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TRANSCRIPT
Overview, the Rules, Risks & Rewards, 2 Case Studies
1. What is Twinning?
2. Rewards of Twinning
3. Risks of Twinning
4. Rules of Twinning
Part One: What is Twinning?
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
▪“80-20” NYC Deals
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Rules of Twinning
4
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).
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%
Adjuster of $5.78M + penalties and interest
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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)
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Virginia’s 9-4 ResultsDeal 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 $11,399 60 48 108 $1,231,094 $683,941 $547,153
Clairmont Apartments $10,952 84 68 152 $1,664,762 $920,000 $744,762
Columbia Hills East $21,582 97 132 229 $4,942,387 $2,093,500 $2,848,887
Fieldstone Senior $10,142 60 84 144 $1,460,491 $608,538 $851,953
Lexington I $14,258 48 148 196 $2,794,515 $684,371 $2,110,144
Wexford Manor $11,548 38 36 74 $854,573 $438,835 $415,738
387 516 $7,518,637
2016
Birchwood at Brambleton $15,065 56 27 83 $1,250,422 $843,658 $406,764
Gilliam Place East $23,494 83 90 173 $4,064,458 $1,950,000 $2,114,458
139 117 $2,521,222
2017
Jackson Ward Senior $10,828 72 122 194 $2,100,613 $779,609 $1,321,004
October Station $12,365 48 39 87 $1,075,721 $593,501 $482,220
Price Street Apartments $11,184 152 112 264 $2,952,632 $1,700,000 $1,252,632
Senior Residences at North Hill $9,417 63 52 115 $1,082,940 $593,263 $489,677
The Berkeley $20,000 125 131 256 $5,120,000 $2,500,000 $2,620,000
The Residences at North Hill 2 $18,912 75 89 164 $3,101,505 $1,418,371 $1,683,134
535 545 $7,848,666
1061 1178 Total Savings (2015-2017): $17,888,525
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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 2014.
• 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 2015. 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.
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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.]
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The Rules of Twinning
IRS Guidance
First Separate It, then Allocate It:
1. IRS Notice 88-91 (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
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
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First, Separate It!The Noah’s Arc of
DocumentsTWO 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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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.
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First, Separate It! The Costs
▪ General Rule: allocate between uses according to “any reasonable method that properly reflects the proportionate benefit to be derived [Novogradacsec 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
▪ 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
15
1. Many Types of Twins
2. Case Study #1 Residences at Government Center
3. Case Study #2 Gilliam Place Apartments
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Case Study #1
Summary Project Details
Building
• 270 apartment units
• 150 units in Condo A (the 9% deal)
• 120 units in Condo B (the 4% deal)
• Structured Parking - 348 spaces
• Amenities include: community room, pool, fitness center, playground, business center, secure mail room
Property Information
• Location: Fairfax, VA
• Delivery Date: March 2017
• Construction Type: New Construction
• Occupancy Type: Family
• LIHTC Amount: $25 million
• Current Occupancy: 100%
Momentum
at Shady
Grove
Residences at Government Center
Timeline
2013 2014 2015 2016 2017
Studied Virginia QAP to structure a competitive 9% deal
Virginia revised QAP to incentivize applicants to submit using hybrid 9/4
structure
June 2014: 9% LIHTC Award was secured
Received “buy in” from all financing participants
Initial Closing
Construction
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
100%
Leased as of
June 1st
9% LIHTC Application submitted
Sources & Uses
• 99 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
Summary Project Details
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 0 2,000,000
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 1,200,000 600,000
Interest Expense 2,000,000 1,200,000 800,000
Developer Fee 4,800,000 2,700,000 2,100,000
Total $58,000,000 $34,000,000 $24,000,000
Stifel: Bond Execution
Original Issue
■ $13,000,000 closed March 26, 2015
■ Initial Mandatory Tender – April 1, 20161
■ Initial Bond interest rate – 0.40% for 12 months2
■ A Section 221(d)(4) loan bearing interest at 3.57% provided collateral for the Bonds
■ Optional redemption on October 1, 2015
■ Negative arbitrage deposit at closing - $53,000
Remarketing
■ $13,000,000 remarketed April 1, 2016
■ Mandatory Tender – April 1, 20173
■ Remarketing interest rate – 1.00% for 12 months4
■ Money in the collateral fund was reinvested in a U.S. Treasury Note bearing interest at 0.67%
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.
2. 1-year MMD approximately 0.18% as of March 20, 2015
3. 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
COMBINED TAXABLE DEBT WITH SHORT TERM TAX
EXEMPT BONDS AND 4% LIHTC –
FAQ/ISSUES
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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 703-568-0190
Despite the recent increase in short-term, tax-exempt rates, the
negative arbitrage deposit can still be significantly reduced.
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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
Historical Performance for 2-Year MMD (plus credit spread) and 2-Year UST
2-Year MMD 0.87
Add: Credit Spread 0.43
Bond Rate 1.30
Less: Reinvestment Rate 1.26
Net Bond Rate 0.04
Pricing Indications
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Publically Offered vs. Privately Placed:
Potential tax implications if Bond Purchaser is “related” to the Borrower (see §1.148
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 703-568-0190
COMBINED TAXABLE DEBT WITH SHORT TERM TAX
EXEMPT BONDS AND 4% LIHTC –
FAQ/ISSUES
Aerial View
APAH- Mission Centered Development
Case Study #2: Gilliam Place
October 2017
Project Overview
• Partnership with Arlington Presbyterian Church since 2012
• 65,000 sq foot site at Town Center on Columbia Pike in Arlington, VA
• 173 affordable apartments o Community rooms & open spaceo 132 at 60% AMI, 32 units at 50%
AMI, 9 @ 40% AMIo 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
• 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
Arlington Presbyterian Church – APAH Project
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GARAGE
RETAIL / CIVIC
RETAIL
WEST (4% LIHTC Deal)
BUILDING LOBBY
ALLEY
GARAGE ENTRANCE
LOADING DOCK
EAST (9% LIHTC DEAL)
BUILDING LOBBY
FIRST FLOOR PLAN
9 PARALLEL PARKING
SPACES ALONG
LINCOLN ST.
6 PARALLEL PARKING
SPACES ALONG
COLUMBIA PIKE.
Gilliam Place-Hybrid- 2 buildings
Gilliam Place-Closing Budget
Total Per Unit Total Per Unit Total Per Unit
VHDA Bonds (Taxable / Tax Exempt) 4,380,000 52,771 1,500,000 16,667 - -
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 75,553 - -
Accrued Interest (AHIF Loan) 469,773 5,660 136,676 1,519 8,568,716 49,530
Tax Credit Equity 21,885,333 263,679 9,253,367 102,815 - -
FHLB AHP Funds 500,000 6,024 - - - -
VA HTF Loan 700,000 8,434 - - - -
Deferred Developer Fee - - 837,410 9,305 - -
Transit Oriented Aff. Hsg Fund and Other - - 925,298 5,349
APAH Sponsor Loan 1,120,380 13,499 1,674,007 18,600 - -
Proceeds from land sale 693,087 4,006
Total Sources 35,317,439 425,511 25,441,255 282,681 10,187,101 58,885
Acquisition 697,615 8,405 137,082 1,523 8,691,103 50,238
Construction 22,788,039 274,555 16,501,683 183,352 800,998 4,630
Soft Costs 8,247,853 99,372 4,875,433 54,171 690,000 3,988
Developer Fee & Reserves 3,583,931 43,180 3,927,057 43,634 5,000 29
Total Uses 35,317,438 425,511 25,441,255 282,681 10,187,101 58,885
Gilliam Place East/ 9%
(83 Units)
Gilliam Place West
(90 Units)Gilliam Place LLC (land)
Gilliam Place - Closing Budget
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)
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SCG Development
Stephen P. Wilson
President-Principal
8245 Boone Boulevard
Suite 640
Tysons Corner, Virginia 22182
Phone: (703) 942-6610 ext. 210
Cell: (703) 627-5056
www.scgdevelopment.com
Stifel, Nicolaus & Company
John B. Rucker
Managing Director
2660 Eastchase Lane
Ste. 400
Montgomery, AL 36117
Phone: (334)-834-5100
Carmen Romero
Vice-President, Real
Estate Development
Kent Neumann, Esq.
TIBER HUDSON LLC
202-973-0107 (direct)
703-568-0190 (cell)
https://tiberhudson.com/Erik T. Hoffman
Klein Hornig LLP
1325 G Street NW, Washington, DC
20005
202-842-0125 (direct)
www.kleinhornig.com