HUD 202 Direct Loans. St. John s Towers A CASE STUDY IN PRESERVATION. Your property is nearing 40 years old and loan maturity.

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1 A CASE STUDY IN PRESERVATION Presented by Gates Dunaway, Scott Burkholder and Tina Poffenberger LeadingAge Maryland Annual Meeting April 24, 2017 Using as a Case Study, we will understand the specific issues with HUD 202 Direct Loan financed affordable senior properties, and understand the options for preserving and improving these properties. Your property is nearing 40 years old and loan maturity. HUD 202 Direct Loans 1

2 HUD 202 Direct Loans Prepay to: Lower your debt service payments Complete substantial rehab Extract cash for other projects Retain Option 4 Section 8 contract HUD 202 Direct Loans Prepayment Permission = Extension of 20 year Use Agreement Prepayment Process Old 202 loans (pre 74) sub rehab New 202 loans (post 74) debt service savings 2

3 HUD 202 Direct Loans If your loan matures, potential for TPVs for unsubsidized residents. (TPV = Tenant Protection Voucher) How can this help you? Other programs working with 202 s: Flexible Subsidy Loans Flexible Subsidy Loan Deferral of Operating Assistance Flex Sub loans possible in a refinancing scenario. Deferral under Notice : Typically part of a refinancing Prepare to pay something at closing Must pay entire loan within new loan term 3

4 Other programs working with 202 s: Section 8 Section 8 Contracts Know what options you can renew under. Why? The first box indicates that you renew under Option 1 or 2. The second box indicates that you renew under Option 4 at exception rents, potentially above market (BUT NOT NECESSARILY!). 4

5 Section 8 Contracts Know if you have an old regulation Section 8 contract (pre-mahra). Why? Section 8 Contracts Make sure you are maximizing your rent potential. Why? Section 8 Contract Rent Increases NEW RULE! - Mark-up-to-Market under Option 1b Available to non-profit senior housing providers. Why is this an improvement? Requires the following: RCS (as-is rents or post-rehab rents) PCNA & Scope of Work (if post-rehab) 5

6 Option 4 Contracts Lesser-of test at renewal must support over-market rents Rents might be under market! Option for marking up under Option 1b Loss of Option 4 in a re-refi, and if 202 loan matures Insured by HUD MAP Lenders Higher fees, lower rates Favorable terms for 236 and 202 refi s No affordability restrictions FHA Loans 223(f) PROS Non-recourse Up to 90% LTV 1.10 DCR 35 year term Low interest rates Medium Rehab No Davis-Bacon wage rates FHA 223(f) Loan Repair Loan 6

7 223(f) CONS Longer timelines HUD world Moderate fees FHA 223(f) Loan Repair Loan What repairs can I complete? Must complete repairs in 12 months from closing No more than one major system replaced FHA 223(f) Loan Repair Loan Case Study: ST. JOHN S TOWERS HAVRE DE GRACE, MD 7

8 OVERVIEW OF PROPERTY Senior 7-story, 57 unit coastal Havre de Grace, MD Non-profit owned 202 Direct loan o Closed 7/27/66 o Matured 2016 o 3% Interest Rate Section 8 o 53 of 57 units o Option 4 Flex Sub Loan due at maturity ($783k) PRESERVATION HURDLES 1. Unsure of options 2. Current Sec 8 rents under-market Prepayment process 4. Flex Sub deferral 5. Refinancing and Rehab options PRESERVATION STRATEGIES 1. Unsure of options Training & Education 2. Current Sec 8 rents under-market Terminate and replace with new 20-year MU2B Section 8 Contract Prepayment process Obtained waiver for sub rehab, obtained HUD prepayment permission 4. Flex Sub deferral Flex Sub deferral approved 5. Refinancing and Rehab options Team decisions on scope of work, best financing options 8

9 PRESERVATION OUTCOMES 1. Increased Section 8 Rental income BEFORE: $528,000 PGI AFTER: $635,000 PGI $107,000 annual increase = 20% increase! 2. Flexible Subsidy Loan Deferral BALANCE DUE: $783K AMT PAID WITH NEW FINANCING: $371K $400K available for repairs! 3. Refinanced with FHA 223(f) Loan and AHP Grant NEW LOAN: $1.6M; AHP GRANT: $176K = $1,776k in proceeds REPAIR BUDGET $1.225K BEFORE AFTER 9

10 BEFORE Hallways with no handrails AFTER Hallways with new handrails to improve accessibility TIMELINE HUD Preservation Training - April 2012 Preservation Study Summer 2012 Rent increase approved December 2013 Lender, contractor, architect selection 2014 FHA Application assembly 2015 AHP November 2015 Closing on FHA 223(f) December 2015 Construction completion November

11 PANEL DISCUSSION 1. Selection of the team 2. Role of the Contractor 3. Tenant impact and relocation 4. Board involvement 5. Post-refinancing how are things different? For more information contact: Scott Burkholder Horst Construction (717) Gates Kellett Dunaway Managing Principal, The Gates Dunaway Group (404) Tina Poffenberger St. John s Tower (410) tina.sjt@comcast.net 11