navigating through the crisis: developers and public housing authorities presentation to iped ira g....
TRANSCRIPT
Navigating through Navigating through the Crisis:the Crisis:
Developers and Public Developers and Public Housing AuthoritiesHousing Authorities
Presentation to IPED
Ira G. Peppercorn
President
Ira Peppercorn International, LLC2008 Real Estate Update: Affordable Housing in
Today’s Market December 10–12 San Juan, Puerto Rico
Sponsored by
Reznick Group, Nixon Peabody LLP and IPED, Inc.
Current Credit Crisis: Current Credit Crisis: Debt and EquityDebt and Equity
• Decreased access to construction and long term debt
• Decreased supply of equity
• Increased cost of equity
• Increased cost of construction debt
• Increased requirements for debt and equity
Current Credit Crisis: Current Credit Crisis: Rental MarketsRental Markets
• Increased number of renters
• Increased average rental costs
• Decreased vacancy rate
• Decreased cost of land and construction costs in some markets
Tax Credit MarketTax Credit Market
• Ernst & Young estimates that tax credit equity has decreased by at least 40%
• Fannie Mae, the largest tax credit equity provider, noted equity investments decreased by 50% between 2006 and 2007
• Government takeover has reduced this even further.
Pre-2007 Tax Credit PricingPre-2007 Tax Credit Pricing
• At peak (2006), prices for pay-in ranged from .94 – 1.04
• Price depended on:
• Pay-in Period
• Financial strength of developer
• Negotiation
• 10-12 Equity providers would call once an application was submitted
Current Tax CreditCurrent Tax Credit
• Estimates from .78-.82
• Developers receiving fewer offers
• Pay-in periods longer
• Stronger developer track record required
• 10-12 calls must be made by the developer to the equity providers AFTER an allocation and only 1-2 might show serious interest
Debt StatusDebt Status
• Construction lending increased from 175 bp over LIBOR to 250bp over LIBOR
• Permanent financing increased from 200 bp over the 10 year Treasury to 400bp
• “Saving grace” is that rates are still relatively low even with the increase (7-8%)
• Lenders are much more stringent
Rental Market StatusRental Market Status
• National vacancy rate is decreasing:– 10.2% 2003– 9.6% 2007 (Q4) – Estimate of 9 – 10% in 2008
• Median asking rate for rentals jumped 14%, from $591 a month during the fourth quarter of 2003 to $673 a month at the end of 2007
• The number of renters in professionally managed apartments leapt by the largest amount since 2000.
Rental DemographicsRental Demographics
• In the 10 years preceding the credit crisis nearly 2.2 million (or 6 percent) of all rental units were demolished or otherwise permanently removed from the inventory
• Number of renters increased by approximately one million in 2007.
• National median gross rent rose 2.7 percent in real terms from 2001 to 2006 while the median renter income fell by 8.4 percent.
Reasons for Increase in Reasons for Increase in RentersRenters
• Foreclosures
• Economic situation makes it difficult to buy
• Underwriting criteria is more strict
• People waiting for home prices to drop
• Lost home due to foreclosure
Different Investor Profile Different Investor Profile SoughtSought
• Fannie, Freddie, many banks not investing or investing less
• Equity funds looking to pension funds, insurance companies, communications firms
• Increased rate of return demands (from current 4-5% to 6.5-8%) will keep equity prices low
Challenges for DevelopersChallenges for Developers
• Equity more difficult to obtain and more expensive
• Debt requirements more stringent and debt costs higher
• Less money for trust funds because of real estate situation
• More competition for trust fund and other governmental monies
• Funds diverted for the foreclosure crisis
Advantages to Advantages to Developer/Public Housing Developer/Public Housing
Authority PartnershipsAuthority Partnerships
• PHAs often located in or near qualified census tracts
• Non-profit affiliates of PHAs are competitive in tax credit applications
• Population served by PHAs makes them competitive in seeking HOME, Trust Fund, AHP and other types of financing
• Able to Leverage Capital and Operating Fund Programs
Factors Aiding PHAs in Factors Aiding PHAs in Developer PartnershipsDeveloper Partnerships
• Strong financial position needed to receive tax credit equity
• Equity needed to secure debt, whether in relation to tax credits or conventional
• Financial resources place developer in a more competitive position
• Less experienced developers, including PHAS, more difficulty raising equity
Preservation EmphasisPreservation Emphasis
• 46 states prioritize preservation in their LIHTC allocation.• 25 states have competitive tax credit set asides for
preservation.• A majority of states dedicate a portion of their four
percent tax credits and private activity bonds to preservation.
• An increasing number of states have developed housing trust fund programs that finance preservation and rehabilitation.
• Most states have made a commitment to the preservation of affordable rural housing through their tax credit programs.
State Low Income and State Low Income and Preservation EmphasisPreservation Emphasis
• Massachusetts: 35% tax credit set aside for preservation
• Georgia: 14 points added for very low income properties in rural areas
• 15 Points Conversion/Rehab for low income renters
Additional Resources Exist Additional Resources Exist but Under Pressurebut Under Pressure
• Municipal Bonds and 4% Credits– Bond market is difficult at current time
• State and Local Housing Trust Funds– Contributions Shrinking due to Financial
Situation
• HOME– Competition with Community Preservation
and Foreclosure Prevention
Capital Fund Financing Capital Fund Financing Program Program
• PHA pledges a portion (up to 33%) of its current and future year capital fund allocations to a lender or investor, for up to 20 years
• If the PHA Forms an Affiliate Organization, Can be Used with Tax Credits
• PHA can Partner with a Private Developer
CFFP: CriteriaCFFP: Criteria
• Up to 33% of Capital Funds May Be Pledged
• Financing Cannot Have Detrimental Impact on Balance of Portfolio
• Analysis Based on Physical Needs Assessment (PNA)
• Plan Should Include Sensitivity if Units and/or Capital Allocations Will be Reduced
CFFP: Key ConditionsCFFP: Key Conditions
• Lender Or Investor Must Understand Pledged Funds Are Subject To Federal Appropriations
• The Transaction Must Stand On Its Own Terms, As There Is No Full Faith And Credit Guarantee Of The U.S. Government
• Section 30 Permits A PHA To Borrow Against Its Assets While Protecting The Housing For Public Housing Residents
Tax Credits and CFFPTax Credits and CFFP
• PHA Affiliate Organization• Application Processes:
– HUD– State HFA
• Timing:– CFFP: 24 Months To Obligation; 48 To
Expenditure– LIHTC: Must Be Placed In Service By End Of
Year Two Years After The Award
What Can Slow Down the What Can Slow Down the ProcessProcess
1. Physical Needs Assessment not complete, not submitted to the field office as part of the PHA Plan, not completed in accordance with regulations, such as life cycle considerations.
2. PHA Plan not complete, not completed in accordance with HUD requirements, or not approved.
3. Evidence of effective DOTs in first position, lacking or insufficient.
4. Adjustments to CFP to reflect activities that would reduce grant.
Source: U.S. Department of Housing and Urban Development
Capital Fund Capital Fund Appropriations HistoryAppropriations History
FY 2000 2001 2002 2003 2004 2005 2006
Total 2,900 3,000 2,843.4 2,730 2,712.2 2,600 2,463.6
Less Set Asides
150 168 194.2 190.1 171.1 150.3 93.3
CFP Available for Formula 2,750 2,832 2,649.2 2,539.9 2,541.1 2,449.6 2,370.2
Change in CFP Available for Formula
2.98% -6.45% -4.13% 0.05% -3.60% -3.24%
Timely Obligator Set Aside
550 447
CFP Available for Untimely Obligators
2,750 2,832 2,0992 2,0929 2,541.4 2,449.5 2,370.2
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Source: U.S. Department of Housing and Urban Development
Operating Fund Financing Operating Fund Financing Program (OFFP)Program (OFFP)
Can pledge the following: (subject to the written approval of the Assistant Secretary of PIH or the DAS of OPHI) Cash flow
Funding Needs at 84% Operating reserves in excess of 3 months of
operating expenses
Source: U.S. Department of Housing and Urban Development
LIHTC and CFFPLIHTC and CFFP
CAPITAL Lease used to “acquire” the real property Ground lease used to control - Isolate the land cost HUD Declaration of Trust in “first” position No First Mortgage debt (impact on DSCR) Construction loan in “second” position Break Even Cash Flow budgeting All cash flow from HUD runs through PHA All HUD Public Housing Rules apply during the tax
credit compliance period Final HUD approvals (CFFP and Mixed Finance)
Source: James Hamilton, Stevens Point (WI) Housing AuthorityTom Landgraf, Tom Landgraf Consulting, LLC
OFFP ConsiderationsOFFP Considerations
•Mixed Finance
•Can use cash flow to pay debt service
•When received by a PHA, such funds must be treated as operating subsidy
•All projects must be under project based accounting
•Project being financed must submit an audited financial statement
•PNA must demonstrate that the improvements cannot be addressed through CFFP and Capital Fund must be used first
PHA Project Based PHA Project Based VouchersVouchers
• PHA – Owner HAP contracts up to 10 years• Except for units for elderly, disabled, or receiving
supportive services, building must have less than 25% receiving project-based voucher assistance.
• PHA may extend HAP contract to achieve long-term affordability or to expand housing opportunities
• Contracts and extensions subject to availability of appropriated funds
Source: U.S. Department of Housing and Urban Development
ConclusionConclusion
• Debt, Equity Markets Create Challenges• PHA-Developer Partnerships Have Advantages
for Both• Tax Credit Competition and Difficult to Develop
Areas• CFFP and OFFP Financing• Project Based Rental Assistance• Still Challenges Ahead
Thank YouThank You
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