TAX EXEMPT BONDS. North Carolina Affordable Housing Conference

Transcription

1 TAX EXEMPT BONDS North Carolina Affordable Housing Conference

2 INTRODUCTIONS Fred Dodson Charlotte Mecklenburg Housing Partnership, Inc. Darren Swanson Red Stone Equity Partners, LLC Mary Nash Rusher McGuire Woods, LLP Chris Austin North Carolina Housing Finance Agency Richard Angino Third Wave Housing Principal

3 TOPICS OF DISCUSSION Bond Program Details Chris Austin Bonds 101 Mary Nash Rusher Stress Tests How Bond Deals are Impacted by Changes in the Market The Numbers! How Bond Deals Pencil Out Case Studies Big Chair Lofts Freedom Drive Apartments

4 BOND PROGRAM DETAILS

5 TAX EXEMPT BOND PROGRAM State receives over $1 billion in volume cap annually Over numerous years, multifamily housing is the only use of cap during the year

6 TAX-EXEMPT BONDS - CLOSED IN 2016 AND bond issues totaling $85 million 1,177 units created or preserved Located in Asheville (rehab), Charlotte (2 new, 2 rehab), Durham (new), Thomasville (mill acquisition/rehab) and Winston-Salem (rehab) 11 bond issues totaling $150 million 2,239 units created or preserved Located in Durham (RAD rehab), Franklinton (mill acquisition rehab), Gastonia (RAD rehab), Raleigh (rehab), Wake County (new), Wilmington (new), Greensboro (RAD rehab)

7 TAX-EXEMPT BONDS - CLOSED IN 2018 TO DATE bond issues totaling $74 million 593 units created/preserved Located in Charlotte (new), Asheville (rehab), Greensboro (mill acquisition rehab)

8 BONDS 101

9 WHAT ARE TAX EXEMPT BONDS? Bond (debt) issued by a governmental entity (state or local housing authority, county or city) - the Issuer City/county housing authorities most typical issuers in NC NCHFA will issue in certain circumstances, including no other issuer available or multiple small projects in multiple jurisdictions Proceeds are loaned to private entity (either for-profit partnership/llc or nonprofit entity - the Borrower ) In 4% deals, the tax credit investor is the limited partner/limited liability member of the Borrower Borrower uses those dollars to acquire, construct and/or rehab and equip multifamily residential rental housing Bonds are tax-exempt private activity bonds under Section 142 of the Internal Revenue Code - the Code

10 TAX EXEMPT BOND STRUCTURE

11 WHAT ARE THE RULES Rules focus on the use of the proceeds of the bonds and use of project constructed with those proceeds 95% of proceeds must be used for capitalizable costs Acquisition of existing property permitted only if an amount equal to 15% of purchase price is used for rehabilitation (structural upgrade or replacement of equipment, renovation of kitchens, etc.)

12 INCOME RESTRICTIONS Either: Or: 20% of units must be set aside for individuals whose income is 50% or less of area median income ( AMI ) 40% of units must be set aside for individuals whose income is 60% or less of AMI Income limits based on HUD guidelines; subject to family size adjustment Income determination must be made at least annually unless 100% affordable

13 INCOME RESTRICTIONS (CONT.) Income of low income tenant continues to qualify until income reaches 140% of AMI; thereafter next available unit must be set aside for low income resident Restrictions apply for the LONGER of 15 years or life of bonds General rule is no students (some exceptions) Income restrictions apply to entire project; not done on building by building basis No rent restrictions for bond deals; rent restrictions arise from tax credits

14 Under Section 42 of the Code, if at least 50% of the basis of the project is financed with Section 142 tax-exempt bonds, tax credits in the amount intended to have a present value equal to 30% of Qualified Basis (which translates to approximately 4%) automatically applies No floor of 4% like there is in the 9%; no basis boost No allocation of 4% tax credits, except in the sense that NCHFA recommends projects to which TRAC allocates volume cap (and 4% tax credits come with it) Rules are similar but not exactly the same TAX CREDITS New legislation permits income averaging for tax credit units Similar rules have not been adopted for tax exempt bond units; generally not an issue for 100% affordable Short term financing still produces tax credits

15 VOLUME CAP IN NORTH CAROLINA Allocation (2018) = greater of $311M or $105 per resident; North Carolina has more than $1 billion in volume cap 2017, North Carolina used $261,024,000 of total of $1,104,678,800 The North Carolina Tax Reform Allocation Committee ( TRAC ) allocates volume cap generally on a first come first served basis Allocations to affordable housing transactions made based on recommendations of NC Housing Finance Agency (NCHFA) NCHFA reviews applications in two rounds (January, same timing as 9% tax credit deals, and a second rolling round between May and October) Once allocation awarded, developer has until the end of the calendar year to get the bonds issued If the deal can t get closed, TRAC and NCHFA do not permit carry forward but instead will swap out the following year s cap (i.e cap for 2017 cap) May permit a swap out twice, but need to have extenuating circumstances

16 THE MATH OF TAX-EXEMPT BONDS HOW DO THESE THINGS WORK ANYWAYS?!

17 BF=(l x w x h )/144 It s just that simple says nobody.

18 VARIABLES Income and Expenses: How much NOI will the property produce to size the perm loan? Metro markets = higher rents = more perm loan sources. Interest Rates: When they go up, perm loan decreases! Construction Costs: It takes, 2-3 years to close a bond deal. Need to project out with cushion. Tax Credit Rate: Bond rate is variable for now! Currently 3.31%. Increases with interest rates. Legislation proposed to fix at 4%. Determines the amount of credits a deal will generate. Gap filler options 4% deals NEED some other source to make them work. Housing Trust Fund (only available in some markets), HOME, Social Impact Funds (ie: Church funds, etc)

19 9% VS 4% - HOW DO THEY DIFFER? Sources Comparison 9% New Metro 4% New Bond 4% Historic Equity Perm Loan Other

20 STRESS TESTS HOW BOND DEALS ARE IMPACTED BY MARKET FLUCTUATIONS

21 STRESS TEST: RENTS (METRO VS NON-METRO) Sources Comparison Baseline Stressed (Non-Metro) Perm Loan Equity Other Gap

22 STRESS TEST: INTEREST RATE (75 BPS RATE INCREASE) Sources Comparison Baseline Stressed (Interest Rate) Perm Loan Equity Other Gap

23 STRESS TEST: CONSTRUCTION COSTS (10% INCREASE) Sources Comparison Baseline Stressed (Construction Cost) Perm Loan Equity Other Gap

24 STRESS TEST: TAX CREDIT RATE (11 BPS DECREASE) Sources Comparison Baseline Stressed (Bond Rate 3.2%) Perm Loan Equity Other Gap

25 STRESS TEST: TAX CREDIT RATE (4% FIXED RATE!) Sources Comparison Baseline Stressed (Bond Rate 4%) Perm Loan Equity Other Gap

26 STRESS TEST COMPARISONS (ALL SCENARIOS) Sources Comparison Baseline Stressed (Non- Metro) Stressed (Interest Rate) Stressed (Construction Cost) Perm Loan Equity Other Gap Stressed (Bond RateStressed (Bond Rate 3.2%) 4%)

27 MY 9% PROPERTY DIDN T SCORE.. CAN WE DO A BOND DEAL? Note: The following tables reflect per unit numbers

28 INCOMES AND EXPENSES HUD Median Income Max Calculated Rents Operating Expenses QAP - $3,800 plus taxes Replacement Reserve QAP $250/$350 new/historic

29 MODERATE AMI COUNTY NET OPERATING INCOME Two 80 unit Properties 160 units 160 units deep discounted rents 9%-New Construction Bond-New Construction All 60% AMI Rents Bond-Historic Total Income $ 6,820 $ 7,521 $ 7,521 Total Expenses $ 4,135 $ 4,240 $ 4,080 Reserves for Replacements $ 250 $ 250 $ 350 Net Operating Income after RR $ 2,435 $ 3,031 $ 3,091

30 INTEREST RATES DEBT ASSUMPTIONS Private Placement Bonds Rate 5.5% Amortization 35 years Debt Coverage Ratio 1.20 at start or at the end of the 20 year holding period (QAP) Conventional Debt Rate 6.5% Same terms as bond financing

31 MODERATE COUNTY SOURCES OF FUNDS 9%-New Construction Bond-New Construction Bond-Historic Net Operating Income after RR $ 2,435 $ 3,031 $ 3,091 DCR-first year DCR-year 20 $ 1.15 $ 1.19 $ 1.19 Annual Debt Service $ 1,876 $ 2,524 $ 2,574 Permanent Loan $ 25,876 $ 39,164 $ 39,936 $3.0 million extra $2.1 million larger loans Workforce Housing Loan $ 18,750 $ - $ - Deferred Developer Fee (25%) $ 3,250 $ 3,250 $ 3,250

32 CONSTRUCTION COSTS Assume $78,000 for Hard Construction Costs QAP Assume $90,000 for Hard Construction Cost current estimate Assume 20% gross up for contractor overhead/fees, building permits, furnishings Assume contingency rates per QAP

33 MODERATE COUNTY - USES 9%-New Construction Bond-New Construction Bond-Historic Land and Site $ 13,438 $ 12,188 $ 10,938 Hard Costs $ 78,000 $ 78,000 $ 90,000 Other Construction $ 19,938 $ 19,875 $ 27,750 Professional Fees and Soft Costs $ 5,000 $ 2,500 $ 2,500 Legal Costs - partnership portion $ 938 $ 750 $ 750 Construction Financing Costs $ 1,434 $ 2,066 $ 2,066 Construction Interest $ 5,281 $ 5,281 $ 5,281 Permanent Financing Costs $ 819 $ 775 $ 775 Agency Fees $ 1,912 $ 1,871 $ 1,807 Reserves $ 3,130 $ 3,507 $ 3,502 Developer Fee $ 13,000 $ 13,000 $ 13,000 Total Uses $ 142,889 $ 139,812 $ 158,368

34 TAX CREDIT RATE Assuming current rate of 3.31% EQUITY PRICING Assuming $0.89 for Section 42 Credits Assuming $0.79 for Federal Historic Credits Assuming $0.85 for North Carolina Historic Credits

35 MODERATE COUNTY - EQUITY 9%-New Construction Bond-New Construction Bond-Historic Tax Credit Equity $ 104,461 $ 37,505 $ 35,085 Historic Tax Credit $ - $ - $ 22,189 State Historic Tax Credits $ - $ - $ 23,874 Total Equity $ 104,461 $ 37,505 $ 81,149

36 MODERATE COUNTY - RESULTS 9%-New Construction Bond-New Construction Bond-Historic Sources $ 152,336 $ 79,920 $ 124,335 Uses $ 142,889 $ 139,812 $ 158,368 Extra/(Short Fall) $ 4,724 $ (59,892) $ (34,032) $9.6 million short $5.4 million short

37 WHAT IF THE PROPERTY IS IN A METRO?

38 METRO AMI COUNTY NET OPERATING INCOME deep discounted rents 9%-New Construction Bond-New Construction Bond-Historic Total Income $ 8,402 $ 9,729 $ 9,729 Total Expenses $ 4,547 $ 4,793 $ 4,453 Reserves for Replacements $ 250 $ 250 $ 350 Net Operating Income after RR $ 3,604 $ 4,687 $ 4,927 Moderate NOI after RR $ 2,435 $ 3,031 $ 3,091

39 METRO COUNTY SOURCES OF FUNDS "Two-9% Properties" 9%-New Construction Bond-New Construction Bond-Historic Net Operating Income after RR $ 3,604 $ 4,687 $ 4,927 DCR-first year DCR-year 20 $ 1.25 $ 1.34 $ 1.37 Annual Debt Service $ 2,999 $ 3,903 $ 4,105 Permanent Loan $ 41,372 $ 60,559 $ 63,696 Moderate Permanent Loan $ 25,876 $ 39,164 $ 39,936 Workforce Housing Loan $ 3,125 $ - $ - Moderate Workforce Housing Loan $ 18,750 $ - $ -

40 METRO COUNTY - USES 9%-New Construction Bond-New Construction Bond-Historic Land and Site $ 20,000 $ 17,500 $ 15,000 Hard Costs $ 78,000 $ 78,000 $ 90,000 Other Construction $ 20,000 $ 19,875 $ 27,750 Professional Fees and Soft Costs $ 5,000 $ 2,500 $ 2,500 Legal Costs - partnership portion $ 938 $ 750 $ 750 Construction Financing Costs $ 1,434 $ 2,066 $ 2,066 Construction Interest $ 5,281 $ 5,281 $ 5,281 Permanent Financing Costs $ 819 $ 775 $ 775 Agency Fees $ 1,923 $ 1,871 $ 1,807 Reserves $ 3,898 $ 4,473 $ 4,454 Developer Fee $ 13,000 $ 13,000 $ 13,000 Total Uses $ 150,292 $ 146,090 $ 163,382 Moderate Uses $ 142,889 $ 139,812 $ 158,368

41 METRO COUNTY - EQUITY 9%-New Construction Bond-New Construction Bond-Historic Tax Credit Equity $ 105,512 $ 37,505 $ 35,085 Historic Tax Credit $ - $ - $ 22,189 State Historic Tax Credits $ - $ - $ 22,189 Total Equity $ 105,512 $ 37,505 $ 79,464 $10.8 million less $4.2 million less Moderate Equity $ 104,461 $ 37,505 $ 79,464

42 METRO COUNTY - RESULTS 9%-New Construction Bond-New Construction Bond-Historic Sources $ 153,259 $ 101,314 $ 142,126 Uses $ 150,292 $ 146,090 $ 163,382 Extra/(Short Fall) $ 1,483 $ (44,776) $ (21,256) $7.1 million short $3.4 million short Moderate Extra/(Short Fall) $ 4,724 $ (59,892) $ (34,032)

43 CASE STUDIES

44 BIG CHAIR LOFTS HISTO R IC ADAPTIV E R E USE BOND D E AL -T HOMAS V ILLE, NC CLOSED IN Q T HIR D WAV E HOUSING & COHEN-E SR EY

45 Big Chair Lofts Location: Thomasville, NC Developers: Third Wave Housing and Cohen Esrey Contractor: Rehab Builders Architect: Belk Architecture Bond Inducer: City of Thomasville Financing: Citi Community Capital Tax Credit Purchaser: Redstone Capital and Foss & Company Completion date: end of 2018

46 Big Chair Lofts Location: Thomasville, NC Developers: Third Wave Housing and Cohen Esrey Contractor: Rehab Builders Architect: Belk Architecture Bond Inducer: City of Thomasville Financing: Citi Community Capital Tax Credit Purchaser: Redstone Capital and Foss & Company Completion date: end of 2018

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49 INCOMES AND EXPENSES Bond-Moderate County-Historic Big Chair Lofts Total Income $ 7,521 $ 7,521 Total Expenses $ 4,080 $ 4,080 Reserves for Replacements $ 350 $ 350 Net Operating Income after RR $ 3,091 $ 3,091

50 INTEREST RATES 5.50% 4.95% Bond-Moderate County-Historic Big Chair Lofts Net Operating Income after RR $ 3,091 $ 3,091 DCR-first year DCR-year 20 $ 1.19 $ 1.42 Annual Debt Service $ 2,574 $ 2,160 Permanent Loan $ 39,936 $ 35,938 $0.5 million smaller loan than example $5.7 million

51 CONSTRUCTION COSTS Bond-Moderate County- Historic Big Chair Lofts Land and Site $ 10,938 $ 8,750 Hard Costs $ 90,000 $ 77,414 Other Construction $ 27,750 $ 23,974 Professional Fees and Soft Costs $ 2,500 $ 2,500 Legal Costs - partnership portion $ 750 $ 750 Construction Financing Costs $ 2,066 $ 1,278 Construction Interest $ 5,281 $ 6,906 Permanent Financing Costs $ 775 $ 1,000 Agency Fees $ 1,807 $ 1,956 Reserves $ 3,502 $ 3,295 Developer Fee $ 13,000 $ 13,000 Total Uses $ 158,368 $ 140,824 $2.4 million less than example

52 TAX CREDIT EQUITY Bond-Moderate County-Historic Big Chair Lofts Tax Credit Equity $ 35,085 $ 40,959 Historic Tax Credit $ 22,189 $ 22,910 State Historic Tax Credits $ 23,874 $ 36,357 Total Equity $ 81,149 $ 100,225 $2.6 million more than example

53 RESULTS Bond-Moderate County-Historic Big Chair Lofts Sources $ 124,335 $ 139,413 Uses $ 158,368 $ 140,824 Extra/(Short Fall) $ (34,032) $ (1,411) $32,600 more per unit X 160 units $5.2 million more than example

54 RESULTS

55 FREEDOM DRIVE APARTMENTS NE W CONSTRUCTIO N BOND D E AL - CHAR LOT T E, NC CLOSING IN O CTO BE R T HE HOUSING PART NE R SHIP

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57 FREEDOM DRIVE APARTMENTS RENT STRUCTURE BR AMI Type # Units SF Net Rent/Mo Rent/PSF 30% $349 $ % $627 $ % $725 $ % $900 $1.25 MKT $1,050 $ % 14 1,004 $412 $ % 14 1,004 $745 $ % 53 1,004 $825 $ % 14 1,004 $1,050 $1.05 MKT 41 1,004 $1,250 $ % 2 1,217 $472 $ % 2 1,217 $857 $ % 5 1,217 $925 $ % 2 1,217 $1,200 $0.99 MKT 5 1,217 $1,450 $1.19 TOTAL ,710 $169,084 $0.94 Affordable , ,084 $0.80 Market 56 54,429 69,000 $1.27

58 FREEDOM DRIVE APARTMENTS CAPITAL STACK Development Budget % Total Per Unit Per SF Total Land Costs 0.0% 0 $0.00 $0 Hard Costs 78.4% 133,799 $ $24,752,732 Soft Costs 13.3% 22,649 $23.32 $4,190,058 Reserves 2.3% 4,008 $4.13 $741,547 Developer Fee 6.0% 10,270 $10.57 $1,900,000 Total Cost 100.0% 170,726 $ $31,584,336 Capital Structure Tax Credit Equity 22% 38,319 $39.45 $7,088,983 Senior Debt 52% 88,919 $91.54 $16,450,000 Soft Debt (City of CLT) 14% 24,324 $25.04 $4,500,000 Covenant Soft Loan Funds 6% 10,811 $11.13 $2,000,000 CMHP Loan (NWA Grant, Other) 2% 3,218 $3.31 $595,353 Deferred Developer Fee 3% 5,135 $5.29 $950,000 GAP 0% 0 $0.00 $0 Total Cost 100.0% $170,726 $ $31,584,336

59 PRESENTER BIOS

60 MARY NASH RUSHER M C G U I R E WOODS, L L P M A NA G I NG PA R T NE R Mary Nash is the managing partner of McGuire Woods Raleigh office. She works closely with local governments, nonprofits and others to finance capital improvements using tax advantage financing, primarily tax exempt bonds. Her work includes financings for educational institutions, including public and private K-12 schools, charter schools, and public and private colleges and universities. She assists local governments and nonprofits in traditional tax exempt financings of capital projects, as well as more innovative financings that involve public-private partnerships, synthetic tax increment financing and new markets tax credits. Mary Nash has been involved in nearly all of the affordable housing bond issues in the state over the past decade that involve tax exempt bonds and 4% tax credits, and she continues to work with local governments to find innovative ways to provide more affordable housing in North Carolina. The best part of her practice is working with public and private borrowers to find ways to provide needed infrastructure and capital improvements using creative and cost-effective financing tools. It is satisfying to know that when we finish a deal, something will be built that the community needs, she said.

61 DARREN SWANSON R E D S TO NE EQ U I T Y PA R T NE RS, L L C D I R E C TO R O F A C Q U I S I T I O NS, S O U T H E A ST Darren Swanson is the Director of Acquisitions for Red Stone Equity Partners, where he is responsible for the origination, acquisition, financial underwriting, partnership structuring, and syndication of tax credit equity investments for the southeastern region. Darren has 12 years of combined experience in LIHTC syndication, real estate lending and investing for developers of affordable housing. Prior to joining Red Stone, Darren was a Senior Relationship Manager at Bank of America where he provided developers of affordable housing with a variety of real estate secured loans totaling over $400 million, tax credit equity investments in excess of $250 million and other bank products and services. Darren began his career as a commercial real estate lender in New York City, closing $1.5 billion of debt financing during this period. Darren received a Bachelor of Science in Biology, with a pre-med concentration, from Appalachian State University and holds Series 7 and 63 securities licenses. Darren is a long-time Board member, and current Chairman, of The Housing Partnership.

62 RICHARD ANGINO T H I R D WAV E H O U S I NG P R I NC I PA L Richard Angino is owner of Third Wave Housing which is based in Winston Salem. Third Wave Housing is a team that specializes in the development of both new and historic multi-family properties. Richard has been on the development side of the industry since Prior to moving to his current role in the industry, Richard held various senior executive positions on the investor and equity syndication side within the tax credit industry since Richard Angino is owner of Third Wave Housing which is based in Winston Salem. Third Wave Housing is a team of professionals who specialize in the creative development of both new and historic multi-family properties. Richard has been on the development side of the industry since Prior to his life as a developer, Richard held senior officer positions on the investor/equity syndication side with roles on the acquisition, underwriting, syndication and asset management of tax credit properties. Richard started in the industry in 1987.

63 FRED DODSON C H A R LOT T E M E C K L E NBURG H O U S I NG PA R T NE RS H I P, I NC. C H I E F O P E R AT I NG O F F I C E R & E X E C U T I V E V I C E P R E S I D E NT Fred Dodson, Jr. is the Chief Operating Officer and Executive Vice president of Charlotte-Mecklenburg Housing Partnership, Inc., where he manages the organization s multifamily real estate development financing activities and corporate operations. Before joining the Housing Partnership in 1997, Dodson gained experience directing the Hospitality House of Boone, North Carolina homeless shelter as well as the New River Valley Habitat for Humanity Affiliate and the Montgomery County Community Shelter, both located in Virginia. Mr. Dodson earned a Bachelor of Science in psychology from Appalachian State University and a Juris Doctor from the University of Tennessee College of Law.

64 CHRIS AUSTIN NORTH C A R O L I NA H O U S I NG F I NA NC E A G E NC Y D I R E C TO R O F R E NTA L I NVESTMENT Chris Austin has worked for the NC Housing Finance Agency since Beginning in 2008, he worked as manager of rental development and is now director of rental investment overseeing the low-income housing tax credit program.