PIDC/PHFA Affordable Housing Seminar March 6, 2013

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1 PIDC/PHFA Affordable Housing Seminar March 6, 2013

2 PAID Background Overview: Managed by PIDC, PAID is a public authority created by the City of Philadelphia pursuant to the Economic Development Financing Law adopted by the Commonwealth of Pennsylvania in December Mission: Issue tax-exempt bonds on behalf of non-profit organizations, qualified manufacturers, other exempt organizations and the City of Philadelphia. Acquire, improve, sell and lease real estate in the City. Facilitate special economic development projects for the City. Serve as a conduit for governmental grant funding. 2

3 Strong Public Finance Experience Tax-Exempt Experience: Since 2007, PAID has issued 71 financings on behalf of 59 borrowers totaling in excess of $2 billion. Average Annual Volume: 12 bond financings Range of Deal Size: $3 - $340 Million (Average $28 Million) Traditional Tax-Exempt Financing Programs: Public Offerings Private Placements Innovative Tax-Exempt Financing Programs: Tax-Exempt Equipment Lease-Purchase Program Recovery Zone Facility Bonds Pooled Loan Program 3

4 Representative PAID Financings OPPORTUNITIES TOWERS I & II LIMITED PARTNERSHIP Non-Rated Non-Rated $23,000,000 Multifamily Housing Revenue Bonds, Series 2012A and 2012B August 2012 BECKETT GARDENS APARTMENTS II LP Non-Rated $12,100,000 Multifamily Housing Revenue Bonds November 2012 Beech International, LLC Non-Rated $17,280,000 Revenue Bonds Series 2010A & 2010B and Series 2010C Taxable September 2010 RIVERSIDE SENIOR APARTMENTS,L.P. AA-/ A-1+ $20,000,000 Retirement Communities Variable Rate Demand Revenue Bonds Non-Rated $15,000,000 Multifamily Housing Revenue Bonds, Series 2008A and 2008B February 2008 April 2008 *Rating of Initial Letter of Credit Provider 4

5 Streamlined Approval Process Complete PAID Financing Application Bi-Monthly PAID Board Meetings Draft Documents are not Required for PAID Board Approval Two Week Turnaround for Mayor and Commonwealth Approval City Council Approval is not Required 5

6 Competitive Fee Structure Three Components to PAID Fee: 1. Application Fee: $2,000 (covers TEFRA publication fee) 2. Administrative Fee: Tiered Pricing Schedule New Money: 37.5 basis points (0.375%) on the 1 st $10 Million 25 basis points (0.25%) on the 2 nd $10 Million 12.5 basis points (0.125%) on the 3 rd $10 Million 6.25 basis points (0.0625%) on any amounts above $30 Million Refundings: 25 basis points (0.25%) for refundings of existing PAID Bonds 3. Authority Counsel Fee: Capped at $10,000 6

7 Benefits of Utilizing PAID Competitive Pricing Streamlined and Flexible Application Process Two Week Turnaround for Governmental Approval Borrower Selects Working Group Professionals Dedicated Professionals Focused on Tax-Exempt Issuances Experience with a Variety of Tax-Exempt Financing Programs Access to Additional Financial and Real Estate Services Low Cost Direct and Subordinate Lending for Commercial Component of Residential Projects Commonwealth and Local Grants Development and Management of Request for Proposals for Land Sales Assistance with Property Acquisition Property Management PAID s Fee Revenue is a Bottom Line Contribution to the City s Economic Development Efforts 7

8 F a c e b o o k. c o m / P I D C p h i l P ID C p h i l a W W W. P ID C - PA. O R G

9 PIDC-PHFA WORKSHOP Affordable Housing Finance Tax Exempt Funding Opportunities

10 Application Process The PA Department of Community and Economic Development each year provides an allocation to PHFA for the issuance of private activity bonds for housing purposes. Applicants for these bonds must request an allocation from PHFA. Either PHFA or a local entity may issue the bonds.

11 PHFA Application Process Applications generally accepted through July 1. Tax-Exempt Bond Term Sheet Project name and address Target population Project type Bond request (construction/permanent) Borrower Bond issuer

12 Tax-Exempt Bond Term Sheet

13 Tax-Exempt Bond Term Sheet The term sheet should be forwarded approximately 60 days prior to submitting the application. Submitting the term sheet will put the project on the radar and preliminarily set-aside the volume cap.

14 Application Process Use the Multi-Family application from website. Same application as for 9% credit applications Some additional exhibits specific to the bonds Be sure to do a quick 50% test. Be sure to provide a detailed description of the bond transaction.

15 Application Process Board presentation for commitment usually occurs within 90 days of application receipt. Portfolio-type applications (combining more than one project into a single application) will take longer. A conditional inducement resolution can be issued prior to the complete application review if necessary, for example, if this resolution is required to submit a HUD application.

16 Application Process The Board presentation consists of a commitment write-up and capital budget analysis. A representative of the applicant must be available at the Board meeting to answer questions, either in person or via telephone conference call.

17 Application Process If the Agency is not the bond issuer, the project must close prior to the end of the calendar year or lose the volume cap allocation. If the Agency is the bond issuer there may be more flexibility on the closing date.

18 Application Process In order for projects that are financed with taxexempt bonds to receive the automatic tax credits, the governmental unit issuing the bonds must make a determination that the application meets the Qualified Allocation Plan. This is called the 42(m) letter.

19 Application Process PHFA routinely issues the 42(m) for applications requesting an allocation of taxexempt bonds. If PHFA is not the bond issuer we will need a written request from the issuer asking us to do the review in its place. The 42(m) letter is usually executed just prior to the bond closing.

20 Application Process In some cases a subsidy layering review is also needed for closing. Required for projects receiving HUD assistance combined with other governmental assistance. FHA Mortgage insurance Section 202/811 Capital Advance Programs Project based voucher assistance PHFA can usually also complete this review.

21 Application Process Owners may elect to lock into the credit percentage for calculating the tax credits either in the month the bonds are issued or when the buildings are placed in service. If electing to lock in at the bond closing, an irrevocable Rate Lock election must be made to PHFA.

22 Application Process The credit percentage election must: Be in writing; Reference IRC Sec. 42(b)(2)(A)(ii)(II); Specify the percentage of aggregate basis financed by the bonds; State the month the bonds were issued; State that the month the bonds were issued is the month elected for the credit percentage;

23 Application Process Be signed by the taxpayer; and Be notarized by the 5 th day following the month in which the bonds are issued. (This notarization must be made on the last page of the election statement and not on a separate page.)

24 Application Process Cost Certification Placement in service package should be submitted to PHFA 90 days after the last building in the project is completed and placed in service. Asset management fee due with cost certification. Tax credit allocation fees due upon completion by PHFA of cost certification review. IRS Form 8609 is issued once allocation fees are paid.

25 Additional Information Agency is an approved MAP lender. Contact the Agency for more information if interested in pursuing this type of financing.

26 Contact Information Holly Glauser, Director of Development Susan M. Belles, Manager of Loan Programs Brian Shull, Senior Development Officer

27 Low Income Housing Tax Credits The Role of Bond Counsel in 4% Low Income Housing Tax Credits with Tax-Exempt Bond Financings William C. Rhodes, Partner Public Finance Department Chair Ballard Spahr LLP

28 The Function of Bond Counsel Validity Tax Exemption Enforceability 28

29 Bond Counsel Tax Diligence Who will be the Owner/Borrower? - For-profit Borrower under Section 142(d) - Contribution of existing property from a nonprofit entity What is being financed? - Residential Rental Housing Units suitable for occupancy on a non-transient basis - 50% of Total Development Costs paid with bond proceeds When are costs incurred? While we will review pro forma, our diligence is NOT a credit assessment! 29

30 Low/Moderate Income Set-Asides 20% or more of units occupied by persons whose income is 50% or less of median gross income OR 40% or more of units occupied by persons whose income is 60% of less of median gross income 30

31 Qualified Project Period Low/moderate income set asides begin on the 1 st day on which 10% of the residential units are occupied and end on the LATEST of: - 15 years after the date on which 50% of the units are occupied - Bonds are no longer outstanding - Expiration/Termination of Section 8 project assistance NB: 15-year compliance period for tax-exempt bonds is typically a non-issue given 30-year Extended Use Agreements imposed as a condition for the tax credits. 31

32 Bond Approval Process Why is PAID involved? Bond Volume Cap Allocation - 4% credits may be considered "automatic credits", but Private Activity Bond volume allocations are definitely not. TEFRA Hearing and Approval PAID Approval DCED Approval 32

33 Documents Trust Indenture Loan Agreement Bond Placement Agreement (Direct Placement) Mortgage and Security Agreement 33

34 Structural Issues and Considerations Will Bonds be paid off in full with Tax Credit Equity? Intercreditor Issues? Bond issue is very dependent on tax credit investor diligence 34

35 Ralph A. Falbo, Inc. Real Estate Development Company Presented to: PHFA and PIDC Philadelphia, PA March 6, 2013

36 Sample Tax Exempt Bond/4% Tax credit Projects 1.Doughboy Square Apartments 80/20 Mixed Income Mixed Use 2.Eva P. Mitchell Senior Apartments Refinance of Section 202 through 223f 3.West Park Court Senior Apartments Refinance of Section 231

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38 Doughboy Square apartments

39 Doughboy Square Apartments Project Summary: Construction of 45 one and two bedroom luxury apartments and 7,300 square feet of street level commercial space with integral garage parking. The building will be located on 3431 Butler Street across from the Doughboy Statue at the intersection of Butler and Penn. Garage parking to be accessed via Mulberry Way, behind the building. The site is located in the Lawrenceville business district. The Children s Hospital of Pittsburgh UPMC and the regional warehouse shopping Strip District are located within blocks of the site. Financing consists of a tax exempt loan, URA financing and 4% LIHTC Equity. Project Financing: $ 9,400,000 Tax Exempt Loan (Dollar Bank) 1,500,000 URA Loan 787,756 LIHTC Equity 390,794 Deferred Developer Fee $12,078,550 Total Development Cost

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41 Eva P. Mitchell

42 Eva P. Mitchell Financing Plan: The development plan included a new $4.4 million first mortgage insured through the FHA 223(f) mortgage program. Evanston Financial purchased a tax-exempt note to fund the new loan. Sources & Uses of Funds Sources Limited Partner Equity from 4% Volume Cap Tax Credits $1,327,000 FHA-Insured Mortgage Loan 4,400, 000 Existing Reserve for Replacement 116,000 Total Sources $5,843,000 Uses Residential Improvements $1,524,321 Land & Building Acquisition 2,815,311 Soft Costs 1,503,368 Total Uses $5,843,000

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44 West Park Court

45 West Park Court Financing Plan: Project was allocated $3.85 million in tax-exempt volume cap. The volume cap allocation was used to fund a 40-year amortizing note to the limited partnership. West Park Court Housing, L.P. obtained Section 231 FHA mortgage insurance. Based on the volume cap allocation, the limited partnership raised $1.9 million in low income housing tax credit equity through the syndication of 4% credits. Total Project Cost: $6,686,688 Project Sources: 1 st Mortgage: $3,858,500 LIHTC Equity: $1,934,000 GP/Seller s Note: $ 580,420 Deferred Developer s Fee: $ 198,768 Interim Income: $ 115,000

46 Thank you on behalf of Ralph A. Falbo, Inc.

47 PIDC/PHFA Workshop on Affordable Housing: Tax Exempt Opportunities March 6, 2013 Legacy Preservation Initiative Mission First Housing Group Building Partnerships, Creating Community Assets

48 Founding Mission & Purpose Founded in 1988 as 1260 Housing Development Corporation. A joint venture: City of Philadelphia, HUD and Robert Wood Johnson Foundation. Original Mission: to develop and manage decent, safe and affordable housing for persons with mental illness and other special needs. 1989: 34 units in Philadelphia. 48

49 Today: A Family of Companies Mission First Housing Group envisions communities where everyone can live independently in affordable, safe and sustainable homes with access to resources and opportunities to participate in their community Housing Development Corporation Founding nonprofit Columbus Property Management & Development Philadelphia-based operating company founded in 1993 Mission First Housing Development Corporation Washington DC; assets acquired in 2010 Dover Housing Development Corporation Delaware; assets acquired in

50 Accomplishments 2,242 Managed Housing Units 1,232 units in 263 buildings in Philadelphia 440 Southeastern PA master-leased units 550 operated units in Washington, D.C. 20 operated units in Delaware Today, housing for 3,500 individuals: 1,200 adults living with chronic mental illness 1,000 formerly homeless Growing veterans population 90+ staff members. Seasoned affordable housing professionals. $60 million operating budget; $5+ million endowment 50

51 Need for Recapitalization Funds Problem: Aging Affordable Housing Stock with No Ready Source of Capital Funding for Reinvestment. Deed ownership of 502 housing units acquired from 1989 to GP interests in 216 units (6 developments) that are at least 10 years old. Competition for 9% LIHTCs is intense; PHFA also has indicated that it wants to limit 9% credits going to preservation. 51

52 The Project Moderate rehabilitation of 13 existing buildings 139 apartment units 9 efficiency, 102 one-bedroom and 28 twobedroom units. All Developments were acquired and/or developed by 1260 Housing Development Corporation between 1992 and The vast majority of units are occupied by residents with special needs. They are located in various neighborhoods of the City of Philadelphia. 52

53 The Financing Sources Construction Permanent Tax-exempt Bonds Philadelphia Authority for Industrial Development $11,700,000 Deferred Developer Fee $467,992 Taxable Loan Community Lenders $2,000,000 LIHTC Equity Enterprise $6,558, Housing Development Corporation Loan $4,873,395 $7,547,200 Assumed Soft Debt $1,135,769 $1,135,769 HUD Energy Innovation Funds $2,800,020 $2,800,020 Existing Operating Reserves $334,967 $334,967 Total Development Cost $20,844,151 $20,844,151 53

54 Limitations to 4% Credit Equity can only pay roughly 30% costs in non-boost areas. PA has limited soft subsidies to supplement equity. LIHTC rents in PA are not high enough to support significant amounts of hard debt. Lack of soft and hard debt = only light to moderate rehab. Transaction costs of bonds means that deals need to be sizable. 54

55 Lessons Learned Relatively high value properties help generate equity for rehab. Interface between property management, maintenance and development are key to success. Prepare a realistic timeline for the bond and LIHTC review. Involve your partners earlier than you think you need to. 55

56 The Future Mission First will be driving most well-maintained LIHTC developments through the tax-exempt/4% credit process. We will be seeking increased soft subsidies to enable deeper levels of renovation; i.e. push for statewide funding, nontraditional funding. Mission First will work with fellow owner/developers to make the 4% credit path the first stop for preservation deals, understanding that some deals need the deeper rehab that comes with the 9%. 56

57 Mission First Housing Group Opening doors to housing opportunities for 24 years Thank You! 57