Overview, the Rules, Risks & Rewards, 2 Case Studies

Transcription

1 Overview, the Rules, Risks & Rewards, 2 Case Studies

2 1. What is Twinning? 2. Rewards of Twinning 3. Risks of Twinning 4. Rules of Twinning

3 Part One: What is Twinning? 3 Separating a Single Project with Multiple Revenue Streams into Multiple Projects with Separate Revenue Streams, Allocating Costs to Each Project, and Funding Each Project with Distinct Sources of Funding NMTC-LIHTC NYC Deals

4 Rules of Twinning Post-HERA, IRC 42(i)(2) provides that a new building is treated as "federally subsidized" if the proceeds of a tax-exempt bond are used (directly or indirectly) with respect to the building or its operation... The applicable percentage for these buildings is limited to the 30% applicable percentage under IRC 42(b) (1) (B) (ii). 4

5 The Risks of Twinning The Risk 9% Total Eligible Basis: $10,000,000 Allocation: $900,000 Total Credits: $9M $1.00 Price Pre-taint Equity = $9M x $1.00 = $9M 4% Total Eligible Basis: $10,000,000 Annual Credit: $322,000 Total Credits: $3.22M Post-taint Equity = $3.22M x $1.00 = $3.22M *Credit Rates 9.00%-3.22% 5 Adjuster of $5.78M + penalties and interest

6 The Rewards of Twinning Cap on Credits or Scoring Criteria in QAP (Efficient Use of Resources) Insufficient Federal, State & Local Subsidies for Gap Financing in TE/4% Project Monetizing the Surplus Basis Incentivize Behavior (use TE Bonds) 6

7 Virginia s 9-4 Results Deal Name Final Credits per Unit (9%) # 9% Units # 4% Units Total Units Total Credits Needed if Not Split Total 9% Credits Awarded Total Savings 2015 Church Hill North Phase I $11, $1,231,094 $683,941 $547,153 Clairmont Apartments $10, $1,664,762 $920,000 $744,762 Columbia Hills East $21, $4,942,387 $2,093,500 $2,848,887 Fieldstone Senior $10, $1,460,491 $608,538 $851,953 Lexington I $14, $2,794,515 $684,371 $2,110,144 Wexford Manor $11, $854,573 $438,835 $415, $7,518, Birchwood at Brambleton $15, $1,250,422 $843,658 $406,764 Gilliam Place East $23, $4,064,458 $1,950,000 $2,114, $2,521, Jackson Ward Senior $10, $2,100,613 $779,609 $1,321,004 October Station $12, $1,075,721 $593,501 $482,220 Price Street Apartments $11, $2,952,632 $1,700,000 $1,252,632 Senior Residences at North Hill $9, $1,082,940 $593,263 $489,677 The Berkeley $20, $5,120,000 $2,500,000 $2,620,000 The Residences at North Hill 2 $18, $3,101,505 $1,418,371 $1,683, $7,848, Total Savings ( ): $17,888,525 7

8 VHDA Summary for 9-4s In 2015 VHDA began offering points for 9% developments with 4% tax exempt bond funding on the same site. Government Residences was the catalyst and was funded in Since 2015, 14 deals that have received an allocation of 9% credits as part of this 9-4% initiative. 14 Deals that add 2,239 total units 1,061 funded with 9% credits; 1,178 with 4% bond financing VHDA s 9-4% initiative has saved $17,888,525 in 9% credits since Savings calculated by 9% credits per unit allocated to a deal and multiplying that times the total number of units (9% and 4% combined). The difference in what was actually allocated and what would have been needed if all of the units were 9% units is considered the savings. 8

9 Twinning Rules Pitfalls to Avoid IRS Guidance (scant) 1995 Technical Advice Memorandum IRS rules that multiple building project with TE bonds in some buildings will taint 9% in same project because: Cross collateralization of buildings as lender security Bond Indenture must specify use of bond proceeds (consistent with 95-5 tests) or bond proceeds are pro rata on all property (both 9% and 4% buildings). [Note, NOT an issue with separate projects.] 2000 Private Letter Ruling IRS finds that TE bonds and 4% for acquisition and 9% for rehabilitation taints 9% due to single plan of financing (independent would be ok). [Note, this was ONE physical building with acq building and rehab building, need to rehab is tired to acquisition.] 9

10 The Rules of Twinning IRS Guidance First Separate It, then Allocate It: 1. IRS Notice (on BINs) recognizes condominium units as a separate tax credit building. That is, an apartment building, single family unit, townhouse, rowhouse, duplex or condominium are each a qualified low-income building per the IRS. Voluminous support for this. 2. Allocation Rules 10

11 First, Separate It! The Real Estate Subdivide Ground Leases HUD-FHA Rider LIHTC Issues Condominium or Air Rights (A&T Lots DC) Virginia versus Maryland (Doug Irvin of Ballard Spahr) Condo Documents, Voting Rights, Common Areas Time (Sequencing) if needed Agency & Lender Concerns Security Silo versus checkerboard approach 11

12 First, Separate It! The Noah s Arc of Documents TWO OF EVERYTHING: Construction Contract (or alternatives) Architect Agreement Developer Agreement Corporate Documents Attorney; Accountant; Other Professionals Property Management Agreements; Consulting agreements 12

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14 First, Separate It! The Costs Hard Costs Soft Costs Common Areas Parking Shared Amenities Systems and Facilities Cost Sharing Maximizing Basis in Each Project Unique Rules for TE Bonds versus 9% Lessons Learned parking in residential, etc. 14

15 First, Separate It! The Costs General Rule: allocate between uses according to any reasonable method that properly reflects the proportionate benefit to be derived [Novogradac sec 3:115 (citing Tax Reform Act of 1986 page 159).] Issues When Dividing development costs between the two entities 4% considerations Land costs 50% test Qualified costs / 95-5 test 15 9% considerations Impact on the application Capital accounts will be distinct NOI and local subsidy debt Bond documents must be drafted to explicitly allocate 100% of the bonds to 4% project Generally, Tax Exempt bond proceeds should not finance any portion of common areas or shared uses ( subordinate and related test for TE Bonds and to avoid the taint ) No cross-defaults

16 1. Many Types of Twins 2. Case Study #1 Residences at Government Center 3. Case Study #2 Gilliam Place Apartments 16

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21 Case Study #1

22 Summary Project Details Property Information Location: Fairfax, VA Delivery Date: March 2017 Construction Type: New Construction Occupancy Type: Family LIHTC Amount: $25 million Current Occupancy: 100% Building 270 apartment units 150 units in Condo A (the 9% deal) 120 units in Condo B (the 4% deal) Structured Parking spaces Amenities include: community room, pool, fitness center, playground, business center, secure mail room

23 Residences at Government Center Momentum at Shady Grove

24 Timeline Project originally conceived as a 4% Transaction through RFP with Fairfax County July 17, 2014 Fed announces tapering of bond purchases. Bond markets retreat, deal becomes infeasible SCG Development finds a creative structure to execute a tax credit transaction Studied Virginia QAP to structure a competitive 9% deal Received buy in from all financing participants 9% LIHTC Application submitted June 2014: 9% LIHTC Award was secured Virginia revised QAP to incentivize applicants to submit using hybrid 9/4 structure Initial Closing Construction 100% Leased as of June 1st

25 Summary Project Details Sources & Uses Sources Total 9% LIHTC 4% LIHTC First Mortgage Loan $30,000,000 $15,800,000 $14,200,000 Tax Credit Equity 26,000,000 18,200,000 7,800,000 Deferred Developer Fee 2,000, ,000,000 Total $58,000,000 $34,000,000 $24,000,000 Uses Total 9% LIHTC 4% LIHTC Acquisition $0 $0 $0 Hard Construction Costs 42,000,000 24,300,000 17,700,000 Transaction Costs 7,400,000 4,600,000 2,800,000 Reserves 1,800,000 1,200, ,000 Interest Expense 2,000,000 1,200, ,000 Developer Fee 4,800,000 2,700,000 2,100,000 Total $58,000,000 $34,000,000 $24,000, year ground lease with Fairfax County HUD 221(d)4 leasehold mortgage loan financing for each Condominium Cash collateralized short term bonds - Condominium B provided by Stifel* *See next slide

26 Stifel: Bond Execution Original Issue Remarketing $13,000,000 closed March 26, 2015 Initial Mandatory Tender April 1, Initial Bond interest rate 0.40% for 12 months 2 A Section 221(d)(4) loan bearing interest at 3.57% provided collateral for the Bonds $13,000,000 remarketed April 1, 2016 Mandatory Tender April 1, Remarketing interest rate 1.00% for 12 months 4 Money in the collateral fund was reinvested in a U.S. Treasury Note bearing interest at 0.67% Optional redemption on October 1, 2015 Negative arbitrage deposit at closing - $53,000 Notes: 1. Approximate construction period of 21 months set initial tender date at 12 months then remarket for additional 12 months to capitalize on money market eligibility year MMD approximately 0.18% as of March 20, Money market rule change looming and interest rate advantage for eligibility has faded at time of remarketing 4. 1-year MMD approximately 0.53% as of March 21, 2016

27 COMBINED TAXABLE DEBT WITH SHORT TERM TAX EXEMPT BONDS AND 4% LIHTC FAQ/ISSUES Bond Amount to meet 50% test > Taxable Loan Amount: Other (bankruptcy remote) sources of funds (i.e. bridge equity, subordinate loan proceeds, etc.) are needed to cover the differential. Timing of funding is critical. Seller Take-Back loan can often be used to collateralize bonds (see applicable slides) Investment and other options to reduce cost: Although short term rates have gone up, taxable investment options have gone up also: Ex.1.25% bond rate less 1.25% investment rate = 0.00% net interest cost per year on bonds. Seller Take-Back Bonds can sometimes be used to help reduce costs further (see applicable slides) Multiple loans/projects can be pooled into a single bond issuance to spread out fixed closing costs all deals need to be in a position to close within the same timeframe. Kent Neumann

28 Despite the recent increase in short-term, tax-exempt rates, the negative arbitrage deposit can still be significantly reduced. Historical Performance for 2-Year MMD (plus credit spread) and 2-Year UST Pricing Indications 2-Year MMD 0.87 Add: Credit Spread 0.43 Bond Rate 1.30 Less: Reinvestment Rate 1.26 Net Bond Rate 0.04 Source: Bloomberg. Thomson Reuters Reflects market conditions as of September 26, 2017 Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds 28

29 COMBINED TAXABLE DEBT WITH SHORT TERM TAX EXEMPT BONDS AND 4% LIHTC FAQ/ISSUES Publically Offered vs. Privately Placed: Potential tax implications if Bond Purchaser is related to the Borrower (see program investment regulations) Costs of issuance are very close. Interest and investment options can vary. Issuer considerations: Possible limitation on Issuer Fees due to short maturity and Loan Yield limitations Some states have very limited private activity volume cap although this structure does use the minimum amount of bonds to meet the 50% test A few Issuers do not allow the structure due to limitations on fees. Kent Neumann

30 Aerial View

31 APAH- Mission Centered Development Case Study #2: Gilliam Place October 2017

32 Project Overview Partnership with Arlington Presbyterian Church since ,000 sq foot site at Town Center on Columbia Pike in Arlington, VA 173 affordable apartments o Community rooms & open space o 132 at 60% AMI, 32 units at 50% AMI, 40% AMI o 205 structured parking 8,500 sq feet of ground floor retail and civic space with reduced rent to support mission-focused tenancy Under Construction as of July 2017 Financial Partners: Virginia Housing Dev. Authority Capital One Enterprise Community Partners Arlington County

33 Arlington Presbyterian Church APAH Project Reflect the church s discernment process: o Discipleship Church of the 21st Century o Crossroads outreach to community o Affordable Housing--drives both mission and economics Leverage underutilized site Declining Sunday attendance and cash Financing and development model to: minimize risk, maximize program, provide good stewardship of land 33

34 Gilliam Place-Hybrid- 2 buildings FIRST FLOOR PLAN ALLEY GARAGE ENTRANCE LOADING DOCK GARAGE EAST (9% LIHTC DEAL) BUILDING LOBBY RETAIL / CIVIC RETAIL WEST (4% LIHTC Deal) BUILDING LOBBY 9 PARALLEL PARKING SPACES ALONG LINCOLN ST. 6 PARALLEL PARKING SPACES ALONG COLUMBIA PIKE. 34

35 Gilliam Place-Closing Budget Gilliam Place - Closing Budget Gilliam Place East/ 9% (83 Units) Gilliam Place West (90 Units) Gilliam Place LLC (land) Total Per Unit Total Per Unit Total Per Unit VHDA Bonds (Taxable / Tax Exempt) 4,380,000 52,771 1,500,000 16, SPARC 1,494,000 18,000 3,240,000 36,000 REACH 2,000,000 24,096 2,000,000 22,222 AHIF 2,767,953 33,349 6,799,795 75, Accrued Interest (AHIF Loan) 469,773 5, ,676 1,519 8,568,716 49,530 Tax Credit Equity 21,885, ,679 9,253, , FHLB AHP Funds 500,000 6, VA HTF Loan 700,000 8, Deferred Developer Fee ,410 9, Transit Oriented Aff. Hsg Fund and Other ,298 5,349 APAH Sponsor Loan 1,120,380 13,499 1,674,007 18, Proceeds from land sale 693,087 4,006 Total Sources 35,317, ,511 25,441, ,681 10,187,101 58,885 Acquisition 697,615 8, ,082 1,523 8,691,103 50,238 Construction 22,788, ,555 16,501, , ,998 4,630 Soft Costs 8,247,853 99,372 4,875,433 54, ,000 3,988 Developer Fee & Reserves 3,583,931 43,180 3,927,057 43,634 5, Total Uses 35,317, ,511 25,441, ,681 10,187,101 58,885

36 Twinning: Lessons Learned Cost allocation Consider your options for allocation method Unit Count, Gross SF, Land Area, Detailed Construction Cost Breakdown A simpler method will make administration easier Design considerations How will the building operate? What features will be duplicated? Shared? Ensure commercial space is compatible with financing Increased documentation Think carefully about construction administration how will draws be approved? Change orders? Good record keeping is critical Side-by-side underwriting Work closely with your investor and lender(s)

37 Carmen Romero Vice-President, Real Estate Development SCG Development Stephen P. Wilson President-Principal 8245 Boone Boulevard Suite 640 Tysons Corner, Virginia Phone: (703) ext. 210 Cell: (703) Kent Neumann, Esq. TIBER HUDSON LLC (direct) (cell) Erik T. Hoffman Klein Hornig LLP 1325 G Street NW, Washington, DC (direct) ehoffman@kleinhornig.com Stifel, Nicolaus & Company John B. Rucker Managing Director 2660 Eastchase Lane Ste. 400 Montgomery, AL Phone: (334) ruckerj@stifel.com 37