How to Construct Public Private Affordable Housing Partnerships IHCDA/ IAHC sponsored Indiana Housing Conference Wednesday, September 27, 2018 11:10 am 12:00 pm Indianapolis, IN Bruce Frankel, Professor Urban Planning
Navigation How to determine the appropriate subsidy How to structure the subsidy to return program income, and realize the sustainability of an affordable housing program My experience in making such programs work 2
To Innovate & Discard Myths Myth A. The price of housing is gateway to affordable homeownership B. Reliance on the developer for the gap in financing is necessary & sets the subsidy C. Affordability ignores the debt structure of the household D. Affordability set at 80% of AMI is affordable to moderate income households Innovation A. Non amortizing junior debt allows affordability & sustainability through program income B. The grantor can calculate the minimum subsidy for the private developer & also be the developer, saving 22% of development cost C. Cannot, as in front and back end ratios for mortgage underwriting D. It is 100% unaffordable [average set @ 65%] 3
Frankel s Relevant Experience 1. Co founder of Fair Share Housing in N.J.: Mt Laurel I and II 2. Housing & Community Development Director for a consortium of an urban county and 22 municipalities; awarded by HUD 3. Private developer for 20 years on mixed income residential [Developers Remedy] and nonresidential projects 4. Consultant to governments, including IHCDA, & production home builders 5. Taught this for the other 27 years of my career 4
PART 1: DIY Public Sector as Land Redeveloper and General Contractor 5
Precursor: Public Sector performs Local CDBG/ HOME Office as Developer & GC Saves 1. Developer profit @ 12% 2. General Contractor profit @ 10% 3. Over bids with developer collusion [bid fixing] 4. Cost of monitoring above [hidden corruption GC & Trades] Staffing Features 1. Determination of household eligibility and subsidy 2. Cost estimators [+/ 10% rule] 3. Trades bidding 4. Inspections of scope of work Cost of staff corruption in collusion with Developer or Trades either way 6
PART 2: Calculate & Apply Minimum Subsidy Public Sector on Same Terms as Private Developer 7
How to Calculate the CDBG/ HOME Junior Mortgage Calculated as givens of the model 1. Qualifying Household Income 2. Cost A&D [acquisition & development] 3. Calculate & Set Affordable Down Payment & Mortgage [FNMA] Calculations of the model 4. LESS Maximum Qualifying Private Mortgage 5. EQUALS Required 2 nd Mortgage CDBG/ HOME [or other source] 6. Account for Maximum Debt Load [ front & back end debt ratios ] 8
Home Ownership 1. Feasible down payment 2. Feasible Front & Back end Ratios 3. Affordable Monthly Housing Payments 4. Affordable Amortization Structure [cf. home price] 5. Cost to Develop Homebuyer or Tenant Developer or Landlord Rent 1. Affordable Monthly Housing Payments 2. Utility Allowance 3. Affordable Contract Rent 4. Cost to Develop 5. Cost to Manage in Operation 6. Landlord Profit Underwriting the Minimum Subsidy More affordable & more costly to subsidize per common scale 1. Ownership 2. Rent 9
Notes in Underwriting 1. Calculate @ income precisely set for qualifying household 2. Use FNMA [or equivalent] underwriting standards for ownership and rental 3. Some subsidy sources assists middle income households [see HoTIF & #4 below] 4. Pursue developer subsidy [market affordable] as the mixed income solution 10
A Word on the Economics Principle of Locational Equilibrium Locational equilibrium achieved when no one has an incentive to move e.g., in hedonic regression with strictly locational factors Beach houses rent for $500/ week more than interior vacation houses Retail or apartments at a transit stop rents 1.5 times than along an arterial with no transit Median value of homes in Carmel $284,000 in 2014 [$201,400 in 2010; new homes on the market in 2015 @ $385,000 and $1,400 to rent] cf. to Median value Muncie at $75,000 [same in 2010] 11
Median Values [2015] 701 W. Ashland Ave., Muncie $75K 14246 Autumn Woods Ave., Carmel $285K 12
It s the location factor [external amenities over internal amenities] 620 2nd NE Ave., Carmel $690,723, $172/ s.f., ¼ AC, $691K/ AC 3-4-2015 2015 Arts & Design 5408 W. Deer Run, Muncie $590,841, $85/ s.f., 1.6 AC, $92K/ AC 3-4-2015 1992 updated 2012 Carmel: closer to DT price up Muncie: further away the better 13
Scenario 1A: Fee Simple Sales in Delaware County Assumptions Assignment 1 Factor 1 BR 2 BR 3 BR 4 BR 1A: Delaware County AMI $ 39,537 $31,422 $37,715 $39,800 $48,565 1Aa: Buyer Income @ 80% AMI $27,000 $30,000 $34,000 $39,000 Affordable Home Price $87,195 $96,053 $108,914 $124,849 LESS Acquisition Cost Pro Rata $ 4,000 $ 4,000 $ 4,000 $ 4,000 LESS Development Cost $ 82,500 $ 137,500 $ 142,000 $ 145,000 EQUALS Surplus [Required Subsidy] $695 ($45,447) ($37,086) ($24,151) 1Ab: Buyer Income @ 120% AMI Affordable Home Price $128,991 $144,320 $159,623 $185,577 LESS Acquisition Cost Pro Rata $4,000 $ 4,000 $ 4,000 $ 4,000 LESS Development Cost $ 103,125 $ 171,875 $ 177,500 $ 181,250 EQUALS Surplus [Required Subsidy] $21,866 ($31,555) ($21,877) $327 14
Scenario 1B: Fee Simple Sales in Hamilton County Assumptions Assignment 1 Factor 1 BR 2 BR 3 BR 4 BR 1B: Hamilton County AMI $ 84,635 $67,263 $80,735 $85,199 $103,961 1Aa: Buyer Income @ 80% AMI $57,000 $65,000 $72,000 $83,000 Affordable Home Price $207,793 $236,751 $261,672 $301,727 LESS Acquisition Cost Pro Rata $20,000 $20,000 $20,000 $20,000 LESS Development Cost $123,750 $142,313 $206,250 $213,000 EQUALS Surplus [Required Subsidy] $64,043 $74,438 $35,422 $68,727 1Bb: Buyer Income @ 120% AMI $86,000 $97,000 $108,000 $125,000 Affordable Home Price $313,909 $353,357 $392,780 $454,913 LESS Acquisition Cost Pro Rata $20,000 $20,000 $20,000 $20,000 LESS Development Cost $213,469 $309,375 $319,500 $326,250 EQUALS Surplus [Required Subsidy] $80,440 $23,982 $53,280 $108,663 15
Scenario 2A: Apartment Rentals in Delaware County Assumptions Assignment 1 Factor 1 BR 2 BR 3 BR 4 BR Scenario 2 Apartment Rentals Per Unit 2A: Delaware County AMI $ 39,537 $31,422 $37,715 $39,800 $48,565 2Aa: Tenant Income @ 60% AMI $20,000 $23,000 $25,000 $29,000 Affordable Contract Rent $374 $426 $447 $512 LESS Landlord Costs + Profit Margin $64 $72 $76 $87 EQUALS Net Rent for Mortgage $310 $354 $371 $425 Mortgage Constant 7.33% 7.33% 7.33% 7.33% 7.33% Calculate Maximum Moirtgage $50,819 $57,885 $60,711 $69,617 LESS A&D Cost for Apt. $69,000 $89,500 $101,000 $111,000 EQUALS Surplus [Required Subsidy] ($18,181) ($31,615) ($40,289) ($41,383) 2Ab: Tenant Income @ 100% AMI $34,000 $38,000 $42,000 $49,000 Affordable Contract Rent $724 $801 $872 $1,012 LESS Landlord Costs + Profit Margin $123 $136 $148 $172 EQUALS Net Rent for Mortgage $601 $665 $724 $840 Mortgage Constant 7.33% 7.33% 7.33% 7.33% 7.33% Calculate Maximum Mortgage $98,377 $108,840 $118,460 $137,557 LESS A&D Cost for Apt. $86,250 $111,875 $126,250 $138,750 16 EQUALS Surplus [Required Subsidy] $12,127 ($3,035) ($7,790) ($1,193)
Scenario 2B: Apartment Rentals in Hamilton County Assumptions Assignment 1 Factor 1 BR 2 BR 3 BR 4 BR 2B: Hamilton County AMI $ 84,635 $67,263 $80,735 $85,199 $103,961 2Ba: Tenant Income @ 60% AMI $43,000 $48,000 $54,000 $62,000 Affordable Contract Rent $949 $1,051 $1,172 $1,337 LESS Landlord Costs + Profit Margin $142 $179 $199 $227 EQUALS Net Rent for Mortgage $807 $872 $973 $1,110 Mortgage Constant 7.33% $0 $0 $0 $0 Calculate Maximum Moirtgage $132,057 $142,810 $159,224 $181,718 LESS A&D Cost for Apt. $102,000 $132,000 $148,500 $162,750 EQUALS Surplus [Required Subsidy] $30,057 $10,810 $10,724 $18,968 2Bb: Tenant Income @ 100% AMI $72,000 $81,000 $90,000 $104,000 Affordable Contract Rent $1,674 $1,876 $2,072 $2,387 LESS Landlord Costs + Profit Margin $251 $281 $311 $358 EQUALS Net Rent for Mortgage $1,423 $1,595 $1,761 $2,029 Mortgage Constant 7.33% $0 $0 $0 $0 Calculate Maximum Moirtgage $232,944 $261,053 $288,300 $332,208 LESS A&D Cost for Apt. $153,000 $198,000 $222,750 $244,125 17 EQUALS Surplus [Required Subsidy] $79,944 $63,053 $65,550 $88,083
Underwriting Home Ownership e.g., Hamilton County 2018 0 BR 1 BR 2 BR 3 BR 4 BR COUNTY COUNTY COUNTY COUNTY COUNTY MEDIAN MEDIAN MEDIAN MEDIAN MEDIAN INCOME INCOME INCOME INCOME INCOME HH=1 PERSON HH=1.5 PERSON HH=3 PERSON HH=4.5 PERSON HH=6 PERSON Household Income @ 80% AMI $64,000 $73,000 $82,000 $91,000 $106,000 FNMA Factor [Front End] 28.00% 28.00% 28.00% 28.00% 28.00% EQUALS Maximum Owner Allowance $17,920 $20,440 $22,960 $25,480 $29,680 LESS Allowance for Taxes [2] ($1,020) ($1,122) ($1,290) ($1,452) ($1,669) LESS Allowance for Hazard Insurance [3] ($332) ($365) ($419) ($482) ($555) EQUALS Income for Mortgage $16,569 $18,953 $21,250 $23,546 $27,456 DIVIDED by Annual Mortgage Constant 0.0733 0.0733 0.0733 0.0733 0.0733 EQUALS Maximum Mortgage $225,979 $258,506 $289,835 $321,148 $374,476 DIVIDED by Loan to Value Ratio [COAH std. of 95%] 95.00% 95.00% 95.00% 95.00% 95.00% EQUALS Maximum Price of Home $237,873 $272,112 $305,090 $338,051 $394,185 Average Price of 2 and 3 BR Homes Moderate Income > $321,570 3 + 4 BR = $366,118 18
Underwriting Rental e.g., Hamilton County 2018 0 BR 1 BR 2 BR 3 BR 4 BR COUNTY COUNTY COUNTY COUNTY COUNTY MEDIAN MEDIAN MEDIAN MEDIAN MEDIAN INCOME INCOME INCOME INCOME INCOME HH=1 PERSON HH=1.5 PERSON HH=3 PERSON HH=4.5 PERSON HH=6 PERSON Household Income @ 60.0% $64,000 $73,000 $82,000 $91,000 $106,000 FNMA Affordability Factor 30.00% 30.00% 30.00% 30.00% 30.00% EUALS Affordable Gross Contract Rent/Year $19,200 $21,900 $24,600 $27,300 $31,800 EUALS Affordable Gross Contract Rent/Month $1,600 $1,825 $2,050 $2,275 $2,650 LESS Utility Allowance [1] ($102) ($126) ($149) ($178) ($213) EQUALS Affordable Net Rent $1,498 $1,699 $1,901 $2,097 $2,437 Average Rent of 2 and 3 BR Homes @ 60% AMI > $1,999 19
Intervention Between the Extremes: Frankel s Mixed Income Solution 50% AMI 80% AMI 120% AMI Cost Mixture Sold Price Mixture Net Proceeds Mixture $ 370,000 $ 370,000 $ 0 Market Price $ 110,000 $ 130,000 $ 170,000 Cost $ 100,000 $ 120,000 $ 150,000 Affordable Price $ 80,000 $ 120,000 $ 180,000 Bold represents sold price [lesser of affordable and market prices] Surplus [Subsidy] $ (20,000) $ 0 $ 20,000 < Sold Price Cost Conceptual Numbers BEP workshop A: afternoon 20
Actual Numbers NRSA Neighborhood of Muncie Neighborhood Redevelopment Strategy Area of HUD Refer HUD Studies to 40 th Anniversary of HCDA 1974 2014 NRSA Strategy Performance [17%] Direct Costs and Revenues Average per Property Total Dwellings 1.20 60 Bedrooms 3.02 151 Assessed Value $25,482 $1,274,100 Proposed Acquisition Value @ 85% Assessed $21,660 $1,082,985 Demolition Cost $7,732 $61,856 New Construction Cost $160,521 $2,889,375 Rehabilitation Cost $90,119 $2,883,800 Total Direct Cost of Acquisition & Development $138,360 $6,918,016 Revenue from Sales $170,200 $8,510,000 Surplus [Deficit] before indirect costs and administration $31,840 $1,591,984 BEP workshop A: afternoon 21
Assumptions of the Apartment Model Factors > Muncie Carmel Site Acquisition Cost $ 400,000 $ 2,400,000 6X Dwelling Units 100 100 Landlord Costs [% rent roll]: Property Tax 2.0% 2.0% Repair/ Replace 4.0% 2.0% 0.5X Management Fee 4.0% 4.0% ROI as Profit Margin 7.0% 7.0% Combined 17.0% 15.0% 22
Assumptions of Both Ownership & Rental Models 1. This is my model, but all assumptions follow the standards utilized by the U.S. Department of Housing & Urban Development [HUD], the Federal National Mortgage Association [FNMA, or Fannie Mae] and state authorities in this field of providing affordable housing. This is how affordable housing is underwritten. 2. All scenarios are mixed income housing, where the opportunity for developer subsidies from market rate dwellings for the affordable, or set aside dwellings are presented. 3. The costs of land acquisition and development are based on my experience as a land developer and particularly with mixed income projects. Land costs are 6 fold in Carmel than in Muncie, development costs are higher as well [although one could argue why], and market rate units are bigger and with upgrade finishes over their affordable set asides as reflected in costs. 4. Significantly, affordable standards are designated as a proportion of Area Median Income [AMI], and, as prescribed by HUD, here based on the counties of Delaware and Hamilton, despite locations in the cities of Muncie and Carmel. Refer to chart Delaware County $39,537 Hamilton County $84,635 Muncie $30,570 Carmel $107,916 23
PART 2: Underwriting Housing Rehabilitation with Front & Rear End Ratios Case of Renaissance Point NOTE: In #8, If secondary loan by CDBG Office were non amortizing, then removes that issue alone for primary lender Calculation @ Front End Ratio ITEM At Muncie 80% Median Delco 25% Delco 80% Input 1 HH Annual Income $ 26,000 $ 13,250 $ 42,400 2 LESS Existing Debt Service [Front End] $ 4,000 $ 3,000 $ 7,000 3 EQUALS Net Income for Reconstruction Loan $ 22,000 $ 10,250 $ 35,400 4 Affordable Front End Debt Ratio 28.0% 28.0% 28.0% Check 5 #2 / #1 15.4% 22.6% 16.5% 6 #4 #5 12.6% 5.4% 11.5% 7 EQUALS Net Income for Reconstruction Loan $ 3,280 $ 710 $ 4,872 8 Mortgage Constatnt Secondary Debt 8.0% 8.0% 8.0% 9 EQUALS Maximum Reconstruction Loan $ 41,000 $ 8,875 $ 60,900 Input 10 Cost of Improvements $ 50,000 $ 50,000 $ 50,000 Calculated Results 11 EQUALS CDBG/ HOME Subsidy $ 9,000 $ 41,125 $ (10,900) 12 % Subsidy 18% 82% 22% NOTE: If # 11, 12 (negative), then surplus of affordable private financing, and public subsidy is not warranted. The greater of the two subsidy calculations is warranted. Calculation @ Back End Ratio ITEM At Muncie 80% Median Delco 25% Delco 80% Input 1 HH Annual Income $ 26,000 $ 13,250 $ 42,400 2 LESS Existing Debt Service [Back End] $ 6,000 $ 4,000 $ 8,000 3 EQUALS Net Income for Reconstruction Loan $ 20,000 $ 9,250 $ 34,400 4 Affordable Back End Debt Ratio 36.0% 36.0% 36.0% Check 5 #2 / #1 23.1% 30.2% 18.9% 6 #4 #5 12.9% 5.8% 17.1% 7 EQUALS Net Income for Reconstruction Loan $ 3,360 $ 770 $ 7,264 8 Mortgage Constatnt Secondary Debt 8.0% 8.0% 8.0% 9 EQUALS Maximum Reconstruction Loan $ 42,000 $ 9,625 $ 90,800 Input 10 Cost of Improvements $ 50,000 $ 50,000 $ 50,000 Calculated 11 EQUALS CDBG/ HOME Subsidy $ 8,000 $ 40,375 $ (40,800) Results 12 % Subsidy 16% 81% 82% NOTE: If # 11, 12 (negative), then surplus of affordable private financing, and public subsidy is not warranted. Front End Ratio = (Annual mortgage + RE taxes + Hazard Insurance @ $3.25/ $1,000; Back End Ratio = (Front End + All other Debt Pmts.) $9K subsidy Target < 28% 18% Target < 36% Determined Subsidy [always larger] $8K subsidy 16% 24
PART 3: Application to Single Family & Mixed Use Developments No Household Income limitations, except MCCP; Highly affordable @ $40K HoTIF Several IHCDA Subsidies [min. planner] 25
PART 3: Application of HoTIF + IHCDA as Affordable Housing Subsidy Homestead Calculated at lowest HoTIF and IHCDA subsidies Within FNMA underwriting Calculated Costs & Amortizing Mortgage Acquisition & Redevelopment $ 168,000 LESS HoTIF [Homeowner pays taxes, City Trust pays 2nd mortgage] $ (25,000) LESS IHCDA Down Payment Assistance @ 4% $ (6,720) EQUALS Conventionally Financed Price $ 136,280 LESS any Buyer Down Payment or Developer Subsidy $ EQUALS Amortizing Mortgage [LTV=LTC] $ 136,280 Affordability Calculation Monthly Mortgage Payment [annual mortgage constant @ 0.073] $ 829 PLUS Monthly Property Tax Payment [annual @ 1.0%] $ 140 PLUS Monthly Hazard Insurance [annual @ 0.325%] $ 46 LESS IHCDA Mortgage Credit Certificate @20% [max @35%] & 6.0% interest $ (136) EQUALS Total Effective Housing Payment [TEHP] $ 878 TEHP/ Household Income @ $3,371/ month [$40,452/ yr.] 26% Compare to Section 8 Fair Market Rent [2014, Muncie metro] $ 1,182 TEHP Sec 8 rent same dwelling unit $ (304) New Construction Taxes Paid/ MC Afford Savings IHCDA Mortgage Credit Certificate Guide https://www.in.gov/ihcda/homeownership/files/2017%20mcc%20program%20guide_sh.pdf BEP workshop A: afternoon 26
Condo @ $168K more likely $86K in reality source: multifamily developer Assumes nonresidential of equal value as residential; capitalized HoTIF $75K + $25K Same, but for a Mixed Use Project Luxury Condo Calculated at higher HoTIF and lowest IHCDA subsidies Calculated Costs & Amortizing Mortgage Acquisition & Redevelopment $ 168,000 LESS HoTIF [Homeowner pays taxes, City Trust pays 2nd mortgage] $ (100,000) LESS IHCDA Down Payment Assistance @ 4% $ (6,720) EQUALS Conventionally Financed Price $ 61,280 LESS any Buyer Down Payment or Developer Subsidy $ EQUALS Amortizing Mortgage [LTV=LTC] $ 61,280 Affordability Calculation Monthly Mortgage Payment [annual mortgage constant @ 0.073] $ 373 PLUS Monthly Property Tax Payment [annual @ 1.0%] $ 140 PLUS Monthly Hazard Insurance [annual @ 0.325%] $ 46 LESS IHCDA Mortgage Credit Certificate @20% [max @35%] & 6.0% interest $ (61) EQUALS Total Effective Housing Payment [TEHP] $ 497 TEHP/ Household Income @ $3,371/ month Creative class argument 15% Compare to Section 8 Fair Market Rent [2014, Muncie metro] $ 1,182 TEHP Sec 8 rent same dwelling unit $ (685) Condo @ 50% Taxes Paid/ MC Afford Savings BEP workshop A: afternoon 27
PART 4: Sustainable Housing Rehabilitation As practiced by Frankel Deferred Payment Loan [non amortizing for affordability] 28
CDBG/HOME Strategy [Frankel 1976 2006; 30 yrs.] Structured Loan 1. $2.7M HUD funding [60% housing $1.62M] a. CDBG 1974 b. HOME 1990 2. Invested in Code Deficient Homesteads @ 20% maximum; 13.5% average [Leverage 7.4/1] 3. Average repairs $30K [Av. $4,040 HUD funds] 4. Deferred Payment Loan as soft second mortgage [non amortized, balloon due at resale] 5. Returned average 5% annually and reinvested 6. Accrue below market interest or structure as shared appreciation 7. Results here at accrued below market interest, but not shared appreciation Results A. 401 units annually served from HUD grant = B. 12,030 units over 30 years C. $62,322,207 in program income 30 years D. Additional 15,426 units served 30 years = E. Total 27,456 units served [13.3%] and increasing F. Materially less reliance on Congressional appropriations Due to: 1. Public agency as developer & GC [cost saving] 2. High private leveraging [cost efficiency] 3. Deferred Payment Junior Loan CDBG, resulting in 4. Program income as reinvested BEP workshop A: afternoon 29
Deferred Payment Loans per $1.0M Generates Program Income & Reinvested Calculations simplified & performed with accrued interest & without shared appreciation, which are based on capital contributions of the Community Development Office and the Home Owner Annual Grant CDBG/HOME YEAR + Program Income 1 1,000,000 2 1,000,000 3 1,051,750 Annual Program Income % Annual Program Income Accrued Interest 3.5% Subtotal Invested 3.5%/yr. $ 0% $ $ 1,000,000 $ 5% $ 50,000 $ 1,750 $ 1,051,750 $ 5% $ 52,588 $ 1,841 $ 1,106,178 30 $ 4,107,245 5% $ 205,362 $ 7,188 $ 4,319,795 Cumulative Invested $ 3,207,531 112,264 Invested w/o Program Income Ratio $ $ 68,470,415 $30,000,000 228% 30