,800 Return on Equity (8%) $329,023 Needed Annual Revenue = $1,424 Average Monthly Rent per Unit = $1,142 Average Monthly Rent per Unit 6

24 Unit Apartment Building Mixed Income Property Rent Distribution Scenario 5 units @ $415 (30% AMI) 5 units @ $670 (50% AMI) 5 units @ $1,050 (80% AMI) 9 units @ $1,860 ( Market Rate ) = $1,142 Average Unit Rent 7

Development Funding Resources Grant Programs No repayment Provide equity into the project Tenant income and rent requirements Examples Affordable Housing Program - FHLB Community Development Block Grant Private philanthropic foundations Low Income Housing Tax Credits 9% competitive credits 4% credits with bond financing 8

Development Funding Resources Soft Debt Programs Repayment is flexible Deferred payments Forgivable Interest-only payments Contingent payments based on cash flow Tenant income and rent requirements Examples Housing Incentive Fund HOME Neighborhood Stabilization Program 9

Development Funding Resources Other Programs and Strategies Interest Buydown Flex PACE (BND and Local EDC/JDA) Rural Development Finance Corp. (NDAREC) Property Tax Reduction NDCC Section 57-02-08(43) Renaissance Zone Local concessions Land Utilities 10

24 Unit Senior Project Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Total Funding Sources $0 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 35,000 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($114,700) Net Operating Income $121,892 Debt Service (Principal & Interest) Net Cash Flow Debt Coverage Ratio 11

24 Unit Senior Project: Conventional Financing Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (5% 15 years) $4,000,000 Owner Equity Investment 500,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 35,000 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($114,700) Net Operating Income $121,892 Debt Service (Principal & Interest) (379,581) 12 Net Cash Flow ($257,689) Debt Coverage Ratio 0.32

24 Unit Senior Project: Land Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (5% 15 years) $3,550,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 35,000 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($114,700) Net Operating Income $121,892 Debt Service (Principal & Interest) (336,878) 13 Net Cash Flow ($214,986) Debt Coverage Ratio 0.36

24 Unit Senior Project: Fees & Permits Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (5% 15 years) $3,500,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Waive Fees/Permits (City) 50,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 35,000 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($114,700) Net Operating Income $121,892 Debt Service (Principal & Interest) (332,133) 14 Net Cash Flow ($210,241) Debt Coverage Ratio 0.37

24 Unit Senior Project: Soft Debt Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (5% 15 years) $2,300,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Waive Fees/Permits (City) 50,000 Soft Debt (HIF, NSP) 1,200,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 35,000 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($114,700) Net Operating Income $121,892 Debt Service (Principal & Interest) (218,259) 15 Net Cash Flow ($96,367) Debt Coverage Ratio 0.56

24 Unit Senior Project: Property Taxes Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (5% 15 years) $2,300,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Waive Fees/Permits (City) 50,000 Soft Debt (HIF, NSP) 1,200,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 10,400 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($90,100) Net Operating Income $146,492 Debt Service (Principal & Interest) (218,259) 16 Net Cash Flow ($71,767) Debt Coverage Ratio 0.67

24 Unit Senior Project: Grants Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (5% 15 years) $1,900,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Waive Fees/Permits (City) 50,000 Soft Debt (HIF, NSP) 1,200,000 Grants (Found n, CDBG) 400,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 10,400 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($90,100) Net Operating Income $146,492 Debt Service (Principal & Interest) (180,300) 17 Net Cash Flow ($33,808) Debt Coverage Ratio 0.81

24 Unit Senior Project: FlexPACE Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (Buydown to 1%) $1,900,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Waive Fees/Permits (City) 50,000 Soft Debt (HIF, NSP) 1,200,000 Grants (Found n, CDBG) 400,000 $175,000 Local FlexPACE Match (EDC/JDA) Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 10,400 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($90,100) Net Operating Income $146,492 Debt Service (Principal & Interest) (136,457) 18 Net Cash Flow $10,035 Debt Coverage Ratio 1.07

24 Unit Senior Project: Final Pro Forma Costs Operating Budget Land Acquisition $650,000 Tenant # Units Rent Annual New Construction 3,200,000 30% AMI 8 $450 $43,200 Fees and Permits 50,000 50% AMI 6 $750 54,000 Soft Costs 120,000 80% AMI 4 $1,100 52,800 Finance Costs 100,000 120%AMI 6 $1,450 104,400 Developer Fee 300,000 Gross Potential Rent $254,400 Operating Reserve 80,000 Less Vacancy & Bad Debt (17,808) Total Cost $4,500,000 Effective Gross Income $236,592 Funding Sources Bank Debt (Buydown to 1%) $1,700,000 Owner Equity Investment 500,000 Discounted Land (City) 450,000 Waive Fees/Permits (City) 50,000 Soft Debt (HIF, NSP) 1,200,000 Grants (Found n, CDBG) 400,000 $175,000 Local FlexPACE Match (EDC/JDA) Deferred Developer Fee 200,000 Total Funding Sources $4,500,000 Administrative Expense $23,500 Utility Expense 30,000 Operating and Maintenance 19,000 Property Taxes 10,400 Replacement Reserve ($300/unit) 7,200 Total Operating Expenses ($90,100) Net Operating Income $146,492 Debt Service (Principal & Interest) (122,093) 19 Net Cash Flow $24,399 Debt Coverage Ratio 1.20

Questions? North Dakota Housing Finance Agency Bill Hourigan Housing Outreach Officer 701/328-8080 or 800/292-8621 whourigan@ndhfa.org 20

Multifamily Development Assistance Program Agency Type of Assistance Eligible Applicant Maximum Award Term (Months) Interest/Fees Income Target Maximum Rent Matching Funds Application Period Notes Housing Market Survey Grant NDHFA Grant Communities Under 35,000 50% of Survey Cost, Max of $5,000 N/A N/A N/A N/A At least 50% of cost is borne by the applicant community Ongoing Cost sharing incentive for rural communities to develop a local housing strategy. Rural Rehabilitation Loan NDHFA Loan Owners of multi-family property in community < 35,000 75% of project cost, Max of $100,000 25 Interest rate based on Agency cost of funds at Min 20% of units time of application. 1% at or below 100% Origination Fee. AMI N/A Minimum 25% equity investment Ongoing Must be used to cure significant deferred maintenance, and improve the property to a decent, safe and sanitary condition. Housing Incentive Fund (HIF) NDHFA Soft Loan Any non-profit or for-profit entities with experience in housing development. The least of 30% of development costs, $3,000,000, or the amount necessary for feasibility. 180+ 0% interest. Origination fee of 5%. Annual compliance fee 30% to 140% of of $50 plus $35 per AMI for the restricted unit. restricted units. 30% of qualifying median income. Developers must assist in raising contributions to the HIF. Quarterly Program exhausted funding in 2013. Reauthorization will be sought during the 2015 Legislative session. Rural Housing Development Loan NDHFA Loan Developers in communities < 35,000 75% of project cost, Max of $200,000 36 Interest rate based on Agency cost of funds at time of application. 1% Origination Fee. N/A N/A Minimum 25% equity investment Ongoing Assistance to cover pre-development costs such as land acquisition, site development, infrastructure. Interest-only payments. Must have permanent financing approved. Neighborhood Stabilization Program NDHFA Grant/Loan Developers within qualifying census tracts N/A Varies Interest rate varies. Maximum of 120% AMI. Half of the funding must be for 50% AMI households. Fair Market Rents. Very low income households: lesser of FMR or 30% of 50% AMI. N/A By Projects must be located within the communities of publication of Alexander, Belfield, Bowman, Dickinson, Fargo, Request for Glenburn, Grand Forks, Mohall, Ray, Rolla, Rolette, Proposals. Sherwood, South Heart, Tioga, and Williston. Low Income Housing Tax Credits (LIHTC) NDHFA Grant Any non-profit or for-profit entities with experience in housing development. Up to 70% of the project's "Qualified Basis". Maximum 25% of the State's annual allocation. 30 year affordability requirement $500 processing + 10% allocation fee. Minimum 20% of Annual compliance fee units at 50% AMI of $50 plus $35 per restricted unit. or 40% of units at 60% AMI. 30% of qualifying median income. Optional Annually Sherwood, South Heart, Tioga, and Williston. Historic Rehabilitation Tax Credits (HRTC) NDHFA Grant Developer reahbbing a property on or eligible to be on the National Register of Historic Places 20% of the project's qualifying expenses Minimum 5 years Up to $6,500 N/A N/A N/A Ongoing Inquiry should begin by contacting the State Historic Preservation Officer Property Tax Exemption (NDCC) County Tax abatement 501(c)(3) owner of affordable housing subject to a deed restriction N/A N/A N/A N/A N/A N/A Ongoing NDHFA certifies a project's eligibility to the county tax director. Rural Rental Housing Direct Loan (Section 515) USDA-RD Loan Developers in communities < 35,000 Up to 100% of total development cost (97% for-profit developers) 360 term / up to 600 amortization 1% 80% AMI + $5,500 30% of adjusted income. N/A Ongoing Rural Rental Housing Guaranteed Loan (Section 538) USDA-RD Loan Guarantee Developers in communities < 35,000 Up to 97% loan-tovalue (90% for-profit 300 to 480 developers) amortization Interest rate according to lender 115% AMI 30% of 115% AMI 3% equity required for non-profits. 10% for for-profits. Ongoing Loan is originated by a participating financial institution. Community Development Block Grant Program ND Dept of Commerce (Division of Community Services) Grant City or County units of government $500,000 N/A N/A 30%, 50%, 80% Based on 30% of qualifying median income Varies Ongoing Funding is applied for through one of the eight Regional Planning Councils. HOME Investment Partnerships Program ND Dept of Commerce (Division of Community Services) Grant or Loan Any non-profit or for-profit entities with experience in housing development. Up to $40,000 or more per unit Varies Varies 80% AMI Based on 30% of qualifying median income 25% Annually Funds administered through two Community Housing Development Organizations: Eastern Dakota Housing Alliance and Affordable Housing Developers, Inc. Renaissance Zone Program Local jurisdiction Tax abatement Projects within a community's Renaissance Zone boundaries. Varies Up to 5 years. N/A N/A N/A N/A Ongoing Program is administered by the ND Department of Commerce Division of Community Services. Flex PACE Affordable Housing Program Bank of North Dakota Interest rate buydown Any non-profit or for-profit entities with experience in housing development. $25,000 per unit, up to $500,000 total award. Terms negotiated between lender and BND. Pre-buydown interest rate according to lender Interest buydown shall not exceed the projected amount of rental relief. The locality will verify current market rates and the rental concessions made. Varies based on the community percentage factor Ongoing BND must participate in 50% to 80% of the loan. Program ends 6/30/15. Community Loan Fund Eastern Dakota Housing Alliance Loan Developers in communities in eastern North Dakota Up to 15% of total loan capital Varies per project Varies per project 80% AMI new construction; 120% AMI urban Based on 30% of rehab. qualifying median income N/A Ongoing Maximum LTV: Rural - 85%; Urban - 95%.