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Developing Affordable Housing A Practical Guide for Nonprofit Organizations Third Edition
Bennett L. Hecht, JD, CPA
John Wiley & Sons, Inc.
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Developing Affordable Housing
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ffirs.fm Page iii Wednesday, March 15, 2006 4:54 PM
Developing Affordable Housing A Practical Guide for Nonprofit Organizations Third Edition
Bennett L. Hecht, JD, CPA
John Wiley & Sons, Inc.
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This book is printed on acid-free paper. Copyright © 2006 by John Wiley & Sons. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/ permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at http://www.wiley.com. Library of Congress Cataloging-in-Publication Data: Hecht, Bennett L., 1959Developing affordable housing : a practical guide for nonprofit organizations / Bennett L. Hecht.—3rd ed. p. cm. Includes bibliographical references and index. ISBN-13: *978-0-471-74346-0 (cloth) ISBN-10: 0-471-74346-1 (cloth) 1. Housing development—United States—Handbooks, manuals, etc. 2. Housing rehabilitation—United States—Handbooks, manuals, etc. 3. Housing management—United States—Handbooks, manuals, etc. 4. Nonprofit organizations—United States—Handbooks, manuals, etc. I. Title. HD259.H43 2006 333.73'150973—dc22 2005058121 Printed in the United States of America 10
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Contents PART ONE
GETTING STARTED
1
Chapter 1 Developing Affordable Housing in the Twenty-First Century 3 1.1 1.2 1.3 1.4 1.5
Introduction The Current State of America’s Affordable Rental Housing The State of America’s Working Poor Seeking Affordable Housing Current Trends in Affordable Housing Unique Opportunities for Nonprofit Organizations: Rental and Homeownership
3 4 4 6 10
Chapter 2 The Real Estate Development Process for Nonprofit Organizations: An Overview 2.1 2.2 2.3
Nonprofit Organizations and the Real Estate Development Process An Overview of the Real Estate Development Process Addressing the Specific Needs of a Community and a Specific Project Site
Chapter 3 Establishing the Development Team 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12
In General The Sponsor The Financial Development Specialist Attorneys Accountant/Bookkeeper Architect Property Management Company General Contractor Construction Manager Community Organizer Appraiser Conflicts, Multiple Roles, and Oversight
13 13 14 17 19 19 20 20 21 25 26 28 29 29 29 31 32
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PART TWO PROJECTING COSTS, INCOME, AND EXPENSES
33
Chapter 4 Project Feasibility and Total Development Costs
35
4.1 Project Feasibility Defined 4.2 Determining Preliminary Project Feasibility 4.3 Estimating Total Development Costs Appendix 4A Sample Letter of Value
35 36 36 60
Appendix 4B Summary of Key Federal Regulations Governing Underground Storage Tanks
63
Appendix 4C Summary of Relevant Laws and Regulations Governing Lead-Based Paint
66
Chapter 5 Determining Projected Income and Expenses 5.1 5.2 5.3 5.4
Introduction Projecting Income—Generally Identifying Targeted Income Levels Determining Affordability as a Percentage of Income and Market Rents 5.5 Income from Nonresidential Use 5.6 Projecting Expenses—Generally 5.7 Evaluating Past Operating Expenses 5.8 Projecting Expenses Where No Operating History Exists 5.9 Allowances and Reserves 5.10 The Role of Lenders Appendix 5A Controllability of Expenses
PART THREE
RAISING CAPITAL
6.1 Introduction 6.2 Sources of Capital—Generally 6.3 Loans 6.4 Grants 6.5 Equity and Sales Proceeds Appendix 6A Example of an Amortizing Loan Appendix 6B Example of a Nonamortizing Loan
Chapter 7 Sources of Capital: Loans
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Who are Possible Lenders? Sources of Loan Funds from Public Lenders—Generally Sources of Loans from State and Local Governments 䡲
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Chapter 6 Raising Capital to Meet Total Development Costs
7.1 7.2 7.3
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7.4 Sources of Loans from the Federal Government 7.5 Sources of Loan Funds from Private For-Profit Entities 7.6 Sources of Loan Funds from Private Nonprofit Entities Appendix 7A 501(c)(3) Bond Terminology Appendix 7B List of Local CDFI Organizations Financing Housing
Chapter 8 Sources of Capital: Grants 8.1 8.2 8.3 8.4
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Grants from the Federal Government Grants from State and Local Governments Grants from Private Nonprofit Foundations Grants from For-Profit Corporations
Chapter 9 Sources of Capital: Equity
Appendix 9B Partial Listing of Low-Income Housing Tax Credit Tax Syndicators
Chapter 10 Sources of Capital: Public Housing Funds
10.2 10.3 10.4 10.5 10.6
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9.1 Creation of an Equity Fund for Housing Development 9.2 Use of the Low-Income Housing Tax Credit 9.3 Other Equity Sources Appendix 9A Tax Credit Information Resources List of State and Regional Tax Credit Equity Funds
10.1
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How Public Housing Resources Contribute to Affordable Housing Mixing Public Housing Capital with other Capital: Mixed Finance Uses of Public Housing Funds in Mixed-Finance Transactions Considerations in Mixing Public Housing Development Funds with other Sources of Affordable Housing Funds Elements of Public Housing Development Transactions Conclusion
245 246 259 266 275 279 280 286 288 293 298 313
PART FOUR ENHANCING FEASIBILITY AND PACKAGING THE PROJECT
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Chapter 11 Enhancing the Feasibility of an Affordable Housing Project 11.1 11.2 11.3 11.4 11.5
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Increasing Access to Capital—Credit Enhancement Increasing Access to Capital—Loan Sales on Secondary Market Reducing Total Development Costs Increasing Income Reducing Operating Expenses 䡲
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Chapter 12 Developing the Project Feasibility Report: Six Case Studies
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12.1 Introduction 12.2 The Feasibility Report and Financial Pro Formas 12.3 The Development of Affordable Housing: Six Case Studies 12.4 Conclusion Appendix 12A The Whitelaw Reference Information
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Appendix 12B
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Friendship Court Reference Information
Appendix 12C Garden Terrace Reference Information
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Appendix 12D The View Reference Information
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Appendix 12E
Kentucky Mountain Housing Reference Information
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Appendix 12F
Lease-Purchase Reference Information
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PART FIVE
PURCHASING AND DEVELOPING THE PROPERTY
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Chapter 13 Securing Site Control over the Property: Signing the Option or Purchase Agreement
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13.1 Introduction 13.2 Site Control Must Be Secured in Writing 13.3 The Use of Purchase Contracts 13.4 The Use of Options Appendix 13A Documents Pertaining to Purchase Contracts
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Appendix 13B
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Documents Pertaining to Option Agreements
Chapter 14 Prepurchase Considerations 14.1 14.2 14.3 14.4 14.5
Introduction Applying for Financing and Operating Subsidies Determining the Ownership Entity—Generally Determining the Ownership Entity—Corporations Determining the Ownership Entity—Partnerships 14.6 Determining the Ownership Entity—Factors 14.7 Establishing the Ownership Entity: Divided Ownership and Leasehold Interests 14.8 Interviewing and Selecting the Management Company 14.9 Developing Plans for Renting or Selling Units Appendix 14A Monthly Management Reports
Chapter 15 Partnerships and Joint Ventures 15.1 15.2 15.3
Issues Concerning Organization’s Tax-Exempt Status Options for Structuring the Relationship Partnerships and the Use of the Low Income Housing Tax Credit 䡲
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Appendix 15A
Joint Venture Checklist
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In General Board Involvement Day-to-Day Management
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Chapter 16 Purchasing the Property: Settling on Acquisition
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16.1 The Settlement Process—Generally 16.2 The Role of the Settlement Agent 16.3 Title Insurance 16.4 Selecting the Settlement Agent 16.5 Preparing for Settlement 16.6 Settlement 16.7 Postsettlement 16.8 Lender Requirements 16.9 Governmental Regulations Appendix 16A Settlement Checklist and Sample Documents
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Chapter 17 Constructing or Rehabilitating the Property: Settling on the Construction Loan and Surviving the Construction Process 17.1 17.2 17.3
Introduction Settling on the Construction Loan The Construction Process—The Participants and Their Responsibilities 17.4 Technology in 21st Century Affordable Housing Construction and Rehabilitation 17.5 Negotiating the Construction Contract and Bidding 17.6 Elements of the Construction Contract 17.7 Rehabilitating an Occupied Property 17.8 Completion of Construction Appendix 17A Construction Process Checklist and Sample Contractor Agreements
Chapter 18 Selective Rehabilitation 18.1 18.2 18.3 18.4 18.5 18.6
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Overview Introduction to Selective Rehabilitation Managing Selective Rehabilitation: Formal Versus Informal Approaches Implementing a Formal Approach to Selective Rehabilitation: The Rehabilitation Specialist Choosing A Property for Selective Rehabilitation: Building Inspection Techniques of Rehab Specialists Conceptualizing the Project: Rehabilitation Standards 䡲
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18.7 18.8 18.9 18.10 18.11 18.12
Designing the Project: Work Write-Ups and Cost Estimates Computerized Specification-Writing and Estimating Systems Defining Methods and Materials: Performance Specifications Selective Rehabilitation and Construction Management Selective Rehabilitation and the Contractor Pool The Role of Government Agency/Public-Purpose Organizations in Selective Rehabilitation 18.13 Avoiding Gut Rehabilitation: Tips of the Trade 18.14 Improving Energy Efficiency in Selective Rehabilitation 18.15 Dealing With Lead-Based Paint Hazards in Selective Rehabilitation 18.16 Dealing With Other Recurring Health and Safety Issues in Selective Rehabilitation 18.17 Applying Construction Codes and Existing Housing Codes to Selective Rehabilitation 18.18 Standards Issues with Funders and Selective Rehabilitation 18.19 Information Sources and Tools for Selective Rehabilitation Appendix 18A Sample Documents Regarding Rehabilitation
PART SIX
COMPLETING AND MANAGING THE PROPERTY
679 681 681 682 683 684 685 686 687 689 691 692 693 695 711
Chapter 19 The Project Completion Phase: Completing the Development and Maintaining an Ownership or Rental Community 19.1 19.2 19.3 19.4
Introduction Settling on the Permanent Loan Maintaining a Rental Property Developing Additional Resident Services As Part of a Comprehensive Property Management Plan 19.5 Key Points on Setting Performance Standards for Comprehensive Property Management 19.6 Key Points on Deciding Whether to Contract for Management or Manage Directly 19.7 Key Points on Selecting a Good Management Company 19.8 Key Points on Evaluating Property Management Performance 19.9 Financial Management of Rental and Multifamily Homeownership 19.10 Converting the Property to Homeownership for Residents 19.11 Managing and Budgeting for Rental or Multifamily Ownership Appendix 19A Sample Documents and Disclosure Statements Index
713 713 714 717 733 734 734 735 740 745 754 757 763 805
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About the Author Bennett Hecht is an experienced nonprofit executive, author and social entrepreneur. He founded One Economy Corporation in 2000 to bring the power of the Internet and the economic mainstream to low-income families living in affordable housing across the country. In five years, One Economy has earned the support of America’s leading foundations and corporations, brought high speed Internet to $2 billion of affordable housing and helped more than five million low-income people to help themselves at www.theBeehive.org. Immediately before One Economy, Mr. Hecht was senior vice president at the Enterprise Foundation. In that capacity, he led the organization’s efforts beyond housing— building well-respected programs in childcare, workforce development and economic development. Under his leadership, the number of community-based organizations working with the foundation doubled from 750 to more than 1,500 in 48 states; capitalization of the organization’s revolving loan fund grew from $30 million to $200 million; and regional networks of nonprofit organizations linked by technology were born in New England and the Northwest. Mr. Hecht received his JD from Georgetown University Law Center and his CPA from the State of Maryland. For 10 years he taught at Georgetown University Law Center, and built the premier housing and community development clinical program in the country. In 1992, with Congressional support, Mr. Hecht founded the National Center for Tenant Ownership at Georgetown, a program facilitating affordable housing development by nonprofits and tenant groups nationwide. Prior to his work at Georgetown, Mr. Hecht worked for the public accounting firm of Coopers & Lybrand in Washington and served as counsel to the nonprofit National Rural Development and Finance Corporation. He has been an adjunct professor of law at Georgetown University Law Center for 17 years, teaching accounting concepts for lawyers. In 1997, he was awarded Georgetown’s prestigious Charles Fahy Distinguished Adjunct Professor Award. Over the years, Mr. Hecht has served on the boards of nonprofit housing organizations in Portland, Oregon; Cleveland, Ohio; and New York City and on the national boards of numerous organizations. He currently sits on the Georgetown Day School and One Economy Board of Directors.
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ABOUT THE AUTHOR
Mr. Hecht has written two other books in addition to Developing Affordable Housing: A Practical Guide for Nonprofit Organizations: ManagingNonprofits.org (2001) with Rey Ramsey and Managing Affordable Housing: A Practical Guide for Building Stable Communities (1996), with James Stockard and the Local Initiatives Support Corporation, both published by John Wiley & Sons.
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Foreword Housing matters—especially decent, stable, affordable housing. While education, health care, and workforce development often receive more attention, there is mounting evidence that housing is a critical factor in opening opportunities to individuals and improving communities. Recent studies confirm what we know intuitively—that decent, stable housing improves the ability of individuals to get and keep jobs, increases psychological well-being, and leads to better social behavior and school achievement among children. Other studies link the availability of affordable housing to the economic vitality of cities and regions. An adequate supply of such housing depends on a broad commitment to our communities and their residents. Nonprofit housing developers work closely with architects, bankers, construction contractors, property managers, public officials and others. Together, they are making a critical difference. For nearly three decades, nonprofit housing developers have demonstrated how essential they are to the revitalization of communities. They increasingly understand the relationship between the bricks and mortar they provide and the critical social and economic supports that residents of their properties need to flourish. In the early years of the twenty-first century, challenges abound. Federal funding is likely to diminish. The regulatory environment that has helped bring conventional capital to communities needing a revitalized stock of affordable housing is weakening. It is difficult for nonprofit developers to purchase, recapitalize, and improve the thousands of affordable housing units that were built in the 1970s and 1980s and whose federal subsidies are coming to an end. However, these are all challenges that a greatly strengthened field of nonprofit housing developers and their many allies are prepared to meet. For over twenty-five years, the MacArthur Foundation has invested in housing. Today, our interest is deeper than ever. Since 2000 alone, more than $100 million in grants and loans have been committed to the development and preservation of affordable housing. These resources have helped nonprofit developers, and the specialized financing intermediaries that support them, ensure that decent, affordable housing is available in both urban and rural communities.
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To be even more effective, these organizations need the kind of clear, practical guidance that can be found in Ben Hecht’s influential book. It has stood the test of time, as the state of the field has changed, as development has become more complex, and as the need for affordable housing has grown. I recommend it to everyone who cares about American communities and understands the crucial role of affordable housing in their success. Jonathan F. Fanton President John D. and Catherine T. MacArthur Foundation
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Preface This is my third edition of Developing Affordable Housing. Much has changed in the housing industry since I wrote the first edition more than ten years ago. The federal government’s commitment has declined precipitously while the level of state investment has grown. The idea of demolishing the most problematic public housing developments and putting new, mixed income communities back in their place has not only become a reality, but the norm. The federal low income housing tax credit has become a permanent part of the rental housing landscape and expanded dramatically into the suburbs. Preserving the existing stock of affordable housing, not just building new units, has been embraced by an increasing number of communities as leaders realize that lost units will never be recaptured. Homeownership rates, especially for people of color and immigrants, have hit historic high levels. The face of America and those who live in its affordable rental housing has changed as well. Immigrants accounted for more than a third of all U.S. household growth in the 1990s. In fact, the number of renter households in America would have fallen during that period was it not for immigrant and minority households. These changes have been accelerated further by historically low mortgage interest rates that helped move millions of renters into homeownership. Two other things also have grown over these ten plus years: the demand for affordable housing and the capacity of nonprofit organizations to develop and manage these units, when sufficient resources are made available to them. Americans do not have income sufficient to afford decent, safe and affordable housing. As recently as 2001, 95 million Americans had excess housing costs burdens (pay more than 30% of their income for housing) or lived in crowded or inadequate conditions. In 2004, the number of people earning $32–50,000 who spent more than 30% of income on housing jumped to 4.5 million. Nonprofit organizations, large and small, public and private, are the only entities ready, willing and able to meet this demand. A 2005 study by the Joint Center for Housing Studies at Harvard found that for-profit developers are building for the high end of the market in increasing numbers. Of all the rental housing units built since 2000, 43% cost more than $800 per month compared to 25% of all units built prior to that date. Only 10% of the units built since 2000 rented for less than $400 a month. Relatedly, a 2000 study by the Urban Institute found that many nonprofit developers substantially increased their capacity to produce affordable housing from 1990 to 2000. Many parts of the industry have become much more sophisticated — using multiple sources of financing, highly 䡲
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leveraging developer fees and shopping various funders for the most attractive terms. Housing for the hardest to serve, such as the homeless, mentally ill and addicted, can be found not just in dense urban areas, but in suburban and rural communities. My goal has been for Developing Affordable Housing to meet the user wherever they are—to provide a living resource for the citizens, policymakers, nonprofit executives and professionals who want to make affordable housing a reality in their community. For the newcomer to the sector, this book provides a step-by-step analysis of the nonprofit real estate development process, from feasibility to long-term management including checklists and sample forms and reports, where necessary. For the more experienced, the book allows you to expand your possibilities by helping you identify relevant federal, state and local programs. The book provides a description of the existing federal loan, grant, mortgage insurance, rent and operating subsidy programs (e.g., HOME, CDBG, HOPE VI, McKinney Grants) and of common state and local government mechanisms used to finance affordable housing. Users over the years have found the detailed case studies that I provide, with accompanying financial pro formas, to be one of the book’s most valuable features. This edition highlights six very different affordable housing organizations and developments. Each development serves a unique population (e.g. homeless, seniors or families), utilizes a multiplicity of funding sources (e.g., low income housing tax credits, tax-exempt bonds, private and public grants) and now manages unique types of housing (e.g., single room occupancy, homeownership or rental). What these six organizations have been able to do and the way they accomplished these developments is an inspiration to me and I hope to you. Many communities have skilled and committed professionals such as lawyers, accountants, bankers, architects, and financial development specialists who have never worked on affordable housing development projects but would like to do so or to help existing nonprofit organizations to do so. This book provides these professionals with the kind of orientation and guidance that they would need to enable them to play an active and valuable role as a development team member in local affordable housing development projects. Finally, many state and local governments have not developed the programs or earmarked the resources necessary to facilitate the wholesale creation of affordable homeownership and rental housing opportunities by nonprofits in their jurisdictions. This book provides a laundry list of ways that government can promote affordable housing, from providing tax relief to nonprofits purchasing or transferring property and establishing flexible “soft second” mortgage programs with CDBG funds, to providing technical assistance and HOME funds. Chapters 1 to 5 provide guidance in putting together the right development team and in helping the team through the steps necessary to determine if an affordable housing project will be financially feasible. Chapters 6 to 12 highlight the various sources of capital available for affordable housing development (loans, grants, and equity), ways to reduce the costs of developing this housing, and methods for presenting the financially feasible project to funding sources, profit and nonprofit, public and private. Chapters 13 to 18 discuss the steps necessary to 䡲
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contract for, purchase, and rehabilitate or construct an affordable housing project. Finally, Chapter 19 takes the nonprofit housing developer through the steps needed to complete the project, sell out the units (if home-ownership developed), and manage and maintain the property including the ongoing financial management of a multifamily property, whether ownership or rental. This third edition has been updated to reflect the latest information and issues facing the affordable housing industry. Major revisions have been made to my earlier treatment of public housing finance and “mixed finance” opportunities (Chapter 10), joint ventures of nonprofit and for profit entities (Chapter 15), and the case studies noted above (Chapter 2). Decent and affordable housing often is the foundation whereby entire neighborhoods or individual families achieve a sense of stability. The information provided in this book should help nonprofit organizations, governments, technical assistance providers, private and public lenders and foundations to work together to bring this stability to people and communities throughout the United States. BENNETT L. HECHT Washington, DC February 2006
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Acknowledgments This third edition could not have been possible without the work and support of a lot of people. My law clerks—Aimee Ferrer, Matthew Peed, Donald Saelinger, Helki Spidle, and Jennifer Walrath—were invaluable in helping me to collect, update, and summarize changes to housing loan, grant, and equity programs throughout the country. I want to thank the law firm of Reno & Cavanaugh, Washington, DC—especially, Julie McGovern, Jaime Alison Lee, Megan Glasheen, and Lee Reno—for updating their excellent and important chapter, Chapter 10, on public housing. Thanks go to Michael Sanders for permission to excerpt his fine book on joint ventures between nonprofit and for-profit organizations found throughout the book, including Chapter 15. I want to thank Rick Eisen, Eisen & Rome, Washington, DC; Barry Mullen, Chicago, IL; and Peter Werwath, Vice President with the Enterprise Foundation, for their contributions to Chapters 14, 16, 17, and 18, respectively. I am indebted to the nonprofit groups featured in Chapter 12 for their leadership in the field, cooperation, time, and efforts. I want to thank Susan McDermott, my editor at John Wiley & Sons, for her support of this edition and her navigation of it through the production process. Finally, I want to acknowledge my wife, Lynn Leibovitz, my daughter, Eliza, and my son, Sam, for all the support, love and joy that they bring me everyday.
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P A R T
O N E 2
Getting Started
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C H A P T E R
O N E 1
Developing Affordable Housing in the Twenty-First Century 1.4 Current Trends in Affordable Housing 6
1.1 Introduction 3 1.2 The Current State of America’s Affordable Rental Housing 4
1.5 Unique Opportunities for Nonprofit Organizations: Rental and Homeownership 10
1.3 The State of America’s Working Poor Seeking Affordable Housing 4
1.1
INTRODUCTION
Affordable housing development came of age in the twentieth century. Many significant federal programs were created from the Federal Housing Act of 1934 through the Affordable Housing Act of 1990 that stimulated supply and subsidized demand for both homeownership and rental housing. By the early 1990s, these programs had helped to provide decent, safe, and affordable homes to millions of working American families. At its height, the industry was managing more than 5.5 million units of federally supported, affordable rental housing. By 2005, more than 33 million people had utilized federally insured mortgage programs to become homeowners.1 Today, the homeownership rate is at an all-time high of almost 70 percent. The private sector has created loan programs that now make it possible for very-low-income people, especially people of color, to buy a home with no money down and to prove creditworthiness in many unconventional ways such as showing 12 months of cell phone bill payments. 2 In fact, these innovations have helped whole segments of the population who historically have been shut out of homeownership to do so in record numbers. For example, Hispanic homeownership increased 1 2
www.hud.gov/offices/hsg/fhahistory.cfm. “Housing Industry Awakens to the Latino Market,” Wall Street Journal, August 3, 2005, page B8. Innovative efforts by Fannie Mae and Freddie Mac to help low-income people become homeowners are discussed fully in Chapter 11.
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DEVELOPING AFFORDABLE HOUSING IN THE TWENTY-FIRST CENTURY
by almost 20 percent from 1993 to 2004 due to increasingly flexible underwriting and outreach.3 The same type of robust growth cannot be found in affordable rental housing. Today, less than 4 million of the more than 5 million units available in the 1990s still exist. The last major piece of housing legislation was enacted more than 15 years ago. No new major initiatives are expected in the coming years. Despite the fact that almost 100 million Americans are in need of affordable housing, resource constraints mandate that the industry focus on how to preserve the units still remaining and how to get the most out of the shrinking pool of resources available to build new ones. This chapter helps the nonprofit housing developer to understand the current state of the affordable housing industry. It highlights the trends that are likely to shape and impact development in this first decade of the twenty-first century. 1.2
THE CURRENT STATE OF AMERICA’S AFFORDABLE RENTAL HOUSING
America’s affordable rental housing stock is dwindling. According to the U.S. Department of Housing and Urban Development (HUD), as of 2000, there were 1.3 million units of public housing, 1.8 million units made affordable through rent vouchers provided to tenants, and 800,000 units developed through the low-income housing tax credit. Many more units are inhabited by low-income people; however, they often provide substandard shelter or are made affordable by crowding multiple families into a single unit. The single largest funding source of funding for new rental housing is the low-income housing tax credit (LIHTC).4 Approximately 1,300 new projects, adding 90,000 new units each year are funded through this program. In contrast, less than 50,000 units were built in the entire decade from 1990 to 2000 using every other federal program such as public housing, Section 8, and other federally insured loan programs.5 1.3
THE STATE OF AMERICA’S WORKING POOR SEEKING AFFORDABLE HOUSING
While the supply of affordable rental housing shrinks, need continues to rise. Simply put, Americans do not have income sufficient for decent, safe, and affordable housing. As recently as 2001, 95 million Americans had 3 4 5
Id. See Chapter 9 for a full discussion of this important source of equity. Huduser.org/datasets/lihtc.html. See Chapters 7, 8, and 11 for a full discussion of other federal grant, loan, and project enhancement programs.
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1.3 THE STATE OF AMERICA’S WORKING POOR SEEKING AFFORDABLE HOUSING
excess housing costs burdens (paid more than 30 percent of their income for housing) or lived in crowded or inadequate conditions.6 In 2004, the number of people earning $32,000—50,000 who spent more than 30 percent of income on housing jumped to 4.5 million.7 Even more troubling, fully one-half of the lowest-income Americans spent at least 50 percent of their income on housing—leaving an estimated $161 a month available for food and $34 a month for health care.8 These statistics do not even address the more than 2.5 to 3.5 million homeless people on the streets each year. Today, more than twice as many people face housing problems as lack health insurance, widely considered the biggest issue facing working class Americans.9 Immigrants account for more than a third of household growth since the 1990s.10 Of the 12 million foreign-born householders, 3.4 million (28 percent) arrived in this country during the 1990s.11 In fact, the number of renter households in America would have fallen during that period were it not for immigrant and minority households.12 If this influx continues at this level, more than 1 million new immigrant households could be added in the next ten years. This reality has significant ramifications for the sector. First, affordable housing developments will have to be more immigrant-friendly. That means that property management staff, tenant communications, unit size, and more will have to reflect the language and culture of this customer base. Second, the median income of these renters continues to drop, meaning that even less money will be available industry-wide for rent payments.13 But demand is not stimulated only by the growing immigrant population. Increasingly, communities are recognizing that they cannot recruit and retain essential workers because their housing costs are prohibitively high. Firefighters, teachers, police officers and service workers are being priced out of many markets. This leaves local governments and industry without the workers they need. This reality has led many in the industry to change the vernacular from “affordable housing” to “workforce housing.” This change is important for two reasons. First, it speaks directly to public and private sector leaders because it is their inability to attract a workforce that will engage them in housing issues. Second, it better frames the issues surrounding affordable housing as ones about real 6 7 8 9 10 11 12 13
The State of the Nation’s Housing, 2004, Joint Center for Housing Studies of Harvard University at 25. Id. at 27. Id. at 26. Id. at 27. Id. at 2. Id. at 11. Id. Id. at 23.
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working people, like teachers that you know and trust, not theoretical welfare recipients. 1.4 (a)
CURRENT TRENDS IN AFFORDABLE HOUSING The Rise of the States and the Decline of the Federal Government
The role of the states in financing affordable housing continues to grow especially as federal programs and funds become more scarce. The states have become increasingly important players since the enactment of the federal Low Income Housing Tax Credit (LIHC) in 1986. Unlike prior federal housing programs that were largely managed and approved by HUD, the LIHTC delegated awarding of these credits to the states. Since 1986, each state, usually through their housing finance agency, has determined the best way to allocate the credits. In the process, each state has developed its own affordable housing expertise, development priorities (for example, homeless, rural, disabled) and, in many cases, their own state funded housing programs. In short, the increased professionalism at the state level has led to a much more sophisticated and more highly funded response to affordable housing issues in that state. For example, a number of states, such as California and New Jersey, have created programs to preserve affordable housing units in their states that were developed originally under federal housing programs but that are now at risk of loss.14 This growth of state action in affordable housing is in contrast to the decline in federal support over the past two decades. Federal support has shrunk in every category. Funds for housing rehabilitation fell 60 percent from 1992 to 2002. Section 8 rent subsidies were reduced from $32 billion to $16 billion during that same period. At the time that this book went to press, it appears that this trend will continue for Fiscal Year 2006. Tenant-based rental assistance is expected to remain about $16 billion ($15.53 billion). However, Home Ownership Partnership (HOME) funds are scheduled to drop $41 million to $1.9 billion; Community Development Block (CDBG) funds are expected to fall $250 million to $4.2 billion with most other programs staying at or about 2005 levels (homeless programs $1.346; public and Indian housing $6.8 billion; housing for people with AIDS $285 million, and elderly housing programs $741 million). A big question mark for 2006 remains the comprehensive 14
California, Colorado, Iowa, Massachusetts, Maryland, Minnesota, Michigan, New Jersey, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin have all taken actions to utilize state resources to preserve their affordable housing stock. See State Housing Finance Agencies: Developing Programs to Preserve Affordable Housing, September 2004, National Housing Trust and New Jersey Housing and Mortgage Finance Agency, http://content.knowledgeplex.org/kp2/cache/documents/66651.pdf.
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public housing redevelopment program, HOPE VI. The president and the House propose to eliminate the program for 2006. Experts believe that it will be salvaged but funded at low levels, possibly for the last time in 2006. (b)
The Shift to the Suburbs
The LIHTC has not only shifted power to the states, but it has also brought affordable housing to the suburbs in record numbers. Prior to the LIHTC, approximately 76 percent of all federal housing funds were invested in central cities. Since the inception of the LIHTC and its administration by the states, housing investment in the suburbs has increased almost 75 percent. A recently published Brookings Institution study found that approximately 42 percent of all LIHTC developments have been built in suburban locations.15 This trend is significant given the fact that most affordable housing built today is built with the LIHTC. Moreover, it is likely to continue as power bases in many states shift from largely Democratic urban central cities to largely Republican suburban and rural areas. (c)
Emerging Role of Affordable Housing As a Platform for Bringing Individual Economic Development Opportunities to Low-Income Residents
Five years ago, Rey Ramsey and I started a new nonprofit organization, One Economy Corporation, in order to use affordable housing as a platform for connecting low-income people to the opportunities provided by the Internet. Our goals were: (1) to change state housing finance policies so all units financed with the LIHTC provided free or low-cost high-speed Internet access to residents, and (2) to build a “self-help, self-sufficiency” destination online that residents could use to find a better job, qualify for health insurance, help their children with homework, or learn how to save money. In January 2004, we launched the Bring IT Home campaign with the U.S. Senate majority and minority leader as co-chairs and underwriting from housing giants Freddie Mac and Fannie Mae and support from technology and telecommunications companies such as Verizon, Qwest, SBC, Bell South, Yahoo!, eBay, Google, Cisco, Intel, and Microsoft. Over the campaign’s first 18 months, more than 33 state housing finance agencies changed their LIHTC requirements to require or incent affordable housing developers to bring affordable high-speed access to each resident in the privacy and dignity of their own homes. 15
Lance Freeman, Siting Affordable Housing Location and Neighborhood Trends of LIHTC Developments in 1990s, Washington D.C. The Center on Urban and Metropolitan Policy, Brookings Institution (2005).
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Mayors, governors, and other elected officials have embraced this approach enthusiastically. They see affordable housing as a cost-effective way to insure that low-income people have the means to take advantage of economic opportunities available through the Internet. These opportunities include continuing education, workforce training or retraining, applying for and receiving public benefits, and finding new markets for microenterprises. One Economy’s online portal, the Beehive (www.thebeehive.org) has helped make these possibilities a reality. The site, now localized to serve 26 different cities and states, serves more than 150,000 people a month in English and Spanish. (d)
Fall in Rental Housing Supply Overall
The United States has seen an extraordinary boom in homeownership over the past ten years. This boom, in many ways, has been to the detriment of the rental housing market. Fewer rental units are being built, and more and more existing units are being lost from the housing stock. Overall, rental housing production fell from 275,000 units in 2002 to 262,000 units in 2003.16 Unlike rental housing built prior to 1990, today’s rental units are being built for higher-income people. Nearly half of the rental housing units that have been built since 1990 have rents greater than $750. Only one-fifth of new rentals during this period were targeted to the bottom income tier. This is in stark contrast to the rents at units built prior to 1990. Only 29 percent of those units had rents at the $750 level or above.17 In many areas of the country, new units barely replaced the number of units lost to the housing stock. From 1992 to 2001, for every three new units added, two existing units were removed.18 In the Midwest, more units were lost than were added over this period. The Northeast added only 100,000 more units than were lost.19 Nationwide, many LIHTC developments are at particular risk of being lost from the housing stock because their initial 15-year use restrictions are expiring. While the LIHTC was enacted in 1986, the program did not begin producing units at any level of scale until the early 1990s. Thus, many of these projects reach their 15-year anniversary in the next few years. As noted above, state housing finance agencies are waking up to this reality and developing programs to preserve these units for the long term.
16 17 18 19
State of Nation’s Housing at 20. Id. at 23. Id. at 22. Id.
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(e)
Fundamental Transition in the Industry to Fewer, Longer Term Owners
In many ways, we have seen the nature and character of the affordable housing industry change dramatically since the 1990s. Federal policies from the 1950s to the 1970s were focused on stimulating the supply of affordable housing. These policies brought an array of for-profit developers into the emerging sector with the promise of making money by sheltering profits from federal taxation, generating considerable fees from financing, construction and management activities, and the later conversion of these developments into for-profit housing in no more than 30 years. As time passed, federal policy turned from stimulating supply to supporting demand (rent subsidies). As noted above, more than 50 percent of HUD’s budget is dedicated to rent subsidies currently. More importantly, the ability to use rental housing as a way to shelter income from federal taxation was all but eliminated by tax reform in 1986. These changes have had dramatic impacts on the sector. First, many of the developers who were in the business simply to shelter income and for the quick fees are long gone. They left once their primary reasons for keeping their capital in affordable housing were no longer available to them. Second, the exodus of the opportunistic many has left the committed few. That means that the industry now is primarily populated by entities that are in the business based on its inherent economics, cash flow from rents, not short-term fees and tax benefits. This evolution has led many of the remaining owners, policymakers and funders who work with them, to look more to the long term. In many ways, this is bringing a new, holistic discipline to the sector. Historically, programs and policies would veer from focusing exclusively on supply or on demand. Now, many are focusing on how to stabilize and grow the sector by insuring that new and existing developments are structured financially so they will both remain in the housing stock for the long term. (f)
Broad Embracing of Mixed-Income Communities
The federal government’s emphasis on supply from the 1950s to the 1970s had another unexpected outcome: extreme concentrations of low-income people in a limited number of neighborhoods. Troubled “projects,” such as Cabrini Green public housing in Chicago or HUD-insured Geneva Towers in San Francisco, became the face of federal housing policy. By the late 1980s, policymakers began looking for alternatives to this “warehousing of the poor.” The Affordable Housing Act of 1990 authorized funds that would demolish the worst of these developments. New “mixedincome” communities would rise up in their place populated with people 䡲
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of low, moderate, and even high incomes. Although the federal program that initiated this approach, HOPE VI, has had its detractors, the reality of building or rebuilding neighborhoods as mixed-income communities has become the norm. Today, many of the most successful “new communities” across the country are composed of inhabitants with incomes from across the spectrum. (g)
Increased Scrutiny of Government-Sponsored Enterprises (Fannie and Freddie)
Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) that were created in the 1960s and 1970s to buy home mortgages made to low- and moderate-income households by financial institutions around the country. Fannie and Freddie buy home mortgages of low- and moderate-income households that financial institutions otherwise would have had to hold for 15 to 30 years, thereby freeing the capital up earlier and enabling the lenders to make more homeownership loans. This approach has not only increased homeownership dramatically but also created two incredibly profitable companies that enjoy the perception that their activities are guaranteed by the full faith and credit of the federal government. In the past decade, the GSEs have come under sharp attack by many on Wall Street who believe that Fannie and Freddie, as for-profits, enjoy an unfair advantage because of their special federal relationship. Critics also argue that the market no longer needs the GSEs because there now are many other players who do the same work as Fannie and Freddie without the implicit federal guarantee. Pressure on the federal government to act on the GSEs has increased in the past three years as they both have been found to have had accounting improprieties. Congress is considering legislation that could result in greater focus on and increased investment in affordable housing. 1.5
UNIQUE OPPORTUNITIES FOR NONPROFIT ORGANIZATIONS: RENTAL AND HOMEOWNERSHIP
As a whole, these trends point to unique opportunities for nonprofit organizations as we turn to the second half of this millenium’s first decade. The increased pressure on Fannie Mae and Freddie Mac is forcing them both to focus more on their missions of serving the underserved. They both have raised the visibility and support of initiatives to help minorities and people of color to become homeowners. Moreover, a number of proposals pending before Congress suggest that
(i) Homeownership.
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the two GSEs use a portion of their profits to establish a fund that will make resources available for affordable housing.20 (ii) Rental Housing. Most opportunities, however, are likely to be found in the developing of rental housing for a number of reasons. One, the sector has shown that it can attract and allocate tax credits efficiently and effectively. The private sectors interest in investing more than $5 billion a year in housing through the LIHTC has strengthened this tool in the eyes of everyone, most importantly, elected officials. These successes not only have made affordable housing advocates of the American business community but also have laid the foundation for possible expansion of the LIHTC or the creation of new tax credit initiatives. The establishment of the New Markets Tax Credit in 2000 is an excellent example of this. Second, government, financial institutions, and philanthropic organizations now acknowledge the need to both preserve the existing affordable housing stock and continue to build new stock. This reality combined with the third factor, that the public and private sector has an enormous amount of confidence in the nonprofit housing development sector, means that nonprofits are poised to play an ever-increasing role in the future. Nonprofits now have a 20-year track record of taking on troubled developments and turning them around in communities big and small. Nothing succeeds like success.
20
www.washingtonpost.com/wp-dyn/content/article/2005/07/26/ AR2005072602033.html.
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TW O 2
The Real Estate Development Process for Nonprofit Organizations: An Overview 2.3 Addressing the Specific Needs of a Community and a Specific Project Site 17
2.1 Nonprofit Organizations and the Real Estate Development Process 13 2.2 An Overview of the Real Estate Development Process 14
2.1
NONPROFIT ORGANIZATIONS AND THE REAL ESTATE DEVELOPMENT PROCESS
Any organization, regardless of profit motive, that is interested in developing housing must grasp the fundamentals of the real estate development process. The basic steps in the development process are summarized in this chapter and detailed in Chapters 3 through 19. The nonprofit housing developer, however, must know more than the basics because affordability for a targeted clientele (based on special needs or income levels), not simply marketability, is the goal. Affordable housing development requires creativity and the ability to access private and public programs, funds, and incentives, especially those available only to nonprofit organizations. For example, nonprofit housing development organizations are usually able to complete projects only by accessing inexpensive funds uniquely available to them (e.g., proceeds from “501(c)(3)” bonds1) and funds available generally to real estate developers (federal, state, or local funds) and tax incentives available only to nonprofits (e.g., payments in lieu of taxes) and operating expense exemptions available only to nonprofits (e.g., water and sewer tax forgiveness).2 Additionally, a nonprofit housing developer must have the capability to address problems caused by the fact that the nonprofit has a limited 1 2
Reference is to I.R.C. § 501(c)(3). See discussion of these various programs in Chapter 11.
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track record as a developer and a limited ability to invest significant equity in any project. For example, a lender of construction funds will often require borrowers to obtain a performance and payment bond (P&P bond) prior to releasing any funds. This bond is the lender’s security that funds will be available to complete the job even if the developer defaults on its obligations. Although this appears to be a reasonable requirement of the lender, it creates a significant problem for nonprofit housing developers. Generally, bonding companies will not issue a P&P bond to developers who do not have significant development experience and assets. The nonprofit must be able to convince the lender to waive the requirement or must provide alternative security such as letters of credit, compensating account balances, and so on.3 As each step in the development process is addressed, special attention will be given to problems or opportunities such as those noted above that are unique to the nonprofit housing developer. These issues are of primary importance as the organization seeks to set standards for determining project feasibility (see Chapters 4 and 5); for accessing financing and financial assistance from public and private sources, including funds to help defray costs of determining project feasibility, completing rehabilitation, and providing rental subsidies to tenants or homeowners (see Chapters 6 through 12); and for adhering to rigid construction lending and bonding requirements (see Chapters 17 and 18). 2.2
AN OVERVIEW OF THE REAL ESTATE DEVELOPMENT PROCESS
The real estate development process can be broken down into three phases: (a) feasibility, (b) acquisition and construction, and (c) project completion. (a)
Feasibility Phase
This phase, often referred to as the predevelopment phase, includes all the tasks and studies that must be completed prior to actually settling on the purchase of a particular property. The feasibility phase is the most important phase in the development process because, in this phase, the nonprofit housing developer must decide whether the project is feasible: Can the property be purchased and developed into housing affordable to the targeted clientele? Generally, feasibility phase activities are comprised of the following: 1. Tasks related to determining project feasibility and securing site control over the property for later purchase. To determine whether 3
See discussion in Chapter 17.
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a project is feasible, the nonprofit housing development organization must:
Associate itself with a development team of experienced professionals who can assist in completing the necessary studies and negotiations (see Chapter 3).
Determine, with the assistance of the development team, a project’s projected total development costs (see Chapter 4) and projected income and expenses (see Chapter 5).
Estimate, with the assistance of the development team, the sources, amounts, and cost of funds that will be available to the developer on a short- and long-term basis for the purchase and rehabilitation of the project (see Chapter 6 through 12).
If a project is deemed feasible, the nonprofit organization must execute a written agreement with the existing property owner that gives it “site control” or the right to purchase the property at a later date under specific terms (see Chapter 13). 2. Tasks that must be completed after execution of the purchase contract but prior to the organization’s purchase of the property. After securing site control over the property, the nonprofit housing developer must:
Determine whether it will take title to the property at settlement in its own name or in the name of another corporation or partnership.
Interview and select an architect, management company, and appraiser.
Apply for and obtain commitments for financing and rent subsidies from sources identified during the feasibility process.
Identify potential tenants from targeted clientele and market.
Develop a sales and marketing plan. All of these issues are addressed in Chapter 14 and 15.
(b)
Acquisition and Construction Phase
This phase includes all the tasks involved in completing the following: 1. Tasks required to complete the transfer of the property to the nonprofit organization (see Chapter 16). To complete the transfer of the property to the nonprofit, the organization must:
Evaluate the seller’s title to the property.
Obtain title and property insurance.
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Obtain title to the property.
Record the title in the land records.
Adhere to all local provisions, if any, that regulate the operation and licensure of rental housing or homeownership entities.
2. Tasks required to complete the construction or rehabilitation of the housing on the property (see Chapters 17 and 18). To complete the construction or rehabilitation of the housing on the property, the nonprofit organization must work with the development team to:
(c)
Develop detailed architectural drawings, specifications, and a narrative description of the work to be performed.
Select a contractor to perform the work.
Negotiate the terms of a construction contract, including cost.
Address preconstruction requirements such as permits, approvals, bonds, insurance, and tenant relocation.
Supervise the successful completion of the work, including the securing of necessary government certifications.
Project Completion Phase
The project will be in a state of equilibrium at the completion of this phase (see Chapter 19). In this phase, the organization’s short-term loans, which were used to acquire, construct, or rehabilitate the property, will be paid off. These interim loans will be replaced with long-term or “permanent financing” that will stay with the property for 5 to 30 years. The use and character of the housing also will be stabilized during this phase. If rental housing has been produced, the nonprofit organization will develop and implement a long- and short-term management plan for the property as well as appropriate tenant services and tenantmanagement outreach programs. If ownership housing was the organization’s goal, the nonprofit housing developer will create the necessary legal structure (fee simple, cooperative, condominium) to allow for homeownership during this phase. The nonprofit must also make provisions for ongoing training and legal assistance for owners and cooperative or condominium boards of directors.
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2.3
ADDRESSING THE SPECIFIC NEEDS OF A COMMUNITY AND A SPECIFIC PROJECT SITE
After a nonprofit housing developer identifies a potential project and begins working its way through the steps outlined in the preceding section, it must keep in mind that the process and the potential financing programs available for that project may differ, based on the following factors:
Homeownership vs. rental.
Multifamily vs. single family.
Occupied vs. unoccupied properties.
New construction vs. rehabilitation of existing structures.
These distinctions are made throughout the book, where appropriate.
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C H A P T E R
T H R E E 3
Establishing the Development Team 3.1 In General 19 3.2 The Sponsor 20 3.3 The Financial Development Specialist 20 3.4 Attorneys
21
3.5 Accountant/Bookkeeper 25
3.7
Property Management Company 28
3.8
General Contractor
3.9
Construction Manager
29
3.10
Community Organizer
29
3.11
Appraiser
3.12
Conflicts, Multiple Roles, and Oversight 32
3.6 Architect 26
3.1
29
31
IN GENERAL
One of the most important tasks that the nonprofit housing development organization must undertake is the assembly of a team of experienced real estate professionals with whom it will work on specific development projects. Generally, the team selected by the sponsor of the housing development will consist of one or more attorneys, a financial development specialist, an accountant, an architect, a property management company, a general contractor, a construction manager, a community organizer, and an appraiser. Whether the development team members are employees of the sponsoring organization or consultants hired by the sponsor, they should have extensive experience in real estate development and management, especially nonprofit-sponsored housing development. Assembling an experienced development team is crucial to a nonprofit for two reasons: 1. A nonprofit housing development organization rarely has on its own staff all the experienced professionals needed to complete a project of this nature—for example, an architect, a zoning attorney, and a property manager. The nonprofit must contract for the services that it cannot reasonably expect to perform in-house. As the
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nonprofit housing development organization gains development experience and in-house capacity, many of the roles of development team members described here may actually be performed by the organization’s staff. 2. The organization generally will need to “piggyback” on the successful real estate development track record of its development team members in order to convince lenders, government officials, and other interested parties that the project will be a success. Assuming that the nonprofit has had little housing development experience of its own, it must associate with other professionals and organizations that have had the requisite experience. This chapter discusses the roles and basic tasks of each development team member. Later chapters describe many of these tasks in greater detail, where appropriate. 3.2
THE SPONSOR
For purposes of this book, the nonprofit housing development organization is considered to be the sponsor of the housing development. The sponsor is the entity often referred to as the “developer.” Generally, the sponsor is the entity that intends to own the property after acquisition and construction are completed. Where homeownership opportunities are being created, the sponsor may serve as only an interim owner of the property until all units are sold to homeowners. The sponsor is the ultimate decision maker. Its responsibilities include the determination of whether the project should in fact go forward, the appropriate purchase price for homeownership units prior to sale, the extent of construction or rehabilitation, the hiring and firing of professionals, and the appropriate level of payment for all outstanding bills, taxes, and license fees. The development team members work on the project only as long as the sponsor desires their services. In contrast to the other development team members, who generally end their relationship to the project once they have received payment for their services, the sponsor generally invests its own funds—its “equity”—into the project on a long-term basis (if rental housing is being developed) or until the project can be sold out (if homeownership housing is being developed). 3.3
THE FINANCIAL DEVELOPMENT SPECIALIST
The financial development specialist is the chief financial officer and number cruncher for the development project. Generally, the financial
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3.4 ATTORNEYS
development specialist performs the following tasks, often with significant input from the other development team members: •
Analyzes the financial feasibility of the project by considering projected income and expenses, costs of acquisition, construction, or rehabilitation, and potential funding sources.
•
Prepares for the project a development plan that includes pro forma development budgets identifying interim (acquisition and construction) and/or permanent financing requirements, construction or rehabilitation expenses, operating income and expense projections, and subsidy needs; if homeownership is being developed, the budgets indicate unit cost, monthly ownership costs, and downpayment projections.
•
Determines the project’s eligibility under various financing programs and prepares the applications for these loan, grant, and mortgage insurance programs.
•
Communicates regularly with private and public lenders on all matters involving loan applications and loan closings, including new project developments, necessary changes to loan commitments, and terms and conditions of loans.
•
Secures acquisition and construction for rental and homeownership housing development, arranges permanent financing for rental and cooperative housing, and often facilitates or identifies permanent lending sources for buyers of homeownership housing.
•
Provides advice and assistance concerning the scope of construction or rehabilitation, the selection of a general contractor, architect, and management company, and the development of a sales and/or marketing plan for the housing development.
•
Acts as the organization’s representative in administering any construction contracts, depending on the nonprofit’s own capacity and the use of a construction manager.
The specialist may review and approve all payment requisitions and change orders, and may be responsible for ensuring that construction budgets and schedules are met and that costs are effectively controlled and remain consistent with estimates. 3.4
ATTORNEYS
The nonprofit housing development organization will need to retain one or more attorneys to assist it in the creation of the housing development. Depending on the complexity of the development project, the developer
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may need an attorney to act as the organization’s general counsel for the entire transaction and separate counsel to handle specialized issues such as taxation, land use, bond issuances, and foreign transactions. (a)
General Counsel
The general counsel will perform the bulk of the organization’s legal work. Generally, the tasks will include:
(b)
•
Establishing the legal existence of the sponsor, if a new organization, including its nonprofit status on the federal and state levels, if appropriate.
•
Negotiating all contracts between the organization and development team members.
•
Negotiating and drafting the written agreement that will provide the organization with site control over the property.
•
Representing the organization before government agencies and lenders.
•
Reviewing all loan documents.
•
Establishing the legal existence of the entity that will take title to the property, if different from the development organization itself.
•
Ensuring that the organization complies fully with all local laws and regulations, if any, that regulate the operation or licensure of rental housing or homeownership entities.
•
Negotiating, reviewing, and revising all construction-related contracts (architect, general contractor, construction manager).
•
Establishing the legal existence of the cooperative or condominium structure, if the organization is developing homeownership opportunities.
•
Drafting the disclosure documents—public offering statements, condominium declarations, and so on—required for the sale of homeownership opportunities. Specialized Counsel
Although the organization’s general counsel may be qualified to handle most transactions alone, the organization inevitably will face circumstances where it will need counsel who is experienced in specialized areas of the law, such as taxation, land use, and foreign corporations. Generally, tax counsel should be retained if a major component of the organization’s development plan can only be achieved if the transaction
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meets certain requirements of the Internal Revenue Code (the Code). Affordable housing developments utilizing the low-income housing tax credit, and bargain-sale agreements between for-profit owners and nonprofit purchasers1 are two examples of transactions that succeed or fail based on tax code compliance. The nonprofit organization should seek tax counsel who has extensive experience in completing projects that utilized parallel tax provisions, for example, tax credits or bargain sales. The nonprofit housing developer should consider retaining special land use counsel if the existing zoning or use classification of the property needs to be changed in order to create the type of housing intended by the organization. Land use changes sought by the nonprofit may be minor, requiring only a variance, such as for allowing a basement to be converted into an accessory apartment, but they are often major, such as a change of zoning that allows dense, multifamily housing developments to be built on land formerly used solely for single-family homes. Whether the required use change is major or minor, if it is not secured, the nonprofit organization will not be able to create the type of housing it set out to develop. In selecting land use counsel, the nonprofit organization should select an attorney who has practiced land use law extensively in the jurisdiction where the property in question is located. Local counsel is required because land use law is uniquely local. The most effective land use lawyer knows the law and all the local people who administer and interpret the laws and regulations. Special bond or foreign counsel also may be necessary, depending on the organization’s development plan. Bond counsel will be required if the nonprofit developer is planning on utilizing Code Section 501(c) (3) bonds in its financing.2 If the nonprofit is purchasing property from a foreign corporation, counsel experienced in transactions involving similar non-U.S. entities should be consulted. (c)
Retaining Counsel on a Fee for Service or Pro Bono Basis
Many state and local bar associations have developed programs in which licensed attorneys in their jurisdictions volunteer to assist low-income individuals and nonprofit organizations in particular tasks. Interested sponsors should contact the local or state bar association to determine the availability of these pro bono or free services. The sponsor should consider the following issues before retaining counsel:
1 2
See discussion of low-income housing tax credits in Chapter 9 and bargain sales in Chapter 11. See discussion of I.R.C. § 501(c)(3) bond financing in Chapter 7.
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As discussed in Section 3.1, the sponsor needs counsel experienced in working with the type of housing development being contemplated by the sponsor and with the local housing officials with whom the sponsor will have to interact. Counsel also must be willing to provide the sponsor with legal opinions required by lenders or government agencies in order to secure financing. Inexperienced counsel may balk at providing these opinions without charge, if acting pro bono, or without an additional charge, if acting under a fee for service arrangement, because of counsel’s lack of understanding of the programs and inability to assess the risks to counsel’s firm in providing the opinion. Sponsors must find out the answers to these questions before the problems arise. Counsel with little or no real estate development experience, whether the services are offered pro bono or for a fee, will be of little assistance to the sponsor. The sponsor may have a false sense of security that all necessary legal issues are being addressed and learn of problems later in the development process as counsel realizes the extent of the complicated legal problems that arise in affordable housing development and the limited resources of its client.
(i) Experience.
(ii) Need for General Counsel. The sponsor may decide to retain a fee for service attorney if the sponsor has or reasonably can foresee having a need for a corporate general counsel to handle longer-term, nondevelopmentrelated legal needs of the sponsoring organization and pro bono counsel will be available only for one specific transaction. For example, if the sponsor has legal service needs in such areas as corporate formation, taxation, or employee relations, it may want to establish a relationship with an attorney who will be available to serve the organization beyond the specific development project. (iii) Responsiveness. Although many pro bono attorneys provide the same
quality and responsiveness to their fee and nonfee clients, attorneys, like all service providers, pay their bills from the collection of professional fees. Sponsors receiving pro bono legal assistance know this reality and, to the detriment of the project, they often choose, consciously or subconsciously, not to utilize or to push their counsel because they are not paying for the service. In the worst cases, pro bono counsel simply may neglect the housing development organization when the number of hours in the attorney’s day do not meet the needs of the paying clients. Although the counsel can be disciplined for this type of behavior, the problems caused to the housing development organization and the affordable housing development can be fatal.
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3.5 ACCOUNTANT/BOOKKEEPER
3.5
ACCOUNTANT/BOOKKEEPER
The nonprofit sponsor must have an accountant/bookkeeper to set up an accounting system for the organization and the project, if a system does not already exist. This system must be able to track and report income and expenses related to a specific development project, especially during the feasibility, acquisition, and construction phases. These tasks are particularly important if the organization has had limited experience accounting for funds to date or if the organization—a tenant group, for example—was established solely to complete one project. The accountant/ bookkeeper can be on the staff of the nonprofit housing development organization or hired as a consultant to a specific project. Tracking and regular reporting of income and expenses related to the development are important for a number of reasons: 1. If federal, state, or local funds are utilized in the project, the nonprofit likely will have to have an independent accountant certify, at the end of the development process, that the costs of the project were indeed what the organization stated they were. This cost certification will be difficult and extremely costly without an accounting system in place that has generated monthly income and expense reports. 2. Tracking will assist the organization in keeping within its development budget. Cost overruns unrelated to construction or rehabilitation can be avoided if the nonprofit receives and evaluates monthly reports that show how much money has been received for the project to date, including funds from loans, and how much money has been spent on the project to date. Reports that compare these actual numbers to budgeted figures also will be helpful. 3. All funds raised and spent on a project by the nonprofit developer will be considered part of the developer’s equity in the project. As discussed in greater detail in Chapters 6–11, the more equity the organization can bring to the project, the easier it will be to finance. Tracking this equity from the outset of the project will ensure that it is fully accounted for when needed. The organization also needs accurate records that identify which residents have contributed funds and the amount of each resident’s contributions toward the development. Generally, these contributions will be credited to the resident as equity when the resident ultimately closes on the purchase of a homeownership unit in the project. This contribution determination is particularly important for federal programs that require a down payment by each homeowner at the time a home is purchased.
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4. Tracking is especially important to a nonprofit developer (such as a tenant group) that cannot qualify for federal tax-exempt status and exists only to complete a specific development for the benefit of existing residents. This organization must worry about owing federal and state taxes each year because of its tax status; therefore, tracking will ensure that it can accurately prove that it owes no taxes because its income has not exceeded its expenses. 5. Tracking of income and expenses will be very important if the nonprofit has employees. The existence of even one paid employee exposes the organization to significant liabilities for employee-related costs such as federal income, Social Security, and Medicaid taxes as well as unemployment insurance and compensation expenses. The accountant, in conjunction with the attorney, may be utilized to establish the legal existence of the entity that will take title to the property, if different from the development organization itself. This will be particularly important if the acquiring entity is a partnership, C corporation, or S corporation created to maximize the tax benefits of certain income tax provisions (the low-income housing tax credit, for example) or to avoid the passive loss rules to the greatest extent possible.3 3.6
ARCHITECT
Generally, the nonprofit organization will select an architect in the very early stages of the feasibility phase. As the development progresses through the feasibility, acquisition, and construction phases, the architect’s role and responsibilities change considerably, as discussed below and in Chapter 17. An affordable housing sponsor needs an architect who is experienced in the planned type of housing development and is able to help the sponsor get the project done within a very tight budget. Given budget constraints of affordable housing development, a sponsor should seek to retain an architect who understands that an ability to solve problems within a limited budget likely will be more beneficial to the sponsor than creative abilities in the area of design. (a)
During Feasibility
The architect plays a vital role in developing a scope of work for the property and in projecting costs for this work. These cost projections are relied 3
Real estate development has become increasingly complicated and difficult since the Tax Reform Act of 1986. The sponsor and its investors, if any, must use experienced counsel and accountants when structuring any venture, to maximize tax benefits and minimize passive loss burdens. See I.R.C. § 469 (passive loss rules).
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3.6 ARCHITECT
on by the financial development specialist in completing a financial feasibility analysis and development plan for the project. When constructing a new building, the architect will meet extensively with the nonprofit’s representatives. Together, they will develop a preliminary design for the building, a construction schedule, and a construction budget. After approval of this preliminary plan, the architect will prepare preliminary drawings, called schematic drawings, that will illustrate the proposed structure to scale. When rehabilitating an existing structure, the architect usually will team up with structural, electrical, and mechanical engineers or contractors to complete an evaluation of the existing units and systems in the building. The architect will then submit to the nonprofit developer a report that may: 1. Describe the present condition of the existing facility’s architectural, structural, mechanical, electrical, and plumbing components and its elevators, if any. 2. List proposed renovation work, including repairs to correct deferred maintenance, address housing code and safety regulations, improve energy conservation, correct existing or pending structural defects, repair or replace major building components with less than ten years of useful life expectancy, and enhance the marketability of the property. 3. List proposed renovation work to meet the objectives of the nonprofit developer, for example, increase the number of three-bedroom units, install individual utility meters for each unit. 4. Contain certifications from registered engineers indicating the structural integrity of the building, its present condition, the remaining useful life expectancy in years, and costs to cure deficiencies in major building components, including heating, cooling, plumbing, and electrical systems, and the roof. 5. Determine what improvements may be required to obtain a local building occupancy permit—sprinkler systems, additional means of ingress and egress, accessibility for the handicapped. 6. State the architect’s preliminary construction budget for the rehabilitation described in the report. After the nonprofit organization has had an opportunity to review this report and to discuss it with the architect, the architect will prepare preliminary schematic drawings, like those for new construction, that incorporate the proposed changes and will develop a preliminary construction budget to reflect the established scope of work.
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In many cases, prior to acquisition, the architect will complete design drawings—a set of drawings that individually detail the architectural, structural, mechanical, and electrical systems that will be used in the project. (b)
During Acquisition and Construction
The architect’s role after acquisition is basically the same, whether the project involves new construction or the substantial rehabilitation of an existing structure. For example, if the project is going to be competitively bid, as discussed in Chapter 17, the architect always will prepare construction documents (design drawings and written specifications regarding the exact type and quality of materials to be used) and provide them to all contractors interested in bidding on the project. The architect then will assist the nonprofit in analyzing bids, negotiating the construction contract, and obtaining any permits required prior to renovation. The architect’s role in projects that are not competitively bid is discussed in Chapter 17. During the construction phase, the architect usually visits the site frequently to review the work being performed. When the contractor believes that the work is complete in whole or in part, the architect often inspects the work on behalf of the nonprofit sponsor. The roles of the various players who participate in the construction or rehabilitation phase of the development are described in greater detail in Chapters 17 and 18. 3.7
PROPERTY MANAGEMENT COMPANY
Most sponsors have a property management company join the development team immediately prior to the nonprofit developer’s acquisition of the property if the property acquired has a building with tenants in place, or at the time when construction is completed and the property is ready for occupancy. To the extent possible, however, sponsors should seek to retain a property management company much earlier in the feasibility phase. A property management company experienced in managing the same type of housing that the nonprofit is intending to develop can provide a financial development specialist whose operating income and expense projections could make the financial feasibility analysis all the more accurate. In addition, problems that will inevitably arise in the development process and will have an impact on the residents—temporary relocation, conversion to homeownership, rent increases, or in-place rehabilitation— may be less disruptive if the management company has had an opportunity to develop a strong relationship with the resident leaders and the residents themselves.
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3.8
GENERAL CONTRACTOR
Like the property management company, the general contractor usually joins the development team after the property has been acquired. As discussed in greater detail in Chapter 17, the general contractor often is selected by the sponsor through a competitive bid or negotiated bid process. The general contractor contracts with the nonprofit housing developer to complete a scope of work specified by the architect in the construction documents described in Section 3.5. The general contractor agrees to complete the work within a certain time frame at an agreed-on cost or under provisions allowing for increasing the time and cost if necessary. The general contractor usually attempts to recover the actual costs incurred by the contractor in completing the project plus an allowance for the contractor’s overhead and profit. 3.9
CONSTRUCTION MANAGER
A construction manager may be brought into the development team at the time when an architect is usually retained or at the same time as the general contractor. Generally, a construction manager has greater expertise than an architect in accessing the needed scope of work, in estimating costs, and in evaluating possible defects or deficiencies in the work of the general contractor or the subcontractors. Therefore, if sufficient funds are available, the nonprofit may want to look to a construction manager to complement the architect’s services in this area from the outset. Often, construction managers are retained at the time of construction to provide the nonprofit with added capacity to review costs incurred and work performed by the general contractor. Although construction management services would enhance any development team, many nonprofit housing developers do not retain a construction manager. Instead, to save costs, they rely on the architect to perform these services because the architect is already needed on the job to perform architectural functions. Where few or no architectural drawings or designs are required in a rehabilitation project, the nonprofit sponsor might have a construction manager fulfill the role of the architect, as described in Section 3.5. The role of the construction manager is described in greater detail in Chapter 17. 3.10
COMMUNITY ORGANIZER
The community organizer may be the most critical member of a development team when the nonprofit developer is a tenant organization or is working to improve housing conditions in a tenanted property. The community organizer acts as the information conduit for the project—getting
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information about the status of the development out to the tenants, getting information about the tenants back to the development team, and getting tenants to provide information about their project to interested outside parties. This role can be best illustrated in the context of a tenantsponsored homeownership project. Generally, in a tenant-sponsored development, the tenant organization is the sponsor and the goal is rehabilitating the property and tailoring homeownership opportunities so all existing residents can afford to purchase. In this context, the community organizer might provide the following services: 1. Be a conduit to the tenants.
Go door-to-door to inform residents of the tenant organization’s efforts, the status of the development, the schedule for meetings, and the projected costs and fees for ownership.
Assist the tenant organization in developing and producing a regular (e.g., monthly) newsletter for distribution to residents.
Assist the tenant organization in scheduling and conducting regular (e.g., monthly, quarterly) meetings of the tenant board of directors and the residents.
Assist the tenant organization in developing and implementing a strategy for maximum resident participation in the development, including membership, fundraising, and community outreach.
2. Be a conduit from the tenants.
Go door-to-door to obtain information from the residents (e.g., income, expense, family size) for use by the financial development specialist in developing the financial feasibility analysis.
Go door-to-door to obtain resident information about the physical condition of individual units and building systems.
Facilitate discussions at meetings of the tenant organization to obtain input of residents on ownership structure (cooperative vs. condominium), and understanding of the rights and responsibilities of the board of directors and the residents or owners as stated in the organizational documents (e.g., articles of incorporation, bylaws).
3. Be a conduit for tenant information to outside parties.
Facilitate meetings for resident leadership with potential private funding sources (e.g., financial institutions, foundations).
Facilitate meetings for resident leadership with public officials, public funding sources, and local, state, and federal governments;
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if necessary, give testimony before legislative bodies that appropriate funds.
Facilitate meetings of resident leadership with media, to increase public support for the development efforts.
Assist residents in completing necessary applications for public and private financing.
For a vacant rental property, the community organizer can be utilized to generate interest in the project and act as a pipeline for applications for vacant units. For a vacant or partially vacant homeownership entity, the community organizer can serve a broader housing counseling role to prepare people for homeownership by providing: •
Homeownership counseling and training.
•
Facilitation of homebuyer’s clubs, as discussed in Chapter 14.
•
Assistance to potential purchasers in completing the necessary applications for financing.
3.11
APPRAISER
An appraiser’s expertise generally is in determining the current and future value of property. An appraiser’s services either will be utilized early in the development process in order to get a general idea of what a property is worth, for the purpose of negotiating site control or at the time that a loan is being requested. There may be situations involving government lenders where the nonprofit would be able to select its own appraiser, but generally, lending institutions, not borrowers, select an appraiser for a proposed project. As discussed in greater detail in Chapter 4, an appraiser will be retained by a lending institution to determine what the property is currently worth and what the property will be worth after the development is completed. In determining the current value, the appraiser will consider the condition of the property (e.g., the building’s plumbing and heating systems), the existing use of the property (e.g., rental housing or single-room occupancy), the amount of income that is left over at the end of the year after paying all expenses, and the sales prices of similar buildings that have recently been sold. In determining future value, the appraiser will consider how much work the nonprofit is proposing to do on the property after acquisition (new construction or rehabilitation), the proposed use for the property after acquisition and construction (e.g., to convert a rental building to homeownership), how much income realistically can be expected to be earned from operating the property, how much expense realistically can
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be expected to be incurred to operate the property, and the sales prices of similar properties that have been recently sold. 3.12
CONFLICTS, MULTIPLE ROLES, AND OVERSIGHT
Conflicts inevitably arise whenever two or more persons work together on a project over an extended period of time. This maxim is especially true in affordable housing development because of the mix of professionals— architects, attorneys, general contractors, and others—who have strong opinions about everything, especially how to allocate the limited resources available for the project. These problems may be exacerbated when some development team members play multiple roles. For example, a sponsor may retain a local community development corporation to provide financial development and community organizing services to the project. The sponsor must be aware of these potential conflicts, plan ahead to avoid them to the extent possible, address them immediately as they arise, and make it clear to all parties that it, and no one else, has oversight and decision-making responsibility over the project.
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P A R T
T W O 2
Projecting Costs, Income, and Expenses
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C H A P T E R
F O U R 4
Project Feasibility and Total Development Costs 4.1 Project Feasibility Defined 35
Appendix 4B Summary of Key Federal Regulations Governing Underground Storage Tanks 63
4.2 Determining Preliminary Project Feasibility 36 4.3 Estimating Total Development Costs 36 Appendix 4A Value 60
Appendix 4C Summary of Relevant Laws and Regulations Governing Lead-Based Paint 66
Sample Letter of
The primary goal of the development team during the feasibility phase is to assist the sponsor in determining whether the project can be completed as planned. A project that looks as though it will be a success is considered “feasible.” Chapters 4 through 12 detail the steps that must be taken to complete a feasibility analysis and develop pro forma financial statements that will reflect the project’s feasibility and will be required by potential sources of capital. This chapter defines project feasibility, sets out the various elements that must be considered in determining feasibility, and explains how one element of feasibility, total development costs (TDCs), can be estimated. 4.1
PROJECT FEASIBILITY DEFINED
Generally, a project will be considered feasible if the sponsor can convince itself that: •
The total costs of acquiring and developing the housing (the TDCs) can reasonably be secured by the nonprofit developer from its own equity, investors, grants, and loans, or from proceeds from sales to purchasers, if homeownership opportunities will be offered.
•
The ongoing costs of operating the units and maintaining the debt service on the project can reasonably be provided by the targeted clientele after construction or rehabilitation is completed.
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4.2
DETERMINING PRELIMINARY PROJECT FEASIBILITY
The nonprofit sponsor, working with its development team, will be able to determine the preliminary feasibility of a project if it can make reasonable estimates about what the property is worth; what the project will cost to build, rehabilitate, and complete; how much income will be generated; and what amount of expenses will be incurred each year after the project is operational. The sponsor must determine the extent to which equity, low-interest loans, grants, operating subsidies, and proceeds from sales of units can be secured in order to keep expenses from exceeding the income that can reasonably be expected from rents set to attract a targeted, low-income clientele. Specifically, the sponsor must estimate: •
Total development costs (TDCs) for the project.
•
Annual operating expenses for the project, based on the proposed use of the property.
•
Annual income from rents for the project, based on projected income levels of targeted clientele.
•
Annual debt service expenses for the project.
If annual income from rents is insufficient to meet annual expenses, including projected debt service, the sponsor must determine whether expenses can be reduced through lowered TDCs, cost savings, a lower interest rate on debt, or additional grants or equity; or whether income can be increased through rent subsidies. Unless otherwise stated, the term “rent,” when used throughout this book, refers to monthly housing costs incurred by the occupant, whether in a rental or ownership setting. Generally, terms such as “carrying charges,” “co-op fees,” or “condo fees,” not “rent,” will be used in cases of ownership. A discussion of how to estimate TDCs follows. 4.3 (a)
ESTIMATING TOTAL DEVELOPMENT COSTS Total Development Costs Defined
Total development costs (TDCs) are the expenses that the sponsor can reasonably expect to incur in order to complete the project.1 TDCs include “hard costs,” or the costs of purchasing the property and making improvements to the property, including new construction or rehabilitation; 1
Different programs, such as HOPE VI, described in Chapter 10, may have their own statutory or regulatory definition of TDC, which may also limit the dollars that the program will allow a sponsor to spend on a project.
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and “soft costs” or all the other costs and fees, such as professional services, financing fees, sales commissions, and similar charges that likely will be incurred to complete the project. Once the TDCs are determined, the sponsor must develop a strategy for securing a combination of equity, grants, debt, and subsidy that will allow the sponsor to meet the TDCs and still keep the housing affordable. As discussed in Chapter 5, if affordability cannot be achieved by securing the necessary amounts of equity, grants, debt, and subsidy, then the sponsor must go back and try to reduce the TDCs to an affordable level. Securing a reasonably accurate estimate of TDCs early in the development process is crucial. The sponsor must be able to make a threshold determination about its ability to approach various sources and obtain funds sufficient to cover the TDCs. If the estimates are too high, a feasible project may look infeasible initially, and the sponsor may pass up an excellent opportunity. If the estimates are too low, an infeasible project may look feasible initially and the sponsor may waste its limited resources on a venture that will soon prove to be unworkable. The ability of a sponsor to accurately estimate TDCs is directly related to the amount of “good” information that the sponsor has been able to secure about the cost of each element of the TDCs. (The TDC elements— “hard” costs and “soft” costs—are described in detail later in the chapter.) Unfortunately, good information about each of these elements usually costs money to obtain, and this money may be wasted if the TDCs are simply too high to be feasible. For example, the sponsor may be able to develop an accurate estimate of construction costs, an important element of the TDCs, if it spends $10,000, early in the development process, on architects, engineers, and construction managers who will supply the necessary schematic drawings and cost projections. However, if the project is deemed infeasible, because of high construction costs or for other reasons, the sponsor will have spent $10,000 and will be no closer to having developed the desired housing. The sponsor must balance the need to obtain good information that will allow it to accurately estimate TDCs against the desire not to spend too much money on any project during the feasibility phase. The sponsor must develop reasonably accurate estimates of the costs to purchase the property, to improve the property (through construction or rehabilitation), and all other costs to complete the project, in order to project the TDCs. (b)
Purchasing the Property (“Hard” Costs)
One of the most significant development costs incurred by the sponsor will be the cost to purchase the property from the prior owner. This cost can be very difficult to estimate unless the nonprofit is limited to matching
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a preestablished sales price determined by law or regulation or the terms of a third-party purchase contract,2 or the sponsor is purchasing the property for little to no cost under special circumstances, such as government homestead or excess property disposition programs.3 If the purchase will be market driven, with the seller seeking the maximum sales price, the sponsor should seek to determine a realistic purchase price by evaluating the property’s current market value. The current market value can be determined in one of the following ways. An appraisal is an estimate of the current value of a property performed by a professional, often licensed or certified, appraiser. An appraiser will appraise the property using one or more of the following methods: the market comparison approach, the cost approach, and the income capitalization approach. An appraiser may use all of these approaches to some extent; the decision of which to rely on most will be based on the purpose of the appraisal and the characteristics of the property being valued.4 The market comparison approach5 estimates the value of a property by evaluating recent sales of similar properties in the same market and comparing them to the property being appraised.6 No two properties are the same, however, so adjustments must be made for factors such as location, financing arrangements, conditions of sale, encumbrances on property rights, differences in use and physical characteristics, and other differences that affect the value of the property.7 Sales comparisons are very effective in residential markets where many similar transactions have taken place recently, but they are less useful when the property to be appraised is unique or the project is the first (i) Appraisal Methods.
2
3
4
5 6 7
In some situations, local or state law may set a sales price. For example, in the District of Columbia, resident groups in multifamily properties have the legal right to match the sales price of a contract already executed by the seller with another purchaser. Many jurisdictions have programs where governments dispose of property in their inventories to nonprofit housing providers or other priority purchasers for little to no money. Nonprofit sponsors should check with their local, state, and federal housing departments to determine whether properties of this nature are available. Some of these programs are discussed in Chapter 11. Stuart M. Saft, Commercial Real Estate Transactions, § 10.20, at 306–307 (1989). Basic appraisal textbooks have taught these three methods for many years; see American Institute of Real Estate Appraisers, The Appraisal of Real Estate 63 (1964). The appraisal standards mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) require appraisers “to conform to generally accepted appraisal standards as evidenced by the Uniform Standards of Professional Appraisal Practice (USPAP) unless principles of safe and sound banking require compliance with stricter standards. 12 C.F.R. 564.4. The USPAP can be found on the Internet at www.appraisalfoundation.org/s_appraisal. This approach is also known as the market data approach. Appraisal Institute, The Appraisal of Real Estate 403, 10th ed. (1992). Id., at 404–405.
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of its kind in the area, because no market exists for comparison. Despite the uncertainty involved in comparing dissimilar properties, this method has been widely used. Those who evaluate an appraisal report must keep in mind that the more factors that need adjustment, the more judgments the appraiser must make and the higher the degree of uncertainty in the final estimation of value.8 The cost approach method of estimating value involves figuring the amount it would cost to reproduce the property. 9 The appraiser will begin by estimating the land value (most likely using the market comparison approach), and then adding the amount it would currently cost to build the existing structures new. The appraiser must then estimate the depreciation of those structures and subtract that amount from the total, thus arriving at the value of the property as calculated by the cost approach.10 The cost approach is most applicable in appraising new construction because the difficulty of estimating the accrued depreciation in older improvements diminishes the reliability of the appraiser’s valuation.11 Most appraisers do not consider the cost approach, or give little or no weight to this method, when appraising existing structures. The income capitalization approach12 estimates the present value of a property by projecting the property’s future potential net income and the rate of return on investment that an investor might expect in the future.13 The appraiser begins by predicting the future rental income that the property can produce and the future expenses that the property may incur. These figures often are based on the property’s recent income-andexpense history. After subtracting expenses from income, the net income must be converted to its present value by dividing it by a capitalization rate or the rate of return that investors would want to receive from their investment. The result is the present value of the future income from the business.14 For example, if projected income from a property is $2,000,000, projected expenses are $1,000,000, and investors are currently requiring a 12 percent return on their equity for similar investments, the income capitalization value of the property would be $8,333,333 ($2,000,000 in income
8 9 10 11 12 13 14
American Institute of Real Estate Appraisers, supra note 3, at 68. Id., at 63, 64. Saft, supra note 3, at 306–307. American Institute of Real Estate Appraisers, supra note 3, at 65–66. This approach is also referred to simply as the income approach. Appraisal Institute, supra note 5, at 424. Saft, supra note 3, at 307.
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less $1,000,000 in expenses = $1,000,000. $1,000,000 divided by .12 = $8,333,333). This method involves considerable speculation and is thus subject to uncertainty. It is typically used to derive an indication of market value, but can also be used to estimate the value of the property to a potential investor.15 The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), passed in response to the savings and loan crisis of the 1980s, has imposed appraisal regulations on many real estate transactions.16 Because the banking crisis was blamed in part on fraudulent or faulty valuation of real estate, the law included reform measures directed at the appraisal profession.17 FIRREA requires appraisals used in federally related transactions to be performed by state-certified or state-licensed appraisers.18 Federally related transactions are real estate–related transactions19 that a federal financial
(ii) Appraisals and Federal Regulations.
15 16
17 18
19
Appraisal Institute, supra note 5, at 425. “Amer-Appraisal; S&L Bailout Boosts Appraisal Reform,” Business Wire (Apr. 21, 1989). Appraisal reform provisions of FIRREA are found at 12 U.S.C.A. §§ 3310–3351 (1998). “Amer-Appraisal,” supra note 15. Many commentators thought appraisal reform was long overdue (id.). State standards for both certification and licensing are subject to approval by the Appraisal Subcommittee of the Federal Financial Institution Examination Council, a body created to oversee the requirements and establish a registry of qualified appraisers in each state. 12 U.S.C.A. §§ 3310, 3332 (1998). State-certified appraisers must satisfy state certification criteria that meet the minimum criteria issued by the Appraisal Foundation, including passing a state certification examination that is consistent with and equivalent to the Uniform State Certification Examination. 12 C.F.R. § 564.2(j) (1998). State-licensed appraisers must satisfy licensing requirements in a state where licensing procedures comply with the minimum standards of FIRREA. 12 C.F.R. § 564.2 (k) (1998). Those standards, set out in 12 C.F.R. § 564.4 (1998), include conformity with uniform standards of the appraisal profession, which have been adopted by the Appraisal Foundation. FIRREA defines a real estate-related financial transaction as: any transaction involving— (A) the sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; (B) the refinancing of real property or interests in real property; and (C) the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities. 12 U.S.C. § 3350(5) (1998).
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institution’s regulatory agency20 engages in, contracts for, or regulates.21 Because many nonprofit housing developments are financed in part by funds provided by or regulated by a lending institution that is regulated by the FDIC or the Federal Home Loan Bank Board, this law has an impact on low-income housing development projects nationwide. The federal regulations provide that a state-certified appraiser is required for: •
All federally related transactions valued over $1 million.
•
Nonresidential and residential (other than 1–4-family) transactions of $250,000 or more.
•
Complex residential transactions of $250,000 or more (including 1–4family).22
For all other federally related transactions, either state-certified or statelicensed appraisers must be used.23 No appraisal is required by FIRREA in transactions valued at $50,000 or less, and in some particular types of real estate transactions.24
20
21 22
23
24
The term “[f]ederal financial institutions regulatory [agency]” means “the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporations, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration.” 12 U.S.C. § 3350(6) (1998). The Code of Federal Regulations contains separate regulations pursuant to this title for each of these institutions. The regulations are essentially identical, with the exception of an extra section in the Office of Thrift Supervision (OTS) regulations entitled “Appraisal policies and practices of savings associations and subsidiaries.” The OTS regulations, 12 C.F.R. §§ 564.1–564.8 (1998), are cited throughout this section. Citations for parallel regulations for other institutions appear in the following sections of 12 C.F.R.: 12 C.F.R. Comptroller of the Currency §§ 34.41–.47 Federal Reserve 225.61–.67 Federal Deposit Insurance Corporation 323.1–.7 National Credit Union Administration 722.1–.7 12 U.S.C.A. § 3350(4) (1998). 12 C.F.R. § 564.3(d) (1998). Complex 1–4-family transactions are those in which “the property to be appraised, the form of ownership, or market conditions are atypical.” 12 C.F.R. § 564.3(d) (1998). 12 C.F.R. § 564.3(e) (1998). Appraisal standards do not apply to appraisals on 1–4family properties and existing multifamily properties prepared on Federal National Mortgage Association forms, Federal Home Loan Mortgage Corporation forms, or other approved forms (subject to some qualifications). 12 C.F.R. § 564.8(d) (1998). The other circumstances not requiring an appraisal are real estate–related financial transactions except those in which: 1) The transaction value is $250,000 or less. 2) A lien on real estate has been taken as collateral in an abundance of caution. 3) The transaction is not secured by real estate. (footnote continues)
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(iii) Appraisals and Subsidized Housing. Nonprofit sponsors must be aware
of the fact that a property that is subsidized complicates the appraisal process. Favorable financing and income subsidies enhance the value of the property, but operating and disposition restrictions imposed by government regulations and limits on profits reduce the value of the property. In applying each of the three appraisal methods, the appraiser must keep these and other peculiarities of the property in mind.25 In this context, the cost approach generally is the least reliable of the three traditional methods, because the value of a subsidized lowincome housing project is, by definition, less than the cost of its construction. That is why a subsidy is necessary. To appraise the property using the cost approach, therefore, would overstate its value.26 In addition, this 4) A lien on real estate has been taken for purposes other than the real estate’s value. 5) The transaction is a business loan that: (i) Has a transaction value of $1 million or less; and (ii) Is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment. 6) A lease of real estate is entered into, unless the lease is the economic equivalent of a purchase or sale of the leased real estate. 7) The transaction involves an existing extension of credit at the lending institution, provided that: (i) There has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies; or (ii) There is no advancement of new monies, other than funds necessary to cover reasonable closing costs. 8) The transaction involves the purchase, sale, investment in, exchange of, or extension of credit secured by, a loan or interest in a loan, pooled loans, or interests in real property, including mortgaged-backed securities, and each loan or interest in a loan, pooled loan, or real property interest met OTS regulatory requirements for appraisals at the time of origination. 9) The transaction is wholly or partially insured or guaranteed by a U.S. government agency or U.S. government–sponsored agency; 10) The transaction either: (i) Qualifies for sale to a U.S. government agency or U.S. government–sponsored agency; or (ii) Involves a residential real estate transaction in which the appraisal conforms to the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation appraisal standards applicable to that category of real estate. 11) The regulated institution is acting in a fiduciary capacity and is not required to obtain an appraisal under other law. 12) The OTS determines that the services of an appraiser are not necessary in order to protect Federal financial and public policy interests in real estate–related financial transactions or to protect the safety and soundness of the institution. 25 26
See, for example, Barbara Christiansen, Subsidized Housing and the Three Approaches, Real Estate Appraiser and Analyst 52, 53 (Spring 1986). Id., at 53.
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approach is largely blind to the operating and disposition requirements imposed on subsidized housing.27 The market comparison approach is a more reliable method of appraising subsidized housing when competent market data exist. In comparing the property to other sales, the appraiser must consider factors such as leverage, income tax shelter, rental subsidies, holding periods, and reduced interest rates, in addition to making the usual adjustments for location, amenities, square footage, and so on.28 The reliability of the appraisal, of course, depends on the abundance of market data and the number of factors to be adjusted for. Because markets for subsidized housing may be relatively unformed, and because so many factors must be compared, a fair amount of uncertainty must be expected in the sales comparison approach.29 The income capitalization approach can also be used to produce an estimate of the value of a subsidized project. In estimating the expected income from the property, however, the appraiser must rely on the contract rent, which is determined by government regulation, and not on the market rent, for comparable unsubsidized space.30 In addition, benefits such as reduced income tax liability and favorable financing, and limitations such as operational regulations must be factored into the calculus if the appraisal is to account for the peculiarities of subsidized housing.31 The analysis is further complicated by adjustments for reversion of the property to unsubsidized use after a specified holding period.32 Like all appraisals, an appraisal of a subsidized housing property is likely to involve a combination of methods, with an explanation of how the appraiser arrived at the final valuation figure. 33 A competent appraisal must account for the unique characteristics of subsidized housing,34 and the developer should be aware of the uncertainties caused by the appraiser’s adjustments for those factors. Although an appraisal may provide the “best” information about the current market value of a property, it also will be the costliest way to get that information. In today’s marketplace, appraisals can easily cost the 27 28 29 30 31
32 33 34
David S. Kirk and David A. Smith, “Using the Reversion/Shelter Approach to Appraise Subsidized Housing,” Appraisal J. 326, 332 (July 1983). Christiansen, supra note 25, at 53–54. Kirk and Smith, supra note 27, at 331–332. Christiansen, supra note 25, at 54. Kirk and Smith, supra note 27, at 332–333. Note, however, that income distributions to owners are usually limited to a certain percentage of return on the original equity. The limit is commonly a 6 percent return on the original equity of 10 percent of cost. Laurence G. Allen, “Valuing Subsidized Housing for Property Tax Purposes,” Appraisal J. 66, 67 (January 1986). Kirk and Smith, supra note 27, at 330–331, 333–337. For example, Kirk and Smith, supra note 27, propose an approach that uses different methods to value each component of a subsidized housing property. See, for example, Christiansen, supra note 25, at 64.
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sponsor $5,000 to $20,000, given the demand for appraisal services and the liability faced by the appraiser who has certified the conclusions. Incurring this cost at such an early stage of the development process may be ill-conceived when there are less costly ways to estimate the market value and the appraiser’s certification is not needed at this stage. The sponsor must be conscious of the fact that any appraisal it obtains for the purpose of determining current value may be unacceptable to the various lenders from whom the sponsor will later seek financing. Generally, lenders will require borrowers to use only those appraisers approved by the lenders. Additionally, lenders often require that they direct the appraiser to do the work and that they receive the findings. Practically speaking, a sponsor who engages an appraiser to perform an appraisal in order to determine current market value should assume that it will have to pay full price again for another appraisal done at a lender’s direction and request. The sponsor, with limited resources, often must look to alternative and less costly methods for determining current market value of a property. One less costly means of determining market value is through the use of a letter of value. A letter of value essentially is an appraiser’s or an experienced real estate broker’s best guess of the current market value of a property, based on limited information and investigation. The appraiser or broker will survey the marketplace, evaluate recent sales of comparable properties, and provide the sponsor with a range of current market values for the targeted property. With a letter of value, the appraiser or broker is not certifying its analysis or conclusions. The market values suggested in a letter of value will be significantly less specific and accurate than those provided in an appraisal, but the letter will provide the sponsor with a good idea of the property’s market value at a limited cost, usually only a few hundred dollars. For example, the range of values provided by the appraiser in the letter of value shown in Appendix 4A allowed the sponsor to evaluate the reasonableness of the seller ’s offer and helped the sponsor to determine whether the property was worth closer to $13 million or $20 million.
(iv) Letter of Value.
(v) Self-Determination. The sponsor’s least costly option may be to try to determine the market value without outside help. The sponsor can reach its own rough conclusions about market value by gathering and evaluating much of the same information that an appraiser gathers to perform its appraisal. Generally, the sponsor will have to gather information concerning three or four properties that were recently sold and that are similar to the property in question (the “target property”) based on property condition, location, unit sizes, number of units, number of bedrooms in
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each unit, amenities available at the property such as pools, front desk, indoor parking, and so on. If the sponsor accepts the challenge of determining the property’s market value on its own, it will need to know how much these similar properties recently sold for, their unit sizes, the number of bedrooms in each unit, the number of units in each property, the level of amenities offered at each property, and the condition of the properties. The sponsor also will need to know the level of net income that was being generated annually by the owners of these similar properties prior to their sale. As noted above, net income is the amount of income left over for the owner to use as it pleases after all expenses for the property other than debt services, have been paid. The net income of the targeted property must be determined as well . The sponsor will have to gather this information from various sources. Sales prices, dates of sales, and property addresses usually can be determined by consulting a directory of real estate sales published in your community by government or for-profit entities. These publications are essential to the work of an appraiser and usually can be easily accessed by the public. Armed with this information, the sponsor will have to visit each of the recently sold properties to determine whether they are comparable to the targeted property. The sponsor will be able to determine property condition, unit sizes, the number of bedrooms in each unit, and the number of units in the property by visiting the site and meeting with the property’s on-site management. When visiting the properties, the sponsor also should seek to obtain the previous year’s income and expense information needed to complete the market value analysis. If the net income information cannot be secured by the sponsor and the properties are subject to rent control regulations, the sponsor may be able to estimate income for the individual properties by checking the current, legal rent levels for the units as reflected in government records. The sponsor would then assume that these legal levels are the rents currently charged. Expenses can be projected either by using the average per-unit, permonth operating expense estimates generated by the Institute of Real Estate Management (IREM)35 for that type of building in that particular jurisdiction, or by estimating these expenses based on discussions with local management companies that manage similar properties.
(vi) Gathering the Information.
35
IREM issues regional reports entitled Income & Expense Analysis—Apartments. IREM can be contacted at (312) 329-6000.
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From this information, the sponsor must determine which properties are in fact similar to the targeted property. Once that determination is made, the sponsor can evaluate the information in two ways, to get an idea about the current market value: (vii) Evaluating the Information.
1. Compare the per-unit cost reflected in the recent sales with the perunit cost asked by the seller of the targeted property. This analysis is quite simple. Divide the sales price paid for each property by the total number of units in the property. The result is the per-unit price paid by the purchasers when they bought the properties. If the analysis is being completed on four similar properties, add up the per-unit costs for the properties and divide by four. This will yield the average per-unit price of similar properties. Now divide the asking price for the targeted property by the number of units in the property. That figure is the per-unit asking price being sought by the seller. Compare this per-unit price with the average per-unit price paid by recent purchasers. If the prices are reasonably similar, the asking price may be reasonable—at or close to the market value. If the prices are very different, with the targeted property costs considerably higher, then the targeted property is either priced too high or the similar properties may have been sold at artificially low prices at distressed or foreclosure sales. If the targeted property costs are considerably lower, then the sales price may be a very good ideal. 2. Perform a “modified income capitalization approach” analysis. As discussed above, the appraiser will complete a complicated, formulaic analysis of the net income of the targeted property and the current financial markets, using the capitalization of income approach to determine an estimated value. The sponsor can attempt to do this analysis as well. However, the sponsor can perform a less scientific but still useful analysis if the income, expenses, and net income of these similar properties can be identified or estimated. Under this modified income capitalization approach, the sponsor determines the net income of each property and then divides the net income for each property by the sales price to establish a “capitalization (cap) rate” for that property. After determining and considering the cap rate for all recent and similar sales, the sponsor sets a cap rate for the property being appraised. The current value of the targeted property would be estimated by taking the net income that is currently being generated at the targeted property and dividing it by the sponsor’s estimated cap rate.
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The per-unit cost analysis and the modified income approach are illustrated in Exhibit 4.1. E XHIBIT 4.1 The Per-Unit Cost Analysis and Modified Income Capitalization Approach for Property Evaluation STEP ONE: EVALUATE SIMILAR PROPERTIES Recent Sale 1
Recent Sale 2
$250,000 $100,000 70,000 $ 30,000
$339,000 $139,000 100,000 $ 39,000
$ 30,000 250,000 12%
$ 39,000 339,000 11%
$250,000 12 $ 20,833
$339,000 14 $ 24,214
Recent Sale 3
Recent Sale 4
$210,000 $ 95,000 75,000 $ 25,000
$375,000 $125,000 90,000 $ 35,000
$ 25,000 210,000 12%
$ 35,000 375,000 9%
$210,000 10 $ 21,000
$375,000 22 $ 17,045
Sale Price Income for Year Less: Expenses for Year Net Income for Year Determine Capitalization Rate: Net Income Divided by Sales Price Equals Cap Rate Determine Per Unit Cost: Sales Price Divided by Number of Units Equals Per-Unit Cost
Sale Price Income for Year Less: Expenses for Year Net Income for Year Determine Capitalization Rate: Net Income Divided by Sales Price Equals Cap Rate Determine Per Unit Cost: Sales Price Divided by Number of Units Equals Per-Unit Cost
STEP TWO: DETERMINE VALUE OF TARGETED PROPERTY USING DATA FROM SIMILAR PROPERTIES Summary of Information on Targeted Property: Sales Price Sought by Seller Number of Units in Property Income for Year Less: Expenses for Year Net Income for Year
$236,500 11 $105,000 $ 78,000 $ 27,000 (continues)
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E XHIBIT 4.1 The Per-Unit Cost Analysis and Modified Income Capitalization Approach for Property Evaluation (continued) Summary of Information on Similar Properties under Each Method: Per Unit Analysis Recent Sales
Modified Income Approach
Per-Unit Cost
Recent Sales
Cap Rate
1 2 3 4
$ 20,833 24,214 21,000 17,045
1 2 3 4
12% 11 12 9
Total Costs
$ 83,092
Average Cap Rate
11%
(the sum of Per-Unit Costs for all 4 recent sales = $83,092) Average Per-Unit Cost
(the sum of cap rates for all 4 recent sales divided by 4 = 11%) $ 20,773
Net Income of Targeted Property
$ 27,000
Projected Market Value for Targeted Property
$245,454
(Total costs of $83,092 divided by 4 properties = $20,773) Number of Units in Targeted Property
11
Projected Market Value for Targeted Property
$228,503
($20,773 average PerUnit Cost times 11 units = $228,503) Asking Price for Targeted Property
($27,000 divided by 11% average cap rate = $245,454) Asking Price for Targeted Property
$236,500
$236,500
Like the letter of value, the sponsor’s analysis is helpful because it offers the sponsor a level of comfort in knowing what the property is worth generally. The seller’s asking price of $236,500 in Exhibit 4.1 is probably reasonable and close to market, based on these two analyses. The decision on whether the overall project is feasible at that sales price, however, requires the sponsor to complete its estimation of total development costs. (c)
Improving the Property (“Hard” Costs)
Estimating the purchase price of the property is only one part of determining the TDCs. The sponsor also must determine how much it will
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cost to improve the property through rehabilitation or new construction so that it can be used for the purposes envisioned by the sponsor. For example, if the sponsor’s purpose is to build town houses on vacant land for low-income purchasers or to rehabilitate a boarded-up hotel as senior citizen housing, then the sponsor must estimate how much it will cost for the labor, materials, and so on, often referred to as “sticks and bricks” needed to build these particular town houses or to renovate this designated hotel. To complete this cost estimate, the sponsor must first determine what work must be performed at the property (the scope of work), whether new construction or rehabilitation of an existing structure, and then determine the costs that likely will be incurred to complete that desired scope of work. The sponsor ’s tasks in determining the appropriate scope of work differ greatly if the project is the rehabilitation of an existing structure and not the construction of a new building. The sponsor must conduct some type of preliminary building evaluation of the existing structure before deciding to rehabilitate a property. The preliminary evaluation, done by qualified professionals, would investigate the present condition of the existing building—its structural integrity, the heating and air conditioning system and components, the electrical system and wiring, the roof, the plumbing system, and the elevators. Based on this evaluation and a review of any housing or fire code violation reports outstanding against the property, the sponsor would, ideally, receive a list of proposed rehabilitation tasks that would correct deferred maintenance, remedy housing code and safety regulations, address environmental concerns, improve energy conservation, replace existing or pending structural defects, repair or replace major building components that have less than ten years of useful life expectancy, and enhance the marketability of the property. The report also should list the proposed renovation objectives of the nonprofit developer, for example, add a bathroom and shower on each floor for a single-room occupancy facility, or increase the number of three-bedroom units for a tenantsponsored conversion of a rental property to homeownership. Finally, the evaluation should include a preliminary estimate of the construction costs that would be incurred in order to complete each aspect of the proposed rehabilitation work. To secure all of the information described above, the evaluation would almost certainly have to be performed by an architect and a team of structural, electrical, and mechanical engineers who would certify
(i) Rehabilitation.
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their findings.36 Like an appraisal, this approach, while providing the sponsor with the “best information,” comes at a cost of several thousand dollars, depending on the size and condition of the property. Given the high level of risk inherent in the feasibility process, many nonprofits are not prepared to invest that much money in a building evaluation at the stage when there is little certainty that the project will go forward. If a report by professionals is not an option, the sponsor must seek an affordable alternative that yields at least a “ballpark” idea of the future construction costs for TDC purposes. Retaining an experienced construction manager (CM) or general contractor (GC) may serve this need. A sponsor who intends to complete the construction or rehabilitation through the use of negotiated bid (discussed in Chapter 17) will identify a CM and/or GC early in the process and be able to use their expertise to prepare a preliminary scope of work and construction budget. Even if a negotiated bid process is not contemplated by the sponsor, a GC or CM may be willing to provide these services at little or no charge, in hope of future business with the nonprofit. In either case, the GC or CM would conduct a building evaluation by walking through the building. Ideally, the CM or GC would do the walk-through with heating and air conditioning, electrical, roofing, plumbing, and elevator subcontractors who could assist the CM or GC by evaluating what they see. After the walk-through, the CM or GC would give the sponsor a summary of the findings and cost estimates, orally or in writing. This alternative generally will not provide the level of specificity and detail available from an architect and engineers, nor the type of building evaluation report that will ultimately be needed to present to a lender when applying for financing. However, given the limited cost of this approach and the fact that GCs or CMs with current experience in developing the type of housing desired by the sponsor are often very good cost estimators, this information may be an acceptable alternative for TDC purposes. New construction will require a very different approach. The sponsor does not have to worry about the condition of an existing structure because none exists. Instead, the sponsor must work with its development team members, primarily the architect, to design from scratch a building that can be used for the purposes envisioned by the sponsor. As with rehabilitation work, the development must be in
(ii) New Construction.
36
The cost estimates of an architect are not always the best information that money can buy because they are based on average costs for improvements, gleaned from a book, and not actual costs incurred for similar jobs. General contractors and construction managers who cost out and purchase these types of improvements every day will usually be able to provide more accurate cost estimations.
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compliance with local housing and fire codes and must address any outstanding environmental problems on the site. During the feasibility stage, the sponsor must meet with the architect to develop together a preliminary building design that meets the sponsor’s programmatic needs (e.g., transitional housing with on-site offices for social service providers or AIDS housing with on-site offices for health care or counseling providers). After designing the facility, the architect must develop construction cost estimates for completion of the building as designed. (iii) Costs to Address Environmental Conditions. Environmental problems
may be the area of housing development that generates the greatest level of concern among lenders. If environmental problems exist, the cost to remedy them may be so enormous as to render infeasible an otherwise feasible project. For example, a leaking underground storage tank that has caused extensive contamination on the property could easily cost $25,000 to $100,000 to clean up. A sponsor needs to receive reliable information on this type of problem as soon as possible so it can terminate its feasibility analysis of the property, if necessary, without incurring additional costs. Early in the feasibility phase, the sponsor must determine whether there are any environmental problems on the property and include the costs (if any) to address these problems in the construction costs portion of the TDC estimate. This requirement holds whether the sponsor is rehabilitating an existing structure or building a new one. Sponsors, and their potential lenders, generally will identify environmental problems through a Phase I environmental assessment of the property. In a Phase I study, environmental experts survey the property for asbestos, PCBs, radon, underground storage tanks, toxic waste sites, leadbased paint, chemical releases in the air, lead in the water supply, and sewage disposal.37 The site engineer provides the sponsor with a written summary of the findings, stating whether any or all of these conditions exist and, if so, whether they can be remedied; a plan for remedying these conditions, including costs, if appropriate; and a recommendation for a more in-depth study of certain conditions, if necessary. Because of heightened lender concern in this area and the enormous costs that the sponsor could incur if it purchases a property with significant environmental problems, the sponsor should arrange for a Phase I survey, to get the best available information about existing environmental conditions. A Phase I survey may be the most costly approach, but, on 37
Radon received a lot of attention in the 1980s; however, it generally is the least problematic environmental condition of those addressed in a Phase I study. Radon tends to exist only in certain areas of the country and usually can be abated with little cost to the property owner through the use of fans or other devices that blow the radon gas out of a specific area in the housing accommodation.
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balance, most sponsors will find that it is worth the investment. No alternative method of determining environmental conditions can give the sponsor an equivalent level of comfort that the findings are reasonable and reliable. Sponsors should be aware of federal laws, regulations, and administrative actions governing environmental hazards. The four most significant and potentially costly environmental issues that sponsors of affordable housing are likely to face are: 1. Underground storage tanks—the most highly regulated of today’s environmental problems. Federal law, often expanded by states and localities, exposes property owners, in a number of ways, to significant costs in relation to underground storage tanks. The law holds property owners liable for the costs to:
Clean up any environmental damage caused by storage tanks located on their property.
Create and maintain a leak-monitoring and -reporting system.
Remove and replace or close any existing tank that does not conform to federal safety standards.38
2. Asbestos—the most pressing environmental problem affecting housing prior to the 1980s, when the national focus turned to underground storage tanks. Asbestos, like underground storage tanks, is regulated by the Environmental Protection Agency (EPA).39 Over the past decade, the government and industry have modified their views on asbestos and now recommend that asbestos should be left alone or encapsulated (covered) where possible. Where removal is required because of the deteriorating condition of the materials that contain the asbestos, such as pipe insulation or flooring tiles, or for other reasons, the sponsor must adhere to federal and local laws and hire a certified hazardous waste contractor.
38
39
Federal laws concerning underground storage tanks are codified in Subtitle 1 of the Resource and Conservation Recovery Act (RCRA) and Section 205 of the Superfund and Reauthorization Act of 1986 (SARA). Regulations can be found in 40 C.F.R. § 280. Generally, the tanks are regulated in five ways: (1) requirements are imposed on the quality and construction of the tanks themselves, including the required replacement by 1998 of tanks currently being used that are not constructed of the required materials, (2) owners must maintain a system for detecting leaks, (3) owners must report a tank’s existence, and certain activities such as a spill or a tank closure, (4) owners must take corrective action in response to any release, and (5) methods are imposed for closing tanks to avoid future leakage. A summary of the key federal regulations is given in Appendix 4B. See 40 C.F.R. § 763 et seq.
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3. Lead-based paint—a concern believed by many housing advocates and developers to be more important and damaging than underground storage tanks and asbestos. The Lead-Based Paint Poisoning Prevention Act of 1971 (LPPPA)40 and the Residential Lead-Based Paint Hazard Reduction Act of 1992 (“1992 Act”)41 authorized HUD to seek aggressively to put an end to lead hazards in public housing, federally assisted housing, and certain nonfederally assisted housing built prior to 1978. Appendix 4C summarizes the other relevant laws and regulations concerning lead-based paint. 4. Chlorofluorocarbons (CFCs).42 Unlike underground storage tanks, asbestos, and lead-based paint, CFCs are not viewed as an environmental risk to the persons living in the housing accommodation or the immediate community. CFCs will likely have a significant economic impact on housing in the coming years because the air conditioning in much of the nation’s housing stock uses CFCs, and they are likely to be phased out over the next 10 or 15 years. Therefore, any sponsor of housing must plan for the time when existing systems will have to be changed or when the cost of maintaining the CFC system will become too great. Nonprofit developers must be aware of the potential costs of having to comply with the Americans with Disabilities Act (ADA) when either building a new building or rehabilitating an existing structure. The act, enacted on July 26, 1990, provides comprehensive civil rights protections in the areas of employment, public accommodations, state and local governmental services, and telecommunications, for individuals with disabilities.43 The provisions of the act relating to public accommodations, Title III, may impose increased construction costs on nonprofit developers. Although private housing generally is not required to comply with the ADA, the ADA does apply if a portion of the private housing is a “place of public accommodation.” Among other definitions, a “place of public accommodation” includes places of lodging; establishments that serve food or drink; sales or rental establishments such as grocery stores or bakeries; places for public gatherings; service establishments such as laundromats, dry cleaners, beauty shops, and professional offices; nurseries or other places of education; day care centers, homeless shelters, or
(iv) Costs to Address the Americans with Disabilities Act.
40 41 42 43
42 U.S.C. §§ 4821–4846; section 7(d), Department of Housing and Urban Development Act, 42 U.S.C. § 3535(d). Residential Lead-Based Paint Hazard Reduction Act of 1992, §§ 1001–1061; H.R. Conf. Rep. No. 1017, 102nd Cong., 2nd Sess. 235–267 (1992). Housing and Development Reporter: Current Developments 181 (July 20, 1992). Pub. L. No. 101–336, 42 U.S.C. § 12101 et seq.
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other social service centers; and gymnasiums or other places of exercise or recreation. Therefore, the ADA may apply if the nonprofit developer intends to combine residential use of a property with almost any other nonresidential use. If the ADA does apply, then, whether the nonprofit is developing a new building or rehabilitating an old one, some or all of the buildings may have to be built or rehabilitated to be “readily accessible to and usable by individuals with disabilities.”44 In the case of a property being rehabilitated, the rehabilitated portions, to the maximum extent feasible, must be readily accessible to and usable by individuals with disabilities, including people in wheelchairs.45 Under Title III, whether new construction or property rehabilitation is involved, when a commercial facility is located in a private residence, the portion of the residence used exclusively for residency is not subject to the Act. However, that portion used exclusively for the commercial facility or that portion used for both commercial and residential purposes is covered.46 This coverage would include those elements used to enter the commercial facility (the front sidewalk, for example), any doors or hallways, and public restrooms. Sponsors should consult early with architects and counsel who are experienced in meeting ADA requirements. The advice gained may help to avoid later “surprises.” Early consultation will ensure that the nonprofit understands the full implications of the design decisions that it makes, especially the costs involved. Future nonresidential uses of the property and the impact of ADA compliance on the construction budget are two major concerns.47 When preparing its construction cost estimate, the sponsor must build in a construction cost contingency. Generally, after the sponsor develops what is believed to be a realistic construction cost estimate, it will then add 5 percent to 10 percent as a buffer against the uncertainties associated with construction. An original construction cost estimate of $100,000 would be budgeted at $110,000, for feasibility purposes, to allow for a 10 percent construction contingency.
(v) Construction Contingency.
44 45
46 47
ADA, § 303(a)(1), and 28 C.F.R. § 36.401. This applies to all commercial facilities that are located in private residences. 28 C.F.R. § 36.401(a)(1). Commercial facilities are facilities whose operations affect commerce that is intended for nonresidential use by a private entity. 28 C.F.R. § 36.104. 28 C.F.R. § 36.401(b)(1). For a comprehensive discussion of the ADA, see Americans with Disabilities Act Handbook, published by the Equal Employment Opportunity Commission and the U.S. Department of Justice (October 1991); available from U.S. Government Printing Office, Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402.
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(d)
Completing the Project (“Soft” Costs)
The final element of the TDCs that must be estimated is the collection of costs commonly referred to as “soft costs”—costs that the sponsor will likely incur to complete the development, other than the purchase price and the cost of making the improvements to the property. Completion costs are described in the following sections. (i) Property Transfer and Recordation Taxes and Fees. Many jurisdictions, at the state, county, and/or municipality level, tax real estate transactions as a means of generating additional revenue. These taxes, usually imposed as a percentage of the purchase price paid for a property (e.g., 1 percent of the purchase price) may be charged simply for the privilege of transferring ownership of a property from one party to another (transfer taxes) and/or for recording one’s interest in the property in the land records of that jurisdiction (recordation taxes). In some jurisdictions where these taxes apply, the state, county, and/or municipality will require the entity recording its interest to pay a perpage recordation fee. The convention concerning who pays these taxes differs from jurisdiction to jurisdiction. In some jurisdictions that impose these taxes, standard practice has the purchaser and the seller splitting these costs; in other jurisdictions, the seller may pay the transfer taxes and the purchaser may pay the recordation taxes. Regardless of the accepted convention, responsibility for paying these costs can be negotiated between the parties.
The sponsor must build in an estimated cost for the legal and accounting fees that it expects to incur throughout the development process. Regardless of what many sponsors may think, professional fees usually are negotiable. Sponsors should discuss the availability of reduced or discounted fees with the professionals they interview. Sponsors also should discuss a fixed fee versus an hourly fee arrangement with their professionals. With a fixed fee, one mutually agreed-on amount of money covers all the professional services rendered. The professional sets the fee high enough to cover its potential time on the project, hoping that the project will take less time than anticipated and provide a greater profit on the services rendered. The sponsor eliminates the possibility that professional fees will skyrocket and make the project infeasible. An hourly fee arrangement does not provide the sponsor with certainty as to professional fee costs. However, if the professional completes its tasks in less time than originally anticipated, the professional is paid only for actual work performed, not a fixed fee. The sponsor is able to reduce the TDCs or apply the cost savings to other parts of the development budget. (ii) Professional Fees.
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The sponsor must build in an estimated cost for the architectural work that may be required in the development process. Initial schematic drawings, completion of a preliminary building evaluation and cost estimation, bid documents including a full set of drawings and specifications, and site visits during renovation and/or construction are necessary and chargeable activities. If an architect or a construction manager will be used to develop a preliminary building evaluation and rehabilitation cost estimate, the fee must be included in this category. Architectural fees often are negotiable: Discounts may be available and fixed or hourly fee arrangements are possible. (iii) Architectural Fees.
The sponsor must build in the estimated cost for fees that will have to be paid to each lender for the privilege of borrowing money from that institution. These fees, which may be referred to as application, commitment, or origination fees, are imposed in addition to the interest that a lender will charge a borrower over the life of a loan. Generally, lenders will refer to these fees in terms of “points.” Each point, or fraction of a point, is equal to 1 percent or a fraction of 1 percent of the loan amount sought. Assume, for example, that a sponsor is planning on applying for a $100,000 loan from Community Bank in order to purchase a property, and that Community Bank generally commits to a loan of this amount only after the applicant has paid it a commitment fee of 1 point. Under this scenario, the sponsor will have to estimate financing fees of at least $1,000 (1 percent of $100,000), when developing its TDCs during the feasibility period. The TDCs must include projected financing fees that may be incurred by the sponsor when it seeks to borrow money at each step of the development process. The borrower likely will pay these fees when: buying the property (acquisition settlement), improving the property (construction settlement), and repaying the acquisition and construction lenders (permanent settlement). Financing fees of government lenders and other nonprofit lending institutions, however, may be nominal or zero.
(iv) Financing Fees.
(v) Costs to Pay Interest on Loans Prior to Completion. The sponsor may have
to include in the TDCs the costs of paying some or all of the interest that it incurs during the development process. For example, assume that a nonprofit tenant association borrows $4,000,000 to purchase and renovate its 200-unit property at an annual interest cost of $400,000. Assume that the renovation will take a year to complete. If rents from the 100 habitable and occupied units are sufficient to cover operating costs plus $100,000 of the $400,000 projected interest cost during this period, the resident council would estimate an interest carry cost of $300,000 in the TDCs.
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The sponsor must include in its TDCs projected legal fees that it will be charged by lenders. To the surprise of many organizations, lenders charge borrowers for the lender’s legal costs incurred in making the borrower a loan. As with financing fees, the sponsor must budget for the payment of lender’s legal fees at acquisition, construction, and permanent settlement. Government lenders and other nonprofit lending institutions may choose not to pass their legal costs on to nonprofit borrowers.
(vi) Lender’s Legal Fees.
(vii) Costs Related to Securing Title Insurance. The sponsor must estimate costs that it will incur to secure title insurance. Generally, these will be the costs of a property survey by an engineer, a search of the jurisdiction’s land records to determine who has what interests in the title of the property (title search), and the premium necessary to secure the appropriate amount of title insurance. These costs are described further in Chapter 16. (viii) Environmental Study. As noted earlier in this chapter, a Phase I study
of the existing environmental conditions of the property must be conducted. The cost of this study—and, potentially, a subsequent Phase II study—should be included in the TDCs. The sponsor should enlist the help of environmental engineering firms in estimating the cost to conduct these environmental studies. (ix) Appraisal. As discussed in Chapter 3, the sponsor must estimate a cost for securing an appraisal of the property. The sponsor may have to budget for more than one appraisal if multiple lenders are contemplated. If an appraisal will be used to establish the value of the property for purchase purposes, that cost must also be included in this category.
The sponsor must estimate costs that it is likely to incur for licenses and permits required by local law for the operation of rental housing or homeownership entities. These costs may vary, based on the type of housing sought to be developed. For example, rental housing laws may require a sponsor to obtain a license to operate an apartment building for rental purposes, but a similar license may not be required for a condominium association.
(x) Licenses and Permits.
The sponsor must estimate costs that may have to be paid to the local, county, or state government for the privilege of converting a property into a condominium or cooperative for the purpose of selling the units to homeowners. These fees may be assessed whether the property was previously used for rental purposes or was built solely to provide homeownership opportunities.
(xi) Conversion Fees.
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Depending on the jurisdiction, the sponsor may have to pay local, county, and/or state government fees for: •
Holding an election by the tenants to determine their interest in converting the property, if required.
•
Certifying the results of the election.
•
Transferring the converted unit to a purchaser.
Nonprofit sponsors must become familiar with their jurisdiction’s regulation of conversions and determine whether a waiver of these fees can be obtained by nonprofit developers. (xii) Marketing Expenses. The sponsor must estimate what amount it will
spend to market the units, for rental or sale, to the public. These expenses would include advertising and sales commissions to real estate agents who bring renters or purchasers to the property to fill vacant units. To complete these estimates early in the feasibility process, the sponsor must project how many units it expects to have for sale or rental to the public and the average percentage of commission that would be due to real estate agents for their services. For example, if a tenant association intends to buy a 12-unit building and 10 of the existing residents are committed to buying their units, the association would have to estimate a marketing cost to fill only the two uncommitted units. This budget entry may be zero if the association has a realistic waiting list for these units. Otherwise, the association would have to estimate the sales price for each vacant unit (assume $40,000), determine the average real estate commission paid in that community (assume 6 percent) and budget $4,800 for marketing expenses ($40,000 plus $40,000 times .06). Temporary or permanent relocations of residents may be required to make the affordable housing project feasible. The costs of these relocations must be estimated and included in the TDCs. Temporary relocation costs often are incurred by sponsors when residents are moved out of a property and then return to it when construction is completed. Sponsors often pay moving expenses and supplement the increased rent costs faced by residents in their temporary accommodations. Sponsors may be required to pay reasonable moving costs, housing counseling costs, and, for a period of months after relocation, the difference between a relocated resident’s prior rent and the new rent if a resident is displaced permanently as a result of the sponsor’s actions. Many states and the federal government (in the Uniform Relocation Assistance (xiii) Relocation Expenses.
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and Real Property Acquisition Policies Act of 1970)48 have detailed programs and protections for displaced residents. Because compliance with these regulations may be extremely costly, sponsors should plan the development wisely, to minimize displacement costs. The sponsor may consider estimating an amount of money that could be used to “prefund” a replacement reserve for the property. A replacement reserve is considered “prefunded” when a sponsor deposits a significantly large amount of money in the replacement reserve account early in the project’s life—for example, when it settles on the acquisition or permanent loan for the property. Prefunding a reserve allows the sponsor to have some resources available to replace items that are not part of the property’s basic systems during the first year or two of ownership and that are not being replaced as part of the initial scope of rehabilitation without significantly increasing costs to residents. (See Chapter 18, Selective Rehabilitation, for more information) Although all of a property’s basic systems—heat, air conditioning, water supply, waste, roofing, and electricity—should be replaced when the property is rehabilitated, in some cases, where funds are limited and systems have an expected remaining useful life of five or more years, these systems are kept in place. The “prefunded” reserve would act as a safety net for these older systems while the reserve is being built up with additional dollars coming from operations. (A more complete discussion of replacement reserves is given in Chapter 5.)
(xiv) Prefunded Replacement Reserves.
The sponsor should consider building a soft cost contingency into its soft cost estimate. Following the recommendation for estimating the construction cost contingency, discussed above, the sponsor would develop what it believes is a realistic soft cost estimate and then add 5 percent to 10 percent to that estimate, to cover the uncertainties affiliated with real estate development. An original soft cost estimate of $100,000 would be budgeted at $110,000, for feasibility purposes, to allow for a 10 percent soft cost contingency.
(xv) Soft Cost Contingency.
48
See 49 C.F.R. pt. 24 for the implementing regulations for this program.
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SAMPLE LETTER OF VALUE
A P P E N D I X
4 A
Sample Letter of Value Mr. John Q. Jones 4900 Brookeway Lane Smithville, GA 33345 Re: Kalorama Towers 123 Kalorama Avenue Smithville, GA 33345 Dear Mr. Jones: As requested, I have researched the market area for the above-referenced property. The purpose has been to establish a preliminary value range for the subject property both “As Is” and “Post-Rehab.” In addition, I have outlined several neighborhood trends. A brief discussion of my findings is presented as follows: MARKET AREA/NEIGHBORHOOD The subject market area is located within Smithville in Jones County. Smithville’s official boundaries extend beyond the border into Delray County. The overall market area extends to the east to Darnestown, Eaglebury, and Needham. It extends to the north to Phillipsburg. The market area encompasses a mix of residential (both single-family and multifamily), commercial uses (strip shopping centers and plazas, and small office parks). Singletary State University occupies a large area to the northeast. The immediate subject neighborhood is located along the Kalorama Avenue corridor, just south of University Boulevard. It is residential in character with apartment buildings and strip commercial uses along Kalorama Avenue. PROPERTY VALUES (GROSS RANGES) Single-Family Detached Homes Flats Apartment Buildings Condominium Units Efficiencies One-Bedroom Two-Bedroom Three-Bedroom
—$90,000 to $150,000 —$100,000 to $200,000 —$32,500 to $36,000 per unit —$30,000 to $50,000 —$40,000 to $60,000 —$45,000 to $70,000 —$57,000 to $75,000 60
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Rents Efficiencies One-Bedroom Two-Bedroom Three-Bedroom
—$400 to $510 per month —$500 to $640 —$645 to $735 —$725 to $840
Trends Property Values—Overall property values have been appreciating and continue to do so due to the market’s relative location within the Smithville Metro Area. In addition, the area is considered fully developed. Very little vacant land exists; therefore, the market competition for existing housing stock remains in balance. Single-family homes have outperformed condominiums and cooperatives in their appreciation in value. Rent Controls—Currently, rents are monitored by the City of Smithville and Jones County for all multifamily buildings. Allowable rent increases are established on a yearly basis. The allowable rent increases have been around 4 percent annually in recent years. Multifamily Housing Stock—The existing supply of rental apartments has remained stable since the 1970s, due to lack of available land and to economics. These buildings, although well maintained, are in need of major rehab as they age. Upgrading of existing buildings will put upward pressure on rental rates, which will be allowed to exceed the allowable rent control rates. Condominiums—This particular market has accepted the condominium form of ownership since the 1970s. Typically, conversions of large-scale projects were slowly absorbed. The condominium concept is fairly well understood by the market at this time. Financing—Real estate transactions are financed both conventionally and by FHA or VA. Government financing is prevalent in this area because of relative property values and buyer income levels. Conversion—Condo conversions have taken place on a small scale because of economics. Income levels make it more difficult to qualify buyers. SUBJECT PROPERTY The subject property, Kalorama Towers, consists of two high-rise towers totaling 447 residential apartment units. The buildings were constructed in the 1964– 1968 period. They contain a mix of efficiencies, one-bedroom, two-bedroom, and three-bedroom apartments. The buildings are of concrete and brick, good quality overall. Maintenance over the years has been good overall. Normal wear and tear has taken its toll in certain areas and will require rehabilitation as is typical for this type of property, given its age. (continues)
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SAMPLE LETTER OF VALUE
SUBJECT VALUE “As Is” The existing property, as a viable income-producing property, is best valued on both a direct comparison basis or market approach and an income approach. My examination of the subject market has revealed that $34,000 to $36,000 per unit is realistic for this type of property. From an income capitalization point of view, it appears that buildings in this area have sold based on an 8 percent cap rate plus or minus. Both of these approaches tend to indicate a value range for the subject property of $15,000,000 to $16,000,000. “POST-REHAB” Assuming a rehab of the existing property as outlined in the preliminary building evaluation by The Design Group, Inc. dated April 1, 1993, the subject’s value would be enhanced due to increases in the rent structure or a potential sellout of the individual units as a cooperative or condominium conversion. Looking at the potential increase in value conservatively, as a rental property, a value range of $18,500,000 to $19,500,000 appears realistic as the first year’s rents are adjusted. The values are subject to the attached limiting conditions, [not shown here].
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A P P E N D I X
4 B
Summary of Key Federal Regulations Governing Underground Storage Tanks 1. Definition. An underground storage tank (UST) is a tank and piping holding an “accumulation of regulated substances” that has 10 percent or more of its volume underground. 2. Exemptions. Tanks exempt from federal regulations include, among others, any underground storage tank system whose capacity is 110 gallons or less; any tank used for storing heating oil for consumptive use on the premises where stored; septic tanks; and USTs that hold less than 1,100 gallons of motor fuel for noncommercial purposes. 3. Performance Standards. A “new” UST system is one for which installation began after December 22, 1988. All new USTs must meet the design, construction, and installation requirements promulgated under 40 C.F.R. § 280.20. An “existing” UST system is one for which installation began on or before December 22, 1988. No later than December 22, 1988, all existing UST systems must meet new UST system performance standards defined in 40 C.F.R. § 280.20, or be upgraded under 40 C.F.R. § 280.12(b), or be closed pursuant to 40 C.F.R. § 280.70–74. 4. Generally: a.
b. c.
Corrosion. All USTs and piping must be protected from corrosion using either either cathodic protection, fiberglass coating, or other comparable means. USTs installed before December 22, 1988 can use some otherwise prohibited retrofit approaches. Spill and overfill protection. All USTs must be protected from spills and overfills. Leaks. New USTs must have leak detection capabilities such as automatic tank gauging in conjunction with monthly inventory control or monitoring performed at least monthly.
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d.
Financial responsibility. Owners must be able to demonstrate they are financially equipped, through insurance or other means, to pay to clean up a leak or compensate others for injuries or property damage.
5. Reporting and Record Keeping. All owners of UST systems must submit the following information:
c.
Notification for all UST systems, which includes certification of installation for new UST systems, within 30 days of the date the UST is first used. Reports of all releases or suspected releases (investigated and results reported within 7 days). Corrective actions planned or taken.
d.
Notification before permanent closure or change in service.
a.
b.
All owners must maintain the following information: a.
b. c. d.
Documentation of operation of corrosion protection equipment including required inspections and tests of the corrosion protection system. Compliance with release detection requirements. Documentation of UST system repairs or upgrades. Results of the site investigation conducted at permanent closure, kept for at least three years after closing the UST.
6. Out-of-Service UST Systems and Closure. If a UST system is temporarily closed, owners must continue operation and maintenance of corrosion protection and release detections systems. However, release detection is not required if the UST system is empty. The UST system is empty when all materials have been removed so that no more than 2.5 centimeters of residue, or .3 percent by weight of the total capacity of the system, remain in the system. If a UST system is temporarily closed for three months or more, owners must leave vent lines open and functioning and they must cap and secure all other lines, pumps, manways, and ancillary equipment. If a UST complies with the new tank standards or has been upgraded, it may remain indefinitely in a temporarily closed condition. For USTs not complying with the new tank standards, or USTs which have not been upgraded, if a system is temporarily closed for more than 12 months, owners must permanently close the system if it does not meet either performance standard for new UST systems (40 C.F.R. § 280.20) or upgrading requirements (40 C.F.R. § 280.21). Spill and overfill requirements do not have to be met. Owners not wishing to permanently close a UST system at the
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end of the 12-month period may apply for an extension upon the completion of a state assessment. Owners must notify the proper agency of their intent to permanently close or make a change in service of an UST system at least 30 days prior to beginning such actions. After notification, owners must measure for the presence of a release according to the requirements of 40 C.F.R. § 280.72. If a release is detected, owners must begin corrective action. To permanently close a tank, owners must empty and clean it by removing all liquids and accumulated sludges and must either remove it from the ground or fill it with an inert solid material. Continued use of an UST system to store a nonregulated substance is considered a change in service. Before a change in service, owners must empty and clean the tank, removing all liquid and accumulated sludge.
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RELEVANT LAWS AND REGULATIONS GOVERNING LEAD-BASED PAINT
A P P E N D I X
4 C
Summary of Relevant Laws and Regulations Governing Lead-Based Paint 1. On March 6, 1996, the Environmental Protection Agency (EPA) and the Department of Housing and Urban Development (HUD) published a final rule, “Lead; Requirements for Disclosure of Known Lead-Based Paint and/or Lead-Based Paint Hazards in Housing,” (61 FR 9064-9088). For more information on lead paint contact the following website: www.hud.gov/lead/leadwnlo.html. 2. HUD Notification to Residents and Prospective Purchasers. HUD must use an EPA-approved pamphlet (“Protect Your Family From Lead In Your Home”) to notify residents and prospective purchasers of housing that is HUD-owned or HUD-assisted, or property owners applying for HUD assistance, including mortgage insurance, that a property was constructed prior to 1978 and may contain leadbased paint, and must indicate the hazards and symptoms of leadbased paint poisoning. If lead paint is known to have been used on the property, HUD must also notify residents and prospective purchasers as to the location of the lead-based paint and the condition of the painted surfaces, and provide them with any records or reports concerning lead-based paint on the unit, and in common areas if applicable. 3. Prohibition of the Use of Lead-Based Paint. Lead-based paint is strictly prohibited in HUD projects. 4. Abatement of Lead-Based Paint Hazards in HUD-Owned or HUDAssisted Housing. The 1992 Residential Lead-Based Paint Hazard Reduction Act requires inspections of these properties to determine the existing risk or the reduction of hazards during a rehabilitation of the property, if the project receives less than $25,000 per unit in federal funds; and abatement of the hazards, if more than $25,000 in federal funds are provided for the rehabilitation project. The 1992 Act designates inspection and removal of lead-based
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paint as allowable costs and activities under various FHA mortgage insurance programs and for HOME, HOPE, and Community Development Block Grant (CDBG) funds. These various programs are discussed in Chapters 6 and 7. 5. Abatement of Lead-Based Paint Hazards in Federally Owned Properties Prior to Their Sale by the Federal Government. All properties owned by the federal government that were built prior to 1960 must be inspected and lead-based paint risk assessment performed. Additionally, all lead-based paint hazards must be abated before the properties are transferred. For properties built between 1960 and 1977, a lead-based paint inspection must be completed and the inspection report provided to prospective purchasers.
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C H A P T E R
F I V E 5
Determining Projected Income and Expenses 5.1 Introduction 69
5.6
5.2 Projecting Income— Generally 70
Projecting Expenses— Generally 74
5.7
5.3 Identifying Targeted Income Levels 70
Evaluating Past Operating Expenses 75
5.8
Projecting Expenses Where No Operating History Exists 77
5.9
Allowances and Reserves
5.10
The Role of Lenders
5.4 Determining Affordability as a Percentage of Income and Market Rents 71 5.5 Income from Nonresidential Use 74
5.1
80
83
Appendix 5A Controllability of Expenses 84
INTRODUCTION
When a sponsor has completed its TDC estimate, its next feasibility task is to develop income and expense projections for the property. If a sponsor is considering developing rental housing or cooperative housing,1 it must determine the amount of annual income it can reasonably expect to earn from the entire property through rents, and the amount of annual expenses that it can reasonably expect to incur in operating the entire property, exclusive of debt service. The funds that remain (after paying 1
As discussed in Chapter 14, rental housing and cooperative housing often are financed as commercial properties, with one or more blanket loans secured by the property. Lending institutions consider the overall income and expenses of these types of properties before making lending decisions. Sales of condominiums and single-family homes, on the other hand, primarily are financed through individual loans. Lending institutions consider the individual income and expenses of the borrower/homeowner before making lending decisions. For purposes of this chapter, cooperative carrying charges are assumed to cover all of the expenses of operating the property. This is not always the case. For example, if utilities are separately metered, the cooperator will have to pay the monthly cooperative charge and the additional utility costs. Sponsors should be conscious of additional housing costs not included in cooperative or condominium fees when developing their feasibility analysis for a property.
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expenses) would be available to pay debt service and/or provide a return on investment to investors. If a sponsor is considering developing single-family as well as condominium homes, its task will be similar but its approach to it will be different. For purposes of projecting income for these types of homeownership, “income” will be the income available to the homeowner to pay housing costs, not the income earned by the sponsor or the property owner from rents or carrying charges. In addition, for single-family homeowners, “expenses” will be the costs likely to be incurred directly by the homeowner in operating and maintaining the home. In the case of a condominium, where many expenses are common to all units (e.g., management fees, trash collection, and landscaping), the annual expense projection should include costs incurred directly by the family (e.g., gas for cooking, homeowner’s insurance) and the common costs or condominium fees incurred by the property as a whole. These individual and common fees associated with condominium ownership are referred to as “condominium costs.” 5.2
PROJECTING INCOME—GENERALLY
To accurately project income, the sponsor must: 1. Identify targeted income levels or the income levels of the individuals or families for whom the sponsor is trying to provide rental or homeownership housing. 2. Determine how much these individuals or families at these targeted income levels can afford to pay each year for housing. 3. Determine which rental units, if any, will be occupied by tenants who earn above the targeted income levels, and how much rent these units will be able to generate in the open market. 4. Project other income that can be earned from laundry facilities, commercial space, parking, and so on. As noted in Chapter 4, the term “rent” is used throughout this book to refer to monthly housing costs incurred by an occupant, whether in a rental or ownership setting, unless otherwise specified. Generally, terms like “carrying charges,” “co-op fees,” or “condo fees,” not “rent,” will be used in cases of ownership. 5.3
IDENTIFYING TARGETED INCOME LEVELS
The sponsor’s first step toward projecting the future income from rents, or the rent stream that can be expected from the property, is to identify or
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5.4 DETERMINING AFFORDABILITY AS A PERCENTAGE OF INCOME
target the expected income level(s) of the persons whom the sponsor is seeking to house in the project. This threshold issue is important because any rents that the sponsor will seek to charge can be only a reasonable percentage of the total income available to the residents. The following example may help to clarify the “reasonable percentage.” Assume that a nonprofit sponsor is seeking to convert a rental property to a housing cooperative for the benefit of the existing residents. Assume also that the sponsor is seeking to complete the project with little or no displacement. The sponsor would have to base future income projections (from cooperative carrying charges) in its feasibility study on a reasonable percentage of the existing incomes of the current residents. If the same rental housing project was 100 percent vacant, the sponsor could set a targeted income level—for example, persons earning 60 percent or less of the area median income—as the anticipated income level or even set multiple income levels for the property, with some units at 60 percent of the area median and others at or above the area median. A sponsor seeking to develop a partially tenanted property could mix these approaches. For example, assume five units of a ten-unit apartment building were occupied. Assume further that the sponsor would like to target three of the vacant units to persons earning 60 percent of the area median income and the remaining two units to anyone who can pay the market rent. The sponsor would identify these income levels and then move on to the step described in the next section, to see what income levels could reasonably be expected from this mix of units. If income is insufficient, the sponsor could consider increasing the mix of upperincome residents, in effect, to subsidize the lower-income residents. 5.4
DETERMINING AFFORDABILITY AS A PERCENTAGE OF INCOME AND MARKET RENTS
Once the sponsor is able to target the specific income levels of the future residents, it must decide what percentage of those incomes will likely be paid out by the residents for monthly housing costs (for rent in rental housing, for cooperative carrying charges in cooperative housing, and for condominium costs in condominium housing). HUD, as a general rule, assumes that residents should not pay more than 30 percent of their income for monthly housing costs.2 If the sponsor is using HUD programs, such as HOPE VI, HUD funds passed through to local jurisdictions, such as Community Development Block Grants (CDBG), or the Low Income Housing Tax Credit,3 it may be required to utilize this or a 2 3
The Section 8 rental assistance program, described in Chapter 11, is based on this principle. For a more detailed discussion of these programs, see Chapter 9.
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substantially similar standard. If no HUD funds are used and local, county, or state funding sources do not require a similar percentage test for affordability, the sponsor may be able to use a more aggressive percentage, such as 32 percent to 35 percent. As an example, assume that the sponsor, during the feasibility phase, is attempting to determine the future income potential for the ten-unit property described in the previous section. As a first step, the sponsor would identify the existing incomes of the current tenants and the projected incomes for persons at the targeted income levels. Assume that 60 percent of the median income in this area is $18,000 for a family of two. The sponsor’s analysis would be: Step 1 Unit No. 1 2 3 4 5 6 7 8
Status
Targeted Income
Occupied Occupied Occupied Occupied Occupied Vacant—reserved for 60% of median Vacant—reserved for 60% of median Vacant—reserved for 60% of median
$10,000 actual 10,000 actual 10,000 actual 10,000 actual 10,000 actual 18,000 18,000 18,000
Next, the sponsor must determine what percentage of these projected incomes reasonably can be committed to rent. Assuming it is 30 percent of the annual income, the rental projections would be:
Step 2 Unit No.
Targeted Income
Annual Rent @ 30% of Income
1 2 3 4 5 6 7 8
$10,000 10,000 10,000 10,000 10,000 18,000 18,000 18,000
$3,000 3,000 3,000 3,000 3,000 5,400 5,400 5,400
Monthly $250 250 250 250 250 450 450 450
Finally, to project rents for the remaining two units, the sponsor must determine what rents could be charged in the market for these units. Assume that market rents are $500. The final chart would read as follows:
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Step 3 Unit No. 1 2 3 4 5 6 7 8 9 10 Projected Annual Rent Stream
Targeted Income
Annual Rent @ 30% of Income
$10,000 10,000 10,000 10,000 10,000 18,000 18,000 18,000 — —
$3,000 3,000 3,000 3,000 3,000 5,400 5,400 5,400 — —
Annual Rent @ Market
$6,000 6,000
Monthly $250 250 250 250 250 450 450 450 500 500
$31,200 + $12,000 = $43,200
The sponsor always must be concerned about projecting rents that are higher than the market can bear, even if these rents are within 30 percent of the residents’ income. Rarely will a sponsor be able to get existing residents to pay more than the market will bear for rent unless they are already paying it. More importantly, a sponsor will be unable to attract residents for the vacant units, or convince lenders that it will be able to do so, if the projected rents are above the market rents. Thus, if the market rents for the above building were $350 per month, not $500, the chart and potential rent stream would be quite different because the maximum annual rent would be $350 × 12 months, or $4,200, not $5,400:
Unit No. 1 2 3 4 5 6 7 8 9 10 Projected Annual Rent Stream
Targeted Income
Annual Rent = Lesser of 30% or Market
Monthly
$10,000 10,000 10,000 10,000 10,000 18,000 18,000 18,000 — —
$ 3,000 3,000 3,000 3,000 3,000 4,200 4,200 4,200 4,200 (at market) 4,200 (at market)
$250 250 250 250 250 350 350 350 350 350
$36,000
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5.5
INCOME FROM NONRESIDENTIAL USE
The final piece of the income portion of the feasibility study is projecting what income, if any, can be earned from nonresidential use of the property. Nonresidential income is rarely if ever an issue for developers of single-family homes. Common sources of nonresidential income are: •
Laundry facilities.
•
Vending machines.
•
Parking spaces.
•
Storage spaces.
•
Application fees.
•
Utility charges for telephone, cable, and Internet access.
A less common but potentially significant source of income is rental of commercial space. Where ground-level space can be used or created for commercial purposes—grocery or convenience store, dry cleaner, hair stylist—the sponsor may be able to use market-rate income generated from commercial rents to “subsidize” the rents of residential tenants. These commercial facilities, if coordinated and/or sponsored by the sponsor, also can act as sources for job training and jobs for the residential tenants. Certain housing cooperatives, however, must be careful not to generate too much income from nonresidential sources because the cooperative’s members could lose their right to deduct on their individual tax returns their portion of mortgage interest and property taxes paid during the tax year.4 5.6
PROJECTING EXPENSES—GENERALLY
The final step in completing the revenue and expense portion of the feasibility study is to estimate operating expenses. Generally, this estimate will be completed by analyzing past operating expenses, if they exist, determining the likely expense categories that the sponsor will incur in operating the property, and estimating the reasonable costs for each category, including the appropriate vacancy, replacement, and operating reserves. Vacancy, replacement, and operating reserve issues generally are not considered when developing single-family homes. 4
I.R.C. § 216 allows shareholders in a cooperative housing corporation to deduct their portion of mortgage interest and property taxes paid to the cooperative as an itemized deduction for federal income tax purposes under certain circumstances. This deductibility will be lost, however, if more than 20 percent of the cooperative’s gross income for the year is paid by parties other than cooperative shareholders. This means that a well-managed housing cooperative that seeks to provide tax deductibility of these payments to its shareholders must be sure not to generate more than 20 percent of its income from the rental of commercial space.
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5.7 EVALUATING PAST OPERATING EXPENSES
Annual operating expenses in the industry are often referred to by their per-unit amounts; a sponsor will be described as spending $3,000 (or whatever amount) per unit per year to operate the property. This perunit cost is derived by taking the annual total operating expenses—say, $36,000—and dividing it by the number of units in the property—say, 12. The figure includes all costs actually applicable to the individual units as well as the common areas. 5.7
EVALUATING PAST OPERATING EXPENSES
The sponsor should evaluate the prior years’ income and expense statements for the property if the property was operating during that period. Three years’ worth of statements, if available, would provide the sponsor with a good basis of knowledge. (A sample income and expense statement can be found in Appendix 14A.) For new construction or where the sponsor is contemplating a substantial gutting and rehabilitation of an existing structure, past history will be unavailable or irrelevant. See Section 5.8. Where past history is available and relevant, the sponsor may consider it in the following manner: 1. Determine an average annual cost for each expense category. An expense category is an individual line item on the statements; electricity and property taxes are two examples. An average annual cost for each category would be determined by adding up the total annual cost for that category in each of the years for which information is available and then dividing that amount by the number of years for which information was available. For example, if three years’ electricity expenses are available and statements reflect that $10,000 was spent on electricity in 1996, $8,000 in 2002, and $9,000 in 2004, the average annual cost would be $9,000 ($10,000 + $8,000 + $9,000 = $27,000 divided by 3, or $9,000). By using the average cost over a multiyear period, the sponsor can avoid relying too heavily on any one year that may have included extraordinary, nonrecurring costs. 2. Adjust average annual cost figures, if necessary. After this average annual cost is determined for each expense category, the sponsor must then evaluate each category to determine whether adjustments to these average expense figures should be made in the feasibility study. Adjustments may be caused by the following factors:
Inflation—an upward adjustment, based on projected inflation rates, in order to have the estimated or budgeted figure more accurately reflect future estimated costs.
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Changes in services provided—an upward or downward adjustment, based on changes in services envisioned by the sponsor. For example, if the current owner provided only 12-hour daily security at the property for the past three years and the sponsor is considering increasing the security to 24 hours per day, the average expense for “security” would have to be increased accordingly.
Changes in policies or goals—an upward or downward adjustment, based on changes in policies or goals envisioned by the sponsor. For example, a housing cooperative may determine that, to establish a sense of responsibility and community, each member will be responsible for maintaining the landscape at the property for one week per year. The expense category “landscaping” could be adjusted downward by the sponsor if the current owner had been paying to have the property landscaped professionally.
Changes in the owner’s approach to controllable expenses—an upward or downward adjustment, based on changes that the sponsor intends to make in the handling of certain controllable expenses. For vehicle expenses, uniforms, employee apartment rental costs, and similar expenses, the owner may be able to completely control the level of expenses incurred or even eliminate these costs entirely. These costs often are referred to as controllable costs. Other costs, such as management fees and vacancy losses, for example, are controllable up to a certain point but then must be incurred at some level. These costs may be referred to as partially controllable costs. A chart showing the controllability of costs faced by a sponsor appears as Appendix 5A. The sponsor has the ability to evaluate the current owner’s treatment of controllable costs and may make changes that would require an adjustment of an average annual cost. For example, the sponsor may determine that the two maintenance persons that it expects to have on staff at the property will not be required to wear uniforms. Costs for uniforms would then be reduced or eliminated in the feasibility study.
Utility and property tax rate changes—an upward adjustment (or, in the unlikely case, a downward adjustment), based on utility rate and property tax rate changes that have been requested and granted or are likely to be granted. Generally, the sponsor will have to determine the likelihood of such rate changes by speaking with local regulatory agencies and government officials.
Changes in vacancy and collection losses—a downward adjustment, based on changes envisioned by the sponsor in this area. For
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5.8 PROJECTING EXPENSES WHERE NO OPERATING HISTORY EXISTS
example, the sponsor, in conjunction with a local banking institution, may seek to have all future residents make monthly rental payments through a direct deposit into the sponsor’s rent accounts. This approach will reduce vacancy and collection losses significantly. The sponsor would make the appropriate downward adjustment in the projected vacancy and collection loss category of its feasibility study.
5.8
Changes in deposits to reserves—an upward or downward adjustment, based on changes envisioned by the sponsor. Operating and replacement reserves are discussed in detail below; however, there are numerous scenarios where the sponsor would want to estimate an operating and/or replacement reserve expense figure that is quite different from the historical average. For example, if the current owner has not budgeted for operating reserves, the sponsor would want to do so. Replacement reserves budgeting also may differ because of the owner’s intentions. For example, suppose that the current owner, for the past three years, has been budgeting for a replacement reserve at a high level, on the theory that the reserves must be sufficient to cover imminent failure of the building’s systems. If the sponsor intends to fully replace the existing systems during the rehabilitation of the property, future payments to the replacement reserve could be significantly less because of the improved condition of the property. The sponsor’s feasibility study should reflect these realities. PROJECTING EXPENSES WHERE NO OPERATING HISTORY EXISTS
Projecting future operating expenses where no history exists is a more difficult proposition. The sponsor must be able to project an annual cost for each expense category, as discussed above, but without any historical basis as a guide. To complete this task, the sponsor must perform the following steps: 1. Determine which expense categories apply to the property. Following are the most common expenses faced by owners of multifamily properties, although some categories apply equally to single-family homes:
Professional management—Most owners of real estate, except singlefamily homeowners who occupy their homes, hire professional management companies to manage their properties, especially if they are multifamily properties. Management companies, often for a fee based on the percentage of rents collected, provide rent
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collection services, monthly income and expense statements, and advice as to preventive maintenance and repairs.
Maintenance and repairs—Every property, regardless of its current condition, will incur costs to maintain or repair the building(s) and their improvements. Items such as painting, groundskeeping, landscaping, and building and unit maintenance and repairs can be listed as separate categories in the budget.
Payroll—This category would be necessary only if the sponsor intends to have on-site staff at the property.
Payroll taxes and benefits—Generally, if the sponsor has on-site staff, it will have to budget for the taxes and benefits that the sponsor-employer will incur.
Property insurance—Aside from a situation where a property may be in such poor condition as to make it uninsurable, almost every property would have this expense category.
Water and sewer—Even if each unit is individually metered for water and sewer consumption, every property will incur these costs because of water and sewer charges that apply to common areas such as lobby bathrooms, lawn sprinkling, and so on.
Gas, electric, and fuel—The sponsor first must determine what type of energy will be used for appliances (gas or electric) and for heat and hot water (gas, electric, or oil). The sponsor will likely incur costs in each of these categories, even if each unit is individually metered for these services, because of usage in the rental office, lobby, and common areas.
Maintenance contracts—The sponsor often will find it cost-effective to maintain some assets, such as an elevator, swimming pool, and boiler, under a maintenance contract with a private vendor. If this approach is appropriate for the property in question, the sponsor would include this expense category.
Licenses and permits—The local, county, or state jurisdiction may require housing licenses and permits to be secured for a fee.
Office expenses and telephone—The sponsor would include this expense category if it will have on-site offices or telephones for use by on-site staff.
Advertising—A rental property will have costs of advertising to fill vacancies as they occur. Ownership housing would not usually have this expense category because each owner would incur any expense to advertise the sale of his or her unit. Limitedequity cooperative housing may be an exception to this rule.
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This type of cooperative may incur advertising costs if the cooperative’s bylaws require the cooperative to buy back units from shareholders when they wish to move, and then to resell them to the public. Limited-equity cooperatives are discussed in greater detail in Chapter 14.
Accounting and legal fees—Every property will incur these costs to some extent, whether the property is operated for rental or home-ownership purposes. Accounting costs for rental, cooperative, and condominium properties likely will include an annual audit by certified public accountants and the preparation of local, state, and federal tax returns for the property. These properties also are likely to incur legal fees for evicting nonpaying residents or homeowners, assisting the sponsor or ownership association in the conduct of its corporate affairs, and enforcing the rules established to regulate resident and homeowner use of the property.
Real estate taxes—Every sponsor must budget for the payment of annual real estate taxes unless the property is located in a jurisdiction that provides some tax relief to properties operated by nonprofit organizations. The sponsor should discuss with legal counsel, during the feasibility phase, the possibilities of applying for and receiving permanent or temporary property tax exemption or deferral. See a further discussion of this in Chapter 11.
Personal property taxes—Some jurisdictions tax the personal property—cars, equipment, and so on—of the sponsor. During the feasibility phase, the sponsor must determine whether the local jurisdiction assesses these types of taxes and discuss with legal counsel the possibilities of applying for and receiving permanent or temporary exemption or deferral.
2. Determine the estimated annual expense for each category that has been identified—This estimate can be completed using one of the following methods or a combination of both:
Gather operating information from similar properties—The best alternative to having an operating history for the property in question is to get the operating history of a property that is similar in size, use, and geographic location. A sponsor may be able to secure an operating history by contacting management companies that manage properties that appear similar, by contacting owners of neighboring properties, and by having the management company that is a member of the sponsor’s development team contact the managers (if any) of these properties.
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If this information can be secured, the sponsor should evaluate each category, as described above. Should the annual expenses of the sponsor’s property be adjusted upward or downward (if at all)? Should additional expense categories be added to reflect operations unique to the property, such as health services, counseling, day care, and similar facilities? Answers to these and other questions will vary from property to property.
5.9
Gather information from the Institute of Real Estate Management (IREM)—The IREM conducts national and regional studies of average operating costs for certain types of properties.5 The sponsor can use these average costs as a basis for its projections or, prior to developing its final budget figures, for comparison with operating expense information gathered about similar properties.
ALLOWANCES AND RESERVES
In addition to estimating annual operating expenses by category, a sponsor of a multifamily property must include in its feasibility study an annual allowance for vacancies and bad debts and annual contributions to separate operating reserve and replacement reserve accounts. (a)
Vacancies and Bad Debts
Property owners rarely can point to a year when they can boast of having received, every month of the year, the full amount of rent from all of the units in a particular property. Inevitably, for a variety of reasons, rents were not received or only partial rent was received from one or more units over the year. The owner may have needed to keep a unit vacant for a month, for remodeling; or the occupant may have moved out without notice or without payment of the last month’s rent. The sponsor must budget for the fact that it will not actually receive all of the rents that it had hoped to realize during the year. Therefore, the sponsor must project, in its feasibility study, the amount of rent that it expects not to collect. This amount, often referred to as a vacancy allowance, includes nonpayment due to vacancies as well as nonpayment of past-due rent that the owner never was able to collect. The allowance is usually estimated as a percentage of the total possible rents collectible during the year. A 5 percent to 10 percent vacancy rate is not uncommon; however, the rate should be established by each sponsor
5
See note 35 in Chapter 4.
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based on the vacancy rate experienced by similar properties in the same geographic location. For example, assume that a sponsor is seeking to purchase a ten-unit apartment building that the sponsor believes has the ability to provide $100,000 in income for the year. If the average vacancy rate for properties of that capacity in that area is 10 percent, then the sponsor should budget the vacancy allowance at 10 percent of $100,000, or $10,000. This vacancy allowance is usually shown in the projected income portion of the feasibility study, as an offset to income. (b)
Operating Reserves
Operating reserves are funds set aside by the sponsor to cover unexpected fluctuations in actual operating expenses during the year. These reserves are critical to the financial health of a property for the following reasons: 1. The annual expense estimates developed by the sponsor for each expense category are nothing more than best-guess estimates of future activity. These estimates almost certainly will be a little higher or lower than actual costs. 2. These estimates can never account for unforeseen circumstances. The operating reserve provides the sponsor with a cushion to absorb unexpected costs and modest cost increases incurred during operations, without jeopardizing the project or passing on rent increases to occupants. Like the vacancy allowance, the operating reserve is usually estimated as a percentage of the total possible rents collectible during the year. A 3 percent operating reserve rate is not uncommon; however, a higher rate might be advisable if the sponsor has little confidence in its annual expense estimates because an operating history for the property was unavailable or because operating histories for similar properties were unavailable. Operating reserves work like this. Assume that a sponsor is seeking to purchase a ten-unit apartment building that the sponsor believes has the ability to provide $100,000 in income for the year. If a 3 percent operating reserve is utilized, then the sponsor should budget an operating reserve of $3,000. This operating reserve is usually shown after all the other expense categories in the feasibility study. At the end of the year, if the operating reserve was not used, the owner can use it to reduce future rent increases, return it to the occupants, or contribute it to the replacement reserve account. Owners of cooperatives and condominiums should review their bylaws to determine whether the bylaws direct the
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board of directors to treat an ending balance in operating reserves in a certain way. (c)
Replacement Reserves
The replacement reserve basically is a savings account set up by the owner to cover some or all of the costs to replace assets as they are used up (e.g., roof, plumbing, appliances). This reserve is critical to the financial viability of the property. The “savings account” most likely will be the only source of funds available to the owner to replace these assets. Most nonprofit-sponsored projects do not have the flexibility to raise rents to cover these one-time charges and still remain affordable. Similarly, the rent stream usually does not provide enough cash to service more debt should the owner wish to borrow money to pay for these capital improvements. Any private or public lender understands the importance of replacement reserves and will require them in almost every project. The most common way that sponsors determine the appropriate level to fund a replacement reserve is to use a percentage of the total possible rents collectible during the year. A 2 percent replacement reserve rate is not uncommon. This method is used most often where the property: 1. Is new (0 to 5 years old). 2. Has recently undergone a substantial rehabilitation that would allow the sponsor to treat the property as if it were new. 3. Has recently undergone a rehabilitation and the replacement reserve was “prefunded” at that time to give the fund a significant balance at the beginning. Assume, as before, that a sponsor is seeking to purchase a ten-unit apartment building that the sponsor believes has the ability to provide $100,000 in income for the year. If a 2 percent replacement reserve is utilized, then the sponsor should budget a replacement reserve of $2,000. The other method for estimating the appropriate annual contribution to the replacement reserve is to conduct a careful evaluation of the remaining useful lives of the property’s systems (roof, heating, electricity, water/sewer) and to develop a multiyear budget and plan for replacement of these items. The annual contribution will be established by calculating the amount of money that must be collected each year in order to have enough money available to replace systems as they wear out.
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5.10 THE ROLE OF LENDERS
Assume, for example, that a property has these assets with the indicated useful lives and replacement costs:
Asset
Remaining Useful Life (UL)
Replacement Cost (RC)
Roof 10 years $10,000 HVAC 8 5,000 Plumbing 20 40,000 Annual Contribution to Replacement Reserve
Contribution/Year (RC divided by UL) $1,000 625 2,000 $3,625
This reserve is usually shown after all the other expense categories in the feasibility study. 5.10
THE ROLE OF LENDERS
As discussed in Chapter 6, lenders closely scrutinize a sponsor’s expense projections when analyzing a property’s debt coverage ratio. To the extent that the sponsor can base its expense projections on historical data and comparable properties, lenders should be satisfied.
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CONTROLLABILITY OF EXPENSES
A P P E N D I X
5 A
Controllability of Expenses Fixed Expenses Real estate taxes Payroll taxes Property and liability insurance Workers’ compensation insurance Mortgage insurance premiums Mortgage interest Operating reserves Replacement reserves
Partially Controllable Expenses
Controllable Expenses
Vacancy and collection loss Management fee Legal expenses
Petty cash Subscriptions/Dues
Audit expenses
Vehicle expenses
Telephone
Uniforms
Office expenses Miscellaneous administration expense Payroll Fuel Electricity Water and sewer Janitor and maintenance supplies Exterminating Grounds maintenance Painting and decorating Repairs Equipment purchases
Miscellaneous insurance Employee health insurance
Source: National Association of Housing Cooperatives.
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P A R T
T H R E E 2
Raising Capital
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C H A P T E R
S I X 6
Raising Capital to Meet Total Development Costs 6.1 Introduction 87
6.5 Equity and Sales Proceeds
103
6.2 Sources of Capital— Generally 88
Appendix 6A Example of an Amortizing Loan 105
6.3 Loans
Appendix 6B Example of a Nonamortizing Loan 106
88
6.4 Grants 102
6.1
INTRODUCTION
At this stage in the feasibility study, the sponsor now knows two crucial elements of its development plan: 1. How much money it is going to need to do the development or cover its total development costs (TDCs). 2. How much money it will have available, after paying operating expenses, to service any debt incurred in order to meet the TDCs. The sponsor, with this information in hand, then must evaluate all the potential sources of capital—loans, grants, equity, and proceeds from sales of units—to determine if the project can be financed (TDCs covered) by using a combination of these sources. A proposed affordable housing development should be considered feasible if capital sufficient to cover TDCs can be identified from these sources and if income projections1 can 1
Income projections for rental housing and most cooperative homeownership housing would be the income that the owner of the property expects to receive from monthly payments from residents and cooperative shareholders that will be used to meet operating expenses and debt coverage on blanket debt. The financing structure of these types of housing is described more fully in Chapter 19. Income projections in the case of single family or condominium homeownership, however, would be the income available to the homeowners to pay costs incurred to operate their homes and to pay debt service on their individual home mortgages. Financing structures common to these types of housing also are described in Chapter 19.
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be expected to cover both the costs of operating the property and the costs of servicing any debt associated with the development’s financing. This chapter defines these basic sources of capital: loans, grants, equity, and sales proceeds. Subsequent chapters identify specific sources of capital that a sponsor should consider applying to for funding: public nonprofit and private for-profit loan funds (Chapter 7), and public sector and private for-profit and nonprofit sector grant programs (Chapter 8). Chapter 9 describes methods for raising equity from the private sector. Chapter 10 highlights resources from public housing. If a project is deemed infeasible because capital funds sufficient to meet TDC could not be identified, then the sponsor should consider pursuing credit enhancement vehicles that are likely to make access to loan proceeds easier and reevaluating TDC to determine if costs can be pared down or paid for by parties other than the sponsor. If a project is deemed infeasible because income expected to be available to pay operating costs and debt service from loans identified by the sponsor will be insufficient, then the sponsor should revaluate initial income and expense projections and consider ways of increasing income (including subsidies) and decreasing operating expenses. This process of revisiting initial assumptions made by the sponsor and of seeking ways to make the project more feasible is described fully in Chapter 11. In most cases, a sponsor should closely analyze TDC, income, and expenses of a project if it is considered “infeasible” after the potential sources of capital have been evaluated. 6.2
SOURCES OF CAPITAL—GENERALLY
A nonprofit sponsor generally will have to secure its TDCs from a number of sources in order to ensure affordability. Nonprofit sponsors commonly have to piece together funds for each housing development from: 1. Loans from private for-profit lenders and from private and public not-for-profit lenders. 2. Grants from private and public nonprofit organizations. 3. Equity from the sponsor, the investors (if any), the purchasers of ownership entities (cooperatives, condominiums, or single-family homes), and the proceeds from the sales of ownership units. 6.3 (a)
LOANS Kinds of Loans a Sponsor Can Anticipate
A sponsor can anticipate having to secure one or more acquisition loans in order to buy a property and (i) Acquisition and Construction Loans. 䡲
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6.3 LOANS
one or more construction loans in order to build or rehabilitate improvements on the property. Generally, acquisition and construction loans are short-term loans that mature or must be paid back in 12 to 18 months. One lender may provide the sponsor with funds to complete both acquisition and construction, or these loans may be secured from two different lenders. In practice, the sponsor may have difficulty attracting a construction lender if an acquisition lender is already in the deal because of the prior lien position held by the acquisition lender. The construction lender would lend to the sponsor and would be secured by the property; however, because the acquisition lender lent its money and filed its claim against the property first, it would get paid in full before the construction lender received anything in the event of a foreclosure sale. This problem may be avoided if the acquisition lender is willing to share its priority position with the construction lender or if the construction lender is a private or public nonprofit lender willing to take an inferior position. A more complete discussion of lien positions can be found in Section 6.3(d). (ii) Permanent Loans. The sponsor will have to secure one or more permanent loans in order to pay off or “take out” the acquisition and construction loans. These “take out” loans got the name “permanent loans” because they historically have been viewed as the last loans that an owner would ever have to have on a property. These loans have terms of 25 to 30 years with a fixed interest rate. At the end of the loan term, the loan is paid off in full and the owner is debt-free. Permanent loans are still available for single-family and condominium ownership. Sponsors of residential rental and cooperative ownership developments may be able to find similar term loans from public sector lenders, but they are rarely offered by private for-profit lenders. Permanent loans for rentals or housing cooperatives often are treated by the private for-profit lending community as “commercial loans,” not homeowner loans, and they rarely have terms that exceed 10 or 15 years. Some private lenders will provide loans referred to as “mini-perms”; they require payments only of interest and they have terms of 2 to 5 years. Interest rates on these shorter-term “permanent” loans often “adjust” or change periodically; at the end of the loan term, the principal of the loan may have been reduced nominally or not at all. (b)
Common Loan Provisions
Every loan that is obtained by a sponsor, whether from private or public lenders, will carry some variation of interest rates, maturity and amortization, financing fees and other lender charges, and prepayment provisions. 䡲
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When a lender agrees to lend money, it not only wants the money or principal paid back according to a payment schedule but it also wants the borrower to pay interest on the amount of the original loan that has not yet been repaid. A lender usually determines how much interest it will charge a borrower by considering:
(i) Interest Rates.
1. Interest costs, if any, incurred by the lender to borrow the money that it is lending the borrower. 2. The amount of interest that the lender could earn if it invested its money elsewhere, given similar risks. 3. The amount of interest being earned from investments that the lender will have to liquidate in order to make the loan. 4. The amount of money that the lender will spend over the loan term to service the loan or track the loan and the loan payments. 5. The amount of money (“profit”) that the lender wants to make over and above the direct costs incurred to borrow the money and service the loan. 6. The riskiness of the loan, as perceived by the lender. Historically, if private for-profit lenders lent to nonprofit housing developers at all, the loans carried high rates of interest. These rates reflected the lenders’ views: affordable housing development was too risky, and the amount of time that their staff had to spend to understand this type of development was too burdensome. A decade of successful nonprofit development, the availability of credit enhancements, and Community Reinvestment Act lending, as discussed below, have made the private for-profit sector a critical and more active player in this field. This increased lending activity by private for-profit lenders has made more capital available for nonprofit development. The interest rates on these funds, however, still approximate the going rate of interest in the marketplace. Therefore, the role of the private nonprofit or the public lender who can provide low- or no-interest loans remains crucial to the success of most nonprofit housing development. These low-cost funds, blended with higher market rates of interest, often constitute the last piece of the financing puzzle needed to ensure affordability. All loans carry interest rates regardless of the profit motive of the lender. Interest rates can be “fixed” or constant throughout the loan term, or they can “adjust” or change periodically over the life of the loan. With a fixed interest rate loan, the interest rate on the loan never varies. The borrower pays, during the entire loan term, whatever interest rate it agreed to pay when it secured the loan. If the borrower borrowed
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6.3 LOANS
$10,000 at a 10 percent interest rate for 30 years in 1970, the borrower will pay 10 percent interest on that loan until 2000. This will be true even if interest rates during that 30-year period fluctuate from 2 percent to 20 percent. Interest rates on adjustable rate loans, often referred to as adjustable rate mortgages (ARMs), can change frequently over the loan term. Every adjustable rate loan should clearly state when the loan adjusts; how the new, adjusted interest rate will be established; and any limitation on the amount of increase in the interest rate that can be imposed on the borrower on a date of adjustment. ARMs with interest rates that are adjusted once a year, once every three years, or once every five years are common in the industry. However, some ARMs are adjusted every month or even more frequently. Where an interest rate is adjusted every three years, the borrower actually has secured a hybrid fixed and adjustable rate loan. The loan remains at a fixed rate of interest for three years, is adjusted, and then stays “fixed” at the adjusted rate for three more years, continuing in this manner until the end of the loan term. A number of common mechanisms are used for establishing the new, adjusted interest rate. Each of these mechanisms establishes a standard benchmark from which to start and then usually provides for the lender to add a “margin” or a preestablished amount of interest to the benchmark. The prime rate of interest as published in The Wall Street Journal on the date of adjustment; the interest rate paid, as of the date of adjustment, on U.S. Treasury securities having various maturity dates from 30 days to 30 years; and the Federal Home Loan Bank Board Series of Closed Loans for a 30-day period, are common benchmarks. As previously noted, the lender then may be able to add its margin to the benchmark. Lenders’ margins commonly range from 100 basis points (1 percent) to 375 basis points (3.75 percent). Many individual homeowner loans, but few rental or cooperative loans, limit the amount of increase that can be imposed on the borrower at the time of adjustment. Lenders of ARMs to single-family and condominium homeowners, for example, often agree to cap any interest rate increase on any adjustment date at 2 percent. Loans for rental or housing cooperative properties often have no cap. Consider this example. Opportunity Housing, Inc., a nonprofit housing developer, borrows $100,000 for ten years from First National Bank on January 1, 2002. The loan requires Opportunity to pay 10 percent interest for the first three years of the loan. In year 3 and every third year thereafter, the interest rate adjusts to the prime rate of interest as published in The Wall Street Journal on the day of adjustment plus a margin of 225 basis points (2.25 percent) with no cap. During years 1 through 3, Opportunity
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pays 10 percent interest. On December 31, 2004, the prime rate of interest is 8.50 percent. As of January 1, 2005, and for the next three years, Opportunity will pay interest of 10.75 percent (the prime rate of 8.5 percent plus the margin of 2.25 percent). The same type of adjustment will be made three years later and three years after that. Generally, all lenders require that their borrowers pay back, by a specific date, the full amount of any principal borrowed and interest incurred during the period of the loan. This due date is referred to as the “maturity date.” The amount of principal and interest that is due on the maturity date will depend on how the loan was amortized. A loan can be fully or partially amortized or not amortized at all. A loan is an amortizing loan if the principal amount of the loan is reduced gradually as a result of periodic payments by the borrower to the lender.2 A loan is considered fully amortizing if the periodic payments are sufficient to completely pay off the loan (including interest) within the term of the mortgage. The most common fully amortizing loans are 30year “permanent” loans or mortgages provided to single-family and condominium homeowners. A borrower of a fully amortizing loan, usually by making equal, periodic payments to the lender during the term of the loan, will have completely paid off the principal and interest by the maturity date. The amount of the last payment, which completes the payback of the loan, is equal in amount to the first payment. A loan is considered “partially amortizing” when the periodic payments reduce only a portion, but not all, of the loan principal during the mortgage term. Most permanent loans provided to rental and cooperative housing developers by the private for-profit sector, as noted above, are partially amortizing loans. Loans are considered “nonamortizing” if the principal amount of the loan is not reduced at all during the term of the mortgage. Most acquisition and construction loans are nonamortizing loans. A partially amortizing loan will be mature after a specific period of time (e.g., 10 years) but will be amortized over a longer period of time, usually 30 years. Thus, the borrower makes equal monthly payments to the lender as if the loan is due and will be fully paid off in 30 years when in fact it will be due in 10 years. At the end of 10 years, the entire amount
(ii) Maturity and Amortization of Loans.
2
This definition and the other definitions of amortization in this chapter are based on definitions in Alvin L. Arnold and Jack Kusnet, The Arnold Encyclopedia of Real Estate 2nd ed. New York: John Wiley & Sons (1978).
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of the loan is due, even though only 10 years’ worth of a scheduled 30year principal repayment plan has been met. At maturity, the borrower must pay the entire principal back to the lender; the last payment in the payment schedule increases or “balloons” dramatically. Refer to the example in Appendix 6A. The borrower borrows $100,000 at 10 percent interest per year. The loan has a ten-year term. For the loan to be repaid in full by the end of the loan term, the loan would have to be amortized over a ten-year period. This would cause the monthly payments to be $1,322 per month. To make the monthly payments affordable to the borrower, the lender allows the borrower to pay the loan off as if it is a loan with a 30-year amortization. The monthly payments fall to $878 per month; however, on the maturity date, ten years later, the borrower owes $90,938, not just $878, the amount paid each month for the past ten years. Nonamortizing loans work in a similar way. Generally, these loans do not pay back the principal at all over the term of the loan. The monthly payments include only interest on the principal amount of the loan. At the end of the loan term, the entire principal is due, which causes a dramatic ballooning on the maturity date. The example in Appendix 6B reflects how a nonamortizing loan works. The borrower borrows $100,000 for three years, agreeing to pay only interest each month; interest is 10 percent per year or $833 per month. For the loan to be repaid in full by the end of the loan term, the loan would have to be amortized over a three-year period, which would cause the monthly payments to be $3,227 per month. The borrower ’s monthly costs are significantly reduced by paying only interest, but, at the end of three years, the entire $100,000 is due from the borrower. Because of the nature of these loans, partial and nonamortizing loans are often referred to as “balloon mortgages.” In a balloon mortgage, the entire amount of the principal, which was not paid back as a result of the periodic payments, becomes due on the maturity date; the final loan payment balloons far in excess of previous periodic payments. Generally, on the maturity date, borrowers will replace the partially amortizing or nonamortizing loan with another partially amortizing loan from either the same or a different lender. Historically, the short-term permanent lender will “roll over” the loan, providing the borrower with another loan under the same or similar terms as long as the borrower has been making the loan payments regularly. Recent scrutiny of the savings and loan and commercial bank industry has forced lenders to reevaluate their investments in real estate generally and this practice in particular. Today, borrowers can no longer rely on this rollover with any kind of certainty. However, a loan with a multiyear, unblemished track record is significantly easier to finance than a new loan. 䡲
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Any nonprofit housing developer of rental or cooperative housing must learn how to manage balloon mortgages. Virtually all acquisition and construction loans will have this feature, and, as noted above, the private for-profit lending community generally will not lend beyond a ten-year period. This means that some or all of the sponsor’s debt may never be fully paid off because it is never set on a fully amortizing basis. Balloon mortgages, however, do allow the nonprofit to access private capital and to reduce monthly mortgage costs from the levels that would be required if the loan was amortized fully over a short period of time. The sponsor should consider establishing a reserve fund and contributing to it throughout the project. The fund will help the sponsor to build capital and thereby reduce principal at the end of the loan term. Moreover, as the loan term nears, the sponsor should constantly seek alternative financing sources for the purpose of converting this partially amortizing debt into long-term, affordable, and fully amortizing debt. Generally, lenders recoup their costs and make a profit from charging interest on their loans and charging fees for the privilege of borrowing their money. Interest, as discussed earlier, is earned throughout the life of the loan. Financing fees are earned prior to or at the time when the loan is provided. Some fees are direct pass throughs of costs incurred by the lender; other fees are charged as a flat amount or percentage of the loan to cover the lender’s staff time for underwriting or considering the loan request and profit. The following are common fees and charges:
(iii) Financing Fees and Other Lender Charges.
•
Application fee—A lender usually charges a flat fee to consider a loan application. Some lenders will waive this fee for nonprofits or will charge the borrower only if the loan is provided. Many public and private nonprofit lenders do not charge application fees.
•
Commitment fee—A commitment fee usually is assessed as a percentage of the total amount of the loan that the lender agrees to provide. The fee must be paid by the sponsor in order to receive the lender’s written commitment to make the loan and only after the bank has committed verbally to make the loan to the borrower. Most public and private nonprofit lenders do not charge a commitment fee.
•
Loan discount or origination fee—A lender may charge the borrower a loan discount fee at the time when the loan is provided. This fee, usually assessed as a percentage of the loan provided, allows the lender effectively to increase the interest rate on the loan indirectly. For example, if the lender provides the borrower with a $1,000,000 loan at 10 percent interest per year, amortized over 30 years, the 䡲
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regular monthly payments to fully amortize the loan would be $8,820. However, if the lender also charges a 1 percent discount fee for the loan, the borrower must pay $10,000 at the time it borrows the money. This $10,000 cost, if paid over the life of the loan, would increase the monthly costs by $28. At $8,848 per month ($8,820 + $28), the lender is obtaining a 10. rate of interest, not 10 percent (.10). Most public and private nonprofit lenders do not charge these fees. •
Appraisal fee—As noted in Chapter 4, the lender will order an appraisal of the property from a list of its approved appraisers. Lenders will seldom accept an appraisal from an appraiser selected by the borrower. The lender will require the borrower to pay for the appraisal, often in advance of both the appraisal’s completion or the lender’s commitment to the project. Many public and private nonprofit lenders will accept the appraisals performed for other lenders participating in the project. To the extent possible, in order to limit uncertainty, sponsors should negotiate with lenders in advance to predetermine the appraisal cost and all related costs.
•
Credit reports—Most lenders will require the borrower to pay the costs incurred to secure a credit report on the borrower and/or its principal partners.
•
Property inspection fee—Many lenders, especially construction lenders, will hire an architect or construction manager to inspect the property prior to payment of a draw request. These costs will be passed on to the borrower.
•
Attorney’s fee—The lender will pass through to the borrower all of its legal costs incurred to process and close the loan.
All of these costs should be reflected in the soft costs portion of the sponsor’s feasibility study. Many borrowers learn long after they have borrowed money from one or more lenders that those lenders will not let them pay off their loans any time they wish to do so. Some loans cannot be paid before their maturity date for any reason, others can be prepaid only at certain times, and others can be prepaid only upon payment of a prepayment penalty, which can be as much as 4 percent or 5 percent of the outstanding amount of the loan. Lenders often have good reasons for these prepayment restrictions; for example, they may be facing similar restrictions imposed on them by the secondary markets to which they will be selling the loan (see Chapter 11). The important point about prepayment provisions is that the sponsor must be aware that they may exist in the loan agreement and must be
(iv) Prepayment Provisions.
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sure that they do not conflict with any fundamental financial assumptions. For example, assume that the sponsor is borrowing $100,000 today at 10 percent interest per year, with the full loan due in 30 years. Assume further that: 1. The sponsor has been actively raising grant funds and intends to fully pay off the $100,000 next year from these contributions. 2. The project cannot afford to pay the 10 percent interest or any part thereof from operating income beyond next year. If the $100,000 loan has a prepayment provision that does not allow the borrower to pay off the loan at all for five years, the sponsor simply cannot use the $100,000 to pay off the loan next year. Instead, it will be legally obligated to pay the 10 percent interest for five years, imposing a debilitating cost on the project and potentially bankrupting the housing development. (c)
Security Required by Lenders
A lender generally will not make a real estate loan unless it knows that it has some protections, other than the borrower’s promise to pay, in case the borrower fails to pay off the loan according to plan. These protections are considered “security” to the lender in case of a loan default. Lenders generally require borrowers to provide security in the form of a mortgage or deed of trust, an assignment of leases and rents, or security agreements for chattels and other tangible property (UCC-1). A mortgage or a deed of trust gives the lender a legal “security” interest in the property. These two instruments are almost identical and serve identical purposes. They provide the lender with the legal power, after a loan default by the borrower, to sell the property in order to raise funds equivalent to the unpaid portion of the borrower’s loan. Some jurisdictions use mortgages, others use deeds of trust. A mortgage is an instrument used in some states to make real estate security for a debt. It is a two-party instrument between the mortgagor (the borrower) and the mortgagee (the lender). A deed of trust serves the same purpose but is a three-party instrument among a trustor (the borrower), a trustee (designated by the lender to act on its behalf), and the beneficiary (the lender).3 A mortgage or deed of trust must be recorded in the land records of the jurisdictions where the property is located. An additional description of mortgages and deeds of trust can be found in Chapter 16. (i) Mortgage or Deed of Trust.
3
Id.
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An assignment of leases and rents gives the lender a legal “security” interest in property leases and the rents generated by these leases. This instrument generally allows the lender, in case of a loan default by the borrower, to control who leases what space in the property and to receive the rents paid by the occupants. These powers provide the lender with security in two ways:
(ii) Assignment of Leases and Rents.
1. The lender ensures that any vacant space is leased to reliable, paying occupants by controlling the leases. 2. The lender ensures that any rents paid will go directly to the lender, not to the borrower. Many lenders record this assignment in the land records of the jurisdiction where the property is located. (iii) Security Agreements for Chattels and Other Tangible Property (UCC-1).
A security agreement for chattels and other tangible property gives the lender a legal “security” interest in everything else (apart from the real estate itself) that is owned by the borrower at the property. The mortgage or deed of trust provides the lender with legal protections as to the land and improvements (real property); the security agreement provides the lender with legal protections as to everything but the land (personal property). This agreement, commonly referred to under the Uniform Commercial Code of most states as a UCC-1, provides the lender with the legal power, after a loan default by the borrower, to sell the personal property—light fixtures, lawn mowers, and maintenance trucks, for example—in order to raise funds equivalent to the unpaid portion of the borrower’s loan. A UCC-1 may or may not be recorded in the land records. However, it must be recorded in the appropriate government office in the jurisdiction where the property is located.4 (A sample UCC-1 can be found in Appendix 16A.) (d)
What Lenders Look for in a Project
A lender generally will consider the following issues when evaluating or “underwriting” a loan request. As noted in Chapter 3, a nonprofit housing developer often does not have the net worth and/or track record sufficient to command a lender’s respect and confidence. Therefore,
(i) Track Record of the Development Team.
4
Lenders will not be satisfied simply because they have recorded a security interest in the real and personal property of the borrower and the leases and rents. They will want to know that these security interests allow them to get paid first if these assets have to be sold and not take what is left over after someone else is paid. This lien priority issue is discussed below.
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the borrower has to convince the lender of its abilities and credibility vicariously, through the members of its development team. The lender will look for development team members who have experience in the type of real estate development for which the borrower is seeking funds. The lender will look very carefully at each line item and category in the sponsor’s income and expense projections, including reserves, to determine their reasonableness. Generally, the lender will want to know the assumptions on which the projections were based. If the projections were based on past operating history of the property, the lender will often request copies of the income and expense reports for the periods reviewed. The lender will be very concerned about income and expense projections because it will want to make sure that there will be enough net operating income (NOI)—the money left over after paying all expenses—to cover the debt service on its loan and any other debt anticipated by the borrower.
(ii) Reasonableness of Income and Expense Projections.
(iii) Debt Coverage Ratio. Even after the lender is able to convince itself of the reasonableness of the income and expense projections, it will still not be satisfied. Lenders generally will want to see that the income and expense projections actually provide enough NOI to cover the debt service and to create a cushion for unanticipated expenses. Lenders evaluate the sufficiency of NOI by analyzing the debt coverage ratio for the project—the ratio between NOI and the debt service projected for the project.5 If NOI is $10,000 and debt service is projected at $7,500, the debt coverage ratio is 1.33 ($10,000 ÷ $7,500). A 1.33 ratio means that, after all debts are paid, the project still has 33 percent of NOI available to pay other costs. The higher the debt coverage ratio, the less risk there is to the lender. Public and private nonprofit lenders may be satisfied with a debt coverage ratio of 1.05; private for-profit lenders may require as much as a 1.30 debt coverage ratio. For a project with a 10 percent vacancy allowance, a 3 percent replacement reserve, a 2 percent operating reserve, and a debt coverage ratio of 1.30, the income projections for the project must be 45 percent higher than the actual projected operating costs, simply to meet all these reserve and ratio requirements.
A lender generally will not provide a borrower with a loan in an amount equal to or greater than the appraised value of the property that is serving to secure repayment of the loan. Although some public lenders may provide loans that equal 100 percent of the property’s value, most lenders lend only a portion of the appraised value
(iv) Loan-to-Value Ratio.
5
See Arnold and Kusnet, supra note 1.
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of the property. The relationship between the amount of a mortgage loan and the value of the real estate that secures it is known as the loan-tovalue (LTV) ratio.6 For example, if a sponsor is seeking to purchase a property appraised at $100,000 and the lender utilizes a 75 percent LTV ratio, the borrower will be able to borrow only $75,000 from that lender. Why will lenders lend only less than 100 percent of a property’s value? Lenders understand that they will not be able to sell the property for 100 percent of its value if they have to foreclose on the property after a borrower’s default and then sell the property to realize the defaulted amount. The lower the LTV ratio, the less risk of nonpayment upon default. In addition, lenders often do not have the discretion to lend at a high ratio. Laws and regulations set the maximum LTV that some lenders, such as commercial banks and savings and loans, can utilize. Federal banking regulators have adopted final regulations that establish the following guidelines for maximum LTV ratios for all commercial banks and savings and loans: raw land, 65 percent; land development, 75 percent; commercial construction, 80 percent; residential construction, 85 percent; and improved property and farmland, 85 percent. The regulations also state that permanent loans on residential properties are expected to carry private mortgage insurance if the LTV ratio exceeds 90 percent. These guidelines do not apply to loans guaranteed by federal or state governments, problem loans that must be refinanced or restructured, loans that facilitate the sale of foreclosed properties, and loans that will be promptly sold into the secondary market.7 A lender generally will not want to make a loan to a borrower if another lender or entity previously has recorded a claim against the real and/or personal property that is being offered by the borrower to secure the loan. Parties who record claims first have the right to have their debt paid first, in the event of a foreclosure sale of the property. This priority is called a first lien position. The higher the lien position, the less risk there is to the lender that its debt will not be repaid upon foreclosure. Consider this example. A sponsor borrows $100,000 in order to purchase a ten-unit apartment building on January 1, 2005. There are no prior claims on record against the property. At the time of the loan, the entity that lent the $100,000 will record its mortgage or deed of trust and an assignment of leases and rents in the land records and will record its UCC-1 in the appropriate government office. These actions will provide the lender with a first lien position as to all of these assets. (v) Lien Priority Position/Good Title.
6 7
Id. 12 C.F.R. 34.62 (1998). Appendix A to subpart D of Part 34—Interagency Guidelines for Real Estate Lending.
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The sponsor then seeks another $100,000 loan to complete the rehabilitation of the property. If the rehabilitation loan lender makes this loan and records its interests in the appropriate government records on February 1, 2005, it will have a second lien position as to all the real and personal property of the borrower. If the borrower defaults on March 1, 2005, and the property is sold for $75,000, the entity holding the first lien position receives all of the proceeds of the sale plus foreclosure costs up to a maximum of the amount of loan outstanding at the time of sale. The second lienholder receives whatever is left over. The first lienholder would receive $75,000 and the second lienholder would receive $0. The first lienholder is provided the greatest amount of security, and each lienholder that claims an interest subsequently is provided less and less security. If for-profit lenders are being asked to provide loans that can be secured only in a second position or worse, the lenders either will not participate or will charge a higher interest rate to reflect the increased risk. Therefore, to get participation by for-profit lenders in a multiloan transaction and to secure lower interest rates, for-profit lenders almost always obtain a first lien position and public and private nonprofit lenders usually agree to subordinate their preexisting claims or to take an inferior lien position to a for-profit lender even if the nonprofit lenders’ loan amount is greater.8 A lender will determine what lien position is being offered by the borrower by reviewing the title insurance commitment on the property. The title insurance commitment, as discussed in greater detail in Chapter 12, will reflect any and all claims against the property that are on file in the appropriate government records. A lender’s concerns about the creditworthiness of a borrower can be minimized if the lender knows that it will be able to sell the loan into the secondary market as soon as the loan is closed. The lender must worry more about the borrower’s ability to repay the loan if the loan is going to be held in the lender’s portfolio throughout the loan term. A discussion of the criteria and standards set by the major players in the secondary market—Federal National Mortgage Association (Fannie Mae), Government National
(vi) Ability to Sell the Loan in the Secondary Market.
8
A lender can be provided with a first lien position, even if another entity previously has recorded a claim against the borrower’s assets, by getting the first lender to subordinate its prior claim to the claims of the new lender. This subordination agreement (or amended UCC-1, in the case of personal property) among the first lender, the new lender, and the borrower would be filed in the appropriate records in the jurisdiction where the assets reside and would provide the new lender with a first lien position. In the example above, if the government provided the sponsor with the $100,000 acquisition loan and secured a first lien position, it would not be unusual for the government to subordinate its first lien position to the rehabilitation loan lender in order to get that entity to participate in the transaction.
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Mortgage Association (Ginnie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac)—for purchasing real estate loans is provided in Chapter 11. (vii) Ability to Have Repayment of the Loan Guaranteed or Insured. A lender’s
concerns about the creditworthiness of a loan also can be minimized if the lender knows that the repayment of the loan will be guaranteed by a personal or corporate guarantee or insured by a state or federal agency. Given the substantial default problems faced with real estate loans provided by commercial banks and savings and loans in the 1980s, many lenders are requiring developers to guarantee their loans with their own personal or corporate assets. These loans are known as recourse loans. If the borrower has assets sufficient to secure repayment of the loan upon default, then the lender will be less concerned about the economic viability of the real estate project being financed. The same is true if the borrower can insure repayment of the loan by securing a state or federal mortgage insurance commitment. In most cases, given the limited resources of most nonprofit sponsors, personal or corporate guarantees are not sufficient insurance for a lender. These guarantees often supplement other guarantees or insurance. A discussion of third-party guarantees and federal mortgage insurance programs, many of which have served as models for similar state insurance programs, is provided in Chapter 11. Lending institutions may be willing to be more flexible in their underwriting in order to meet their general commitment under the federal Community Reinvestment Act (CRA)9 or to meet their specific community reinvestment commitments made with local community organizations. Under the CRA, commercial banks and savings and loans have a statutory responsibility to meet the credit or lending needs of the low- and moderate-income communities in which they do business. The CRA states that these lenders have a continuing and affirmative obligation to meet these needs while simultaneously observing safe and sound operations. In reality, lenders are seldom sanctioned for failing to meet this obligation. However, over the past ten years, community organizations have challenged financial institutions’ performance in this area by objecting to federal regulators when the institutions have requested a merger, acquisition, new branch opening, change in charter, or acquisition of federal deposit insurance. As a result of these challenges, many banks have made multimillion-dollar and multiyear commitments to provide financing to low- and moderate-income communities, which should make
(viii) Community Reinvestment Act Considerations.
9
12 U.S.C. § 2901 et seq.
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financing for nonprofit, affordable housing development more plentiful. For example, in 2004, Bank One Corporation merged with J.P. Morgan Chase and Company and committed to invest $800 billion in communities across the country over the subsequent ten years. Key aspects of this commitment included $675 billion in mortgages for minority and lowincome communities, $90 billion in loans and investments to assist small businesses and community-based organizations, and $35 billion in loans and investments for affordable housing, commercial and economic development in low- and moderate-income communities. Similarly, beginning in 2005, Bank of America will lend and invest at least $100 billion in community development in the Northeast as part of its acquisition of Fleet Bank. The loan package includes home mortgages, small business loans, economic development financing, as well as $115 billion for affordable housing. Nonprofit sponsors must become aware of the existence of similar agreements in their communities and aggressively seek their financing from these sources. A description of various loan programs and sources of loan funds is provided in Chapters 7 and 11. (e)
Making a Loan Application More Attractive to a Lender
As noted earlier, a nonprofit sponsor’s loan will be more attractive to lenders if the loan has credit enhancement and/or can be sold by the lender on the secondary market. Even if these mechanisms are not available to a sponsor, a loan may be made more attractive and a project more financially feasible by: 1. Increasing the property’s income through operating subsidies. 2. Reducing the property’s operating costs through exemptions, waivers, or deferrals of certain operating expenses. 3. Reducing the TDCs by acquiring properties at little or no cost. These issues are discussed and described fully in Chapter 11. 6.4
GRANTS
Grants are sums of money that must be spent in an agreed-on manner but, unlike debt incurred with loans, do not have to be paid back. The more grants a nonprofit sponsor is able to obtain to help meet its TDCs, the less it has to borrow from lending institutions or raise through equity. Lenders and sponsors like grants and equity because neither requires debt service payments each year. The lower the debt, the lower the required debt service payments. Lower payments make it easier for the borrower to meet lender debt coverage ratios and for the lender to agree to lend the 䡲
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money. The ability or inability of a sponsor to raise grant funds for a project often makes or breaks a proposed development. If history is any guide, nonprofit housing developers in the 1990s will continue to find their need for grant funds far exceeding the availability of these funds from all sources. A discussion of various grant programs and sources for grant funds is provided in Chapter 8. 6.5 (a)
EQUITY AND SALES PROCEEDS Equity
Equity is money contributed by the sponsor to the housing development. In the case of resident-sponsored conversions of rental housing to homeownership, equity is likely to be contributed in the form of down payments made at the time of settlement on the individual ownership interests. In most cases, however, the equity is expected to be committed by the sponsor early in the development process and not contingent on sales of units. Like grants, these funds do not have to be paid back. Unlike grants, however, there are no restrictions on how the money must be spent because it is the sponsor’s own money. The more equity a sponsor can raise to help meet its TDCs, the less it has to borrow from lending institutions or raise through grants. Lenders like grant funds because they free a project from additional debt service payments, but they like equity even more because it requires the sponsor to make a real cash commitment to the project. The higher the amount the sponsor has invested in the project, the more comfortable the lender will be with investing in the project as well. The higher the equity, the lower the debt and the lower the required debt service payments. A low level of debt will make it much easier for the borrower to meet lender debt coverage ratios and for the lender to agree to lend the money. A discussion of various methods for raising equity is provided in Chapter 9. (b)
Proceeds from the Sales of Homeownership Housing
Proceeds from the sponsor’s sales of homeownership housing, particularly single-family homes and condominium units, although not technically equity, are a critical source of debt-free capital that will be available to the sponsor in order to meet the TDCs or to be used for other purposes such as establishing a down-payment assistance fund for purchasers, capitalizing a replacement or operating reserve, or capitalizing a reserve to be used to subsidize monthly costs for the homeowners. The proceeds from these sales are a debt-free source of capital to the sponsor, but the money does not come without a cost. Most homebuyers have to incur costly debt in order to provide these sales proceeds. The monthly costs to 䡲
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the homebuyers to maintain this debt must not make the project unaffordable to the clientele targeted by the sponsor. This source of capital is less common in the development of housing cooperatives for low- and moderate-income families, especially limitedequity cooperatives. In most cooperative developments targeted for these income levels, as described in Chapters 14 and 19, purchasers assume a portion of the blanket debt on the property and do not secure their own financing. The only capital provided in these types of homeownership sales is a nominal down payment or purchase price for the share.
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RAISING CAPITAL TO MEET TOTAL DEVELOPMENT COSTS
A P P E N D I X
6 A
Example of an Amortizing Loan Option I: Option II:
amortize the loan amortize the loan
fully over balance is as if a 30 balance is
Principal Interest Rate (annual) Term (years) Payment (annual) Amortization
10 year term; at end of 10 years, zero year term; at end of 10 years, $90,311.
Option I Option II --------------$100,000 $100,000 10.0% 10.0% 10 30 $16,275 $10,608 Full Balloon (Yr 10)
END OF YEAR 0 1 2 3 4 5 6 7 8 9 10
O P T I O N I ----------------------------------------BALANCE PRINCIPAL INTEREST PAYMENT 100,000 93,725 6,275 10,000 16,275 86,823 6,902 9,373 16,275 79,231 7,592 8,682 16,275 70,880 8,351 7,923 16,275 61,693 9,187 7,088 16,275 51,588 10,105 6,169 16,275 40,472 11,116 5,159 16,275 28,245 12,227 4,047 16,275 14,795 13,450 2,825 16,275 0 14,795 1,480 16,275
END OF YEAR 0 1 2 3 4 5 6 7 8 9 10
O P T I O N I I ----------------------------------------BALANCE PRINCIPAL INTEREST PAYMENT 100,000 99,392 608 10,000 10,608 98,723 669 9,939 10,608 97,988 736 9,872 10,608 97,179 809 9,799 10,608 96,289 890 9,718 10,608 95,309 979 9,629 10,608 94,233 1,077 9,531 10,608 93,048 1,185 9,423 10,608 91,745 1,303 9,305 10,608 90,311 1,433 9,174 10,608
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EXAMPLE OF A NONAMORTIZING LOAN
A P P E N D I X
6 B
Example of a Nonamortizing Loan Option I: Option II:
no amortization over the 3 year term; at end of 3 years, the loan balance is still $100,000 amortize fully over 3 year term; at end of 3 years, the loan balance is $0.
Principal Interest Rate (annual) Term (years) Payment (annual) Amortization
Option I -------$100,000 10.0% 3 $10,000 None
Option II -------$100,000 10.0% 3 $40,211 Full
END OF YEAR 0 1 2 3
O P T I O N I ----------------------------------------BALANCE PRINCIPAL INTEREST PAYMENT 100,000 100,000 0 10,000 10,000 100,000 0 10,000 10,000 100,000 0 10,000 10,000
END OF YEAR 0 1 2 3
O P T I O N I I ----------------------------------------BALANCE PRINCIPAL INTEREST PAYMENT 100,000 69,789 30,211 10,000 40,211 36,556 33,233 6,979 40,211 0 36,556 3,656 40,211
䡲
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S E V E N 7
Sources of Capital: Loans 7.1 Who are Possible Lenders? 107 7.2 Sources of Loan Funds from Public Lenders— Generally 107
7.5 Sources of Loan Funds From Private For-Profit Entities 138 7.6 Sources of Loan Funds from Private Nonprofit Entities 149 Appendix 7A 501(c)(3) Bond Terminology 218
7.3 Sources of Loans from State and Local Governments 108
Appendix 7B List of Local CDFI Organizations Financing Housing 219
7.4 Sources of Loans from the Federal Government 128
This chapter and the four chapters that follow were developed as reference tools for nonprofit sponsors, not necessarily to be read from beginning to end. Each of these chapters identifies programs that are available primarily to nonprofit housing developers. Where programs apply only to specific types of housing development—for example, multifamily rental, transitional housing for the homeless, or housing for the elderly—these restrictions are highlighted. 7.1
WHO ARE POSSIBLE LENDERS?
As discussed previously, nonprofit sponsors likely will have to seek loans from various sources: public lenders, private for-profit lenders, and private nonprofit lenders. Therefore, sponsors must be aware of all of the possible types of lenders and all of the specialized loan programs that might be available. This chapter identifies direct lenders of funds. Chapter 11 identifies additional programs, such as mortgage insurance, that sponsors may be able to use to secure loan funds from lenders highlighted in this chapter or others. 7.2
SOURCES OF LOAN FUNDS FROM PUBLIC LENDERS—GENERALLY
Public lenders generally include state and local governments (cities, counties, and municipalities) as well as the federal government. Many state and local programs, as described below, have been created from
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funds passed through by the federal or state government to local jurisdictions. Participation by public lenders in a nonprofit housing development is usually critical to the success of the project. Public lenders, depending on the program and its source of funds, often can: 1. Provide no- or low-interest loans. 2. Provide fully amortizing permanent financing with 30-, 40-, or 50year amortization periods. 3. Provide financing up to and in some cases exceeding 100 percent of the value of the property (see discussion of loan-to-value ratio in Chapter 6). 4. Accept a lien priority position behind other lenders, which is something that traditional lenders will not do. 5. Provide down-payment assistance loans that serve as permanent no- or low-interest loans as long as the low-income individual or family resides in the property. 7.3 (a)
SOURCES OF LOANS FROM STATE AND LOCAL GOVERNMENTS Community Development Block Grants
The federal government, specifically the U.S. Department of Housing and Urban Development (HUD), passes through millions of dollars to states, counties, and cities each year through the Community Development Block Grant (CDBG) program. The money is intended to be used in a wide range of community development activities directed toward neighborhood revitalization, economic development, and improved community facilities and services. Metropolitan cities of at least 50,000 people, other local governments designated as central cities of metropolitan areas, and urban counties with populations of at least 200,000 are entitled to receive annual grants directly from the federal government. States have the option of administering CDBG funds for communities that are not entitled to direct government grants. Communities have broad discretion in determining how best to use these funds. They develop their own programs and funding priorities and consult with local residents before making final decisions. All CDBG activities must either benefit low- and moderate-income people, or aid in the prevention or elimination of slums and blight, or address other serious and immediate community development needs, At least 70 percent of CDBG funds must be used to benefit low- and moderate-income people either in the form of specific assistance to low- and moderate-income
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people, or in the form of generalized programs that benefit communities with majority low- and moderate-income residents. CDBG activities that can be carried out with community development funds include acquisition of real property or demolition and clearing of property in anticipation of other land use; rehabilitation of residential and nonresidential properties; provision of public facilities and improvements, such as water and sewer, streets, and neighborhood centers; assistance to profit-motivated business to help with economic development activities; job-training, welfare-to-work, and other activities designed to help people obtain employment; public assistance to youth, the elderly, or disabled people; crime reduction activities including neighborhood watches and demolishing abandoned buildings; direct financial assistance to low-income homebuyers through methods such as down-payment assistance, subsidzed interest rates or reduced closing costs; enforcing building codes to maintain existing structures; and paying for administrative costs. These funds can be granted or loaned to individuals or entities that are furthering a community’s CDBG goals. Many CDBG communities use these funds to provide low- or no-interest property acquisition, construction and/or permanent financing for affordable housing development, and/or homeownership. Sponsors must check with their state, county, or local housing department or housing finance agency to determine the availability of CDBG funds for nonprofit housing development. (b)
Community Development Block Grants Loan Guarantees
Communities entitled to CDBG funds can use their right to future CDBG allocations to guarantee loans for housing rehabilitation, economic development, and large-scale physical development projects. Section 108 of the Housing and Community Development Act of 1974, as amended, is the loan guarantee provision of the CDBG program. Under this program, the CDBG community pledges its current and future CDBG funds as the principle security for the loan guarantee. The guarantee may secure a private loan for a borrower or a loan from a public agency. The guarantees, commonly referred to as Section 108 loans on loan guarantees, can be used to secure loans for: •
CDBG-eligible economic development activities.
•
Real property acquisition.
•
Rehabilitation of publicly owned real property.
•
Housing rehabilitation eligible under the CDBG program.
•
Related relocation, clearance, and site improvements.
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•
Construction, reconstruction, or installation of public facilities.
•
Interest payments on the guaranteed loan and issuance costs of public offerings.
•
Debt service reserves.
•
Public works and site improvements in the Colonias.
In addition, the guaranteed loan funds may be used to finance housing construction by nonprofit organizations when undertaken as part of a project financed under the Housing Development Grants (HODAG) or Nehemiah Housing Opportunity Grants programs, two formally active HUD programs. Loan guarantees are discussed in greater detail in Chapter 11. Economic Development Initiative (EDI) or Brownfield Economic Development Initiative (BEDI) grants may also be combined with loan commitments in order to pay predevelopment costs of a CDBG-funded project. EDI and BEDI grants may also be used as a loan loss reserve, to write–down interest rates, or establish a debt service reserve. As with the CDBG program, all projects and activities must principally benefit low- and moderate-income people, or assist in eliminating or preventing slums or blight, or meet other community development needs having particular urgency. (c)
The HOME Program: HOME Investment Partnerships
Congress created the HOME Program (HOME) as part of the National Affordable Housing Act of 1990 (NAHA). HOME was designed to stimulate the formation of creative local, state, and federal partnerships for the purpose of meeting community housing needs, with a special emphasis on nonprofit, community-based housing development organizations. HOME provides federal grants, through HUD, to states, units of local government, and Indian tribes to implement local housing strategies designed to increase homeownership and affordable housing opportunities for low- and very low-income Americans. As in the CDBG program, this will meet the community’s affordable housing needs. Participating jurisdictions may use HOME funds in ways that are crucial to nonprofit housing development—loans, grants, interest rate subsidies, rental assistance, security deposits, and equity. HOME funding may be used to provide incentives and support for affordable housing development that offers permanent housing for disabled homeless persons, transitional housing, and single-room occupancy housing. 1 The funds
(i) Use of HOME Funds.
1
NAHA, § 212(a)(1), as amended.
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may be used for site acquisition, site improvements, demolition, housing rehabilitation, new construction, relocation, and other necessary and reasonable activities related to the development of HOME-eligible housing, for tenant-based rental assistance, and for assistance to first-time homebuyers. Funds also may be used on a limited basis for administrative costs; however, they may not be used for public housing modernization, matching funds for other federal programs, operating subsidies for rental housing, or activities under Title VI. (See the discussion of Title VI in Chapter 8.) The Multifamily Housing Property Disposition Reform Act of 1994 (“the Act”), P.L. 103-233, made a number of changes to the HOME program. One important change simplifies the income targeting requirements for HOME funds when they are being sued for rental housing. Under the Act, not less than 90 percent of the families receiving the benefits of HOME funds must have incomes not exceeding 60 percent of area family median income. The remainder of HOME funds utilized for rental housing must go to either to: (1) families that qualify as low-income families (other than those who meet he 60 percent or area median requirement; or, (2) dwelling units occupied by such low-income families. This amended income-targeting language will make it easier for jurisdictions to comply with program rules without forfeiting the income-targeting goals of the legislation. Current HOME rules require participating jurisdictions to contribute 25 percent of the total funds drawn from the jurisdiction’s HOME Investment Trust Fund in a fiscal year with respect to rental assistance, housing rehabilitation, and substantial rehabilitation. For new construction, a 30 percent match is required. Section 205 of the 1994 Reform Act amended the matching requirement by eliminating the higher 30 percent match for new construction. Instead, there is now a 25 percent match for all funds drawn from the jurisdiction’s HOME Investment Trust Fund for “housing that qualifies as affordable housing under this title.” The 1994 Act also allows HOME administrative costs to be paid for from CDBG program funds. Similarly, the Act allows CDBG funds to be used for housing counseling in connection with tenant-based rental assistance, energy auditing, preparation of work specifications, loan processing, inspections, tenant selection, management of tenant-based rental assistance, and other services related to assisting owners, tenants, contractors, and other entities participating under affordable housing programs assisted under Title II of the Cranston-Gonzalez National Affordable Housing Act (including HOME program). (ii) HOME Matching Requirements.
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Many cost limitations are imposed by federal regulations on HOME funds. Among them are:
(iii) Limitations on the Use of HOME Funds.
2 3 4 5 6
•
Maximum per-unit cost limits—HUD has set maximum limits on the amounts of HOME funds, but not matching funds, that can be spent on a per-unit basis. For multifamily housing, the limits cannot be less than the per-unit dollar limitations of the Section 221(d)(3) program, adjusted up to 140 percent of those amounts in areas where multifamily housing construction costs exceed the national average.2 Cost limits on single-family units are set on a market-by-market basis, taking into account that HOME is for nonluxury housing with suitable amenities.3
•
Restrictions on rents for rental housing—Rental housing will qualify as “affordable housing” under HOME only if it meets six criteria: 1.
Rents do not exceed the lesser of the existing fair market rents as established by HUD for the Section 8 program or 30 percent of the adjusted income of a family use income equals 65 percent of the median income for the area, adjusted for the number of bedrooms in the unit.4
2.
No less than 20 percent of the units are occupied either by very-low-income families paying no more than 30 percent of their income toward rent or by very low-income families who are at the allowable level of rents under a project financed through the low-income housing tax credit.5
3.
The housing is occupied only by households that qualify as low-income families (80 percent or less of the area median).
4.
No person holding a Section 8 certificate or voucher is refused residency because of his or her status as a holder of the certificate or voucher.
5.
The property will remain affordable for its remaining useful life or the longest feasible period of time pursuant to a binding commitment entered into with HUD.
6.
If new construction, the property must meet energy efficiency standards.6
NAHA, § 212(d)(1); 42 U.S.C. § 12742(d)(1), as amended. Id. The Secretary can set higher or lower ceilings if necessary for a particular jurisdiction. NAHA, § 215(a)(1)(A); 42 U.S.C. § 12745(a), as amended. Restrictions on rents chargeable under the low-income housing tax credit are discussed in 9.2; see also I.R.C. § 42(g)(2). NAHA, § 212(a)(1)(A)-(F); 42 U.S.C. § 12745(a)(1)(A)-(F), as amended.
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Rents may be adjusted only if HUD finds that the adjustment is necessary to support the continued financial viability of the project.7 Moreover, the property will continue to qualify as HOME-eligible housing even if the percentage occupancy requirements are not being met because of increases in tenant income or unit turnover as long as vacancies are filled with income-eligible families. Tenants who are no longer incomeeligible will pay as rent not less than 30 percent of the family’s income; however, tenants in HOME properties financed with low-income housing tax credits are not protected by this limitation.8
7 8 9 10 11 12 13
•
Tenant-based rental assistance—HOME funds can be used for tenantbased, not project-based rental assistance. These funds can be used for grants and loans for security deposits, in combination with rental subsidies, or separately. The conditions for use of the HOME funds are that they must be an “essential element of the jurisdiction’s housing strategy,”9 the housing strategy must specify the local market conditions leading to this choice, and the eligible recipients must be selected based on written selection policies that are reasonably related to federal and local preference policies. Assistance is limited to two years and may be renewed. This does not affect the jurisdiction’s Section 8 allocation.10
•
Homeownership, HOME imposes limitations on homeownership projects financed with HOME funds. Under HOME, the sales price is to be not more than 95 percent of the area’s median sales price.11 Eligible buyers must be income-eligible, first time homebuyers.12 However, purchasers will not be disqualified as first time homebuyers if they owned a mobile home or a manufactured home that does not comply with state/local codes or has not been affixed to a permanent foundation over the past three years.13 Single parents and displaced home-makers qualify. Resales may be made to eligible low-income buyers or the jurisdiction may recapture, at the time when the property is sold, all or a portion of the HOME funds used to assist a homebuyers and may then use the recaptured funds to NAHA, § 215(a)(2); 42 U.S.C. § 12745(a)(2), as amended. NAHA, § 215(a)(3); 42 U.S.C. § 12745(a)(3), as amended. See the discussion in note 16, infra. NAHA, § 212(a)(4); 42 U.S.C. § 12742(a)(4), as amended. NAHA, § 212(b)(1); 42 U.S.C. § 12742(b)(1), as amended. NAHA, § 212(b)(2) and (3); 42 U.S.C. § 12742(b)(2) and (3), as amended. Under NAHA, each jurisdiction seeking HOME funds must develop a Comprehensive Housing Affordability Strategy (CHAS) that describes, among other things, the jurisdiction’s housing needs, housing capacity, and strategy for dealing with these issues. See NAHA, § 105; 24 C.F.R. pt. 91.
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assist other eligible homebuyers. The jurisdiction must devise resale restrictions for HUD approval.14 Newly constructed homes must meet HUD standards for energy efficiency.15 Two significant changes were made to the HOME program in 1994 concerning homeownership. Congress removed the restriction that HOME funds could be used for homeownership only when the purchaser was a first-time homebuyer. Removal of the first-time homeowner provision broadens the population eligible for HOME homeownership programs. In addition, Congress removed the restriction that all funds recaptured when HOME homeownership housing is sold must be used for future HOME homeownership activities. These funds may now be used for any HOME-eligible activity. What sets HOME apart from other federal housing programs is Congress’s inclusion of specific benefits for nonprofit housing developers. HOME provides nonprofits with an almost guaranteed access to capital. Under HOME, 15 percent of all HOME funds must be set aside for use by nonprofit housing development organizations. At the 2005 HOME appropriation level of nearly $2 billion, this provides $300 million in new money for nonprofit housing development. NAHA requires every participating jurisdiction to set aside 15 percent of its HOME allocations for use by community-based nonprofit housing development organizations, called Community Housing Development Organizations (CHDOs pronounced cho-dos), seeking to conduct allowable HOME activities in its community. If a jurisdiction does not use the nonprofit set-aside funds, it loses them. As long as they are not the owners, developers or sponsors of other housing, CHDOs may participate in other HOME-eligible activities. The HOME money committed to those other activities, however, will not count toward the set-aside. If the funds are not used by CHDO within 24 months, HUD recaptures the funds and reallocates them to other jurisdictions for nonprofit housing development. This 15 percent is a floor, not a ceiling. Jurisdictions can commit a greater percentage or even all of their HOME funds for use by CHDOs. Participating jurisdictions must make reasonable efforts to locate CHDOs that can be expected to carry out CHDO set-aside projects. However, jurisdictions having difficulty identifying CHDOs can use up to 20 percent (an amount not to exceed $150,000 in a 24-month period) of their set-aside funds for capacity building. These funds can be utilized only if (iv) Special Nonprofit Set-Aside of HOME Funds.
14 15
NAHA, § 212(b); 42 U.S.C. § 12742(b), as amended. NAHA, § 212(b)(4); 42 U.S.C. § 12742(b)(5), as amended.
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a participating jurisdiction is unable to identify a sufficient number of capable CHDOs during the first 24 months of the jurisdiction’s participation in HOME. Finally, HOME allows jurisdictions to provide operating support for CHDOs. Participating jurisdictions can use up to 5 percent of their entire HOME allocation (not just 5 percent of the CHDO set-asides) for CHDO operating support. This assistance cannot exceed $50,000 to any individual group or 50 percent of the organization’s operating budget, whichever is greater. These funds do not require a match as do the other uses of HOME money.16 A CHDO is defined as a nonprofit organization that has among its purposes the provision of decent housing that is affordable to lowincome and moderate-income people in a clearly identified geographic area. Such an organization maintains, through significant representation on the organization’s governing board and otherwise, accountability to low-income community residents and, to the extent practicable, to lowincome beneficiaries with regard to decisions on the design, siting, development, and management of affordable housing. The CHDO must have a demonstrated capacity for carrying out HOME-approved activities and a history of serving the local community or communities within which the HOME-assisted housing is to be located.17 Most jurisdictions receiving HOME funds have established a mechanism whereby nonprofits can be certified as CHDOs for purposes of HOME. In addition to the 15 percent set-aside, HOME provides CHDOs with access to significant and valuable technical assistance. Each year, HUD awards millions of dollars in technical assistance grants to organizations throughout the country. The grantees are funded to provide CHDOs with direct technical assistance and training that will strengthen their capacity to participate effectively in the HOME program. A list of these organizations can be found at www.hud.gov/communityconnections. They enable CHDOs to maintain, rehabilitate, and construct affordable housing in jurisdictions participating in the HOME program. Each participating jurisdiction is responsible for designating the CHDOs that are eligible for these services. Although CHDOs have significant access to funds and technical assistance that they never had before, they are restricted by the general 16 17
12 U.S.C. § 12750, as amended. The law allows on a temporary basis the award of CHDO funds to organizations that meet all CHDO requirements other than those for board composition. An organization receiving CHDO funds on this basis has six months from the date it receives funds whichever is earlier, to bring its board into compliance. Multicounty CHDOs are not required to include on their boards at least one low-income representative from each county that the organization serves. Moreover, community land trusts, described in 7.6(h) can qualify as CHDOs.
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HOME program limitations discussed above and by the following restrictions: If the CHDO is developing and operating rental housing, it must devise and get approval for a plan for tenant participating in the management of the housing accommodation and must develop a tenant grievance procedure, and the CHDO cannot receive more than 50 percent of its operating budget through HOME. (d)
Appropriated Funds/General Obligation Bonds/Repayment of Prior Loans
State, county, and city legislatures with active housing and community development departments or housing finance agencies often authorize these agencies to create loan programs for affordable housing development. The money for these loans usually comes from a variety of nonfederal sources, including appropriated funds or funds provided by the legislature to the government agency from tax dollars raised by the government, proceeds from bonds issued by the state for this purpose, and funds received from the repayment of previously made loans. Loans provided from these sources can be used for any purpose authorized by the legislature unless, as is the case with certain types of bonds, federal laws restrict the use of bond proceeds. (Bonds commonly used in housing development are discussed in the next section.) Legislatures often authorize housing agencies to use these funds to meet specific housing needs in their jurisdiction, such as rehabilitation of properties for low-cost rental or development of affordable homeownership housing opportunities. Moreover, legislatures usually provide their housing agencies with broad discretion, allowing them to adjust loan terms to meet the specific needs of the project, perhaps by providing low-interest loans for a short period of time or market rate loans for a long period of time. Governments often seek to leverage their funds with funds from other government entities (city funds may be leveraged with state funds) and with private loans and equity. Nonprofit housing developments commonly are financed using a mix of appropriated funds, CDBG funds, funds from bond proceeds (as discussed below), and/or proceeds of a private loan from a for-profit lending institution. As an example, in the State of Maryland, the legislature has authorized the Department of Housing and Community Development to use proceeds of state general obligation bonds, revolving funds of prepayments and repayments of previously made loans, federal subsidies, and tax-exempt revenue bonds and notes18 to provide: •
18
Low-interest construction and permanent financing for multifamily rental housing developments. See the discussion of tax exempt bonds Chapter 6, 6.3(d)(iv).
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•
Below–market interest rate mortgage loans for low- and moderateincome families wishing to purchase a single-family home.
•
Low-interest financing for rehabilitation and energy conservation, to improve and preserve single- and multifamily housing.
•
Low-interest financing for construction or acquisition and rehabilitation of a variety of types of housing for people with special needs.
In many of these programs, the department has the discretion to provide special loan terms to make the project feasible, including no interest payments during the construction period, loans at a 100 percent loan-to-value ration,19 and loan terms in excess of 30 years. In addition, many of these programs require local jurisdictions (cities and counties) to commit their resources to a project as a condition of state participation. (e)
Bond Financing—Generally
Bonds issued by state and local governments and their agencies can provide a valuable source of funds for the development of affordable housing, both single-family and multifamily. Generally, jurisdictions with the authority to issue bonds can issue two kinds of bonds: 1. General obligation bonds, which are secured by the full faith and credit of the government issuer. 2. Revenue bonds, which are payable from and secured by the revenues generated from the projects they finance. Bonds used for housing generally are revenue bonds, secured by the project’s revenues, not the full faith and credit of the government. Technically, these revenue bonds fall into the category of tax-exempt or qualified private activity bonds (see Section f) and taxable private activity bonds (see Section g). Regardless of the type of bond issued for an affordable housing development, sponsors should be aware of two important factors related to bond financing: 1. The costs of issuing bonds are substantial. Government issuers usually will pool together a number of housing projects, fund them with proceeds from a common issuance, and split the issuing costs among the borrows. A single nonprofit housing development project can rarely afford to absorb the full costs of a bond issuance and maintain project affordability. 19
See the discussion of loan-to-value ratios in Chapter 6, 6.3(d)(iv).
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2. Credit enhancement usually is required for a revenue bond issuance because the project is secured only by the project’s revenues and not by the full faith and credit of the government issuer. (Credit enhancement is discussed in Chapter 11.) The better the credit enhancement or security for repayment, the higher the bond rating in the bond markets, the lower the risk to the bondholders, and the lower the interest rate that the issuer must pay to the bondholders. For housing bonds, credit enhancement has typically been provided by federal, state, or private mortgage insurance, bond insurance, bank letters of credit, or insurance company guarantees. (f)
Tax-Exempt Bond Financing
Generally, bonds that are issued by state and local governments to pay for the costs of building government facilities or financing government operations are tax-exempt: interest paid to bondholders is not subject to income tax. This tax-exempt status allows the government to secure credit at interest rates lower than the market would bear and provides bondholders with tax-free investments. Bonds issued for most housing, however, are issued to finance privately owned for-profit or nonprofit housing, not government operations or government-owned facilities. Therefore, these bonds, referred to as private activity bonds, are taxable unless they meet the requirements of a “qualified private activity bond” under Section 141 of the Internal Revenue Code (the Code).20 The major categories of qualified private activity bonds commonly used for housing development are: Mortgage revenue bonds, exempt-facility bonds, redevelopment bonds, and Internal Revenue § 501(c)(3) bonds. These bond categories are discussed in the following sections. (i) Mortgage Revenue Bonds: Single-Family Homes, Condominium Units, Cooperatives. Mortgage revenue bonds are issued primarily to help
finance the purchase by low- to moderate-income homebuyers of singlefamily homes, two- to four-family properties, and individual condominium units. 21 These bonds can also be used for the rehabilitation or improvement of single-family homes and condominium units and for the development of limited-equity cooperatives. Proceeds from the bonds are used by the government issuers to make loans directly to qualified borrowers or to purchase loans made by the private lenders. Reductions in interest rates that result from the use of tax-exempt bonds are passed 20 21
I.R.C. § 141. A two- to four-unit property must be used by the borrower as a principle residence, and a one unit must have been occupied by the owner for at least five years prior to the bond-financed mortgage.
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through by the government to the qualified borrowers in the form of lower interest rates. S INGLE F AMILY (1–4 UNITS) AND C ONDOMINIUM U NITS
Certain restrictions apply when mortgage revenue bonds are to be used to finance single-family (1–4 units) and condominium unit purchases. These funds must be earmarked for first-time homebuyers or families that have not owned a home in the prior three years.22 This restriction, however, does not apply to purchases of homes in targeted areas,23 or to home improvement and rehabilitation loans. In addition, the purchase price of a unit cannot exceed 90 percent of the average home purchase price for the areas, or 110 percent if the home is located in a targeted areas of economic distress. These limits are adjusted upward for two-, three-, and four-family homes and for whether the homes are new or existing. The Internal Revenue Service (IRS) publishes “safe harbor” limits or prices that the developer can aim for that would be safely within the allowable purchase prices for that area. These funds also carry income restrictions. The annual income of the borrower may not exceed 115 percent of the median family gross income for the state or area in which the home is located, whichever is greater. If the property is located in a targeted area, at least two-thirds of the financing provided must go to borrowers with incomes no higher than 140 percent of the higher of state or area median family gross income. The remaining one-third may be lent without any income restrictions. Home improvement and rehabilitation loans also have restrictions. Home improvement loans may not exceed $15,000 and must be used to finance alterations, repairs, or improvements to an existing residence that substantially protect or improve the basic livability or energy efficiency of the property.24 Rehabilitation loans are only available for properties owned by the borrower or for the acquisition and rehabilitated property where the borrower will be the first occupant after the rehabilitation is completed.25 L IMITED-E QUITY C OOPERATIVES
Proceeds from mortgage revenue bonds can be used to acquire and rehabilitate a multifamily property in order to establish a limited-equity cooperative. Under Code Section 143(k)(9), a limited-equity cooperative is any 22 23
24 25
I.R.C. § 143(d). Targeted areas include (1) qualified census tracts where at least 70 percent of the families have annual incomes no higher than 80 percent of the statewide median income, and (2) areas of chronic economic distress as designated by the states. I.R.C. 143(k). Id.
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cooperative housing corporation26 in which the appreciation available to a shareholder when reselling a cooperative share is limited to the consideration paid for the share, payments made to improve the unit, and payments made to reduce principle on the outstanding debt. To have access to proceeds from a tax-exempt mortgage revenue bond, the cooperative must irrevocably elect to set aside a portion of its cooperative units for low-income use27 and to waive the rights of shareholders to include mortgage interest and property tax payments as itemized deductions in their federal and state tax returns.28 Limited-equity cooperatives are discussed more fully in Chapter 16. Exempt-facility bonds can be issued to finance “qualified residential rental projects.” Generally, these projects include any property characterized by nontransient use: detached housing, row houses, high rises, or other buildings with one or more units, or the residential portion of a mixed-use project.29 Under the exempt-facility provisions of the Internal Revenue Code, even multiple properties owned by the same owner and financed under a common plan may be treated as a single project. Like mortgage revenue bonds, exempt-facility bonds are subject to significant use restrictions. The first restriction concerns unit set-asides for low-income use. Developers of qualified residential rental projects must elect either a 20-50 or a 40-60 set-aside by the time of the bond issue. The 20-50 set-aside requires that at least 20 percent of the project’s units must be occupied by tenants with annual incomes of 50 percent or less of area median gross income. The 40-60 set-aside requires that at least 40 percent of the units (25 percent in New York City) must be rented to tenants at or below 60 percent of area median gross incomes.30 A set-aside tenant will continue to be treated as a low-income tenant even if the tenant’s income increases or if there is a decrease in household size, unless the tenant’s income has increased to more than 140 percent of the area median gross income in effect at the time when the tenancy began.31 If a tenant’s failure to qualify as low-income places a project in noncompliance with the set-aside requirement, no penalties will be assessed if the next vacant project unit of comparable or smaller size is rented to a new, qualified low-income tenant and the project is returned to compliance.32 (ii) Exempt-Facility Bonds: Multifamily Rental Housing.
26 27 28 29 30 31 32
Defined in I.R.C. § 216. These set-asides are the same as in I.R.C. § 142 (exempt-facility bonds). I.R.C. § 143(k)(9). I.R.C. § 142. These percentages apply to four-person households and must be adjusted for households of other sizes. I.R.C. § 142(d)(3)(B). Id.
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The exempt-facility bond also provides borrowers with an add-on to the 20-50 or 40-60 rules. This add-on would allow tenant income to increase up to 170 percent of the maximum qualifying income and not place compliance at risk. Under this alternative, at least 15 percent of the units required to be set aside under the 20-50 or 40-60 rules must be occupied by tenants with incomes no greater than 40 percent of the area median, adjusted for household size. Moreover, the borrower must limit the rent charged such a tenant to no more than 30 percent of the maximum qualifying income for that tenant, adjusted for family size.33 Rents also cannot exceed one-third of the average rent for tenants who are not low-income and have units of comparable size.34 The set-aside restrictions begin on the date when 10 percent of the units of a project area occupied (or the date when the bond is issued, if later), and end on the latest of: •
Fifteen years after the date when 50 percent of the units are first rented.
•
The first date on which there are no outstanding tax-exempt private activity bonds for the project.
•
The termination date of any Section 8 rental assistance payments to the project.35
Property owners who receive proceeds from an exempt-facility bond issuance to complete their development must file annual reports with the U.S. Treasury Department proving that the project complies with the setaside requirement. Failure of an owner to file the report can result in financial penalties. 36 If a project fails to comply with the set-aside requirements or is not being used as rental property, then interest on the bonds will become taxable retroactive of the date of issuance. Furthermore, interest on the bond-financed mortgage will no longer be deductible by the borrower.37 If the compliance with the applicable requirements is restored, the loan interest will again become deductible but interest on the bonds will remain taxable.38 Exempt-facility bonds are unlike any other qualified private activity bond program in that the housing developer who uses these bonds automatically qualifies for 4 percent low-income housing tax credits. If 50 percent or more of a building is financed by exempt-facility bonds, the entire building is eligible for the credits without affecting the amount of low-income 33 34 35 36 37 38
I.R.C. § 142(d)(4). Id. I.R.C. § 142(d)(2). I.R.C. § 6652(j). I.R.C. §§ 142(e) and 150(b). Id.
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housing tax credits available from the state to other projects. 39 Even though the state credit cap is unaffected, the state or other tax credit issuing agency must review the project for feasibility and the project must commit to a 30-year extended use restriction, as required of all other tax credit projects. Low-income housing tax credits are discussed more fully in Chapter 9. (iii) Redevelopment Bond: Acquisition and Rehabilitation of Real Property.
Redevelopment bonds are authorized by state law and are designed to induce private development in certain neighborhoods. Governments may issue these bonds to finance important aspects of a nonprofit’s housing development project including: 1. The acquisition of real property by a governmental unit. 2. The clearance and preparation for redevelopment of land acquired by a governmental unit. 3. The rehabilitation of real property acquired by a governmental unit. 4. The relocation of occupants of existing real property acquired by a governmental unit.40 As with the other qualified private activity bonds, restrictions are imposed on the use of proceeds from redevelopment bonds. Aside from the eligible uses for the proceeds, noted above, the funds can be used only in a “designated blighted area,” as determined by the governing body of the local government. Factors that must be considered in determining whether an area is blighted include the substantial presence of: 1. Excessive amounts of vacant land previously occupied by buildings. 2. Abandoned or vacant buildings. 3. Substandard structures. 4. Vacancies. 5. Delinquencies in real property tax payments.41
39 40 41
I.R.C. § 42(h)(4)(B). Proceeds of redevelopment bonds may not be used for the construction of property or the enlargement of an existing building. I.R.C. § 144(c). I.R.C. § 144(c)(3). The blighted area must have a minimum size of 100 acres that are contiguous and compact. However, if no more than 25 percent of the bond-financed property is given to a single person or related persons, the minimum size can be as low as 10 acres. Furthermore, a designated blighted area may not contain more than 20 percent of the total assessed value of all real property within the governmental unit’s jurisdiction.
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Unlike the other qualified private activity bonds discussed above, the payment of debt service or redevelopment bonds must be primarily secured by taxes of general applicability imposed by a general-purpose governmental unit (not project-income), or a pledge of increased real property tax revenues earned because of an increase in property values resulting from the redevelopment.42 (iv) “501(c)(3) Bonds”: Residential Rental by Code Section 501(c)(3) Organizations. Code Section 501(c)(3) bonds can be issued by a 501(c)(3) organi-
zation in order to finance the organization’s activities, as long as the funds are spent for activities related to the exempt purpose of the organization. Under the provision stated in Code Section 145, 501(c)(3) organizations that are organized, in whole or in part, for the purpose of developing affordable housing can issue bonds to develop new residential rental facilities, to substantially rehabilitate existing housing, or to own or develop residential rental properties as defined under the exempt-facility provisions of Code Section 142.43 The 501(c)(3) bonds may be more attractive to a nonprofit than the other qualified private activity bonds because they provide the nonprofit with the option of developing residential rental housing without the strict set-aside restrictions of Code Section 142 (exempt-facility bonds). Moreover, the bonds can be issued without affecting the state’s volume cap on the amount of tax-exempt bonds that can be issued, as discussed earlier in this section.44 With ever-increasing competition for Low Income Housing Tax Credit allocations coupled with a public-policy trend away from rental housing in many parts of the country, nonprofit developers increasingly are scrambling to put together below-market financing for multifamily rental housing. 501(c)(3) tax-exempt bond financing may provide the answer in certain situations.45 As described in Section f above, the interest received by the purchaser of tax-exempt bonds is exempt from federal and, in many cases, state income taxes. Generally, each state has a specific annual cap, or maximum, from the federal government on the amount of federally tax-exempt debt it can issue. This form of “private activity” bond financing can be available automatically with a 4 percent tax credit for affordable housing. However, competition for private-activity bond financing can be stiff and often is 42 43 44 45
I.R.C. § 144(c). I.R.C. § 145(d)(2)(A-C). With a substantial rehabilitation of existing properties, the rehabilitation must be completed within three years after the property is acquired. I.R.C. § 146(g)(2). Much of the substance of this section is paraphrased from an article written by MaryAnn Dillon when she was with The Enterprise Foundation’s Cornerstone Housing Corp. that appeared in the Enterprise Foundation’s Cost Cuts magazine, Summer 1997.
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allocated through annual funding cycles. State housing finance agencies, local redevelopment agencies, and public housing authorities are typical issuers of this kind of debt. In contrast, 501(c)(3) tax-exempt bond financing is issued by a government agency, not on behalf of the government but on behalf of a nonprofit organization exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code. Interest paid to bond purchasers is exempt from federal taxation, as with private activity bonds, but no Low Income Housing Tax Credits (LIHTC) are available. In fact, the LIHTC cannot be used with properties financed with 501 (c) (3) bonds. Unlike private activity bonds, there is no state cap on how much can be issued in a given year, so there is not the same competition as for private activity bonds. In fact, until 1997, there was a lifetime cap on the amount of 501(c) (3) bonds any one organization could have outstanding at any time. That cap no longer exists. 501(c)(3) bonds require a high level of sophistication, which brings with it a myriad of investment bankers and attorneys. Transaction costs may be very high, often 3 to 4 percent of bond proceeds. Given the need to sell the bonds for what is often a single housing deal, 501(c)(3) bonds generally require loans of at least $3 to $4 million to be worth the effort. This may make this form of financing impractical for many smaller nonprofit deals. However, multiple properties can be bundled together in a single tax-exempt issue. Despite these limitations, 501(c)(3) financing can provide extraordinary flexibility. First of all, it is available, generally, whenever your project requires it, whereas tax credits often are allocated only once or twice a year. Second, it offers extremely attractive interest rates, often over a 30-year term. While those rates, of course, will fluctuate with the bond market, they have recently hovered around 4.5 percent. Third, the financing process is relatively fast. A transaction that is really ready to go could close within three months of starting the process. Many 501(c)(3) bonds are purchased by government-sponsored entities such as Fannie Mae and Freddie Mac after being rated as “investment grade” by rating agencies such as Standard & Poor ’s (S&P) or Moody’s. Therefore, underwriting standards for these bonds tend to be quite strict. Rating agencies grade bonds from AAA to BBB. Below BBB is generally not considered investment grade. The higher the grade, the lower the interest rate charged. The most important characteristic for an investment-grade bond is usually its debt coverage ratio, or the money a project has left over after paying all its operating expenses and debt service. In order to achieve these investment grades, S&P, for example, requires a considerable debt service coverage, generally 1.5 to 1. This means that the property must
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have 50 cents left over after paying all its operating expenses and debt service for every dollar borrowed. Often, fairly high operating, replacement, and debt service reserves also are required. Credit enhancement, in the form of a letter of credit or insurance that will reduce the risk of loss to the purchaser of the bonds should the property fail to pay its debts, also may be required to mitigate risk. Some public issuers require ratings of AA or AAA, which mandate credit enhancement. In addition to the grading of each deal, the financial and management strength of the borrower is of critical importance. Property management ability is carefully critiqued. Only nonprofits with fairly substantial balance sheets and established track records will be successful in attracting 501(c)(3) financing. For example, years ago when I worked at the Enterprise Foundation. Cornerstone Housing Corporation, then a supporting organization of The Enterprise Foundation, joint ventured with smaller nonprofits on several tax-exempt bond deals, matching its financial and development strength with local expertise in specific markets. The IRS requires that nonprofit owners of rental housing developed with tax-exempt bond financing set aside either 20 percent of the units for households earning less than 50 percent of the area’s median income or 40 percent of the units for households earning less than 60 percent of the area median. A nonprofit must either indicate its intent to finance with 501(c)(3) bonds in its IRS exemption application or request bondfinancing authority from IRS, and, further, must choose one of these two thresholds-of-affordability set-asides. Rents must be held at a reasonably affordable level “consistent with other federal programs.” This generally is interpreted to assume rents of no more than 30 percent of the selected income thresholds. Tax-exempt bond financing works extremely well with larger mixedincome properties, and in some markets can be the only form of financing required. In many cases, subordinate debt is permitted. Given the 1.5 to 1 debt service coverage typically required for the bonds, there’s generally ample room for a second loan, but the lender will have to forego some traditional lender rights, such as the ability to foreclose. Once a project is identified, a nonprofit owner will contact a potential issuer, usually a state or local housing finance agency, to “induce” its project. This simply means that the agency’s board passes a motion to consider financing the project for up to a specified dollar amount. The inducement resolution is a necessary prerequisite to seeking tax-exempt financing. While the agency is working on the inducement resolution, the nonprofit begins to put together its financing team. This team includes an experienced bond attorney and a financial advisor, usually an investment
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banker or consultant with experience underwriting tax-exempt deals with the government agency expected to issue the bonds. In the early stages of this process, the financing team must apply to a rating agency and secure an appraisal, market study, environmental review, and physical-needs assessment. Once the government agency has passed its inducement resolution, the agency will put together its own team of tax-exempt specialists, including issuer’s counsel, bond counsel, an underwriter, underwriter’s counsel, and trustee. In a best-case circumstance, the nonprofit’s financial advisor will become the issuer ’s bond underwriter, but this may not always be the case. The issuer’s counsel represents the public agency’s interests in negotiating the transaction. The bond counsel provides advice that informs all parties, but is hired by and represents the issuer. The bond counsel provides legal opinions on compliance with the tax code and preparing many of the key loan and bond documents. The underwriter reviews the financial strength of the transaction, working with the rating agency, and actually sells the bonds in the capital markets. Underwriter ’s counsel prepares disclosure information required under securities law. Finally, the trustee, generally a bank, manages and disburses the bond proceeds. The trustee is active with the project for the life of the bonds, and controls all or most of the operating revenues and disbursements on behalf of the owner. Beyond all the players, a nonprofit sponsor must understand the legal documents unique to tax-exempt bonds. One of the most important is the trust indenture, written by underwriter’s counsel. Very similar to a deed of trust in a more traditional real estate transaction, the trust indenture lays out the duties and obligations of the issuer and the trustee, the payment characteristics of the bonds, and default provisions, among other things. In effect, the trust indenture serves as a blueprint for the entire life of the bonds, and it is the trustee’s bible. If the indenture does not say so, the trustee will not do it. Because tax-exempt bonds are securities under federal securities law, they require another unique document called the preliminary official statement, or POS. The POS, which ultimately becomes the official statement once the bonds are priced in the marketplace, is intended to provide potential purchasers of the bonds with enough information so that they can make a reasonable judgment about investing. The POS describes the project, including recent and projected financial performance, the ownership structure, the form of the bonds, potential risks, and events of default. Because the POS is a form of public disclosure, its contents are tightly regulated by securities law. There must be reasonable assurances that information provided is reliable, and various
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parties to the transaction, including the borrower, will be required to certify to the accuracy of the disclosures for which they are responsible. These certifications are an extremely serious matter in securities law. Remember, while the issuer selects many members of the team, the non-profit sponsor must pay the bill. Securities law allows that only 2 percent of the bond proceeds can be used for “cost of issuance,” which includes due diligence items as well as the costs of the bond-financing team. Any costs over 2 percent, and there generally are plenty, must be provided by the borrower from a source other than the bond proceeds. The issuer and borrower need to be on the same team, working together to contain the costs of this huge cast of characters. The first step as a nonprofit in using 501(c)(3) tax-exempt bonds is to assemble a team, a financial advisor, and counsel. Check with other nonprofit housing developers who have used 501(c)(3) bonds. What advisors do they recommend? Make sure that your advisors have specific experience with the kind of property you are seeking to finance. More importantly, make sure that they have a good working relationship with the issuer you are considering. There may be several choices for an issuer. Issuers vary considerably in their levels of expertise in multifamily bond financing. Some states have excellent housing finance agencies with extensive multifamily experience. In other communities, a local jurisdiction, such as a county or city housing finance agency, may be a better bet. Often, the transaction costs are lower than with state agencies, but the trade-off may be a less experienced issuer. Be sure that your project meets the social goals of the issuer; otherwise, there will be little interest. Get some sense of whom the issuer likely will assign to the team. Do these professionals have good reputations? Remember, you do not control them, but they have tremendous influence over your project. Having the right team in place is key to success, and having the right project, and the right financial and management strength to oversee it, is indispensable. Key terminology used with 501(c)(3) bonds can be found in Appendix 7A. Nonprofits need to be aware that, even if their affordable housing development could qualify for tax-exempt financing, securing the bond financing is not a sure thing. Obtaining tax-exempt financing for an affordable housing development is a political process. The nonprofit must get its bond issue request approved by the government unit issuing the bonds,46 and this process is much more complicated than simply seeking a government resolution supporting the bond issuance. The nonprofit must convince the government issuer that the state should use its limited, tax-exempt, (v) Additional Considerations for Qualified Private Activity Bonds.
46
I.R.C. § 147(f).
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qualified private activity bonding authority to fund its project. In 1986, Congress, in an effort to put a cap on the amount of federal tax dollars lost through the issuance of tax-exempt bonds, limited the right of jurisdictions to issue most qualified private activity bonds to the greater of $50 per capita or $150 million per year.47 In jurisdictions that regularly reach this volume cap on their tax-exempt bonds, securing approval for a single project may not be easy. Even if approval of the issuer can be secured, the nonprofit also has to get the approval of the local government unit that has jurisdiction over the property sought to be developed or rehabilitated with bond proceeds.48 (g)
Taxable Bond Financing
Jurisdictions that can issue tax-exempt, qualified private activity bonds also can issue taxable private activity bonds. This financing mechanism, virtually ignored prior to 1986, recently has become a common vehicle for financing multifamily housing development because traditional financial institutions have pulled out of multifamily lending. In fact, taxable bonds are a common funding source for projects involving the lowincome housing tax credit. Although taxable bonds carry higher interest rates than tax-exempt bonds do, they are a source of capital that the government can assist the developer in accessing, and taxable bond proceeds do not carry the restrictions imposed on projects funded with qualified private activity bonds. 7.4
SOURCES OF LOANS FROM THE FEDERAL GOVERNMENT
Contrary to popular belief, HUD rarely acts as a lender for housing development or redevelopment. HUD generally provides grants, insures loans from other lenders, and provides monthly rental assistance, as discussed in Chapter 11. In the rare cases where it directly funds projects, HUD usually provides capital advances—interest-free loans that are repayable only if the housing ceases to be used for the purpose intended during a specified period of time or as part of a much larger initiative. The current HUD programs that utilize capital advances are discussed in Sections 7.4(a) and 7.4(b). Loan funds available under special initiatives are described in Sections 7.4(c), and (d). Programs of the other major source of loans from the federal government, the USDA Rural Housing Services, formerly the Farmer’s Home Administration (FmHA), are detailed in Sections 7.4(e) through 7.4(g). 47 48
I.R.C. § 146. In 2000, Congress enacted legislation raising the caps to $75 per capita or $225 million, and they indexed future increases to inflation starting in 2003. I.R.C. § 147(f).
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(a)
Supportive Housing for the Elderly
Under this program, also referred to as the Section 202 program, HUD provides capital advances to nonprofit housing developers and consumer cooperatives in order to expand the supply of housing that offers supportive services for the elderly. The advances are interest-free, and repayment is not required so long as the housing remains available for at least 40 years for very-low-income elderly people (people earning less than 60 percent of the area’s median income for a family unit with at least one person 62 years of age or older). The funds can be used for construction, moderate or substantial rehabilitation, reconstruction, and acquisition from the FDIC.49 Sponsors must provide a range of services—meals, transportation, health-related services, and so on. Project rental assistance may be available to cover the difference between the HUD-approved operating cost per unit and the amount that the resident pays. The rental assistance does not include an amount for debt service. Rental assistance is discussed in Chapter 11.50 (b)
Supportive Housing for People with Disabilities
Under this program, referred to as the Section 811 program, HUD provides funds to nonprofit housing developers in order to expand the supply of housing that offers supportive services for persons with disabilities. The characteristics of this program are almost identical to those of the Supportive Housing for the Elderly program. Capital advances are made to eligible private nonprofit sponsors to finance the development of rental housing with supportive services for the disabled. The advance is interest-free, and repayment is not required so long as the housing remains available for at least 40 years for very-low-income people (people earning less than 60 percent of the area’s median income), ages 18 to 62, who have disabilities. Project rental assistance may be available to cover the difference between the HUD-approved operating cost per unit
49
50
Under this program, HUD imposed cost limitations based on per-unit costs in that market area. For FDIC properties, limitations will include the cost of acquisitions, rehabilitation and improvements, and land. If a sponsor can produce the housing for less than the limits, the sponsor can keep up to 50 percent of the savings in a special housing account for supplementary services, project reserves, or other approved purposes. This percentage is increased to 75 percent for owners who add energy efficiency features. The law also states that Davis-Bacon wage rates apply for any properties designed for 12 or more elderly persons; however, they can be waived where laborers or mechanics donate their services in order to lower construction costs. Source: HUD.
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and the amount that the resident pays. Rental assistance is discussed in Chapter 11.51 (c)
Community Renewal Initiative—America’s Renewal Communities, Urban Empowerment Zones, and Enterprise Communities (RC/EZ/EC)
HUD’s Community Renewal Initiative targets tax incentives, performance grants and loans to designated low-income areas, called Renewal Communities (RCs), Urban Empowerment Zones (EZs), and Enterprise Communities (ECs) to create jobs, expand business opportunities and support people looking for work. Through this initiative, an urban or rural economically distressed area develops a comprehensive strategy for economic opportunity and revitalization, and applies to HUD for an RC, EZ, or EC designation. Once designated, they can receive preference for certain federal programs. Within each RC/EZ/EC, residents decide what projects and activities should occur in their own neighborhoods. They also help local officials, businesses, and leaders develop benchmarks that determine how funds will be allocated and describe anticipated results. HUD and USDA designated original EZs and ECs during the Clinton Administration. HUD reenergized this Initiative in December 2001 by designating 40 urban and rural RCs and 8 new urban EZs (Round III EZs). These 48 new designees will revitalize their communities using a business tax incentive package valued at $22 billion nationwide but few to no grant funds. Very few of these incentives can help in the development of affordable housing, except that they may be eligible for additional LIHTCs by the state because of this designation. •
What renewal communities receive—Renewal Communities are eligible for the following benefits:52 1.
Zero-percent rate for capital gain from the sale of qualifying assets.
2.
A 15 percent wage credit to employers for the first $10,000 of qualified wages.
3.
A “commercial revitalization deduction” that allows taxpayers to deduct either: a.
51 52
50 percent of qualifying expenditures for the taxable year in which a qualified building is placed in service, or
Id. www.hud.gov/offices/cpd/economicdevelopment/news/ Tax_Relief_Act_of_2000_Summary.pdf (last modified 2001)
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b.
•
53 54 55 56
All of the qualifying expenditures, allowable ratably over a 10-year period beginning with the month in which such building is placed in service.
4.
$35,000 of Section 179 expensing for qualified property.
5.
expansion of the Work Opportunity Tax Credit with respect to individuals who live in a Renewal Community.
What Round III EC/EZs receive: Round III empowerment zones will be eligible to receive the following benefits:53 1.
Use of the EZ employment credit, which allows EZ businesses to claim a credit of as much as $3,000 per qualified EZ employee each year.
2.
Increased expensing (up to $35,000 from $20,000) under Section 179 of the Internal Revenue Code. EZ businesses can claim this deduction on depreciable property such as equipment and machinery;
3.
Higher limits on tax-exempt EZ facility bonds ($130 million available from 2002 through 2009).
4.
Nonrecognition of gain on roll-over of EZ investments and increased exclusion of gain on the sale of EZ stock.
5.
Use of the Work Opportunity Tax Credit, (WOTC) available through December, 2005 unless further extended by Congress. This is a credit up to $2,400 against federal taxes for businesses for each new hire from groups that have high unemployment rates or other special employment needs.54
6.
Use of Qualified Zone Academy Bonds (QZABs), which school districts with low-income populations use to save on interest costs associated with financing school renovations and repairs as well as investing in equipment and up-to- date technology.55
7.
Use of the Welfare to Work Tax Credit, (WTW) assuming that Congress extends this credit beyond 2001. This is a two-year credit against Federal tax liability for businesses that hire long-term welfare recipients. This credit is up to $3,500 in the first year and $5,000 in the second year for each new hire.56
www.hud.gov/offices/cpd/economicdevelopment/news/faq3.pdf Learn more about the WOTC at www.uses.doleta.gov/wotcdata.asp. Learn more about QZABs at www.qzabs.com. Learn more about WTW at www.uses.doleta.gov/wtw.asp.
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8.
(d)
Possible preferential consideration for benefits under federal programs that have given preferential consideration to EZ applicants, including the Weed and Seed Program (Department of Justice), Youthbuild (HUD), 21st Century Community Learning Centers (Department of Education), One-Stop Capital Shops (Small Business Administration), and Youth Opportunity Grants (Department of Labor).
Brownfields Economic Development Initiative (BEDI)
BEDI provides funds and loan guarantees to clean up and redevelop environmentally contaminated industrial and commercial sites, commonly known as “brownfields.” Successful redevelopment requires rehabilitating these sites for industrial, commercial, retail, and residential uses, but cleaning up the contamination at these sites can send development costs skyrocketing. BEDI provides important “start-up” funds. HUD, along with 15 other federal agencies, is committed to focusing attention on brownfields redevelopment and to providing local governments with the tools to achieve this goal. The BEDI brings together four different types of existing HUD assistance that communities can use to clean up and revitalize potentially contaminated sites: annual formula grants allocated to states and larger local jurisdictions through Community Development Block Grants (CDBG), lower-interest loan guarantee authority available through the Section 108 Loan Guarantee program, accompanying competitive grants through the Economic Development Initiative program, and additional competitive grants provided through the Lead-Based Paint Hazard Control program. For FY 2005, HUD has earmarked $25 million BEDI funds to brownfields activities. However, these amounts do not include awards made for other brownfields projects funded pursuant to the normal operation of these programs, as well as through CDBG and Section 108. (e)
The USDA Rural Housing Service (RHS)
Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Loans can be made by approved lenders and guaranteed by RHS or made directly by RHS. Funds can be used to build, repair, renovate, or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. Applicants for loans may have an income of up to 115 percent of the median income for the area. Families must be without adequate housing but be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories. (i) Guaranteed Loans.
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Approved lenders under the Single Family Housing Guaranteed Loan program include: •
Any State housing agency.
•
Lenders approved by:
HUD for submission of applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities.
The U.S. Veterans Administration as a qualified mortgagee.
Fannie Mae for participation in family mortgage loans.
Freddie Mac for participation in family mortgage loans.
•
Any FCS (Farm Credit System) institution with direct lending authority.
•
Any lender participating in other USDA Rural Development and/ or Consolidated Farm Service Agency guaranteed loan programs.
Loans are for 30 years. The promissory note interest rate is set by the lender. There is no required down payment. The lender must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt. Under the Section 502 program, housing must be modest in size, design, and cost. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and RHS thermal and site standards. New Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and RHS thermal and site standards. Existing manufactured housing will not be guaranteed unless it is already financed with an RHS direct or guaranteed loan or it is Real Estate Owned (REO) formerly secured by an RHS direct or guaranteed loan. Rural Housing Direct Loans are loans that are directly funded by the Government. These loans are available for low- and verylow-income households to obtain homeownership. Applicants may obtain 100 percent financing to purchase an existing dwelling, purchase a site and construct a dwelling, or purchase newly constructed dwellings located in rural areas. The purpose of this loan is to provide financing at reasonable rates and terms with no down payment. Mortgage payments are based on the household’s adjusted income. These loans are commonly referred to as Section 502 Direct Loans. Section 502 loans are primarily used to help low-income individuals or households purchase
(ii) Direct Loans.
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homes in rural areas. Funds can be used to build, repair, renovate, or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. Applicants for direct loans from RHS must have very low or low incomes. Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI. Families must be without adequate housing but be able to afford the mortgage payments, including taxes and insurance. These payments are typically within 22 to 26 percent of an applicant’s income. In addition, applicants must be unable to obtain credit elsewhere yet have reasonable credit histories. Elderly and disabled persons applying for the program may have incomes up to 80 percent of area median income (AMI). Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The interest rate and amount of subsidy are determined by family income as percentage of AMI so that a family pays from 22 to 26 percent of their income for principal, interest, taxes, and insurance (PITI) up to an amount not exceeding the promissory note rate. There is no required down payment. RHS must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt. Under the Section 502 program, housing must be modest in size, design, and cost. Modest housing is generally defined as housing costing less than the HUD Section 203 (b) loan limits as of 9/30/98. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and RHS thermal and site standards. Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and RHS thermal and site standards. (f)
Rural Cooperative Housing Loans
Loans to provide cooperative-type housing projects in rural areas for persons with low and moderate incomes are available from the USDA Rural Housing Service (RHS). Loan funds cannot be used to finance individual cooperative units within the projects. Loans may be made for housing in open country and in communities of up to 20,000 people, but applicants in towns of 10,000 to 20,000 should check with their local RHS office to see whether the agency can serve them. Eligible properties for these loans primarily made to build, purchase, or repair housing, usually consisting of duplexes, garden-type, or similar multi-unit dwellings. The housing must be modest in size, design, and cost, but adequate to meet the tenants’ needs.
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Eligible uses of these loan funds are to buy and improve the land on which the buildings are to be located, provide streets and water and waste disposal systems; supply appropriate recreation and service facilities, install laundry facilities and equipment and landscape, including lawn seeding, shrubbery and tree planting, or other measures to make the housing an attractive addition to the community. Funds may not be used for nursing, special care, or other institutional types of housing. Eligible borrowers of these funds are consumer cooperatives that will organize and operate the cooperatives on a nonprofit basis. Borrowers must agree to provide cooperative units for occupancy by low- and moderate-income individuals or families. They must be unable to finance the housing with personal resources and unable to obtain credit from other sources on conditions and terms that permit affordable charges to eligible tenants. The maximum repayment period is 50 years. Fees for application packaging and the required 2 percent operating capital may be included in the loan as part of the development cost. Loans can be up to 100 percent of the appraised value or the development cost, whichever is less. Fees are not charged for appraisals or loan processing. However, the applicant does pay for legal services necessary to guarantee a satisfactory title to the site, as well as for other incidental loan-closing costs. These expenses may be included in the loan. Each loan will be secured in a manner that adequately protects the financial interest of the government. A first mortgage will be taken on the property purchased or improved with the loan, except for public or quasi-public organizations that cannot give a real estate mortgage. In those instances, the security will be determined by RHS. RHS district directors will provide application forms and information on how to complete and file applications. (g)
Rural Rental Housing Loans
Loans for rental housing in rural areas are available from USDA Rural Housing Services (RHS) to provide living units for people with low and moderate incomes and for those age 62 and older. Loans may be made for housing in open country. Communities of up to 20,000 population should check with their local RHS office to see whether the agency can serve them. The properties that are eligible for rural cooperative housing loans also are eligible for this program. Rural rental housing loan funds also can be used for the same purposes as rural cooperative housing loan funds.
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Rental housing loans, however, can be provided to individuals, trusts, associations, partnerships, limited partnerships, state or local public agencies, consumer cooperatives, and profit and nonprofit corporations. Nonprofit corporations may be organized on a regional or multicounty basis. Borrowers must agree to provide rental units for occupancy by lowand moderate-income individuals or families and for people age 62 or over. The renters must be unable to finance the housing with personal resources and, with the exception of state or local public agencies, be unable to obtain credit from other sources on conditions and terms that would permit them to rent units to eligible families. If the borrower is a profit or limited-profit organization, the assets of the individual members will be considered in determining whether other credit is available. In some cases, rent charges must be within limits that eligible occupants can afford to pay. Borrowers are required to deposit rental income in special accounts and establish reserve funds to meet long-term capital replacement needs. Limited-profit borrowers are allowed an 8 percent return on their initial investment in a project. The maximum repayment period is 50 years for projects designed for those 62 and older, and 40 years for all other projects. All applicants are required to provide initial operating capital equal to at least 2 percent of the cost of the project. For nonprofit organizations and state and local public agencies, fees for application packaging and the 2 percent operating capital may be included in the loan as part of the development cost. Loans to nonprofit organizations and state or local public agencies can be up to 100 percent of the appraisal value or development cost, whichever is less. Loans to all other applicants are limited to not more than 97 percent of the appraisal value or development cost, whichever is less. District directors of the RHS will provide information on how to complete and file applications. Fees are not charged for appraisals or loan processing. However, the applicant pays for legal services necessary to guarantee a satisfactory title to the site and for other incidental loan-closing costs. These expenses may be included in the loan. Each loan will be secured in a manner that adequately protects the financial interest of the government. A first mortgage will be taken on the property purchased or improved with the loan, except for public or quasi-public organizations that cannot give a real estate mortgage. In those instances, the security will be determined by the RHS.57
57
Id.
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(h)
Self-Help Housing Loans: Single Family
The RHS makes loans for self-help housing, including site development, and grants for technical assistance to help low-income families build homes in rural areas. Rural areas include open country and communities that are rural in character and not closely associated with urban areas. With self-help housing, individual houses are built under the supervision of a construction supervisor by a group of 6 to 10 families who will live in the dwellings. In short, a group mutually helps each other with the guidance of a construction expert. Any small group of low-income families may qualify, providing they cannot individually afford to build modest houses by customary methods. Each family must be able to repay a loan for the cash cost of the house. Under this program, groups will decide how members will share labor, how records will be kept of time worked, and how labor will be exchanged on a basis fair to all members. Depending on skills of participants, a group may decide to do all the construction, or contract for work that cannot be done easily, such as excavating, installation of wiring or plumbing, and dry-wall finishing. Self-help housing loans may be used to buy materials and to pay for any skilled labor and contracted work that the families are unable to perform. If necessary, loans may be used to buy building sites and to prepare them for construction activity. The RHS will not only provide the necessary loans but will conduct reconstruction meetings that will offer basic instructions in construction, familiarization with the self-help approach, and discussion of planning, construction, and maintenance of housing. The RHS will make loans to eligible nonprofit organizations to develop home sites to be sold to applicants on a nonprofit basis, and will award technical assistance grants to qualified organizations to pay for technical assistance and construction supervision.58 An applicant organization must show that:
58
•
A need for self-help housing clearly exists in the area.
•
Personnel can be hired to successfully carry out a technical assistance program.
•
Funds are not available from other sources to provide these services.
A public body or a public or private nonprofit corporation with the legal, administrative, and technical capacity to provide supervisory assistance to help low-income families build homes in rural areas by the self-help method may qualify for technical assistance grants from RHS.
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If the applicant is a nonprofit corporation, it must also have either successful experience in the field of self-help housing or a sponsoring organization with this experience or with proven ability in related business fields. Organizations may use technical assistance funds: •
To hire the personnel to carry out a program of technical assistance for self-help housing.
•
To pay necessary and reasonable office and administrative expenses.
•
To make essential equipment such as power tools available to families participating in self-help housing construction.
•
To pay fees for training self-help group members in construction techniques or for other needed professional services.
An initial agreement with an organization usually will provide for not more than $100,000. The amount will be based on estimates of reasonable technical assistance costs per house as determined by RHS. Agreements may be made for up to two years. The group must provide the RHS with monthly financial and construction progress reports. Funds may not be used for hiring personnel to perform actual construction work for families participating in a self-help project, or for buying real estate, building materials, or other property for participating families. Loan applications are accepted by the RHS on an individual basis from each family participating in a self-help housing program. Loan applications are filed in the RHS county office serving the area where the housing will be located.
7.5
SOURCES OF LOAN FUNDS FROM PRIVATE FOR-PROFIT ENTITIES
Sponsors must look to private for-profit lenders for capital. Participation by these lenders in a nonprofit housing development usually is a crucial element because of limited public resources. As discussed earlier, many nonprofit housing developments are completed using loans from numerous for-profit and non-profit lenders as well as grants and equity. Most private for-profit entities specialize in certain types of real estate lending, such as construction or permanent loans. A sponsor must be aware of the loans or products that each lender will likely offer and apply to those lenders for the types of loans that they historically provide.
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(a)
Owner Take-Back Financing
A sponsor may be able to secure the financing necessary to purchase a property from the owner who is selling the property. This financing, referred to as owner take-back financing, is most common where: 1. The owner needs to provide a purchaser with an incentive to purchase the property for whatever reason, for example, a favorable interest rate and/or longer loan term. 2. The owner needs to provide financing because limited financing is available for this type of transaction, as has been the case for multifamily housing since the late 1980s. Generally, owner take-back financing is provided in the form of an acquisition loan that will be repaid in the short term (12 to 24 months). As with any lender, an owner will seek to secure a first priority lien position as a condition to providing take-back financing.59 However, if the sponsor provides the owner with this priority, the sponsor is unlikely to secure additional loans from more traditional lending institutions (commercial banks, savings and loans, and so on) for its project until the owner is paid off. As discussed in Chapter 6, traditional lenders are wary of making loans when other lenders have a prior claim against the property. When the prior claim is held by an owner who has little experience acting as a lender and a track record that is unfamiliar to the lending community, traditional lenders generally will stay away from the project. This could make the entire project, especially a property rehabilitation, infeasible. Sponsors, where possible, must be careful to negotiate owner take-back financing that allows more traditional lending institutions to secure a prior lien position over the owner if funds are provided.60 (b)
Commercial Banks
Commercial banks generally are federally chartered members of the Federal Reserve System and are insured by the Federal Deposit Insurance Corporation (FDIC). Commercial banks tend to be the largest and most visible banks in most communities. For many reasons, including the fact that commercial banks are subject to the Community Reinvestment Act (CRA),61 commercial banks may be an excellent source for affordable housing development loans. 59 60 61
See the discussion of lien priorities and positions later in this chapter. Source: USDA RHS. See the discussion of the Community Investment Act earlier in this chapter.
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Historically, the sources of funds for commercial banks have been, in large part, customer checking accounts. Funds from savings accounts and certificates of deposits with relatively short terms (30 days to 3 years) constitute the remainder of the bank’s capital. Because cash from checking accounts is a short-term investment by the customer, commercial banks historically have not provided loans for long periods of time. Therefore, short-term acquisition and construction loans have been the most common form of loans provided by commercial banks for real estate development. “Mini-perms”—loans with one- to three-year terms—also are common products of commercial banks lending for real estate development. Permanent loans have never been a large part of commercial banks’ business, but increased federal regulation of commercial banks, increased capital requirements, and the collapse of the real estate market throughout the country have caused many banks to shy away from providing real estate loans at all over the past five years. Commercial banks that have made significant CRA commitments to community lending may be a nonprofit organization’s only hope of securing real estate development financing of any nature from commercial banks.62 (c)
Savings and Loans
Today, most savings and loan associations (S&Ls) are federally chartered members of the Federal Housing Finance Board (FHFB) and are insured by the Federal Savings and Loan Insurance Corporation (FSLIC). S&Ls historically have been the prime real estate lenders in the country, providing most of the financing for one- to four-family homes. Over the years, the primary sources of funds for S&Ls have been customer savings accounts and certificates of deposit. These longer-term customer investments have provided S&Ls with the ability to make permanent, long-term loans. Federal regulations actually require S&Ls to commit a significant amount of their deposits to real estate.63 The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)64 provides nonprofit housing developers with unique loan opportunities through S&Ls. As part of Congress’s response to the S&L crisis and the multibillion-dollar federal bailout of the S&L industry,
62
63 64
Many commercial banks seeking to expand into new markets have made commitments to the Federal Reserve Board that they will provide a certain level of loans to specific, historically underserved borrowers and neighborhoods. Often, these commitments include promises to consider and fund, if appropriate, nonprofit housing development. 24 C.F.R. 563.512. 12 U.S.C.A. § 1430(j) and related regulations; 12 C.F.R. pt. 960.66.
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Congress required S&Ls to establish an affordable housing program under the auspices of the FHFB. The program has three components: 1. The Community Investment Funds (CIF) loan program, which is not a competitive program. Under this program, any member of the FHFB may borrow money from its district Federal Home Loan Bank (FHLB) at a discounted rate. The member then passes this discount on to the borrower in the form of a lower interest on the loan. The member borrows the money for a 30-year period so it can lend the money on a “permanent” basis at the reduced rate. 2. The Affordable Housing Program (AHP), which is a competitive program. The program was designed to provide deep interest-rate subsidies on some loans, to finance homeownership by families with incomes at or below 80 percent of the median income for the area. A second purpose was to finance the purchase, construction, or rehabilitation of rental housing, with at least 20 percent of the units occupied by and affordable for very-low-income households for the remaining useful life of the housing development or for the mortgage term. A very-low-income household is considered to be one with an income of 50 percent or less of the area median. Affordable housing for very low-income households means rents charged to tenants shall not exceed 30 percent of the adjusted income of the family, adjusted for family size. Some FHLB districts have a special set-aside for homeownership down payment assistance as well. 3. The Community Investment Program (CIP) is a targeted housing and economic development loan program to provide funding for community-oriented mortgage lending, which means providing loans: •
To finance home purchases by families whose incomes do not exceed 115 percent of the area median income.
•
To finance the purchase or rehabilitation of housing for occupancy by families whose incomes do not exceed 115 percent of the area median income; to finance commercial and economic development activities that benefit low- and moderate-income (defined as 80 percent of the area median income) households, or activities that are located in low- and moderate-income neighborhoods (defined as a neighborhood in which 51 percent or more of the households are low- to moderate-income households); and to finance projects that include a combination of these activities.
CIP funds are available as advances, or loans, to members of the FHLBanks. CIP advances generally are priced slightly below the FHLBank’s
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regular advance rate. FHLBanks also may issue AAA-rated letters of credit under the CIP. Letters of credit are described more fully in Chapter 11. CIP is a flexible program that members have used to finance a wide range of targeted housing and economic development projects, including: •
Day care centers.
•
Special needs housing.
•
Single-family housing.
•
Multifamily housing.
The AHP program is described in greater detail below: The purpose of the Affordable Housing Program is to subsidize the interest rates on advances or loans made by the Federal Home Loan Bank (FHLBank) system to a member bank and to provide direct subsidies to these banks. The banks then pass these subsidized interest rates and direct subsidies on to nonprofit housing developers to help them to support the development of affordable homeownership and rental housing.65 AHP is a competitive program administered by each of the 12 FHLBank Districts. Advances under this program may be used in conjunction with other sources of funds such as the Community Investment Program and Low-Income Housing Tax Credits, as well as other federal, state, local, or private assistance programs.
(i) Affordable Housing Program (AHP).
Subsidies under the AHP, awarded through a competitive process, must be used:
(ii) Use of Subsidies.
•
To finance the purchase, construction, and/or rehabilitation of owneroccupied housing for very-low-, and low- and moderate-income households, or
•
To finance the purchase, construction, and/or rehabilitation of rental housing, at least 20 percent of the units of which will be occupied by and affordable for very-low-income households for at least 15 years.
(iii) Competitive Process. Nonprofits apply to one of the 12 FHLBank Dis-
tricts for AHP funds through a local bank that is a member of that District Bank. Each FHLBank District determines the number of competitive
65
The Finance Board issued and published comprehensive revisions to the regulations for the AHP in the Federal Register on August 4, 1997, Vol. 62, No. 149, beginning on page 41812. See also 66 FR 8256, Feb.18, 2000.
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application periods it will have per year and the dates of those application periods. Applications must pass basic eligibility requirements first and then be scored, as described below. Projects are first evaluated to determine whether they meet the following eligibility requirements: 1. Owner-occupied or rental housing. 2. Project feasibility and the need for subsidy. 3. Ability of the project to begin using FHLBank assistance within 12 months. 4. AHP subsidies will be used for eligible costs. 5. Retention: how long units will remain in housing stock. 6. Project sponsor qualifications. 7. Compliance with fair housing laws and regulations. 8. Additional District FHLBank eligibility requirements—an FHLBank may require projects to meet one or more of the following additional eligibility requirements:
The project is located in the FHLBank’s District.
The member institution submitting the application has made use of a FHLBank credit product, other than AHP or CIP, within the previous 12 months.
The amount of subsidy requested does not exceed limits established by the FHLBank as to maximum amounts of AHP subsidy per member, per project, or per project unit.
A project must meet all of the eligibility requirements in order for the application to be scored by the FHLBank.
Then, the project must compete based on the 100-point scoring system designed by the District FHLBank. The scoring system is based upon the following nine scoring criteria, with each criteria allocated a minimum of 5 points, with the exception of targeting, which must receive a minimum of 20 points: 1. Use of donated government-owned or other properties. 2. Sponsorship by a not-for-profit organization or government entity. 3. Targeting. 4. Housing for homeless households. 5. Promotion of empowerment.
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6. First District Priority—The District FHLBank may choose one or more of the following criteria: special needs, community development, first-time homebuyers, member financial participation, disaster areas, rural, urban, economic diversity fair housing remedy, community involvement, lender consortia, in-district projects. 7. Second District Priority—Projects that meet a housing need defined and recommended by a FHLBank’s Advisory Council and adopted by its Board of Directors. 8. AHP subsidy per unit. 9. Community stability. The amount of AHP funds available per year was set by FIRREA as a percentage of the FHLBanks’ net income in the prior year. Currently, the FHLBanks are required to contribute 10 percent of net earnings or $100 million per year, whichever is greater. The FHLBank System also allows for each District Bank to operate a homeownership set-aside of AHP Funds. Eight of the twelve FHLBanks have established Homeownership Set-Aside Programs by setting aside annually up to the greater of $1.5 million or 15 percent of its required AHP contribution to assist low- and moderate-income households to become homebuyers. Set-aside funds may be used for down payments, closing costs, or rehabilitation assistance, or counseling costs in connection with a household’s purchase or rehabilitation of an owner-occupied unit. Households must be low- to moderate-income, complete a homebuyer-counseling program, and meet other requirements set by the District FHLBank in order to be eligible to receive AHP homeownership set-aside funds. No household can receive more than $10,000 in these set-aside funds. A homebuyer who purchases or rehabilitates a home with AHP set-aside funds must keep that home for five years.
(iv) Homeownership Set-Aside Program.
FHLBank staff members, called Community Investment Officers (CIOs) are available to provide technical assistance to members, not-for-profits, and other community-based sponsors in the development of plans to use CIP, AHP, or CICA funds. FHLBanks’ Community Investment Officers (CIOs) and their phone numbers are listed in Exhibit 7.1. For more information, see www.fhlbanks.com. Since its inception, the AHP has subsidized about 147,000 housing units with $574 million on subsidy. More than 70 percent of those units benefited families with incomes lower than 50 percent of their area
(v) Technical and Application Assistance.
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medians. Average subsidy per unit was $3,853, 73 percent rental, 27 percent ownership.66 (d)
Life Insurance Companies
Life insurance companies are not regulated like commercial banks and savings and loans; instead, life insurance companies are free to invest their money in any type of investment, real estate or otherwise. Historically, however, life insurance companies have been one of the largest sources of long-term permanent financing for major real estate investments such as apartment buildings and shopping centers. E XHIBIT 7.1 Federal Home Loan Bank Community Investment Officers FHLBank of Atlanta www.fhlbatl.com Lynn M.Brazen Community Investment Officer (404) 888-8177
[email protected] FHLBank of Boston www.fhlbboston.com John T. Eller Community Investment Officer Senior Vice President (617) 292-9677
[email protected] FHLBank of Chicago www.fhlbc.com Eldridge Edgecombe Senior Vice President, Community Investment Officer (312) 565-5705
[email protected] FHLBank of Cincinnati www.fhlbcin.com Carol M. Peterson Senior Vice President, Housing & Community Investment (513) 852-7615
[email protected]
66
Source: FHFB.
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E XHIBIT 7.1 Federal Home Loan Bank Community Investment Officers (continued) FHLBank of Dallas www.fhlb.com Bruce Hatton Community Investment Officer (214) 441-8586 FHLBank of Des Moines www.fhlbdm.com Curt Heidt Community Investment Officer Vice President (515) 281-1175 FHLBank of Indianapolis www.fhlbi.com Pat Gamble-Moore Community Investment Officer Vice President (317) 465-0369 FHLBank of New York www.fhlbny.com Eric Amig Bank Relations (212) 294-1764 FHLBank of Pittsburgh www.fhlb-pgh.com John Bendel Community Investment Officer Senior Vice President (412) 288-3407 FHLBank of San Francisco www.fhlbsf.com James E. Yacenda Community Investment Officer Vice President (714) 633-1271 FHLBank of Topeka www.fhlbtopeka.com Christopher Imming First Vice President, Community Investment (785) 233-0507
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Life insurance policyholders pay regular premium payments to their insurers over an extended period of time. These premium payments for life insurance coverage provide the company with a steady, stable, multiyear flow of capital that can be accurately estimated. On the payout side, the life insurance companies can easily estimate the future timing and amount of life insurance benefits that they will have to pay out based on the statistical age and health of the policyholders. Thus, by the nature of their business, life insurance companies are perfectly situated to provide permanent financing. The companies’ steady and reliable flow of capital allows them to provide commitments for loans to borrowers years in advance of a project’s completion and to make long-term loans. (e)
Pension Funds
Pension funds are similar to life insurance companies in that they also have a steady and reliable flow of capital. Employees and employers make regular payments to the pension fund for use by the employee upon retirement. These payments, like life insurance premiums, provide the pension fund with a steady, stable, multiyear flow of capital that can be accurately estimated. Like the payout of life insurance benefits, the future timing and amount of pension benefits that the fund will have to pay can be easily estimated, based on the ages of the employees. Unlike life insurance companies, however, pension funds are even more liquid because they pay out over a period of time, not in one large lump sum. Pension funds also are perfectly situated to provide permanent financing. With assets estimated at over $3 trillion, pension funds can potentially provide one of the largest sources of financing for affordable housing today. Historically, pension funds have avoided affordable housing and other community-based investments because they were seen as high-risk, low-yield investments that were inconsistent with the funds’ fiduciary duty to their contributors. Moreover, unlike life insurance companies, pension funds are often heavily regulated by the government. In fact, some pension funds are limited in the amount of real estate investments that they can participate in and the level of risk allowed in real estate investment. The role of pension funds in affordable housing development is changing. The track record of funds that have made social investments has been good, demonstrating returns comparable to the average return earned by pension funds nationwide. The potential exposure to increased risk has been managed through the use of proper underwriting criteria for loans, credit enhancements, and partnerships with government agencies at the federal, state, and local levels.
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With many government treasuries in poor fiscal condition, the nation’s pension funds are receiving increasing pressure to help fill the gap in financing for affordable housing and other community development and economic investments.67 The means used by pension funds to make socially desirable investments vary. For example, the AFL-CIO Housing Investment Trust, one of the largest funds (over $3.6 billion), funnels pension money toward union-only construction projects. In so doing, the fund not only makes a profitable investment in community development but also creates jobs for the plan’s participants, thereby increasing the income generated for the fund and benefiting retirees more than an alternative investment might. During the past 20 years, Trust investments have produced more than 75,000 units of multifamily housing, and generated an estimated 75,000 jobs in construction and related business. Working through a nonprofit organization, the fund that seeks to acquire greater access to limited federal funds aimed at nonprofits and affordable housing and to provide advantages to property owners who may want to contribute property to the organization in exchange for tax benefits. Other funds have made similar investments. The New York City Retirement Systems has invested over $1 billion since 1981 to provide mortgage financing for affordable housing, to finance the rehabilitation of existing low-income rental units and to purchase SBA loans. The Public-Private Apartment Rehabilitation (PPAR) Program is it’s largest active program. As of March 2005 the program (for both of its lenders—J.P. Morgan Chase & the Community Preservation Corporation) has financed 11,012 affordable apartments (cost of $208 million) and committed to an additional 3,073 units (cost of $123 million). Similarly, United Methodist Board of Pension and Health Benefits’ affordable housing and community development program has grown from an initial investment of $25 million in 1990 to more than $900 million. To date, that program has seen a 7.5 percent return on the total investment, with loan defaults at less than one-tenth of 1 percent. CALPERS, the California Public Employee Retirement System, the largest in the nation, has invested more than $1 billion in its single family real estate investment program since 1990. This large source of investment has received a significant amount of focus in the past decade. A group of funders, academics and foundations 67
The Department of Labor also provided the affordable housing development movement a boost when it amended Prohibited Transaction Exemption (PTE) 82–87 allowing ERISA-controlled pension funds to make mortgage loans on residential, multifamily buildings so long as the loan was eligible for purchase by Fannie Mae, Ginnie Mae, or Freddie Mac, or the residential loan was insured by the FHA.
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have come together to pursue a strategy for expanding this funding source. A fascinating series of papers, including identification of public pension funds across the country that are poised to begin such activities, can be found at http://urban.ouce.ox.ac.uk. In 1994, HUD began its own demonstration program to attract pension fund investment in affordable multifamily housing through the use of Section 8 project-based rental assistance, Section 8 Community Investment Demonstration Project. Under the demonstration, selected pension funds received a set-aside of Section 8 funding authority. They selected projects to be assisted and submitted them to HUD for approval. New construction and substantial rehabilitation projects were eligible. Participating pension funds made or purchased loans to finance the construction or rehabilitation of affordable, multifamily rental housing. Each participating fund receives a Section 8 set-aside to be used for rental assistance payments. After completion of construction or rehabilitation, a Housing Assistance Payments Contract was executed between the owner and HUD. These rental assistance payments helped support the rents for the units occupied by lower-income families. Under the program, at least 50 percent of appropriated funds had to be used for multifamily properties owned by HUD or for those with HUD-held mortgages. No more than 50 percent of units in any project could be assisted. In addition, no single pension fund awarded more than 50 percent of the total Section 8 set-aside authority. Unfortunately, no new committments have been permitted after FY 1998. 7.6
SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
Sponsors must look to private nonprofit lenders for capital to use in conjunction with public and private for-profit loans. As with the private forprofit lenders, participation by these lenders in a nonprofit housing development usually is a crucial element because of limited public resources. Like private for-profit lenders, nonprofit lenders specialize in certain types of real estate lending, for example, construction or permanent loans. A sponsor must be aware of the loans or products that each lender will likely offer and apply to specific lenders for the types of loans they historically provide. (a)
The Enterprise Foundation
The Enterprise Foundation, recently renamed Enterprise Community Partners, is a national, nonprofit housing and community development organization created in 1982 by Jim and Patty Rouse. The foundation’s
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mission is to see that all low-income people in the United States have the opportunity for fit and affordable housing and the resources to move up and out of poverty into the mainstream of American life. Over the past 20 years, The Enterprise Foundation has worked in partnership with more than 1,500 local nonprofit organizations and dozens of state and local governments to revitalize neighborhoods through developing affordable housing, building community and individual assets, and enhancing community safety. Because the foundation believes that housing is the platform upon which residents can build healthy communities, Enterprise has helped develop 150,000 new and renovated homes in more than 200 locations through the commitment of more than $2 billion in loans, grants, and equity investments. Its experience and relationships with government, financial institutions, foundations, and the private sector allow the foundation to marshal both public and private resources and serve as a catalyst to bring local partnerships together in new ways. Lending activities within the foundation provide a critical link between the program services area of the foundation and the community-based groups which it serves. The loan funds available within the foundation currently total approximately $100,000,000. Acting as an intermediary, the Foundation has primarily borrowed from a variety of sources in order to relend these monies to the community groups the foundation has worked with in various capacities. These groups include private foundations (through Program Related Investments, better known as PRIs), various federal, state, and local governments, commercial banks, and individuals. Loan requests are generated nationally through The foundation’s local offices, or in its headquarters in Columbia, Maryland. 68 Loan requests typically must include the following information: Borrower overview. • Project overview. •
Collateral description. • Loan repayment terms. •
Source of loan funds. • Importance of program action. •
•
68
Tax status.
The foundation’s local offices and local office directors can be contacted at: www.enterprisefoundation.org.
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•
Report status.
•
Prior history with Enterprise Foundation.
The foundation is not a permanent lender. It offers flexible, shortterm, low-interest financing products to nonprofits working to renew communities. Preferences are given to loan requests originating from Enterprise offices and subsidiaries. A list of these offices and organizations can be found at www.enterprisefoundation.org. Enterprise provides short-term loans primarily for the predevelopment, acquisition, and construction of affordable housing. Other loans for community facilities, child care centers and lines of credit may also be available. Interest rates are below those of traditional lenders and generally range from between 6 and 9 percent. Enterprise Mortgage Investments Inc. (EMI), an approved Fannie Mae lender, offers first-mortgage financing products to meet permanent development financing needs. A deeper discussion of EMI can be found in Chapter 11. The majority of the funds available to the foundation to lend have specified requirements surrounding permissible uses, qualified borrowers (with limited exception the foundation primarily lends to 501(c)(3) organizations), repayment terms, and geographic references. Obviously, the foundation’s preference is to limit these types of restrictions as much as possible to allow prospective borrowers as much flexibility as possible. As it is the mission of the foundation to serve low-income people and help those individuals up and out of poverty, there are specific foundation requirements that funds are lent only to households at 80 percent of median income and less, with greater emphasis upon the very lowincome households. In addition, the foundation does not charge any fees in the delivery of a loan product. Generally, loans which are made through the foundation are originated at 6 percent and depending upon the type of loan originated do not extend more than two years. Enterprise loan dollars have been lent primarily for real estate– secured transactions, typically for predevelopment and acquisition financing. Other utilization of the foundation funds have been funding construction projects, revolving lines of credit (real estate secured), working capital lines of credit, and small (less than $100,000) mini-permanent financing. For more information, go to www.enterprisefoundation.org. (b)
Local Initiatives Support Corporation
When the sponsors of affordable housing developments are Community Development Corporations (CDCs), they may be able to secure loans or other financial assistance from the Local Initiatives Support Corporation (LISC). Since its inception in 1979, LISC has grown to be the nation’s
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largest community development support organization, working with more than 830 CDCs in 30 cities and regions of the country. LISC’s mission is to help local people rebuild and revitalize deteriorated neighborhoods across America. LISC accomplishes this goal by providing financing and technical expertise to neighborhood-based groups that develop affordable housing, spur commercial development, create jobs, and expand other services that improve the quality of life in low-income communities. Currently, LISC is working to create and expand the availability of affordable housing in several ways. During the past 20 years, its rental housing program, by securing grants and loans for affordable housing projects, has resulted in the building or renovation of tens of thousands of rental units. Much of this success has been aided by the enactment in 1986 of the federal Low Income Housing Tax Credit, which has helped attract significant corporate investment to neighborhood-based rental housing development.69 In addition, LISC is developing homeownership programs in an effort to support community-based developers in the production of homes for sale. By building or renovating homes, by providing purchasers with low-interest mortgages, and by counseling them on how to buy and maintain a property, LISC is helping families to secure a financial stake in their neighborhood and their future. Recently, the Home Improvement Industry Affordable Housing Coalition, along with Fannie Mae, established a fund to support a new LISC national homeownership initiative. This program, entitled Homestart, will help CDCs develop and finance hundreds of affordable homes in various cities across the nation. LISC’s support of community development extends well beyond financial development. Its training program helps CDCs achieve its goal of neighborhood renewal more rapidly and efficiently by sponsoring courses for CDC staff on the topics of residential real estate development, community and organizational development, and economic development. Through its “Development Team” strategy, LISC also works with local business and government to identify deteriorated neighborhoods that are likely to recover and to identify and organize local leadership. Furthermore, realizing that the presence of retailers and small local businesses must go hand in hand with the creation of affordable homes, LISC is striving to support CDCs in the second step of self-sufficiency for lowincome neighborhoods and the creation of long-term stability through commercial development.
69
See the discussion of the tax credit in Chapter 9.
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LISC currently has programs in place in 30 cities across the country. Each program is served by LISC staff and a Local Advisory Committee. As a new program is launched, national LISC matches the dollars the Advisory Committee raises locally. Once established, local programs recommend projects to LISC’s national board of directors. With board approval, national LISC then commits funds to support these CDCsponsored ventures.70 (c)
Living Cities (National Community Development Initiative)
The Living Cities (National Community Development Initiative) (Living Cities) is an unprecedented partnership that provides financial and technical support to nonprofit community development corporations engaged in locally driven efforts to improve physically and economically distressed inner city neighborhoods. Living Cities combines resources from 15 major national corporations and foundations, the U.S. Department of Housing and Urban Development, the U.S. Department of Health and Human Services, and scores of local public and private organizations. Together, these entities give a major boost to community development groups working to build housing, spur economic revitalization, and provide employment opportunities and other essential services that will help restore a decent quality of life in these neighborhoods. (i) How Does Living Cities Work? Living Cities created a mechanism through
which major corporations, foundations, and the federal government can invest in the revitalization of urban neighborhoods. The investments and contributions are managed by the Local Initiatives Support Corporation (LISC) and The Enterprise Foundation in 23 cities. They act as intermediary mechanisms that assemble and invest national resources in local community renewal efforts. Using Living Cities resources, LISC and Enterprise work with CDCs and other neighborhood-based organizations, local foundations, banks, corporations, and state and local governments to bolster the institutional growth of CDCs, support concerted, coordinated efforts of local partnerships, and attract resources and new funders to the field. Living Cities funds may be available for loans in these cities:
70
Source: LISC. To find out whether LISC has a program in your area or for more information about its programs, you may write to Local Initiatives Support Corporation, 733 Third Avenue, New York, NY 10017, call (212) 455-9800, or visit www.LISCNET.ORG
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Atlanta (E) Baltimore (E) Boston (L) Chicago (L) Cleveland (E) Columbus, Ohio (E) Dallas (E) Denver (E) Detroit (L) Indianapolis (L) Kansas City, Missouri (L) Los Angeles (L)
Greater Miami (L) New York City (L) & (E) Newark, New Jersey (L) Philadelphia (L) Phoenix (L) Portland, Oregon (E) San Antonio (E) San Francisco Bay Area (L) Seattle (L) St. Paul (L) Washington, DC (L) & (E)
(The letter in parentheses indicates which intermediary—LISC, Enterprise, or both—will manage the Living Cities investment in the listed location.) For more information, see www.livingcities.org. (d)
Institute for Community Economics
The Institute for Community Economics (ICE) was established in 1967 with the goal of promoting community development, especially in lowerincome communities. Toward this end, ICE provides technical assistance to both urban and rural community development groups, conducts research on technical matters relating to community development, and disseminates news and information to local development groups and government agencies. ICE also works extensively to help provide capital to lowerincome communities in need of community development funds. ICE has established its own loan fund and has actively assisted in the formation of over a dozen loan funds nationwide. The ICE Revolving Loan Fund (“ICE Fund”) was founded in 1979 to bring together those who were in need of capital with those who were interested in community investment but lacked the technical expertise and experience to identify and manage community investment opportunities directly. Investors in the ICE Fund provide loan capital and in return receive timely payments of principal and interest from the ICE Fund’s borrowers. Since its inception, the ICE Fund has experienced steady growth and a strong record of financial performance. The fund had made over 380 loans totalling over $35 million to community groups across the country. Approximately 80 percent of these loans were made to low-income housing development projects, 10 percent were to cooperative businesses, and 10 percent were to community services such as health centers, cultural centers, and soup kitchens.
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ICE’s principal lending goes to community land trusts, limited equity cooperatives, and community-based nonprofit organizations creating housing that is permanently affordable to people with lower incomes. Funds from the RLF are commonly used to finance land acquisition and the acquisition, construction, and rehabilitation of housing. Other frequent uses include the acquisition of office space or other property by a nonprofit community service organization. •
Eligible borrowers—Community Land Trusts (CLTS), limited equity cooperatives, or other community-controlled or community-based non-profit organizations—that is, 501(c)(3).
•
Interest rates—Typically between 6 and 9 percent (as of June 30, 2000). This range is adjusted periodically based in the RLF’s cost of funds.
•
Fees—1–2% of the loan amount.
•
Collateral:
•
First mortgage lien or first deed of trust with assignments of agreements affecting the real estate, where appropriate (rents, leases, occupancy agreement.) Subordinate financing is possible whereby a local financial institution offers acceptable firstmortgage financing, but for policy or other reasons cannot provide the full financing.
Assignment of the receivable/source of repayment for bridge loans.
Loan types include:
Construction loan (rehabilitation) Projects: Affordable housing developments with special emphasis placed on those that are part of a land trust or are otherwise designed to be permanently affordable. Housing may be a cooperative, affordable rental, lease-to-purchase, or affordable for-sale housing. Amount: No minimum; maximum per RLF loan policy ($715,000 as of June 30, 2000). Terms: From 6 to 24 months, based on a construction completion schedule; interest only monthly until completion, principal upon completion or sale of residences.
Mini-Permanent Loan (Balloon) Projects: Same as construction loan (rehabilitation). Amount: Up to $500,000. Terms: Typically 3 to 5 years with an amortization period of 10 to 30 years.
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Permanent Mortgage Loan Projects: Same as construction loan (rehabilitation). Amount: $100,000 to maximum per RLF loan policy ($715,000 as of June 30, 2000). Terms: Fully amortizing loans (length to be determined based on fund availability, up to a maximum of 30 years).
Bridge Loan Projects: Property acquisition or project financing, secured by real estate where an identifiable repayment source is acknowledged and assigned OR working capital secured by a committed source of organizational support (a grant or contract payment). Amount: Up to $250,000 for project/ financing secured by real estate OR up to $100,000 for working capital secured by receivable (a minimum loan amount of $5,000). Terms: 6 to 12 months, based on projected receivable payment.
Facilities Loan Projects: Construction and/or permanent financing of facilities for organizations that create affordable housing for people with lower incomes, with special emphasis placed on those that are part of a land trust. Amount: $100,000 to maximum per RLF loan policy ($715,000 as of June 30, 2000) Terms: Same as standard construction or mini-permanent loan products.
For more information, see www.iceclt.org. (e)
The Low Income Investment Fund
The Low Income Investment Fund (LIIF) is dedicated to creating pathways of opportunity for low-income people and communities. LIIF fosters healthy communities by providing a bridge between private capital markets and low-income neighborhoods. By investing capital and providing technical assistance to community development organizations, LIIF spurs economic advancement for the very poor. As a national community development financial institution (CDFI), LIIF is a steward for capital invested in housing, child care, education, and other communitybuilding initiatives including workforce development. Through a family of funds—the Affordable Buildings for Children’s Development (ABCD) Fund, the Child Care Facilities Fund (CCFF), Making Space for Children, the New York Child Care Seed Fund, and the Revolving Loan Fund (RLF)—LIIF encourages a comprehensive approach to the challenges that face low income communities.
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In its 19-year history, LIIF’s lending and technical assistance have helped hundreds of community organizations serving the nation’s hardest-to-reach populations. To date, LIIF has provided capital and technical assistance totaling over $353 million in 35 states across the nation. LIIF’s assistance, in turn, has leveraged investments in poor communities of over $3.0 billion—an impressive 8 to 1 leveraging ratio—and has supported: •
44,300 units of low income and special needs housing.
•
Nearly 12,000 child care spaces.
•
1,125 student spaces in educational facilities.
•
1.2 million square feet of commercial space.
LIIF operates nationally, but focuses its work in three core market areas: Northern California, Southern California, and the New York metropolitan area—areas that comprise nearly 20 percent, or one-fifth, of the nation’s total poverty population.Today, LIIF has access to approximately $196 million in capital for community development projects. Approximately $96 million are assets on balance sheet and the remaining $100 million is off-balance-sheet capital, for which LIIF is the sole administrator. In fiscal year 2003, LIIF’s lending activities totaled approximately $40.4 million, including $32.9 million in direct loans and $7.5 million in loans packaged for other lenders. LIIF operates with a 40-member staff and offices in five locations: Oakland, San Francisco, Marin County, Los Angeles, and New York City. LIIF is governed by a prominent board of directors, drawn nationally from the banking industry and the national housing development and policy fields. At the heart of LIIF’s efforts to build strong communities is its Revolving Loan Fund (RLF). LIIF makes direct loans to nonprofit developers for the full spectrum of development finance needs—predevelopment, acquisition, acquisition lines of credit, construction, mini-permanent, and interim or bridge loans. LIIF offers loans for nonproject needs too, such as operating lines of credit and loans for working capital. The RLF offers loans of up to $2.3 million, with terms ranging from a few months to 10 years. Over 150 institutions and investors place capital in the RLF, including foundations, banks, insurance companies, religious organizations, and individuals. A sizable proportion of the RLF is equity rather than debt, making LIIF one of the largest and most financially stable community development loan funds in the nation. The RLF targets borrowers who find it difficult to secure financing from traditional lending sources. As loans are repaid, the funds are returned to the RLF and become available to relend to new projects. As of
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June 30, 2003, RLF annual lending volume totaled nearly $32.9 million for 85 commitments. For more information about LIIF, see www.liifund.org. (f)
National Community Capital Association
The National Community Capital Association (NCCA) was established in 1986 to serve as a financial intermediary for community development and low-income housing. NCCA serves this function through its member funds, which pool capital from private investors and lend it to lowerincome communities in support of multifamily and single-family housing projects, as well as community-based businesses and community development generally. Investors in NCCA’s member funds are typically social investors, both individuals and institutions, who are willing to accept below-market rates of return. In the past, NCCA has loaned over $106 million and has helped to finance over 15,000 low-income housing units. Each fund sets its own loan criteria. In the past, loans have ranged from $500 to $350,000 and have included loans to nonprofit developers, community land trusts, housing cooperatives, and nonprofit service providers. NCCA provides support services for these funds to strengthen their overall performance and to build support for the community development loan fund industry. Services include assessments of each fund’s overall financial strength, management, and technical assistance to implement recommendations resulting from such evaluations, and unsecured term loans to help raise capital and finance local development projects. A list of the names, addresses, and telephone numbers of the member funds can be found in Appendix 7B.71 (g)
Local Community Land Trusts
A growing number of communities have established or are in the process of establishing community land trusts. These trusts, often Code Section 501(c)(3) tax-exempt organizations, are created to purchase land in order to ensure that the land will be used permanently for the provision of affordable housing. After acquisition of the land, the trust will lease the property (often for 99 years with the option to renew), and lease or sell buildings located on the property to individuals or organizations for homeownership or rental housing use. This approach can be quite advantageous to a nonprofit developer if a community land trust exists, if the trust has resources sufficient to purchase the land sought by the developer, and if the trust will agree to have the sponsor purchase the 71
Source: NCCA. For more information about NCCA, write to National Community Capital Association, 924 Cherry Street, Philadelphia, PA 19107, call (215) 923-4754, or visit www.communitycapital.org.
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building and lease the property back from the trust. The land trust’s purchase of the property would significantly reduce the project’s TDCs by transferring the cost of acquiring the property, which would otherwise have to be borne by the sponsor to the trust. See Chapter 12 concerning reducing TDCs through the use of land trusts. The land trust approach, however, is not likely to make sense for a sponsor seeking to finance the project using the low-income housing tax credit because the “basis” of the project would be too low for syndication purposes if the purchase price was not included.72 Community land trusts can be used to promote affordable homeownership or rental housing. However, the trusts have primarily focused on creating homeownership opportunities. In the case of homeownership housing, the trust sells single-family homes located on the property to individual homeowners or sells multifamily buildings located on the property to cooperative or condominium associations.73 Under this scenario, ownership is divided: The trust continues to own the land but the homeowners own the buildings on the land. At the time of sale, the homeowners (or homeownership association) enter into a ground lease with the trust. The lease usually will impose restrictions on the use of the land in order to maintain the affordable housing usage of the property. These restrictions may include equity limitations on the amount of appreciation that can be earned upon resale, requirements that the property be resold only to persons at or below specified income levels (e.g., 80 percent of the area median income or less), and prohibitions on subletting by homeowners except in extraordinary situations or for limited time periods. The lease also may provide the trust with the right of first refusal to purchase any units being transferred by homeowners. Rental housing also can be developed using a community land trust. The trust may develop and operate the rental housing itself. In that case, residents of the property simply execute traditional landlord-tenant leases with the trust. Another option, however, is for the trust to purchase the land; a nonprofit sponsor would purchase the building and then lease the land from the trust. This relationship would be similar to the ownership model discussed above. The ground lease entered into between the developer and the trust would likely have restrictions ensuring the continued use of the property for affordable rental housing purposes. As discussed under HOME (Section 7.3), community land trusts can qualify for organizational support, technical assistance, education, training, and continuing support under the HOME Investment Partnership program. The 1992 amendments to HOME also allowed for jurisdictions 72 73
See the discussion of low-income housing tax credits in Chapter 9. Condominiums and cooperatives are discussed in Chapter 16.
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to provide this support to community groups seeking to establish community land trusts.74 The Institute for Community Economics (ICE), discussed earlier in this chapter, has developed a considerable number of useful resources and guides for the creation and operation of a community land trust. ICE’s publications include, among others, The Community Land Trust Handbook and The Community Land Trust Legal Manual. The legal manual includes a model ground lease. A list of ICE’s publications can be obtained from ICE, 57 School Street, Springfield, MA 01105, or call (415) 746-8660. (h)
National Nonprofit Foundations: Program-Related Investments
A growing trend among large, national nonprofit foundations is to invest a portion of their endowment funds in projects that further their charitable purposes. These investments are often referred to as program-related investments (PRI). Foundations dedicated to affordable housing, the eradication of urban blight, or similar purposes may be sources of long-term loans for nonprofit developers. Sponsors interested in pursuing this source of capital should purchase or review The Foundation Directory, a publication of the Foundation Center. The index to The Foundation Directory lists program-related foundations. The Directory can be purchased from the Center at (800) 424-9836 or can be reviewed at the Center’s offices located in Washington DC, New York City, San Francisco, and Cleveland. (i)
Local Community Foundations
Among the most likely sources of grants for affordable housing projects are local community foundations, discussed in Chapter 8. However, some community foundations may also provide direct loans or participate in a community loan fund for affordable housing development. If sponsors have not identified community foundations in their community, they can do so by using The Foundation Directory, described above. (j)
Affordable Housing Loan Consortia
Loan consortia are a vehicle for financial institutions to pool resources and share the risk of loans they would not make individually. This section deals with loan consortia that makes loans for housing affordable to lower-income people, though consortia could make other types of loans as well. Consortia can be statewide or regional, and participants can— and usually do—range in size from small community institutions to the largest banks in a state. 74
NAHA, § 233; 42 U.S.C. § 12773, as amended.
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Though there are smaller, loosely structured consortia and some forprofit consortia, the more formally structured ones are generally taxexempt under Section 501(c) of the Internal Revenue Code. Smaller, less structured affiliations among lenders operate in some local areas, with member institutions originating loans in their own names. These groups of lenders are typically not incorporated and have no independent staff. The affordable housing loan consortia profiled below are independent organizations in that they make loans in their own names and have their own staff. Most formal consortia focus almost exclusively on multifamily housing, either new construction or the acquisition and rehabilitation of existing buildings. Proponents of a multifamily emphasis say that affordable single-family loans are more available in the marketplace, with a secondary market in place, reducing the need for a consortium approach to these loans. Some also point out that single-family loans are highly laborintensive, making it difficult for a consortium to reach the volume of loans required to meet costs. Consortia vary in the specific guidelines they set for the properties they finance. Some set specific income limits for those who will benefit from the housing, such as 80 percent or less of median income. Income guidelines for developments may be governed by other funding sources, such as Low Income Housing Tax Credits. And some consortia may not use income guidelines at all. For instance, the board of Chicago’s Community Investment Corporation changed the consortium’s lending emphasis from targeting lower-income residents to revitalizing neighborhoods in need of help. Consortia loan to both for-profit and nonprofit developers, as long as the loan is sound and in keeping with the consortium’s goals. Most consortia provide debt financing only, though some like Massachusetts Housing Investment Fund have started an equity fund to complement their debt program. Consortia come about under a variety of circumstances. Often the need for affordable housing becomes more evident through the results of a needs assessment or task force study. For some, the Federal Reserve has been instrumental in bringing lenders together. In Washington state, for example, the Federal Reserve Bank of San Francisco visited early on to encourage lender participation in the Washington Community Reinvestment Association (WCRA). The basic premise, however, is that it should be abundantly clear that there is a real need for a consortium to fill. Participating members create a loan pool, typically structured as a commitment to lend as loans are approved. Among the more formal consortia, lending is usually structured so that all members participate in all loans. Each lender’s level of funding for each loan may be determined by the percentage of the total loan pool that their commitment represents, or
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their percentage of domestic deposits or assets in the state. For instance, for a $1 million loan, a bank that has contributed 20 percent of the consortium’s total loan pool would be responsible for $200,000. Consortia are initially capitalized by their members. Consortia generate their operating funds through points and servicing fees for loans, with the goal of becoming self-sufficient. It can take between two and three years for a consortium to become self-sufficient, and the experts advise that initial capitalization should be adequate to cover operating and administrative costs for the start-up period. The Central Florida consortium, now called the Florida Community Partners, differs in that in addition to its loan pool, some counties in the region have granted them funds that they in turn can lend to affordable housing programs within those counties. The consortium determines how the monies can best be used within the scope of the affordable housing needs that have been determined for the area. Affordable housing consortia started as early as 1970, when the Savings Association Mortgage Corporation, Inc. (SAMCO) was started in California. Growth in the industry has been considerable in the 1990s: While there were about 15 affordable housing loan consortia as recently as 1991, that number had more than doubled by mid-1995. Today, consortia are located in 22 states and the District of Columbia. Among the states with the largest consortia activity are California, Florida, Massachusetts, and New York. Why do banks join consortia? Meeting the regulatory requirements of the Community Reinvestment Act (CRA) is certainly a factor—this, in fact, can serve as a motivator to “get them to the table.” But banks see value beyond CRA credits. By sharing the risk to fund loans they would not otherwise make, participating institutions can tap into new market niches. This may mean moving into the “affordable” market, or doing business in a community they might not otherwise reach. Some experts have noted that having smaller consortium members, from rural or out-of-the-way communities, “opens the door” for the larger members to lend in those communities. Lenders also use loan consortia as a cost-effective vehicle for building their own expertise. Loans that come to the consortium are often different from those that a bank typically sees—for instance, those made in conjunction with low-income housing tax credits or other federal programs. Consortium members, therefore, receive “hands-on training” instead of investing their own institution’s time and money to build and train a new staff. Finally, there is the intangible “goodwill” impetus for bank involvement. Doing good works in their own communities builds lenders’ reputations. Lenders also understand that loans to rebuild a neighborhood may mean an improved business climate for the entire area.
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Regulatory bodies are often brought into the consortium formation process early on, to provide members and potential members assurances that the loans they make will be permissible and in accord with CRA requirements. Regulators can include the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), the Office of Trust Supervision, and state banking commissioners. Typically, a consortium will be governed by a board that sets policy for the organization. Boards are made up entirely or in large part by consortium members. For 501(c)(3) organizations, IRS requirements may call for board participation by nonmember community representatives. A few examples of board makeup: Washington Community Reinvestment Association has 20 percent of its board members from state housing entities and a private nonprofit; at Chicago’s Community Investment Corporation, one quarter of the board is made up of civic, housing, and community leaders. Community and nonprofit development groups may also serve the consortium in a separate advisory capacity. Experts recommend their involvement from the start, as a way to build understanding and lines of communication within the community where the consortium operates. Experts recommend that banks designate a senior officer—even the chief executive officer—as their consortium representative. Designees make decisions on behalf of their institutions, and must be in a position to do so without checking first with management. Experts also make the point that representatives to the consortia must make the “mental transition” to thinking as a part of the consortium, rather than as individual lenders. Consortia staffs are generally small. A typical staff might consist of as many as three or four employees—an executive director, a loan officer, an administrative assistant, and a secretary—though some consortia have even fewer staffers. A central role of the staff is to identify possible loan candidates and provide the needed underwriting for the proposal to meet consortium standards when presented to the loan committee. Many consortia also offer technical assistance to potential borrowers, to help them structure a successful loan package. Some consortia also designate one of their members as lead bank or agent bank, to perform certain functions. Agent banks typically administer the disbursement of a loan, performing such tasks as calculating each lender’s contribution to the loan. Loan servicing is often performed initially by a member institution until loan volume is sufficient to make “in-house” servicing by the consortia cost efficient. An advantage to having consortia staff service loans are the servicing fees that can be generated for the consortium. This discussion and the following information was provided by the National Association of Affordable Housing Lenders. The National
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Association of Affordable Housing Lenders (NAAHL) is a professional association for financial institution executives who are responsible for developing new products and originating loans for first-time homebuyers, lower-income purchasers, and affordable rental housing. Membership also includes professional staff members from a number of affordable housing loan consortia. NAAHL was formed by a handful of dedicated bankers in 1988 to meet their collective educational and informational needs. The Association presents regional and national forums on product development, service enhancement, underwriting, loan origination, and technical issues involving affordable housing. Two periodicals, Directions in Affordable Housing Finance and NAAHL Briefs, provide broad coverage of affordable housing finance issues. Members also receive memoranda throughout the year on legislative and regulatory changes affecting affordable housing lending. For more information, see www.naahl.org. NAAHL seeks to increase the volume and number of loans made for affordable housing by providing lenders with information and training necessary to develop innovative products and deliver them effectively. Membership is open to financial institutions as well as others involved in affordable housing finance. Information presented in the following section is the most recent available.
CALIFORNIA COMMUNITY REINVESTMENT CORPORATION 595 East Colorado Blvd., Suite 200 Pasadena, CA 91101 Tel. (818) 795-9788 Fax (818) 795-9708 Contact: Clyde Freeman, President Background. CCRC is a nonprofit corporation formed in 1989 to provide permanent financing to rental housing for low-income people throughout California. Initial support came from the Federal Reserve Bank of San Francisco, Bank of America, and Security Pacific Bank. San Francisco Development Fund served as consultant. CCRC’s $222 million loan pool is funded by 58 commercial banks who participate in CCRC loans on a blind pool basis. Business. The consortium provides permanent financing for new construction, acquisition, and rehabilitation of multifamily housing. CCRC also provides technical assistance in the form of subordinated debtstructuring advice to nonprofits and public agencies. Eligible borrowers for acquisition and new construction include individual, for-profit, and nonprofit sponsors. Nonprofit sponsors are the only eligible borrowers for rehabilitation. For-profit and non-profit sponsors are eligible borrowers
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CALIFORNIA COMMUNITY REINVESTMENT CORPORATION (CONTINUED) for acquisition of existing property to be used as single room occupancy housing. For-profit sponsors are the most frequent borrowers for multifamily loans except special needs housing, where nonprofit sponsors are the most frequent borrowers. Operations. CCRC operates with eleven full-time staff people and one part-time staff person on an annual budget of $885,000. The loan committee consists of eight members, the board of directors 21 members (including five non-profit/public sector representatives), and the executive committee eight members (including one nonprofit representative). Initial Capitalization: 1989–1990: $350,000 from member banks for operations 1990–1991: $145,000 from member banks for operations Minimum contribution from participating lenders: $5,000 over two years for operations.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, California Rental Housing Construction Program and Housing Rehabilitation Program, and tax increment funds from local redevelopment agencies. Targeting Requirements. Rent Restrictions: At least 20 percent belowmarket/area rents for similar units. Income Restrictions: Incomes of tenants occupying 51 percent of the units in a project must not exceed 80 percent of adjusted area median income. Activity Level Period
Loans Funded
Loan Volume
52 18 36
$90,000,000 $34,000,000 $65,000,000
1989–1994 1993 1994
Delinquencies* Period
Rate
1989–1994
none
*Delinquent means 90 days late.
Participating Institutions. Bank of A. Levy, Bank of Agriculture & Commerce, Bank of America NT&SA, Bank of Canton California, Bank of Encino, Bank of Fresno, Bank of Montecito, Bank of Newport, Bank of Santa Maria, Bank of Stockton, Bank of the West, Borrego Springs Bank,
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CALIFORNIA COMMUNITY REINVESTMENT CORPORATION (CONTINUED) California Commerce Bank, California Korea Bank, California State Bank, California United Bank, Cathay Bank, Chino Valley Bank, City National Bank, CivicBank of Commerce, Comercia Bank-California, Commercial Center Bank, Community Bank, Dai-Ichi Kangyo Bank of Los Angeles, Delta National Bank, Exchange Bank, Farmers and Merchants Bank of Central California, First Business Bank, First IndoAmerican Bank, First Interstate Bank of California, First Los Angeles Bank, First National Bank, First Professional Bank, First State Bank of Southern California, General Bank, Manufacturers Bank, Mercantile National Bank, Modesto Banking Company, National Bank of Long Beach, Pacific Bay Bank, Pacific Valley National Bank, Pacific Western Bank, Santa Monica Bank, Sanwa Bank, Silicon Valley Bank, Southern California Bank, Sumitomo Bank of California, The Bank of California N.A., Tokai Bank of California, Trans Pacific National Bank, Tri Counties Bank, Union Bank, Union Safe Deposit Bank, United Citizens National Bank, University National Bank & Trust Company, Wells Fargo Bank N.A., Western Bank, World Trade Bank.
CAPE AFFORDABLE HOUSING LOAN CONSORTIUM 1620 Falmouth Road (Route 28) Centerville, MA 02632 Tel. (508) 771-3910 Fax (508) 771-3910 Contact: Laura Shufelt, Loan Coordinator Background. CAHLC is an unincorporated consortium organized by community representatives and local bank presidents with assistance from the Massachusetts Housing Partnership to finance single and multifamily housing for low- and moderate-income households. Five core banks participate in each loan on a pro rata basis. Other banks serving CapeCod may participate in individual loans. The consortium operates under a lending agreement between participating financial institutions. Business. CAHLC offers construction and rehabilitation financing to nonprofit and for-profit sponsors of affordable housing. This includes new construction of single-family and multifamily dwellings, as well as predevelopment, acquisition, and rehabilitation of multifamily dwellings. The consortium also provides financing for acquisition with rehabilitation or new construction of special needs housing. Special needs
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
CAPE AFFORDABLE HOUSING LOAN CONSORTIUM (CONTINUED) includes housing for HIV-positive people, veterans, battered women and the elderly, single-room occupancy, and transitional housing. Borrowers are mainly nonprofit organizations. Operations. The consortium operates with a part-time loan coordinator. A seven member loan committee consisting of five voting members from participating banks and two nonvoting community representatives was dissolved because it was viewed as slowing down loan processing. The consortium has a 12-member steering committee, including seven representatives of member banks and five community representatives elected by the Regional Housing Caucus. Initial and Current Capitalization: Approximately $10 million for loans (half of 1 percent of member banks Cape Cod deposits); operations were originally funded by a $20,000, no-interest loan from Massachusetts Housing Partnership.
Subsidy Programs Utilized. Community Development Block Grants and the Resolution Trust Corporation’s Affordable Housing Program. Targeting Requirements.
None.
Activity Level Period
Loans Funded 3
1991–1994 1993 1994
Loan Volume $2,618,071 $ 896,000 $ 982,071
1 1
Delinquencies* Period
Rate none
1991–1994 *Delinquent means 30 days late.
Participating Institutions. Cape Cod Five Cents Savings Bank, Cape Cod Bank and Trust Co., Bank of Boston, Citizens Bank, Sandwich Cooperative Bank, Falmouth Cooperative Bank, Cape Cod Cooperative Bank, Seamen’s Bank, Plymouth Savings Bank.
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CENTRAL FLORIDA COMMUNITY REINVESTMENT CORPORATION 255 S. Orange Avenue, Suite 1455 Orlando, FL 32801 Tel. (407) 872-3000 Fax (407) 872-1040 Contact: Judith F. Kovisars, Executive Director Background. Central Florida Community Reinvestment Corporation is a non-profit corporation created in 1990 to act as a catalyst for affordable housing in five central Florida counties. CFCRC grew out of a recommendation by the Orange County Board of Commissioners’ Affordable Housing Task Force. Eleven local banks worked with The Development Fund to create CFCRC, which made its first loan commitment in June, 1993. The consortium’s $75 million loan pool is funded by 16 member banks who participate in each CFCRC loan. To date, CFCRC has loaned over $25 million. Business. The consortium offers loans for acquisition of land and existing multifamily housing, new construction and rehabilitation of single-family and multifamily housing, and permanent financing for multifamily projects. Eligible borrowers are for-profit as well as nonprofit developers. Operations. CFCRC operates with two full-time and two part-time staff people on an annual budget of approximately $300,000. A seven-member loan committee consists of representatives of the four largest member banks and three others nominated by the board of directors and confirmed by CFCRC members. Individuals on the loan committee cannot serve more than two consecutive one-year terms. The loan committee uses underwriting guidelines established by the board of directors. Members elect a board of directors, which must include 20 percent disinterested directors (not employees of member institutions) and two government officials. The number of votes to which a member is entitled is calculated each year based on the size of its contribution to the loan pool. In addition to the loan committee, the board designates steering, audit, and operations committees. Subsidy Programs Utilized. Low Income Housing Tax Credits, HOME Investment Partnership, state- and county-funded second mortgages, other state programs, and county grants and waivers of impact fees. Targeting Requirements. Affordability is defined as a household not paying more than 30 percent of its income for housing. 20 percent or more of the units must be reserved for households earning 50 percent or below area median income, or 40 percent or more of the units must be
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
CENTRAL FLORIDA COMMUNITY REINVESTMENT CORPORATION (CONTINUED) reserved for households earning 60 percent or below area median income, or 51 percent or more of the units must be reserved for households earning 80 percent or below area median income. Activity Level Period
Loans Funded
Loan Volume
5 1 3
$23,700,000 $ 7,500,000 $16,200,000
1993–1994 1993 1994
Delinquencies Period
Rate
1993–1994
none
Participating Institutions. SunBank, N.A.; Barnett Bank of Central Florida, N.A.; NationsBank; Bank of Central Florida; United American Bank of Central Florida; National Bank of Commerce; Security National Bank; SouthTrust Bank; Lochaven Federal Savings and Loan; AmSouth Bank of Florida; First Mercantile National Bank; Seminole National Bank; The Bank of Winter Park.
CINCINNATI DEVELOPMENT FUND 105 W. Fourth Street, Suite 707 Cincinnati, OH 45202 Tel. (513) 721-7211 Fax (513) 721-7214 Contact: David R. Wohl, Director Background. CDF is a nonprofit corporation formed in 1989 to finance affordable housing in the Cincinnati area. CDF acts as an intermediary between financial institutions and affordable housing developers, providing permanent financing at below-market rates and assistance in securing other financing. The current $9,000,000 pool is funded by 14 local banks and savings and loans which purchase participations in each CDF loan made from the pool. Business. CDF offers short-term adjustable rate loans and long-term fixed-rate loans for rehabilitation and new construction of multifamily and single-family housing. Predevelopment loans and grants are available
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CINCINNATI DEVELOPMENT FUND (CONTINUED) to nonprofit borrowers in the City of Cincinnati for single- and multifamily housing development. CDF will provide acquisition financing and bridge loans for multifamily housing. Eligible borrowers for all other loans are nonprofit and for-profit developers. The most common transaction is a permanent loan for multifamily housing. The consortium provides technical assistance in the form of financial packaging and tax credit syndication advice to developers. Technical assistance fees are usually structured as a percentage of the funds CDF helps raise. Operations. CDF operates with a staff of two on a $176,000 annual budget (excluding interest expense). A loan committee made up of member financial institutions determines a borrower’s creditworthiness. The board of directors, consisting of two loan committee members and others, determines whether a proposed loan fulfills CDF’s mission. Underwriting criteria were developed by a subcommittee of CDF organizing banks. The loan committee and the board approve individual loans as well as any amendments to the underwriting criteria. CDF’s initial operations were funded with grants and loans. Earned income has supported operations since 1991. Initial Capitalization: $4,000,000 from six banks and $500,000 from Local Initiatives Support Corporation (LISC) for loans to developers. There was no required minimum contribution. Current Capitalization: $9,000,000 from 14 banks; minimum contribution: $100,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, State of Ohio nonprofit housing development grants, and property tax abatements. Targeting Requirements.
None. Activity Level
Period
Loans Funded
Loan Volume
12 6 2
$7,956,000 $4,330,000 $ 600,000
1989–1994 1993 1994
Delinquencies* Period 1989–1994
Rate A few CDF loans have had payments more than 10 days late, incurring a late fee. One payment was more than one month late.
*Delinquent means 10 days late.
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
CINCINNATI DEVELOPMENT FUND (CONTINUED) Participating Institutions. Bank One, Centennial Savings Bank, Cincinnati Federal Savings & Loan, Enterprise Federal Savings & Loan, Fifth Third Bank, Franklin Savings Bank, Huntington Bank, Oak Hills Savings & Loan, PNC Bank, Provident Bank, Seven Hills Savings Association, Society Bank, Star Bank, Suburban Federal Savings Bank.
COMMUNITY FINANCING CONSORTIUM, INC. 105 S. Narcissus Ave., Suite 302 West Palm Beach, FL 33401 Tel. (407) 833-8503 Fax (407) 655-4075 Background. Community Financing Consortium (CFC) is a nonprofit organization founded in 1991 as the Consortium for Affordable Housing Financing by six financial institutions to provide below-market financing for construction and rehabilitation of housing for lowerincome people in Palm Beach County, Florida. Founding banks worked with the Palm Beach County Housing Partnership, Inc. and a consultant for nine months developing the organizational and working documents of the consortium. The consortium has expanded to 12 member banks serving Palm Beach, Broward, and Martin counties. Member banks make loans individually, using underwriting guidelines adopted by the consortium. The consortium forwards single-family loan applications to member banks on a rotating basis. Multifamily loan applications are forwarded on a rotating basis to a lead bank for underwriting, commitment, and closing. Member banks may choose to participate in each multifamily loan. To date, consortium banks have closed over $40 million in loans representing single-family homeownership for more than 320 families and 1,200 units of affordable multifamily rental housing. Business. CFC offers construction, mini-permanent, and permanent financing for new construction, acquisition, and rehabilitation of single and multifamily housing including special needs housing. Bridge loans are also available. Eligible borrowers include individuals, for-profit, and nonprofit borrowers. The consortium has executed financing partnership agreements with local governments to build and rehabilitate single family homes. First mortgages are provided by consortium banks. Interest rate buydowns come from Palm Beach County Housing Finance Authority. Palm Beach County provides grant money and the State of Florida offers HOME money for “due on sale” second mortgages. CFC has helped finance an innovative apartment complex requiring tenants
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COMMUNITY FINANCING CONSORTIUM, INC. (CONTINUED) to participate in on-site credit repair workshops. The consortium also offers a monthly homebuyer education workshop. Operations. The consortium operates with five full-time staff people on an annual budget of $340,000. Each member of the consortium has one member on the board of directors. Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, HUD HOME Investment Partnerships, Resolution Trust Corporation’s Affordable Housing Program, Federal Home Loan Banks’ Affordable Housing Program (AHP) and Community Investment Program (CIP), county housing trust fund and rental rehabilitation fund, and other county and municipal programs. Targeting Requirements.
None. Activity Level
Period
Loans Funded
Loan Volume
186
$21 million $ 9 million $10 million
1991–present 1993 1994
Delinquencies Period
Rate
1991–present
0%
Participating Institutions. American Savings and Loan Association of Florida; Bank of Boston, Florida, N.A.; Bankers Trust Company of Florida, N.A.; Chemical Bank of Florida (Savings Bank); Community Savings Bank; Fidelity Federal Savings Bank of Florida; First Federal Savings of the Palm Beaches; First Union National Bank; NationsBank; J.P. Morgan; SunBank/South Florida, N.A.; Barnett Bank/Broward County; Northern Trust Bank; Barnett Bank/Palm Beach County; Comerica Bank; SouthBank.
COMMUNITY INVESTMENT CORPORATION 222 South Riverside Plaza, Suite 2200 Chicago, IL 60606 Tel. (312) 258-0070 Fax (312) 258-8888 Contact: John Pritscher, President Background. The Community Investment Corporation’s predecessor organization, Community Services and Research Corp., was created in 1974 by the Savings and Loan Network as a vehicle to research credit
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
COMMUNITY INVESTMENT CORPORATION (CONTINUED) needs and provide single-family rehabilitation financing in targeted areas of Chicago. In 1984, after lending $15 million to rehabilitate 1,000 houses, the renamed CIC created a $17.5 million loan pool for multifamily rehabilitation in Chicago. Fourteen banks and thrifts pledged the capital. Today 75 member banks, a national lender, a utility, and a pension fund contribute to a $527.4 million loan pool serving six counties in metropolitan Chicago. Members participate in each CIC loan. The nonprofit consortium has loaned over $267 million to rehabilitate 16,600 housing units. Business. CIC offers construction and permanent loans for rehabilitation and new construction of multifamily housing. Eligible borrowers for multifamily projects include individuals, for-profit and nonprofit sponsors. Approximately 35 percent of CIC loans involve government sponsored low- or no-interest second mortgages. Most loans include construction and permanent financing in one closing. CIC will also provide permanent financing for acquisition of existing multifamily housing in good condition located in “hard-to-lend” areas. Less than 1 percent of CIC loans are for new construction of single-family homes. CIC offers construction and line-of-credit loans to for-profit or nonprofit borrowers developing 10 or more new single-family homes. CIC also provides financing to individuals, for-profit, and nonprofit sponsors of special needs housing. CIC offers technical assistance by conducting workshops on affordable housing finance and development for developers, contractors, and community organizations. Operations. The consortium operates with a 26-person staff and $2 million annual budget. CIC’s 19-member board of directors includes member institutions and representatives of nonprofit organizations. There is a nine-member loan committee made up of member institutions. CIC also has an executive committee and a performance and credit review committee. Initial Capitalization: $17.5 million from member banks/S&Ls for the multifamily loan pool minimum contribution: $250,000. Current Capitalization: $527.4 million loan pool.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, tax exempt financing, Historic Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Federal Home Loan Banks’ Affordable Housing Program (AHP), and Illinois Affordable Housing Trust Fund. Local government programs use HOME funds for second mortgages and CDBG funds to subsidize interest rates.
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COMMUNITY INVESTMENT CORPORATION (CONTINUED) Targeting Requirements.
None. Activity Level
Period
Loans Funded
Loan Volume
450 54 60
$245,000,000 $ 44,000,000 $ 50,000,000
1984–1994 1993 1994
Delinquencies* Period
Rate
1984–1994 1993
3.81% .006%
*CIC defines delinquent as 30 or more days late. 1.09% are 60 or more days late.
Participating Institutions. Advance Bank, All American Bank, Amalgamated Bank, American National, Amerifed Bank FSB, Argo Savings, Associated Bank, Avenue Bank of Oak Park, Bank of America Illinois, Bank of Chicago, Bank One Chicago, Bell Federal, Calumet Federal Savings, Chicago City Bank, Chicago-Tokyo Bank, Citibank, Cole Taylor Bank, Colonial Bank, Columbia National Bank of Chicago, Comerica Bank, Community Bank Edgewater, Community Bank Lawndale, Cosmopolitan Bank, Damen Federal Savings, Fairfield Savings, Fannie Mae, First Bank National Association, First Bank Oak Park, First Chicago, First Eagle National, First Midwest Illinois, First National Evergreen Park, First Nationwide, First Security Trust and Savings, Harris Bank, Heritage Bank, Household Bank, LaSalle Cragin, LaSalle Lakeview, LaSalle Lisle, LaSalle Matteson, LaSalle National, LaSalle Northbrook, LaSalle Northwest, LaSalle Talman, LaSalle Westmont, Liberty Federal Savings, Lincoln Park Savings Bank, Manufacturers Bank, Merchandise National, Michigan Avenue, Mid America Federal, Mid-City National, Mid-Town Bank, Midwest Bank, Mount Greenwood Bank, National Bank Greece, NBD Illinois, Northern Trust, Northwestern Savings, Old Kent Bank, Peoples Gas NDC, Pinnacle Bank, Regency Savings, River Valley Savings, St. Paul Federal, Seaway National, Security Federal Savings, South Chicago Bank, South Shore Bank, Southwest Federal, Standard Bank and Trust, Standard Federal Bank, Suburban Federal Savings, Success National, Superior Bank FSB, United Methodist Pension Fund, Uptown National.
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
COMMUNITY INVESTMENT CORPORATION OF NORTH CAROLINA (CICNC) P.O. Box 19999 Raleigh, NC 27619-1999 Tel. (919) 781-7979 Fax (919) 881-9909 Roger L. Earnhardt, Executive Vice President Background. CICNC is a for-profit corporation formed in 1990 to provide permanent financing for low- and moderate-income housing in North Carolina. The consortium is a wholly owned subsidiary of the Community Bankers Association of North Carolina. Lenders participate voluntarily in each loan, after reviewing a loan request analysis sent to all 97 member institutions. Generally 25–40 lenders participate in a CICNC loan. To date, the consortium has made or committed over $33.6 million in loans representing more than 1,967 units of housing affordable to lower-income people. Business. The consortium offers permanent financing for rehabilitation and new construction of multifamily housing, including special needs housing for low- and moderate-income people. Bridge loans are made in limited circumstances. Eligible borrowers include for-profit and nonprofit sponsors. Technical assistance is offered to assist developers and other parties with various aspects of a Low Income Housing Tax Credit project. Fees for technical assistance are included in the origination fee. Operations. CICNC operates with a two-person staff on an annual budget of approximately $200,000. The loan committee, board of directors, and executive committee are made up of financial institution representatives. Loans are serviced by the consortium using loan management software. Initial Capitalization: $250,000 from the Community Bankers Association of North Carolina for working capital. Membership fees: $500–2,500. Current Capitalization: $260,000 net worth plus remaining original capitalization. Current minimum participation: $10,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, HUD HOME Investment Partnerships, Federal Home Loan Banks’ Affordable Housing Program (AHP), state housing trust fund, and local government housing bonds.
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COMMUNITY INVESTMENT CORPORATION OF NORTH CAROLINA (CICNC) (CONTINUED) Targeting Requirements. Rent Restrictions: As required by use of federal, state, and municipal funds. Income Restrictions: As required by use of federal, state, and municipal funds.
Activity Level Period
Loans Funded
1991–1994 1993 1994
17 2 12
Loan Volume $17,000,000 $ 1,500,000 $12,000,000
Delinquencies* Period
Rate
1991–1994
0%
*CICNC defines delinquent as 30 days late.
Participating Institutions. Ninety-seven financial institutions from throughout North Carolina. Membership is open to all financial institutions in North Carolina.
THE COMMUNITY PRESERVATION CORPORATION 5 West 37th Street, 10th Floor New York, NY 10018 Tel. (212) 869-5300 Fax (212) 768-8348 Contact: Nancy Feldman, Vice President Background. The Community Preservation Corporation (CPC) is a private non-profit mortgage lender specializing in low- and moderateincome housing. Founded in 1974, CPC is sponsored by 94 financial institutions throughout New York State. CPC’s mission is to work with government to strengthen and stabilize lower-income communities by preserving and developing affordable housing. CPC seeks to remove legal and regulatory impediments to investment in affordable housing and coordinate public subsidies with private financing to improve access to credit for small owners and builders. CPC assists other lenders
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
THE COMMUNITY PRESERVATION CORPORATION (CONTINUED) in originating loan/subsidy packages and works with institutional investors to create a secondary market for such investments. CPC works to improve the skills and increase the number of developers, contractors, and community groups involved in developing affordable housing. CPC has loaned more than $1.25 billion (including public and private funds) to finance more than 40,000 units of affordable housing in New York State. Business. CPC offers construction financing for rehabilitation of occupied properties, gut renovation of vacant buildings, and new construction. CPC offers permanent financing to take out construction loans made by CPC and other lenders, and to refinance rental and cooperative buildings. Condominium sponsors and single-family home developers may obtain bulk end-loan commitments from CPC. CPC also assists owners with government programs offering below–market rate loans and grants for affordable housing. To date, most CPC loans are for rehabilitation of multifamily housing. The most frequent borrowers for construction loans are joint ventures between for-profit and nonprofit sponsors. In 1992, CPC created a wholly owned for-profit subsidiary, CPC Resources, Inc., to service loans held by the private sector, consult with bankers and government officials in other areas about establishing entities like CPC, and seek equity participation in loans or real estate ownership of residential property in low-income neighborhoods served by CPC. Operations. CPC operates with a staff of 70 people on an annual budget of approximately $7.5 million. Mortgage officers are located in the Bronx and Brooklyn boroughs in New York City, Westchester County, Long Island, Albany, Rochester, and Syracuse. CPC has a 22-member board of directors, which elects an executive committee, audit committee, and mortgage committees for New York City and the Mid-Hudson Valley. Underwriting criteria were developed by the board of directors. Each loan is approved by one of three regional mortgage committees comprising representatives of member institutions elected by the board and CPC’s president. Initial Capitalization: $8,000,000 revolving line of credit used to fund loans and $400,000 for operations. Current Capitalization: $165,000,000 line of credit used to fund loans and $16.1 million for operations.
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THE COMMUNITY PRESERVATION CORPORATION (CONTINUED) Subsidy Programs Utilized. Community Development Block Grants, HUD HOME Investment Partnerships, HUD Section 8, Federal Home Bank Affordable Housing and Community Investment Programs, New York State Housing Trust Fund, Turnkey and Affordable Housing Corporation programs, and 1 percent financing from New York City. Targeting Requirements. York State.
Nonluxury communities throughout New
Activity Level Period
Loans Funded
Loan Volume
875
$1,100,000,000 $ 166,000,000 $ 110,000,000
1975–1994 1993 1994
Delinquencies* Period
Rate
1988–1994 1993
5% 5%
*CPC considers a loan delinquent and in default when payment is one day late. Default is typically declared after 60 or 90 days, depending on individual circumstances. The above rates exclude onemonth delinquencies. Until 1988, CPC had a negligible delinquency rate. Since inception, CPC has foreclosed on two mortgages, suffered no loan losses, and made one final mortgage insurance claim.
Participating Institutions. The Adirondack Trust Co.; Amalgamated Bank of New York; Ballston Spa National Bank; Banco Popular de Puerto Rico; Bankers Trust Company; The Bank of New York; The Bank of Tokyo Trust Company; Barclays Bank of New York, N.A.; Canadian Imperial Bank of Commerce (NY); Canadaigua National Bank & Trust Co.; Cattaraugus County Bank; Central National Bank of Canajoharie; Champlain National Bank; The Chase Manhattan Bank, N.A.; Chemical Bank; Chemung Canal Trust Co.; Citibank, N.A.; City National Bank & Trust Co.; Ellenville National Bank; European American Bank; Evergreen Bank; First Fidelity Bank, N.A.; First National Bank of Cortland; The Fishkill National Bank; Flushing Savings Bank; The Green Point Savings Bank; Hamilton Federal Savings, F.A.; Home Savings of America, FSB; Independence Savings Bank; Jamaica Savings FSB; Key Bank of New York N.A.; Lincoln Savings Bank, FSB; The Long Island Savings Bank, FSB; Marine Midland Bank, N.A.; Mid-Hudson Savings Bank FSB; Middletown Savings Bank; Morgan Community Development Corporation; National Westminster Bank USA; North Fork Bank; North Side Savings Bank; Putnam County Savings Bank; Queens County Savings
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
THE COMMUNITY PRESERVATION CORPORATION (CONTINUED) Bank; Republic Bank for Savings; Rhinebeck Savings Bank; Ridgewood Savings Bank; River Bank America; Roosevelt Savings Bank; Sterling National Bank and Trust Company of New York; United States Trust Company of New York.
CONSORTIUM OF SALEM AREA LENDERS (CONSALL) P.O. Box 728 Salem, OR 97308 Tel. (503) 399-3967 Fax (503) 399-3937 Contact: Terry R. Morrison Background. CONSALL is a consortium of Salem area lenders founded in 1992 to provide financing for long-term affordable housing in three Oregon counties: Marion, Polk, and Yamhill. Sponsored by the Oregon Bankers Association, the consortium targets loans to organizations for purchase, rehabilitation, and new construction of single family homes to be rented to low-income tenants. To date, 16 loans totalling more than $1.2 million have been made. Member banks participate in each loan made by the consortium. Business. The consortium offers construction, rehabilitation, and permanent financing for single-family rental housing affordable to tenants earning less than 80 percent of area median income. CONSALL will also fund special needs housing such as group homes and SROs of up to four units. The consortium also provides free technical assistance on building and managing affordable housing to for-profit and nonprofit borrowers. Eligible borrowers are for-profit and nonprofit entities as well as municipal or other public corporations. Nonprofit housing sponsors have been the most frequent borrowers to date. Interest rates are percent above Fannie Mae’s 30-day mandatory 30-year rate. Operations. The consortium operates as a group of participating lenders without its own staff or operating budget. A loan committee is comprising one representative of each member bank, using Fannie Mae guidelines. Loans are made in the name of Commercial Bank, which serves as lead bank. Advisory and executive committees are also made up of representatives from member financial institutions. Initial Capitalization: $1,125,000 from member financial institutions for loans. Minimum contribution: $125,000. Current Capitalization: $3,000,000 from member financial institutions for loans. Minimum contribution: $250,000.
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CONSORTIUM OF SALEM AREA LENDERS (CONSALL) (CONTINUED) Subsidy Programs Utilized. Tax-exempt financing, HUD HOME Investment Partnership Program, HUD Section 8 Rental Assistance Program, and Oregon Lenders’ Tax Credit Program. Targeting Requirements. Rent Restrictions: Affordable to households earning less than 80 percent of area median income. Income Restrictions: Household income should be less than 80 percent of area median income. Activity Level Period
Loans Funded
1994 1995 (projected)
7 10–15
Loan Volume $ 689,844 $1,000,000+
Delinquencies Period
Rate
cumulative (1993–1994)
0%
Participating Institutions. (Since inception): Bank of America, Commercial Bank, First Interstate Bank of Oregon, Key Bank of Oregon, Pioneer Trust Bank, U.S. Bank of Oregon, Westone Bank.
CONNECTICUT HOUSING INVESTMENT FUND, INC. 121 Tremont Street Hartford, CT 06105 Tel. (203) 233-5165 Fax (203) 233-3920 Contact: Paula Sampson, President and CEO Background. CHIF is a statewide housing finance intermediary dedicated to affordable housing and neighborhood redevelopment. CHIF was formed in 1964 as a nonprofit corporation to help minority families purchase homes in nonintegrated neighborhoods and suburbs. In the early 1970s, CHIF gave a $3 million promissory note to three large insurance companies, expanding its mission to providing affordable housing for all in Connecticut. CHIF’s $5.25 million loan fund is supported by five insurance companies, which participate in each loan made by the Fund. CHIF’s main business is administering loan programs funded by People’s Bank, the State of Connecticut, several municipalities, and the Episcopal Diocese. CHIF has a servicing portfolio
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
CONNECTICUT HOUSING INVESTMENT FUND, INC. (CONTINUED) of about 5,000 loans and annually originates 500 to 700 loans under these programs. Business. CHIF’s loan pool offers permanent loans for acquisition, construction, and rehabilitation of single-family and multifamily housing. Eligible borrowers for multifamily projects are nonprofit and forprofit sponsors. Down-payment assistance and permanent loans for rehabilitation of single-family homes are offered. Individuals and nonprofit sponsors are eligible borrowers. Nonprofit sponsors and (in certain circumstances) for-profit sponsors may borrow for predevelopment activities in connection with single-family housing development. Technical assistance is provided at cost to nonprofit developers regarding acquisition, finance, and tax credits. CHIF administers several loan programs for government entities and banks, providing loan underwriting, origination, and servicing. Operations. CHIF operates with a 13-person staff on an annual budget of $1,000,000. The board of directors, loan, advisory, and executive committees consist of financial institution representatives and others. Initial Capitalization: $5.25 million from investors for below-market loans. There was no required minimum contribution. Current Capitalization: $1 million for loans.
Subsidy Programs Utilized. Low Income Housing Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, state and local government programs. Targeting Requirements. federal programs.
Rent and Income Restrictions: As imposed by Activity Level
Period 1993–present
Loans Funded
Loan Volume
CHIF has been in a workout mode after restructuring debt.
$250,000
Delinquencies* Period
Rate
1993
20% (multifamily); 13% (single family)
*Delinquent means 90 days late.
Participating Institutions. Aetna Life Insurance Company, Connecticut Mutual Life Insurance Company, Phoenix Mutual Life Insurance Company, The Travelers Corp., Connecticut General Life Insurance Company, Episcopal Diocese of Hartford, People’s Bank.
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SOURCES OF CAPITAL: LOANS
DALLAS AFFORDABLE HOUSING PARTNERSHIP 3101 Greenwood Street Dallas, TX 75204 Tel. (214) 826-6594 Fax (214) 826-8077 Contact: Barbara Cassel, Director Background. DAHP is a nonprofit corporation formed in 1991 by Dallas area financial institutions and the Enterprise Foundation to finance single-family and multifamily housing affordable to lower-income people in Dallas County, Texas. The consortium’s $56 million loan pool is funded by member banks and the City of Dallas. An Affordable Housing Program grant from the Federal Home Loan Bank of Dallas also supports the loan pool. Members do not participate in each loan made by the consortium. To date, more than 300 single-family loans have been made to lower income first-time homebuyers. Business. DAHP offers permanent financing for new construction and acquisition of single-family housing. Eligible borrowers are first-time homebuyers earning less than 80 percent of area median income. DAHP accepts applications and enrolls qualified applicants in a fourweek homeownership counseling program. Depending on the creditworthiness of the borrower, first mortgage loans are made by DAHP and sold to Fannie Mae, or individual member banks make a firstmortgage loan and Enterprise Foundation makes a “soft” second mortgage loan. DAHP also offers construction and permanent financing for acquisition and rehabilitation of multifamily housing. Eligible borrowers include nonprofit and for-profit sponsors. DAHP has made two multifamily loan commitments to date. Technical assistance is offered without charge to nonprofit multifamily borrowers. Operations. DAHP operates with a full-time staff of nine on an annual budget of $335,000. The board of directors and executive and loan committees are all composed of representatives of member banks and others. Bank One, Texas, N.A. serves as agent bank. Initial Capitalization: $53 million from member banks, $3 million from the City of Dallas, and a $250,000 AHP grant from FHLBank of Dallas for loans; $290,000 frommember banks and $216,000 from the City of Dallas for operations. Minimum contribution: $10,000. Current Capitalization: Same as above. There is no minimum contribution required to participate in DAHP.
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DALLAS AFFORDABLE HOUSING PARTNERSHIP (CONTINUED) Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Resolution Trust Corporation’s Affordable Housing Program, Federal Home Loan Banks’ Affordable Housing Program (AHP), state housing trust fund, and local community receivership program. Negotiations are under way with Fannie Mae on a multifamily agreement. Targeting Requirements. area median income.
Income Restrictions: Less than 80 percent of
Activity Level Period
Loans Funded
Loan Volume
672 220 360
$29,994,778 $ 9,643,825 $16,000,000
1991–1994 1993 1994
Delinquencies* Period
Rate
1991–1994
0%
*DAHP defines delinquent as 15 days late.
Participating Institutions. Bank of America, Texas, N.A.; Bank One Texas, N.A.; Bank United of Texas, FSB; Comerica Bank-Texas; Compass Bank; First Inter-state Bank of Texas, N.A.; Guarantee Federal Bank, FSB; NationsBank of Texas, N.A.; Texas Commerce Bank, N.A.
DELAWARE COMMUNITY INVESTMENT CORPORATION 1220 Market Street, Suite 708 Wilmington, DE 19801 Tel. (302) 655-1420 Fax (302) 655-1419 Contact: Doris R. Schnider, Chief Operating Officer Background. DCIC is a nonprofit multibank community development corporation established to finance and invest in housing and related activities benefiting lower-income people and areas of Delaware. Established in 1989, DCIC operated as an informal loan pool with participating banks performing underwriting and lending functions under criteria
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DELAWARE COMMUNITY INVESTMENT CORPORATION (CONTINUED) established by DCIC. From 1989 through 1993, approximately $14 million was provided to finance over 700 units of affordable housing. DCIC chose to organize as a multibank CDC in late 1993 to allow more flexibility in the types of investments banks can make through DCIC. Member commitments to the loan pool are evidenced by a master note from DCIC. DCIC draws on member commitments as loans are funded. Members participate in each DCIC loan on a blind pool basis, making advances to DCIC based on their pro rata share of the total loan pool. Business. DCIC offers permanent loans for acquisition, rehabilitation, and new construction of multifamily housing. Eligible borrowers include individuals, for-profit, and nonprofit sponsors as well as government agencies. Bridge loans are available to nonprofit sponsors. In addition to the loan program, DCIC purchases Low Income Housing Tax Credits through a $10.1 million equity fund. DCIC’s goal for the equity fund is $13.5 million in the next 2 to 3 years. DCIC provides technical assistance to borrowers without charge. Operations. DCIC operates with two full-time staff people and an annual operating budget of $225,000. Ongoing operational costs are covered by loan fees and other charges. DCIC’s board of directors consists of representatives from member banks and the community at large. A loan committee consists of representatives of member banks. Advisory, executive, audit, equity investment, and new programs committees are also utilized. Loans are underwritten by DCIC staff, and reviewed and approved by the loan and executive committees. Equity fund investments are underwritten by DCIC staff, reviewed and approved by a five-member equity investment committee as well as the executive committee. DCIC staff service all loans. Initial Capitalization: $22,395,000 from member banks for loan pool. $8,000,000 from member banks for equity fund. $1.2 million for operations generated from sale of stock to banks Minimum contribution: $100,000 for loan pool; $250,000 for equity fund. Current Capitalization: $23,545,000 from member banks for loan pool.
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DELAWARE COMMUNITY INVESTMENT CORPORATION (CONTINUED) $10.1 million from member banks for equity fund. $1.2 million for operations generated from sale of stock to banks. Minimum contribution: $100,000 for loan pool; $250,000 for equity fund.
Subsidy Programs Utilized. Low Income Housing Tax Credits, Historic Tax Credits, HUD HOME Investment Partnerships, Farmers Home Administration programs, and state housing authority programs. Targeting Requirements. 51 percent of units in DCIC financed projects must be reserved for low income renters.
Activity Level Period
Loans Funded
Loan Volume
7
$6,159,926
1994
Delinquencies* Period
Rate
1994
0%
*DCIC considers a loan delinquent after 30 days and in default after 45 days.
Participating Institutions. Advanta Corp.; American Express Centurion Bank; Artisans Savings Bank; Associates National Bank; Baltimore Trust Company; Bank of New York (Delaware); Bankers Trust (Delaware); Beneficial National Bank; Beneficial National Bank, USA; Chase Manhattan Bank, USA; Chemical Bank Delaware; Citibank Delaware; CoreStates Bank; County Bank; Delaware Trust Company; FCC National Bank; First National Bank of Wyoming; First Maryland Bancorp; First State Bank; J.P. First USA Bank; Morgan Delaware; MBNA America Bank N.A.; Mellon Bank (DE) N.A.; NationsBank of Delaware N.A.; Ninth Ward Savings Bank; PNC Bank (formerly Bank of Delaware); PNC National Bank; Travelers Bank; Wachovia Bank Card Services; Whirlpool Financial National Bank; Wilmington Savings Fund Society; Wilmington Trust Company.
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DETROIT NEIGHBORHOOD INVESTMENT CORPORATION (DNIC) Community & Economic Development Dept. City of Detroit 150 Michigan Avenue Detroit, MI 48021 Tel. (313) 965-7212 Fax (313) 965-7250 Contact: Bruce E. Ruffin, President Background. DNIC is a nonprofit corporation founded in 1989 as a public/private partnership between the City of Detroit and nine area financial institutions. Participating lenders have committed $36 million towards the support of housing programs in Detroit. DNIC’s purpose is to assist lower-income Detroit residents finance home improvements and purchases through below–market rate loans. Lenders may select a loan pool for home improvement, single-family acquisition, or multifamily housing loans and purchase participations in each loan in that pool. To date, $1.8 million in DNIC home improvement loans have been made. Business. DNIC currently offers home improvement loans and loans for acquisition and rehabilitation of single-family homes. Eligible borrowers are individuals. The City of Detroit guarantees construction funds under a program for purchase and rehabilitation of vacant housing. Operations. DNIC operates using staff of member institutions and the City of Detroit. The board of directors, loan, advisory, and executive committees consist of representatives of member banks and the City of Detroit. Underwriting criteria were developed by the City of Detroit and consortium lenders. The loan committee, consisting of representatives of the city and participating lenders, approves each loan. Initial Capitalization: $90,000 from member banks for legal and marketing expenses. Each bank contributed $10,000.
Subsidy Programs Utilized. Community Development Block Grants, HUD HOME Investment Partnerships. Targeting Requirements. Income Restrictions: based on household size, gross annual household incomes from $25,000 to $47,100.
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DETROIT NEIGHBORHOOD INVESTMENT CORPORATION (DNIC) (CONTINUED) Activity Level Period
Loans Funded
1990–1994 1993 1994
185 11 20
Loan Volume $1,620,000 $ 93,749 $ 220,000
Delinquencies* Period
Rate
None reported *DNIC considers loan delinquent after 30 days and in default after 90 days.
Participating Institutions. Comerica Bank; Detroit Savings Bank; First Federal of Michigan; First Independence National Bank of Detroit; First Nationwide Bank, FSB; First of America Bank-Southeast Michigan, N.A.; Michigan National Bank; NBD Bank, N.A.; Standard Federal Bank.
FIRST HOUSING DEVELOPMENT CORPORATION OF FLORIDA 1715 N. Westshore Boulevard, Suite 375 Tampa, FL 33607 Tel. (813) 289-9410 Fax (813) 289-5580 Contact: Clifford B. Hardy, President Background. First Housing is a for-profit corporation created by 1978 Fla. Laws ch. 420 to finance affordable multifamily housing throughout Florida. State law requires all shareholders to be financial institutions doing business in Florida. An advisory board includes representatives of the Florida Senate, House of Representatives, Comptroller’s Office, Treasurer’s Office, and Department of Community Affairs to keep First Housing in touch with the state’s housing needs. Created in 1991, First Housing’s $100 million loan pool is funded by 10 member banks who participate in each loan on a blind pool basis. Since 1979, First Housing has loaned more than $239 million in construction and permanent financing for more than 6,000 units of affordable housing in Florida.
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FIRST HOUSING DEVELOPMENT CORPORATION OF FLORIDA (CONTINUED) Business. First Housing offers construction and permanent loans for new construction and rehabilitation of multifamily housing. Construction loans fold into permanent fixed rate loan with 15-year terms and 25-year amortization. Eligible borrowers include individuals for-profit and nonprofit sponsors. Special needs housing is eligible so long as it serves low- and moderate-income individuals. In addition to the loan pool, a full range of mortgage banking services are offered, including making and servicing permanent mortgage loans, originating, making, and placing conventional permanent loans for multifamily rental housing. First Housing provides underwriting, construction, and compliance servicing. Compliance monitoring for multifamily properties using federal and state programs like the Low Income Housing Tax Credit, HOME, and SAIL has grown to include over 48,500 rental units and more than $1.4 billion in mortgage loans. Operations. First Housing operates with a full-time staff of 20 on an annual budget of $1,477,000. There is a board of directors and executive committee, a loan committee, and an advisory board. Initial Capitalization: $150,000 from shareholders for operations. Current Capitalization: $1,149,922 from retained earnings.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, tax-exempt financing, HUD HOME Investment Partnerships, HUD Section 8, state Apartment Incentive Loan program providing soft second mortgages, and local governmentsponsored soft second mortgages or grants. Targeting Requirements.
None. Activity Level
Period
Loans Funded
Loan Volume
41 6 7
$239,810,700 $ 32,053,000 $ 30,000,000
1979–1994 1993 1994
Delinquencies* Period
Rate
1979–1994
0%
*Delinquent means 30 days late.
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FIRST HOUSING DEVELOPMENT CORPORATION OF FLORIDA (CONTINUED) Participating Institutions. AmSouth Bank of Florida; County National Bank of South Florida; Great Western; First Union National Bank; Sun Bank N.A.; NationsBank of Florida; Barnett Bank; Safra Republic Bank; Citibank, FSB; Jefferson Bank of Florida.
GREATER NEW HAVEN COMMUNITY LOAN FUND 5 Elm Street New Haven, CT 06510 Tel. (203) 789-8690 Fax (203) 865-6475 Contact: Carla Weil-Coleman, Fund Manager Background. GNHCLF is a nonprofit corporation founded in 1987 through the efforts of the Downtown Cooperative Ministry, an organization of 16 New Haven religious institutions, to address the affordable housing needs in the region. The Fund makes below–market interest rate loans and provides technical assistance to community-based and nonprofit developers who build or rehabilitate low- to moderate-income housing in the New Haven area. To date, $1.3 million has been loaned to 18 projects creating nearly 350 units of affordable housing for more than 700 people. In 1993, ten banks committed $7 million to an affordable housing bank pool (AHBP). Member banks participate in each of the bank pool’s loans. The bank pool has loaned $5.84 million to six projects, resulting in 125 units of low-income rental housing and units for first-time home buyers. Business. AHBP offers construction loans for rehabilitation and new construction of single-family and multifamily housing, including special needs housing. Bridge loans and loans for acquisition and predevelopment activities are also available. Eligible borrowers include for-profit and nonprofit sponsors. Nonprofit sponsors are the most common borrowers to date. Operations. The bank pool operates as a committee of the GNHCLF, which has two full-time staff people and an annual budget of $125,000. A loan committee consists of 10 representatives (one from each member bank) and three nonvoting representatives from the GNHCLF board. GNHCLF’s board of directors includes financial institution representatives as well as individuals from across the community.
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GREATER NEW HAVEN COMMUNITY LOAN FUND (CONTINUED) Initial Capitalization: $7,000,000 from member banks for loans; $50,000 for operations. Minimum contribution: $250,000. Current Capitalization: $7,250,000 from member banks for loans; $50,000 for operations. Minimum contribution: $250,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Federal Home Loan Bank’s Affordable Housing Program (AHP), state Department of Housing funds for site development, and municipal infill housing program providing city lots and second mortgages. Targeting Requirements. Rent Restrictions: None. Income Restrictions: 80 percent of area median income. Activity Level Period
Loans Funded
Loan Volume
5 2 3
$2,850,000 $1,050,000 $1,800,000
1993–1994 1993 1994
Delinquencies Period
Rate
1993–1994
0%
Participating Institutions. Bank of Boston, CT; Bank of New Haven; Centerbank; First Federal Bank; First Fidelity Urban Investment Corp.; Fleet Bank, N.A.; Lafayette American Bank; New Haven Savings Bank; People’s Bank; Shawmut Bank, CT, N.A.; Union Trust Co.
HAWAII COMMUNITY REINVESTMENT CORPORATION Pacific Tower, Suite 1450, 1001 Bishop Street Honolulu, HI 96813 Tel. (808) 524-2295 Fax (808) 524-1069 Contact: Donald L. Tarleton, President Background. HCRC is a nonprofit corporation founded in 1991 to address the serious shortage of affordable housing in Hawaii. The impetus came from the State of Hawaii and the City and County of Honolulu with the assistance of the Federal Reserve Bank of San Francisco. The nonprofit Development Fund of San Francisco staffed the planning
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HAWAII COMMUNITY REINVESTMENT CORPORATION (CONTINUED) task force. The $50 million loan pool is funded by 21 Hawaii financial institutions, which participate in each loan the consortium makes. To date, the consortium has loaned more than $31 million to finance 678 units of affordable housing in Hawaii. Business. HCRC offers fixed rate permanent financing for multifamily rental housing, including special needs housing. This includes refinancing, forward commitments and financing for acquisition of existing properties, rehabilitation, and new construction. Special needs populations served include elderly, homeless, and mentally handicapped people. Eligible borrowers are individuals and for-profit and nonprofit sponsors for all loans. HCRC has also created a tax credit equity fund, the Hawaii Affordable Housing Fund I. An HCRC affiliate, Hawaii Investors for Affordable Housing, Inc., will purchase tax credit projects on behalf of its limited partner investors. These investors are primarily Hawaiian financial institutions. Operations. HCRC operates with a full-time staff of four and an annual operating budget of 450,000. The loan committee consists of member institutions; the board of directors and executive committee include others. Initial Capitalization: $185,000 from lenders for operating expenses. Current Capitalization: $200,000 from operational income. Minimum lender contribution for loans: $250,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing tax Credits, HUD Section 8, state rental assistance, rent supplement, rental housing trust fund, state and local real property and excise tax waivers, and local unilateral agreements with developers. Targeting Requirements. Debt Program: Rent Restrictions: 51 percent of units at 30 percent of 80 percent of HUD area median income. Income Restrictions: 51 percent of units targeted to households earning less than 80 percent of HUD area median income. Equity Program: Rent Restrictions: 30% of imputed income level for tenants. Income Restrictions: Minimum of 20 percent of units at 50 percent of area median income, or minimum of 40 percent of units at 60 percent of area median income.
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HAWAII COMMUNITY REINVESTMENT CORPORATION (CONTINUED) Activity Level Period
Loans Funded
1991–1994 1993 1994
15 3 6
Loan Volume $28,990,000 $ 1,030,000 $ 9,160,000
Delinquencies* Period
Rate
1991–1994
0%
*HCRC defines delinquent as 30 days late.
Participating Institutions. American Savings Bank, FSB; Bank of America; Bank of Hawaii; Bank of Honolulu; Bank U.S.A., N.A.; Central Pacific Bank; City Bank; Finance Factors, Limited; First Federal Savings and Loan Association of America; First Hawaiian Bank; First Hawaiian Creditcorp, Inc.; First Nation-wide Bank, FSB; GECC Financial Corporation; Hawaii National Bank; Liberty Bank; Pioneer Federal Savings Bank; Rainbow Financial Corporation; Realty Finance, Inc.; Servco Financial Corporation; Standard Financial Corp.
HOMES FOR SOUTH FLORIDA 1390 Brickell Avenue, Suite 270 Miami, FL 33131 Tel. (305) 579-3076 Fax (305) 358-8638 Contact: Marie Lee, Executive Director Background. Homes for South Florida (HSF) was founded in 1987 to support development of low-income and minority communities by helping for profit and nonprofit developers finance affordable housing in Dade, Broward, and Monroe counties. HSF also arranges financing for businesses in low-income areas of South Florida and black-owned businesses in Dade County. Banks participate through commitments to four distinct loan pools. The consortium has made 28 loans totaling approximately $90 million. Business. The consortium offers acquisition, construction, rehabilitation, and permanent financing for single-family and multifamily housing affordable to tenants earning less than 80 percent of area median income. Financing for special needs housing such as group homes and SROs is also available. The consortium also provides free technical assistance
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HOMES FOR SOUTH FLORIDA (CONTINUED) on building and managing affordable housing to nonprofit borrowers and similar services to for-profit borrowers on a fee basis. Nonprofit housing sponsors have been the most frequent borrowers to date. HSF operates four loan pools: The Founding Pool, The Community Bank Loan Program, The Community Economic Development Program, and the Hurricane Andrew Recovery Program. Member institutions need not contribute to all pools but participate in all loans made from the pools to which they have contributed. Each Founding Pool member agrees to provide $10 million in financing for affordable housing through HSF in the form of construction, mini-perm, and permanent loans, as well as letters of credit and government receivables financing. Institutions participating in the Community Bank Loan Program agree to provide a minimum of $1 million each for similar loans. Commitments to the Community Economic Development Program are tailored to the size of the institution and range from $200,000 to $1 million. Institutions in the Hurricane Andrew Recovery pool have committed $25 million each. Interest rates for construction loans are generally prime plus two points; permanent loans are fixed at 2¾ percent above comparable Treasuries. Fees vary according to project economics but are targeted at 3 percent of total financing and 2 percent of any forward commitment on permanent loans. Operations. Each loan pool has its own credit committee whose members represent each participating institution. The consortium operates with a staff of three and an annual operating budget of $250,000. Initial Capitalization: $16 million from member institutions for loans and $25,000 from each member institution for overhead. Current Capitalization: $200 million from member financial institutions for loans and $300,000 from loan fees for overhead. Minimum contribution: $1,000,000.
Subsidy Programs Utilized. Community Development Block Grants, HUD HOME Investment Partnership Program, HUD Section 8 rental assistance program, Low Income Housing Tax Credit program, taxexempt financing, Federal Home Loan Banks’ Affordable Housing and Community Investment Programs, Veterans Administration and Small Business Administration Programs and state and local government programs.
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HOMES FOR SOUTH FLORIDA (CONTINUED) Targeting Requirements. Rent Restrictions: affordable to households earning less than 80 percent of area median income. Income Restrictions: Household income should be less than 80 percent of area median income. Activity Level Period
Loans Funded
Loan Volume
28
$90,000,000
1987–1994
Delinquencies Period
Rate
cumulative (1987–1994)
0%
Participating Institutions. (Since inception): American Savings Bank of Florida, Barnett Bank of South Florida, Citibank, City National Bank, Coconut Grove Bank, Dadeland Bank, Eastern National Bank, First Union National Bank of Florida, Home Savings of America, NationsBank, Northern Trust Bank of Florida, Pacific National Bank, Peoples National Bank, Safra Bank, SunBank/Miami, United Nations Bank.
HOUSING DEVELOPMENT FUND OF LOWER FAIRFIELD COUNTY, INC. 300 Main Street Stamford, CT 06901 Tel. (203) 969-1830 Fax (203) 969-2356 Contact: Joan Carty, Executive Director Background. HDF was incorporated in 1989 as the Stamford Development Fund, a 501(c)(4) nonprofit corporation. In 1992, the name was changed to the Housing Development Fund of Lower Fairfield County to reflect a regional approach to addressing the high cost of housing in one of the most expensive areas of the country. HDF grew out of a working group comprosed of individuals representing banks, corporations, and nonprofit organizations. The working group was created with the assistance of then Senator Richard Blumenthal. The group identified the need for a single source of long-term below–market rate housing loans.
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
HOUSING DEVELOPMENT FUND OF LOWER FAIRFIELD COUNTY, INC. (CONTINUED) Business. The consortium offers acquisition, construction, rehabilitation, and permanent financing for single-family and multifamily housing affordable to tenants earning up to the area median income. Financing for special needs housing such as group homes and SROs is also available. The consortium also provides free technical assistance on building and managing affordable housing to borrowers. For-profit housing sponsors have been the most frequent borrowers to date. The most common loans are construction and permanent loans for multifamily housing. Operations. Lenders participate in each loan made by the consortium. The consortium operates with a staff of three and an annual operating budget of $208,000. Underwriting criteria were developed by the loan committee and the board. Initial Capitalization: $9.5 million from member institutions for loans. Current Capitalization: $8.9 million from member financial institutions for loans.
Subsidy Programs Utilized. Community Development Block Grants, HUD HOME Investment Partnership Program, HUD Section 8 rental assistance program, Low Income Housing Tax Credit program, tax-exempt financing, Federal Home Loan Banks’ Affordable Housing Program, and state and local government programs. Targeting Requirements. Rent Restritctions: Affordable to households earning less than 80 percent of area median income. Income Restrictions: Household income should be less than 80 percent of area median income.
Activity Level Period 1987–1994
Loans Funded
Loan Volume
28
$90,000,000
Delinquencies Period
Rate
cumulative (1987–1994)
0%
Participating Institutions. (Since inception): American Savings Bank of Florida, Barnett Bank of South Florida, Citibank, City National Bank, Coconut Grove Bank, Dadeland Bank, Eastern National Bank, First Union
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HOUSING DEVELOPMENT FUND OF LOWER FAIRFIELD COUNTY, INC. (CONTINUED) National Bank of Florida, Home Savings of America, NationsBank, Northern Trust Bank of Florida, Pacific National Bank, Peoples National Bank, Safra Bank, SunBank/Miami, United National Bank.
IDAHO COMMUNITY REINVESTMENT CORPORATION P.O. BOX 2002 Boise, ID 83701-2002 Tel. (208) 336-8847 Fax (208) 331-4801 Contact: Robert E. Reed, Jr. (208) 331-4742; or Laura Shaffer (208) 331-4741 Background. Idaho Community Reinvestment Corporation is a nonprofit corporation founded in 1993 to finance the creation and preservation of affordable rental housing for low- and moderate-income people. Members purchase participations in each loan made by the consortium. To date, more than $8 million dollars have been loaned to five projects in Idaho. Business. ICRC offers permanent financing for acquisition, new construction, and rehabilitation of multifamily housing. Special needs populations served include large families, single-parent households, and the elderly. Eligible borrowers for all loans include individuals, forprofit and nonprofit sponsors. Operations. Idaho Housing Agency serves as the Agent for ICRC, providing operational services. Initial Capitalization: $35,000,000 for loans. Current Capitalization: $35,000,000 for loans.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing tax Credits, HUD HOME Investment Partnerships, Federal Home Loan Banks’ Affordable Housing Program (AHP), and Farmers Home Administration programs. Targeting Requirements. At least 20 percent of the units must be affordable to households earning 50 percent of the area median income; or at least 40 percent of the rental units must be affordable to households earning 60 percent of the area median income. Affordability is defined as 30 percent of household income.
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IDAHO COMMUNITY REINVESTMENT CORPORATION (CONTINUED) Activity Level Period
Loans Funded
Loan Volume
4
$6,318,200
1994
Delinquencies* Period
Rate
1994
0%
*Delinquencies are defined as 10 days late; defaults are declared after 30 days. Participating Institutions. Bank of America, First Federal Bank of Idaho, Farmers and Merchants State Bank, First Interstate Bank of Idaho, First Security Bank of Idaho, Ireland Bank, Key Bank of Idaho, U.S. Bank of Idaho, Washington Federal Savings, West One Bank.
LONG ISLAND HOUSING PARTNERSHIP Regional Lending Consortium 180 Oser Avenue Hauppauge, NY 11788 Tel. (516) 435-4710 Fax (516) 435-4751 Contact: Marie Nahikian, Regional Lending Consortium Coordinator Andrew Buonantuono, Regional Lending Consortium Administrator Background. LIHPRLC is an unincorporated committtee of the Long Island Housing Partnership (LIHP). LIHP is a nonprofit corporation founded in 1987 by business, religious, educational, and professional leaders to facilitate development of affordable housing for Long Island’s young and elderly. LIHP offers mortgage training and education in cooperation with the New York Mortgage Coalition as well as conducting seminars for first-time homebuyers. LIHP’s affiliate, Long Island Partnership Housing Development Fund Company has developed over 300 units of for-sale affordable housing. The consortium began in 1991 to fund housing development that met social goals as well as credit standards. The $17 million loan pool is funded by member banks who purchase participations in loans. Member banks are not required to participate in each loan made by the consortium, but each bank agrees to participate in at least one loan each year.
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LONG ISLAND HOUSING PARTNERSHIP (CONTINUED) After review by consortium staff, applications are forwarded to member banks who decide whether to participate. The consortium’s first loan commitment is a $1 million construction loan and $3.5 million permanent loan for conversion of a historic school to 59 rental apartments for low-income seniors and space for community organizations. Business. The consortium offers construction and permanent financing for single-family and multifamily housing, including special needs housing. Loans are available for new construction, acquisition, and rehabilitation as well as predevelopment activities. Bridge financing is also available. Eligible borrowers include for-profit and nonprofit sponsors. For-sale housing must be for first-time homebuyers. Technical assistance is provided to borrowers seeking access to public funds. Fees for assistance that goes beyond the loan application process are negotiated. Operations. The consortium operates with four part-time staff people. The consortium committee of LIHP functions as the loan committee. Members are five bankers, two government representatives, and one construction industry representative. Once a project is deemed socially and creditworthy, the consortium committee offers the project financing to member banks for participation in the construction and/ or permanent financing. The lead bank then underwrites the loan against its credit criteria and each participating lender performs its own due diligence. Initial Capitalization: $15,000 from participating banks for administration. Minimum contribution: $1,000. Current Capitalization: $50,000 from participating banks. Minimum commitment required to participate in the consortium is $500,000 Minimum contribution; $2,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, Federal Home Loan Banks’ Affordable Housing Program (AHP) and Community Investment Program (CIP), and New York State Affordable Home Ownership Development Program and Housing Development Fund.
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LONG ISLAND HOUSING PARTNERSHIP (CONTINUED) Activity Level Period
Loans Funded
Loan Volume
1 1 2
$3,500,000 $3,500,000 $2,650,000
1993–1994 1993 1994
Delinquencies none reported
Targeting Requirements.
None.
Participating Institutions. AFL-CIO Housing Investment Trust, Apple Bank, Astoria Federal Savings, Barclays Bank, Chase Community Development Corp., Chemical Bank, Citibank, European American Bank, Fleet Bank, First Nation-wide Bank, Home Federal Savings Bank, Home Savings of America, Jamaica Savings Bank, Long Island Commercial Bank, Long Island Savings Bank, National Westminster Bank, North Fork Bank, Northside Savings Bank, Pioneer Savings & Loan Association, Reliance Federal Savings Bank, Republic National Bank of New York, River Bank America, Roosevelt Savings Bank, Roslyn Savings Bank, The Bank of New York.
MASSACHUSETTS HOUSING INVESTMENT CORP. 70 Federal Street Boston, MA 02110-1906 Tel. (617) 338-6886 Contact: Ray Weaving Background. MHIC is a nonprofit corporation formed in 1990 by the Massachusetts Bankers Association to pool the resources of Massachusetts banks to improve and expand affordable housing finance in Massachusetts. MHIC’s $52 million loan pool is funded by member banks,
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MASSACHUSETTS HOUSING INVESTMENT CORP. (CONTINUED) which participate in each MHIC loan. To date, the loan program has committed $63 million to 43 project loans financing 1,849 units of affordable housing. MHIC operates an equity investment program, placing more than $101 million in 34 developments representing 1,023 units of housing. MHIC’s loan and equity programs have together committed over $166 million in pooled investments to 62 affordable housing projects, representing 2,583 units of affordable housing. Business. MHIC has to date offered construction loans for rehabilitation and new construction of single-family and multifamily housing, including special needs housing for low- and moderate-income people. Eligible borrowers are for-profit and nonprofit sponsors. During 1994, MHIC expanded to originate permanent mortgage loans to be sold to the Massachusetts Housing Partnership Fund. To broaden the pool of investors and improve the investment process for project sponsors, MHIC’s equity program has been restructured as a pooled investment called the Massachusetts Housing Equity Fund. Offering investments in Low Income Housing Tax Credits, the Fund is organized as a limited partnership. Massachusetts Housing Equity Fund, Inc., a wholly owned subsidiary of MHIC, is the general partner of the Fund. MHIC has worked to simplify the process of applying for financing of any kind. In conjunction with other affordable housing lenders, MHIC designed and released a “one-stop” application for use with all participating agencies. This single-application process eliminates redundant and burdensome paperwork often required to secure financing. Operations. MHIC operates with a 17-person staff on an annual budget of approximately $2 million. Program revenue fully covers overhead costs, including a loan loss reserve. A 15-member board of directors consists of ten bank and five community members. A loan committee composed of representatives of member banks and community groups meets twice monthly to review and recommend loans to the board. A loan policy governs all lending decisions and credit guidelines specifically tailored to affordable housing are used. Underwriting guidelines were developed by the Loan Department staff and approved by the loan committee and board of directors. Loan servicing is managed by the Bank of Boston. Initial Capitalization: $35 million from 17 banks for construction loan pool. Minimum contribution: $150,000. Current Capitalization: $52.4 million from member banks. Minimum contribution: $250,000.
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
MASSACHUSETTS HOUSING INVESTMENT CORP. (CONTINUED) Subsidy Programs Utilized. Government subsidy programs regularly used in conjunction with MHIC financed projects: Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Federal Home Loan Banks’ Affordable Housing Program (AHP), and local government programs. Targeting Requirements.
None. Activity Level
Period
Loans Funded
Loan Volume
32 9 9
$35,000,000 $ 8,590,000 $17,416,000
1990–1994 1993 1994
Delinquencies* Period
Rate
1990–1994
0%
*MHIC defines delinquent as 30–60 days late.
Participating Institutions. (Loan Program): Bank of Boston, Shawmut Bank, Fleet Bank, BayBank, State Street Bank, Massachusetts Company, Wainwright Bank, FDIC (Workingmen’s Coop Bank), US Trust, Sterling Bank, Neworld Bank, Springfield Institution for Savings, Bank of Commerce, Atlantic Bank, Stoneham Savings, Boston Private Bank.
NETWORK FOR OREGON Affordable Housing (NOAH) P.O. Box 13436 Portland, OR 97213 Tel. (503) 287-9750 Fax (503) 287-9761 Contact: Margaret Van Vliet, Executive Director Background. NOAH is a nonprofit corporation formed in 1990 by Oregon financial institutions to finance housing affordable to lower-income people in Oregon. NOAH made its first loan commitment in July, 1992. Member banks can choose to participate in every loan NOAH makes or only those loans in a certain geographic area of the state. To date, NOAH has loaned and committed nearly $38 million to finance approximately 1,600 units of affordable housing in the state of Oregon. NOAH issues 12- to 15-month forward commitments, accounting for approximately $17 million in loans committed but not yet closed.
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NETWORK FOR OREGON (CONTINUED) Business. NOAH offers permanent loans for rehabilitation and new construction of multifamily rental housing, including special needs housing for seniors, farmworker families, homeless people, and SROs. Eligible borrowers include individuals, for-profit and nonprofit organizations. Most commonly, NOAH lends to nonprofits for multifamily new construction projects. NOAH provides pro bono technical assistance to nonprofit borrowers, helping to assemble loans and subsidy applications and teach housing finance. NOAH also serves as nonprofit intermediary for the statewide Downpayment Assistance Program for first-time home buyers, and for preservation technical assistance grants under HUD’s LIHPRHA program. Operations. NOAH operates with a four-person staff on an annual budget of $350,000. The loan committee, board of directors, and executive committee consist of financial institution representatives and others. Subsidy Programs Utilized. Low Income Housing Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Federal Home Loan Banks’ Affordable Housing Program (AHP) and Community Investment Program (CIP), Oregon Low Income Housing Trust Fund grants, Oregon Low Income Housing and Farmworker Housing Tax Credits. Targeting Requirements. Rent Restrictions: Affordable to people earning 80 percent of area median income. Income Restrictions: 80 percent of area median income. Activity Level Period
Loans Funded
Loan Volume
11 4 5
$15,013,116 $ 7,660,000 $ 3,903,116
1992–1994 1993 1994
Delinquencies* Period
Rate
1992–1994
0%
*NOAH defines delinquent as 30 days late.
Participating Institutions. Bank of America Oregon, Bank of Astoria, The Bank of California, Clackamas County Bank, Columbia River Bank, The Commercial Bank, First Interstate Bank, First Security Bank of Oregon,
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NETWORK FOR OREGON (CONTINUED) Juniper Banking Company, Key Bank of Oregon, Liberty Federal Bank, Oregon Pacific Banking Company, Security Bank, Siuslaw Valley Bank, U.S. Bank, Valley Community Bank, Washington Mutual Savings Bank, West One Bank.
NEVADA COMMUNITY REINVESTMENT CORPORATION 5920 W. Flamingo Road, Suite 8 Las Vegas, NV 89103 Tel. (702) 221-0499 Fax (702) 221-0602 Contact: Mamie Chinn Hechter, President Background. NCRC is a nonprofit corporation formed in 1991 by Nevada financial institutions as a catalyst for development and preservation of affordable housing in Nevada. The Development Fund, a San Francisco nonprofit organization, served as consultant. NCRC’s $40 million loan pool is funded by member institutions on a prorata basis based on deposit size. Members participate in each NCRC loan. Business. The consortium offers permanent loans for acquisition with rehabilitation, permanent take-out financing for newly constructed units and construction and permanent loans for newly constructed units in rural areas only. Eligible borrowers are for-profit and nonprofit sponsors. Technical assistance is offered to borrowers in preparing loan applications and seeking other financing. Operations. NCRC operates with a two-person staff on an annual budget of $180,000. A loan committee, board of directors, and executive committee are composed of member institutions. Underwriting criteria were developed by NCRC’s task force and The Development Fund, Inc., formatting the criteria after other consortia assisted by The Development Fund. Initial Capitalization: $218,900 from member banks for the first two years of operation. There was no required minimum contribution; a member’s contribution was based on deposit size.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Resolution Trust Corporation’s Affordable Housing Program and Federal Home Loan Banks’ Affordable Housing Program (AHP), and state housing trust fund.
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NEVADA COMMUNITY REINVESTMENT CORPORATION (CONTINUED) Targeting Requirements. Rent Restrictions: No more than 30 percent of household income can go towards rent. Income Restrictions: Only as required by other government programs such as HOME or the Low Income Housing Tax Credit OR at least 51% of the units must be set aside for people earning 80 percent or less of the area median income. Activity Level Period
Loans Funded
Loan Volume
5 3 2
$3,174,678 $1,540,000 $1,634,678
1992–1994 1993 1994
Delinquencies* Period
Rate
1992–1994
0%
*NCRC defines delinquent as 5 days late and declares default at 30 days late.
Participating Institutions. American Bank of Commerce; American Federal Savings Bank; Bank of America, Nevada; Bank West of Nevada; California Federal Bank, FSB; Citibank (Nevada), N.A.; Comstock Bank; First Interstate Bank of Nevada; First Security Bank; InterWest National Bank of Nevada; Laughlin National Bank; Nevada Banking Company; Nevada State Bank; Pioneer Citizens Bank of Nevada; PriMerit Bank, FSB; Sierra Bank of Nevada; Sun State Bank; U.S. Bank of Nevada.
NEW HAMPSHIRE COMMUNITY REINVESTMENT CORPORATION New Hampshire Housing Finance Authority P.O. Box 5087 Manchester, NH 03108-5087 Tel. (603) 472-8623 Fax (603) 471-1043 Contact: Christopher Miller, Director of Planning and Development Background. The New Hampshire Community Reinvestment Corporation (NHCRC) is a loan consortium created by 29 New Hampshire banks and the New Hampshire Housing Finance Authority in February 1995. The Development Fund, a San Francisco nonprofit organization, served as consultant. NHCRC loan programs are designed to increase the
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NEW HAMPSHIRE COMMUNITY REINVESTMENT CORPORATION (CONTINUED) availability and consistency of financing for affordable rental housing in New Hampshire. Participating institutions sought to share credit risks and develop underwriting, pricing, and servicing standards acceptable to all. Business. The consortium will initiate its activities with five loan products: permanent loans for newly constructed multifamily projects, substantial rehabilitation of multifamily projects, refinancings to preserve the affordability of existing multifamily projects, construction loans where another lender cannot be identified and the permanent loan is to be made by NHCRC, and bridge loans up to seven years for projects receiving a federal low-income housing tax credit allocation. There is no minimum loan amount, and the minimum number of units for a project is two. The maximum loan to value ratio is 75 percent of appraised value or the total cost, whichever is less. Interest rates and fees for construction loans are derived from the comparable Treasury bond rate plus an applicable spread. Permanent loan fees for projects not using government subsidy are 2.50 percent over U.S. Treasuries of comparable maturity. Permanent loan fees for projects using government subsidy is 1.25 percent over U.S. Treasuries of comparable maturity. The application fee is $500, plus legal, appraisal, environmental study, inspection, and other out-of-pocket costs. Origination fees are 2.5 percent for projects not using government subsidy and 1.5 percent for government subsidized projects. Operations. Lenders participate in each loan made by the consortium. The consortium operates with staff from the New Hampshire Housing Finance Authority. Underwriting criteria were developed by the loan committee and the board. Initial Capitalization: $30,000,000 for loans. Current Capitalization: $30,000,000 for loans.
Subsidy Programs Utilized. Community Development Block Grants, HUD HOME Investment Partnership Program, HUD Section 8 rental assistance program, Low Income Housing Tax Credit program, and historic tax credits. Targeting Requirements. A minimum percentage of the units in a development must meet at least one of the following household income and affordability goals: 20 percent of the units affordable to households earning 50 percent of area median income, or
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NEW HAMPSHIRE COMMUNITY REINVESTMENT CORPORATION (CONTINUED) 40 percent of the units affordable to households earning 60% of area median income, or 51 percent of the units affordable to households earning 80 percent of area median income. Priority will be given to projects in which at least 30 percent of the units serve one or more of the following populations: large families, single-parent households, people with physical or mental disabilities, the elderly, and households dislocated or at risk of dislocation. Participating Institutions. (Since inception): Centerpoint Bank; Community Bank & Trust Company; Community Guarantee Savings Bank; Concord Savings Bank; Family Bank of New Hampshire; Farmington National Bank; Federal Savings Bank; First Colebrook Bank; First NH Bank; First National Bank of Portsmouth; First Signature Bank & Trust Company; Fleet Bank NH; Granite Bank; Lake Sunapee Savings Bank, FSB; Landmark Bank; Ledyard National Bank; Meredith Village Savings Bank; Milford Co-Operative Bank; New Hampshire Housing Finance Authority; New London Trust, FSB; Olde Port Bank & Trust Company; Pelham Bank & Trust; Peterborough Savings Bank; Portsmouth Savings Bank; Profile Bank, FSB; Salem Co-Operative Bank; Shawmut Bank NH; Siwooganock Guarantee Savings Bank; Village Bank and Trust Company; Woodsville Guarantee Savings Bank.
NEW JERSEY COMMUNITY LOAN FUND One West State Street, P.O. Box 1655 Trenton, NJ 08605 Tel. (609) 989-7766 Fax (609) 393-9016 Contact: Anne S. Li, Executive Director Background. NJCLF is a nonprofit corporation formed in 1988 to assist community-based organizations finance housing and economic development for lower-income people in New Jersey. Financial institutions have been joined by other corporations, foundations, a public agency, religious organizations, and individuals investing in a loan pool with over $5 million. Members provide capital for each loan on a blind pool basis. Lenders can also make grants to a separate fund for seed money forgivable loans. To date, NJCLF has loaned over $6 million dollars to support about $70 million worth of affordable housing, day care centers,
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
NEW JERSEY COMMUNITY LOAN FUND (CONTINUED) and other development projects in New Jersey. Approximately 80 percent of NJCDLF’s loans have been for affordable housing. Business. NJCLF offers construction and mini-perm loans for acquisition, rehabilitation, or construction of single and multifamily housing (including special needs housing) as well as services or business activities benefitting lower-income people. Bridge loans and loans for predevelopment activities are also available. Eligible borrowers are nonprofit organizations, community land trusts, and cooperatives. Loans are most commonly made to nonprofit sponsors of single-family and multifamily housing construction and rehabilitation. Economic development loans are available to support small business and commercial development. Eligible borrowers for economic development loans are nonprofit sponsors, for-profit organizations affiliated with a non-profit, and small businesses with a significant impact on job creation and neighborhood revitalization. Technical assistance is offered to nonprofits in the form of financial review and financial packaging. Fees for technical assistance are negotiated. Operations. NJCLF operates with a staff of six full-time people and two part-time people on an annual operating budget of $300,000. The loan committee, board of directors, and executive committee include financial institution representatives and others. Initial Capitalization: $200,000 from banks, religious organizations, and foundations for loans; $50,000 for operations. Minimum investment: $1,000. Current Capitalization: $5 million plus from over 70 institutions and individuals for loans; $300,000 per year for operations. Minimum investment: $500.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Tax-exempt financing, Historic Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, HUD McKinney Act programs, Federal Home Loan Banks’ Affordable Housing Program (AHP) and Community Investment Program (CIP), Farmers Home Administration and Small Business Administration programs, and state balanced housing and housing demonstration programs Targeting Requirements. communities.
Lower-income
207
people
or
lower-income
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SOURCES OF CAPITAL: LOANS
NEW JERSEY COMMUNITY LOAN FUND (CONTINUED) Activity Level Period
Loans Funded
Loan Volume
60 16 24
$6,100,000 $2,000,000 $2,200,000
1988–1994 1993 1994
Delinquencies* Period
Rate
1988–1994 1994
1% 1%
*NJCLF defines delinquent as 45 days late.
Participating Institutions. South Jersey Savings Association; Sovereign Bancorp; Midlantic Bank; Chemical Bank NJ; United Jersey Bank/ Hackensack; Bank of New York, National Community Division; Cenlar Federal Savings; Central Jersey Bank; Collective Bank; Community Bank of Bergen County; CoreStates New Jersey National Bank; Dime Savings Bank NJ; Meridian Community Partnership Development Corp.; Valley National Bank; Bergen Commercial Bank; Atlantic Stewardship Bank; Woodstown National Bank; Burlington County Bank; Spencer Savings Bank; Clifton Savings Bank; National West Bank, N.A.; First Fidelity Bank; Great Falls Bank.
SAVINGS ASSOCIATIONS MORTGAGE COMPANY (SAMCO) 2001 Gateway Place, Suite 210 East San Jose, CA 95110 Tel. (408) 451-2600 Fax (408) 451-2626 Contact: David Nahas, Vice President/Chief Lending Officer Background. SAMCO is a for-profit corporation founded in 1969 by 11 savings and loan associations in the San Francisco Bay area to pool single-family mortgages for low-income borrowers. Passage of the Community Reinvestment Act in 1978 resulted in lenders originating these
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
SAVINGS ASSOCIATIONS MORTGAGE COMPANY (SAMCO) (CONTINUED) loans for their own portfolio, so SAMCO refocused on originating and servicing permanent loans for multifamily and special needs housing. SAMCO’s more than 80 member institutions include thrifts, commercial banks, and commercial loan companies. Members participate on a discretionary loan-by-loan basis. Some members participate in all SAMCO loans, and others participate only in loans serving their communities. In 1994, SAMCO’s nearly $48 million helped finance 1,800 units of affordable housing in California. Business. SAMCO offers permanent financing for acquisition and new construction of multifamily and special needs housing for low-income people. The consortium also offers bridge loans. Eligible borrowers for all loans are individuals, for-profit, and nonprofit sponsor. Nonprofit sponsors are the most frequent borrowers. Operations. SAMCO operates with a full-time staff of 12 people and an annual operating budget of approximately $1.4 million. SAMCO utilizes a board of directors, loan, advisory, and executive committees. Underwriting criteria are developed by SAMCO staff and the loan committee. Loan applications approved by the loan committee are submitted monthly to members. SAMCO’s $2–3 million monthly volume offers members various investment options. Initial Capitalization: $110,000 from member savings and loan associations. Minimum contribution: $10,000. Current Capitalization: $307,500 capital stock; $1,798,265 retained earnings.
Subsidy Programs Utilized. Government subsidy programs regularly used in conjunction with SAMCO financed projects: Community Development Block Grants, Low Income Housing Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Federal Home Loan Banks’ Affordable Housing Program (AHP), state rental housing programs, and local redevelopment agency tax increment funds. Targeting Requirements. Rent Restrictions: Rents may not exceed 30 percent of household monthly gross income, adjusted for targeted affordability levels. Income Restrictions: At least 51 percent of units must be affordable to households earning 80 percent or less of area median income.
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TAMPA BAY COMMUNITY REINVESTMENT CORPORATION 1111 N. Westshore Blvd., Suite 103, Box 311 Tampa, FL 33607 Tel. (813) 282-4525 Fax (813) 286-6566 Contact: Debra S. Reyes, President Background. TBCRC is a nonprofit corporation founded in 1993 as a catalyst for affordable housing in the Tampa Bay region. Eighteen lenders and the Federal Reserve Bank of Atlanta consulted with the nonprofit Development Fund of San Francisco, modeling the consortia on similar organizations elsewhere. TBCRC’s $50 million loan pool is funded by member banks, which participate in each loan made by the consortium. If additional pools are established, participation is optional. Membership in the consortium is for a two-year period. To date, nearly $10 million has been committed to projects in three counties. Business. TBCRC offers mini-permanent and permanent loans for acquisition and rehabilitation of multifamily housing. Individuals, for-profit and nonprofit organizations are eligible borrowers. Individuals and nonprofit sponsors are the most frequent borrowers for multifamily housing. Loans for acquisition and rehabilitation of special needs housing are available to nonprofit sponsors. Transitional housing, emergency housing, and shelters are not eligible. Technical assistance is provided to borrowers in preparing loan applications and to nonprofits seeking additional funding in the form of public subsidies. Whenever possible, TBCRC financing is combined with government assistance to make housing affordable to those most in need. Priority will be given to projects in which at least 30 percent of the units serve one or more of the following populations: large families, single-parent households, farm workers, physically or mentally disabled, elderly, or homeless people. The consortium works with government agencies to maximize leverage of public and private funds to increase the supply of affordable housing. Operations. TBCRC operates on an annual budget of $182,000. The board of directors and loan and executive committees are made up of representatives of member banks. Initial Capitalization: $182,000 from member banks for operating expenses. Contributions to the loan pool were pro rata based on deposit share in the market area. The smallest member committed $100,000 to the loan pool. Current Capitalization: $117,000 from member banks. Minimum contribution to the loan pool: $100,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, HUD Section 8.
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TAMPA BAY COMMUNITY REINVESTMENT CORPORATION (CONTINUED) Targeting Requirements Income Restrictions. At least 51 percent of the units must be reserved for households earning not more than 80 percent of the area median income OR at least 40 percent of the units must be occupied by households earning not more than 60 percent of area median income OR at least 20 percent of the units must be occupied by households earning not more than 50 percent of area median income. Activity Level Period
Loans Funded
Loan Volume
2
$1,450,000
1993–1994
Delinquencies* Period
Rate
1993–1994
0%
*TBCRC defines delinquent as 30 days late and declares default at 90 days late.
Participating Institutions. Ameribank; Anchor Savings Bank; Bay Financial Savings Bank, FSB; The Bank of Tampa; Barnett Bank of Pinellas Country; Barnett Bank of Tampa, N.A.; The Chase Manhattan Bank of Florida, N.A.; Citizens Bank of Clearwater; City Bank of Tampa; Countryside Bankers; Crown Bank, FSB; Enterprise National Bank of Tampa; First Central Bank; The First National Bank of Clearwater; First Union National Bank of Florida; Fort Brooke Bank; Gulf Bank of Dunedin; Indian Rocks State Bank; Marine Bank; Mercantile Bank; NationsBank; Northside Bank of Tampa; Pinellas Community Bank; Republic Bank; Seminole Bank; South Hillsborough Community Bank; South Trust Bank of West Florida; South Commerce Bank; SunBank of Pasco County; SunBank of Tampa Bay; The Terrace Bank of Florida; United Bank of Pinellas; Valrico State Bank.
THRIFT INSTITUTIONS COMMUNITY INVESTMENT CORPORATION OF NEW JERSEY (TICIC) 1111 North Avenue, East Cranford, NJ 07016 Tel. (908) 272-8500 Fax (908) 272-6626 Contact: Gordon M. Ur, President Background. TICIC was formed in 1991 as a subsidiary of the New Jersey Savings League (NJSL) to facilitate the work of the Regional Lender Consortium (RLC), established in 1990. RLC began as a joint venture of
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THRIFT INSTITUTIONS COMMUNITY INVESTMENT CORPORATION OF NEW JERSEY (TICIC) (CONTINUED) the FHLBank of New York and the NJSL to make below-market loans for low- and moderate-income housing. The RLC is divided into four regions in New Jersey. Formerly, institutions in each region rotated origination and servicing of pooled loans. Now, TICIC underwrites and services all loans. Member institutions do not participate in each loan, choosing which loans to participate in and the amount of participation. Underwriters reports on each loan application are reviewed at investor meetings. The Regional Lender Consortium resulted in loans of more than $70 million to finance over 1,800 units of affordable housing in New Jersey. Reformed as TICIC, the consortium expects to loan over $15 million in 1994. Business. TICIC offers permanent loans for acquisition, rehabilitation, and new construction of multifamily housing including special needs housing. Eligible borrowers are individuals, for-profit and nonprofit sponsors. Most commonly, loans are made to nonprofit sponsors of senior citizen housing. Technical assistance is offered to for-profit and nonprofit developers in processing applications for FHLBanks Affordable Housing and Community Investment Programs as well as the Low Income Housing Tax Credit. Technical assistance is paid out of the $2,500 application fee. Operations. TICIC operates with one full-time and one part-time staff person on an annual budget of $182,000. The loan committee and board of directors consist of representatives of member institutions only. Initial Capitalization: $51,000 from New Jersey Savings League for administrative costs. Current Capitalization: $51,000 from New Jersey Savings League and retained earnings. There is no required minimum contribution to participate in the consortium.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, HUD Section 8, Federal Home Loan Banks’ Affordable Housing Program (AHP) and Community Investment Program (CIP), New Jersey Department of Community Affairs balanced housing grants, county subsidy and guarantee programs, and municipal housing authority programs.
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THRIFT INSTITUTIONS COMMUNITY INVESTMENT CORPORATION OF NEW JERSEY (TICIC) (CONTINUED) Targeting Requirements.
None.
Activity Level Period
Loans Funded
Loan Volume
1992–1994
12
$17,040,000
1993
2
$ 1,020,000
1994
9
$15,480,000
Delinquencies Period
Rate
1992–1994
0%
Participating Institutions. American S&L Association, Boiling Springs Savings Bank, Bordentown People’s Savings Bank, Cape Savings Bank, Cenlar Federal Savings Bank, Central Jersey Savings Bank, Century Federal S&L Association, Charter Federal Savings Bank, Chatham S&L Association, Clifton Savings Bank, Collective Federal Savings Bank, Columbia Savings Bank, Crestmont Federal S&L Association, Delanco S&L Association, First DeWitt Savings Bank, First Financial Savings Bank, First Savings Bank, First Savings Bank of Little Falls, First Savings Bank of New Jersey, First S&L of Sea Isle City, GSL Savings Bank, Glen Rock Savings Bank, Gloucester County Federal Savings Bank, Haven Savings Bank, Investors Savings Bank, Kearney Federal S&L Association, Lakeland Savings Bank, Lakeview Savings Bank, Lehigh Savings Bank, Lincoln Park S&L Association, Little Falls Savings Bank, Magyar Savings Bank, Manville Savings Bank, NVE Savings Bank, Palisade Savings Bank, Pulaski Savings Bank, Ridgewood Savings Bank of New Jersey, Robeling S&L Association; Roselle Savings Bank, Schulyer Savings Bank, Spencer Savings Bank, Statewide Savings Bank, Summit Federal S&L Association, Union City Savings Bank, Wawel Savings Bank, Wayne Savings Bank, Westwood Savings Bank.
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SOURCES OF CAPITAL: LOANS
WASHINGTON COMMUNITY REINVESTMENT ASSOCIATION 1325 4th Avenue, Suite 918 Seattle, WA 98101 Tel. (206) 292-2922 Fax (206) 292-0782 Contact: Judy Reed, President Background. Washington Community Reinvestment Association (WCRA) is a nonprofit corporation begun in 1992 to serve as a catalyst for the development and preservation of affordable housing in the State of Washington. WCRA resulted from the joint efforts of 19 lenders, the Federal Reserve Bank of San Francisco, and the nonprofit Development Fund. WCRA’s $75 million loan pool is funded by member financial institutions, which participate in each WCRA loan. To date, approximately $40 million has been committed to permanent financing for over 1,700 multifamily housing units in the State of Washington. Business. WCRA offers permanent, fixed rate loans for multifamily housing and for special needs projects using single family buildings. This includes financing for newly constructed multifamily rental projects, refinancing/preservation and financing for acquisition, and moderate rehabilitation. WCRA also provides technical assistance to affordable housing project sponsors and works with government to increase the supply of affordable housing by maximizing leverage of public and private investments. Eligible borrowers are for-profit and nonprofit sponsors. Operations. WCRA operates with a three-person staff, rotating loan committee of member banks, and a board of directors including representatives of member banks, government, and nonprofit organizations. Continental Savings Bank handles loan closings and servicing functions, and Seattle First National Bank acts as agent bank. Initial Capitalization: $400,000 from member banks used for start-up and first year operations. Contributions from participating lenders were based on deposit size. Current Capitalization: $75,000,000 loan pool. Minimum lender contribution: $100,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, Historic Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, Federal Home Loan Banks’ Affordable Housing Program (AHP), and state housing trust fund. Targeting Requirements. Rent Restrictions: Affordable to people earning 80% of area median income. Income Restrictions: 80% or less of area median income.
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WASHINGTON COMMUNITY REINVESTMENT ASSOCIATION (CONTINUED) Activity Level Period
Loans Funded
Loan Volume
1992–1994 1993 1994
11 same as above 7
$18,229,000 $10,000,000
Delinquencies Period
Rate
1992–1994
0%
Participating Institutions. Anchor Savings-Bank; Bank of California; Cashmere Valley Bank; Centennial Bank; City Bank; Columbia Bank; Continental Savings Bank; Enterprise Bank; Evergreen Bank; First Federal S&L Association of Port Angeles; First Interstate Bank, N.A.; First Mutual Savings Bank; First National Bank of Port Orchard; First Savings Bank of Washington; Interwest Savings Bank; Key Bank of Washington; Metropolitan S&L Association of Seattle; North Pacific Bank; North Sound Bank; Pacific Northwest Bank; Redmond National Bank; Seafirst Bank; Security Pacific Savings Bank; Skagit State Bank; Summit Savings Bank; Timberland Savings Bank; U.S. Bank of Washington, N.A.; U.S. Savings Bank; Washington Federal S&L Association, Washington First International Bank; Washington Mutual Savings Bank, FSB; Washington Trust Bank; West One Bank, Eastern Washington; West One Bank, Western Washington; Whidbey Island Bank.
WISCONSIN PARTNERSHIP FOR HOUSING DEVELOPMENT 104 S. Webster Street Madison, WI 53704 Tel. (608) 258-5560 Fax (608) 258-5565 Contact: William C. Perkins, Executive Director Background. The Wisconsin Partnership for Housing Development is a nonprofit corporation managing a loan consortium and equity fund for low-income housing in Wisconsin. Wisconsin Partnership works with business, government, and community organizations to assess housing needs and develop responsive housing finance programs. Establishing new housing development corporations and introducing state legislation are among the organization’s activities. The consortium was established in 1987 by local financial institutions, local government,
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SOURCES OF CAPITAL: LOANS
WISCONSIN PARTNERSHIP FOR HOUSING DEVELOPMENT (CONTINUED) and a utility to finance affordable housing in Milwaukee. To date, 19 participants have contributed over $19 million to the consortium’s revolving loan fund. Business. The consortium offers construction, bridge, and five-year mini-perm loans for rehabilitation and new construction of single-family and multifamily housing, including special needs housing. Loans for acquisition of existing multifamily properties are also available. Utility contributed funds are restricted to energy conservation measures. Eligible borrowers include nonprofit sponsors and joint ventures between for-profit and nonprofit organizations. Technical assistance is provided to nonprofit housing developers without charge. Operations. The consortium operates with a staff of four full-time and four part-time people on an annual budget of $200,250. The loan committee and board of directors include financial institutions and others. Loans are underwritten by the assistant director of financing programs and are approved by the Housing Partnership Corporation loan committee. Initial Capitalization: $3.95 million from financial institutions; $2 million from WEPCO, and $1 million from the City of Milwaukee for the revolving loan fund. Current Capitalization: $19,150,000.
Subsidy Programs Utilized. Community Development Block Grants, Low Income Housing Tax Credits, HUD HOME Investment Partnerships, HUD Section 8, and Federal Home Loan Banks’ Affordable Housing Program (AHP) and Community Investment Program (CIP). Targeting Requirements. Rent Restrictions: Affordable to people earning 80 percent of area median income. Income Restrictions: 80 percent or less of area median income.
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7.6 SOURCES OF LOAN FUNDS FROM PRIVATE NONPROFIT ENTITIES
WISCONSIN PARTNERSHIP FOR HOUSING DEVELOPMENT (CONTINUED) Activity Level Period
Loans Funded
1987–1994 1993 1994
99 6 9
Loan Volume $11,495,000 $ 2,970,770 $ 3,200,000
Delinquencies* Period
Rate
1987–1994 1994
0.72% 0%
*Wisconsin Partnership defines delinquent as 10 days late. Loans are declared in default if they are 60 days late.
Participating Institutions. Wisconsin Electric Power Company (WEPCO), Badger Bank, Bank One, The Equitable Bank, First Bank—Milwaukee, First Financial Bank, Gaurantee Bank, Kilbourn State Bank, Marquette Savings Bank, Mutual Savings Bank, North Shore Bank, Norwest Bank, Republic Capital Bank, Security Bank, St. Francis Bank, TCF Bank; M&I Bank— Milwaukee, West Allis Savings Bank, Community Housing and Preservation Corporation, Redevelopment Authority of the City of Milwaukee .
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501(C)(3) BOND TERMINOLOGY
A P P E N D I X
7 A
501(c)(3) Bond Terminology E XHIBIT 7A.1 TEAM MEMBERS: Obligor is the single-purpose nonprofit borrower who will own the housing development to be financed. Obligor’s counsel represents the borrower in negotiations on the bond transaction. Sponsor is the nonprofit which controls its affiliate, the obligor. Issuer is the public agency with tax-exempt borrowing authority that will act as the lender. Issuer’s counsel represents the issuer in negotiations on the bond transaction. Underwriter is the investment bank that will review the loan for creditworthiness, work with the rating agency, price, and sell the bonds. Underwriter’s counsel is the attorney ensuring proper disclosure under securities law. Rating agency (generally Standard & Poor’s, Moody’s, or Duff & Phelps) assesses the creditworthiness of the bond transaction and issues a rating that reflects the overall risk of the bond issue, and hence affects the interest-rate cost. Credit enhancer may be a bank providing a letter of credit or a bond-assurance company, which provides extra security by assuming the real estate risk in order to increase a bond’s overall rating. Bond counsel is the attorney reviewing the overall deal, ensuring compliance with the tax code. Trustee generally is a bank which, as representative of the bondholders, will manage and disburse bond proceeds and control operating-revenue collections and disbursements for the life of the bonds.
KEY LEGAL DOCUMENTS WITH 501(C)(3) BONDS In addition to the loan documents typical of any housing finance transaction, 501(c)(3) bond deals also will include the following special documents: Trust indenture lays out the duties and obligations of the issuer and trustee, the payment characteristics of bonds, events of default, and other key provisions. Preliminary official statement is the primary source of disclosure to investors. Official statement is the final version of disclosure, released after the bonds are priced and numbers can be finalized. Bond purchase agreement defines the responsibilities of the underwriter to purchase bonds issued by the issuer in order to make a loan to the obligor.
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A P P E N D I X
7 B
List of Local CDFI Organizations Financing Housing
219
Tucson Lake Forest San Jose Oakland San Francisco West Sacramento Denver Fort Collins Denver Denver Hartford New Haven Stamford Washington Washington Wilmington Orlando Tampa Atlanta Orient Des Moines Pocatello Chicago Chicago Berea Boston Springfield Roxbury Baltimore Columbia Silver Spring
City AZ CA CA CA CA CA CO CO CO CO CT CT CT DC DC DE FL FL GA IA IA ID IL IL KY MA MA MA MD MD MD
State Geo Description
Pima, Cochise, Maricopa, Pinal, Yuma, Santa Cruz Southern California Silicon Valley, California National 42 counties in California Pacific Western States Colorado Eleven Counties in CO National Greater Denver Metropolitan Area CT Greater New Haven, CT Fairfield County, CT National National Delaware Florida 19 counties in west central Florida Atlanta Metropolitan Area Southwest quadrant of Iowa Designated Neighborhoods in Des Moines, Iowa Idaho, Nevada Greater Chicago Metropolitan Area Illinois Central Appalachia Massachusetts National Boston, MA Maryland National Washington/Baltimore Region
Community Development Financial Institutions that Fund Housing Development
PPEP MicroBusiness and Housing Development Corporation Clearinghouse CDFI Lenders for Community Development Low Income Investment Fund Northern California Community Loan Fund Rural Community Assistance Corporation Colorado Housing Assistance Corporation Funding Partners for Housing Solutions Mercy Loan Fund Mile High Housing Fund, Inc Connecticut Housing Investment Fund Greater New Haven Community Loan Fund Housing Development Fund, Inc. Housing Assistance Council Partners for the Common Good First State Community Loan Fund Florida Community Loan Fund Neighborhood Lending Partners of West Florida, Inc. Community Redevelopment Loan & Investment Fund, Inc Grow Iowa Foundation Neighborhood Finance Corporation Idaho Nevada CDFI Chicago Community Loan Fund Illinois Facilities Fund Federation of Appalachian Housing Enterprises, Inc. Boston Community Capital Institute for Community Economics RLF UECDF Corporation Community Capital of Maryland Enterprise Housing Financial Services, Inc. Unitarian Universalist Affordable Housing Corporation
Org Name
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220
Wiscasset Damariscotta Lansing Minneapolis Little Falls Detroit Lakes Minneapolis Wilmington Durham Omaha Concord Trenton Albuquerque Albany Yonkers New York New York Hawthorne Kent Cincinnati Cleveland Philadelphia Nashville Charlottesville Richmond St. Johnsbury Montpelier Madison Almena
City ME ME MI MN MN MN MN NC NC NE NH NJ NM NY NY NY NY NY OH OH OH PA TN VA VA VT VT WI WI
State Geo Description
Maine / NMTC program - northern New England. Maine Michigan Minnesota 14 counties in central MN 7 COUNTIES IN NORTHWESTERN MINNESOTA MN, WI, IL, IN, MI, KS, NE, IA, ND, SD, MT New England and Hudson River Valley of NY National NEBRASKA, KANSAS, IOWA, WYOMING New Hampshire New Jersey New Mexico 11 counties in New York's Capital Region NY, NJ, CT National National Seven counties in New York Ohio & nearby portions of contiguous states Greater Cincinnati and Northern Kentucky National PA, NJ, DE Nashville-Davidson County, Tennessee Virginia's Planning District 10 Virginia 3 counties in NH and 3 counties in VT Vermont Dane County in Wisconsin Wisconsin
Community Development Financial Institutions that Fund Housing Development
Coastal Enterprises, Inc. Genesis Fund Michigan Housing Trust Fund Habitat for Humanity of Minnesota Initiative Foundation Midwest Minnesota Community Development Corporation Northcountry Cooperative Development Fund Cooperative Fund of New England Self-Help Ventures Fund Midwest Housing Development Fund New Hampshire Community Loan Fund New Jersey Community Capital New Mexico Community Development Loan Fund Capital District Community Loan Fund Leviticus 25:23 Alternative Fund Local Initiatives Support Corporation Seedco Westchester Housing Fund, Inc. Common Wealth Revolving Loan Fund Cornerstone Community Loan Fund Neighborhood Capital Corporation Reinvestment Fund, The Nashville Housing Fund Piedmont Housing Alliance Virginia Community Development Fund Northern Community Investment Corporation Vermont Community Loan Fund Dane Fund, The Impact Seven, Inc.
Org Name
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221
Russell
Weil
Carty
Loza
Jacokes
Hampton
Cynthia
Carla
Joan
Moises
Jeannine
Van
222
Lee
Faust
Knight
Phillips
McPherson
Coady
Michael
Kristin
Mark
Ron
Elizabeth
Christine
Jim
Cherry
King
Trinita
Blanton
Logue
Calvin
Leonard
Holmes
Chuck
Elyse
Olson
Prince
Holly
Houghtaling
Jakubowski
Lara
Debra
Leavesley
Diane
George
Rowan
Joe
K.C.
Mitchell
Michelle
Esteban
Executive Director
McCumber
Graves
Executive Director
Rogier
Mary
Kevin
Mary
President
Andrews
Nancy
Ignacio
President
Weaver
Eric
Position Chief Administrative Officer
Douglas
Director
President
Executive Director
President
Executive Director
President
Executive Director
Controller
CEO
CEO
President
Executive Director
Director
Executive Director
Director of Housing Finance
Capitalization Director
Executive Director
Executive Director & COO
Executive Director
Executive Director
President & CEO
Executive Director
517-372-6001
207-563-6073
207-882-7552
301-588-5533
410-964-1230
410-732-9571
413-746-8660
617-427-8600
859-986-2321
312-629-0060
312-252-0440
208-637-0671
515-288-5626 x203
641-343-7977
404-522-2637
813-879-4525
407-246-0846
302-652-6774
202-289-2636
202-842-8600
203-969-1830
203-789-8690
860-586-2028
303-860-1888
303-830-3386
970-494-2021
303-572-9445
916-447-9832
415-392-8215
415-772-9094
408-297-0204
949-859-3600
520-806-9513
Phone
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
407-246-0856
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
E-Mail
Community Development Financial Institutions that Fund Housing Development
Executive Director/Loan Programs Manager
President
Chief Financial Officer
Executive Director
President
Ballesteros
Bystry
Frank
Contact
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www.mhtf.org
www.genesisfund.org
www.ceimaine.org
www.uuahc.org
www.enterprisefoundation.org
www.urbanedge.org
iceclt.org
www.bostoncommunitycapital.org
www.fahe.org
iff.org
www.cclfchicago.org
www.neighborhoodfinance.org
www.southwestiowa.org
www.andpi.org
www.nlp-inc.com
www.fclf.org
www.firststateloan.org
www.pcgloanfund.org
www.ruralhome.org
www.hdf-ct.org
WWW.GNHCLF.ORG
www.chif.org
www.mhhf.org
www.mercyhousing.org
www.coloradohousingassistance.org
www.rcac.org
www.ncclf.org
www.liffund.org
www.L4CD.com
www.clearinghousecdfi.com
azsmallbusinessloans,com
Org Website
223
Bay
Nowak
Jeremy
William
Kimlin
Kathryn
Martiniak
Spinney
Margie
Salli
McIntyre
Bill
Belongia
Jacobs
Kim
Will
Grinker
William
Roberts
Ginn
Anna
Sterling
Raynor
David
Suzanne
Radliff
Bob
Christopher
Lozano
Marvin
Armstrong
Scheck
Carrie
David
Owens
French
Jim
Stu
Reiker
Robert
Loretta
Dunn
Schall
Rebecca
Kangas
Lund
Margaret
Kathy
Arlen
Plimpton
Gaalswyk
Jan
Contact Position
President
Executive Director
Executive Director
Vice President
Managing Director
Executive Director
Executive Director
President & CEO
Executive Director
Executive Director
330-672-3028
Executive Director
President
Executive Director
Executive Director
Loan Officer
Executive Director
Executive Coordinator
President
President
Executive Director
Executive Director
President
President
Executive Director
c07.fm Page 223 Wednesday, March 15, 2006 3:50 PM
715-357-3334
608-257-3863
802-223-1448
802-748-5101
804-343-1200 x5
804-817-2436
615-780-7000
215-925-1130
216.432.9209
513-369-0114
330-672-4063
914-592-3244
212-473-0255
212-455-9807
914-237-3306
518-436-8586
505-243-3196
609-989-7766
603-224-6669
402-334-8899
919-956-4400
910-395-6008
612-331-9103
218-847-3191
320-632-9255
612-331-4439
Phone
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
E-Mail
Community Development Financial Institutions that Fund Housing Development
www.hfhmn.org
impactseven.org
NA
www.vclf.org
www.ncic.org
www.vacdc.org
www.avenue.org/pha
www.nashvillehousingfund.org
www.trfund.com
www.neighborhoodcapital.org
www.cornerstoneloanfund.org
http://dept.kent.edu/oeoc/commonwealthbrochure.pdf
www.seedco.org
www.lisc.org
www.leviticusfund.org
www.cdclf.org
www.nmcdlf.org
www.newjerseycommunitycapital.org
www.nhclf.org
mheginc.com
www.self-help.org
www.cooperativefund.org
www.ncdf.coop
www.mmcdc.com
ifound.org
Org Website
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C H A P T E R
E I G H T 8
Sources of Capital: Grants 8.1 Grants from the Federal Government 225
8.3 Grants from Private Nonprofit Foundations 236
8.2 Grants from State and Local Governments 236
8.4 Grants from For-Profit Corporations 244
This chapter discusses the various sources that are available for securing grants for a nonprofit housing development project. 8.1
GRANTS FROM THE FEDERAL GOVERNMENT
There are numerous federal grant programs that were created to stimulate development of specific types of housing, including housing for people with special needs. The key programs are discussed in this chapter. Sponsors must keep in mind that some jurisdictions provide grants to nonprofit housing developers from their Community Development Block Grant (CDBG) and HOME Investment Partnership (HOME) funds or appropriated tax dollars as well. (a)
Grants for Developing Single-Family Homeownership
(i) HOPE VI Revitalization of Severely Distressed Public Housing. Since 1993,
HOPE VI has been the engine driving revitalization of the nation’s most distressed public housing developments by providing grants and unprecedented regulatory flexibility to address the housing and social service needs of its poorest residents. Over $5 billion in revitalization grants have been awarded since the program’s inception, including $335 million for the demolition of more than 49,000 severely distressed public housing units. The HOPE VI program was developed as result of the National Commission on Severely Distressed Public Housing, which was charged with proposing a National Action Plan to eradicate severely distressed 䡲
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public housing by the year 2000. The Commission recommended revitalization in three general areas: physical improvements, management improvements, and social and community services to address resident needs. HOPE VI has funded planning, revitalization, implementation, and demolition-only grants. Any public housing authority (PHA) that operates public housing units is eligible to apply for that public housing. Indian Housing Authorities are not eligible for HOPE VI. HOPE VI permits expenditures for the capital costs of demolition, construction, rehabilitation and other physical improvements, development of replacement housing including homeownership, planning and technical assistance, and planning and implementation of self-sufficiency programs. It encourages PHAs to seek new partnerships with private entities to create mixed-finance and mixed-income affordable housing that is radically different from traditional public housing “projects.” PHAs administer the program and can use the grants in conjunction with modernization funds or other HUD funds, as well as municipal and state contributions, public and private loans, and low-income tax credit equity. While most of the funds are to be used for capital costs, a limited amount may be used for self-sufficiency programs. Appropriations are distributed through an annual national competition. PHAs respond to Notice of Funding Availability (NOFA) published in the Federal Register by submitting an application to HUD. Each year’s NOFA and application kit are automatically mailed to each eligible PHA upon publication. The NOFA can also be found on the HOPE VI website. PHAs are provided with guidance from HUD Headquarters and may ask questions of HUD staff while preparing their applications. On average, approximately $500 milion has been appropriated for HOPE VI grants each year since fiscal year (FY) 1993, with $568 million being appropriated in FY 2004. In recent years, revitalization grants have ranged from $1.8 to $20 million, with an average of $17.7 million, and demolition-only grants range from $35,000 to $13 million, with an average of $1.7 million. HOPE VI and mixed financing projects are described more fully in Chapter 10 and at www.hud.gov/offices/pih/ programs/ph/hope6. For the past two years, the president has recommended funding this program at zero; however, funds have been appropriated each year. (ii) Youthbuild. HUD can make grants available to train and employ young adults in designing, constructing, acquiring, or rehabilitating single-family and multifamily housing for low-income, homeless, or disabled tenants. This program, called Youthbuild, is described in detail later in the chapter, under grants for multifamily housing. 䡲
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HUD’s HOZ program allows communities to reclaim vacant and blighted properties, increase homeownership, and promote economic revitalization by creating entire neighborhoods of new, single-family homes, called Homeownership Zones. This initiative provides grants and matching loan guarantees as seed money to lower the cost of building new housing and to stimulate investment in these areas. Homeownership Zones usually consist of several hundred new homes in concentrated areas near major employment centers. Communities are encouraged to use New Urbanist design principals that incorporate pedestrian-friendly environments, mixed-income families, defined neighborhood boundaries, and access to jobs and mass transit.1 HUD provides Economic Development Initiative grants and Section 108 loan guarantees to HOZs. Grantees may use funds to acquire property, build or rehabilitate housing, finance site preparation, provide direct financial assistance to homebuyers, provide homeownership counseling, and construct public improvements to complement the Homeownership Zone. Any unit of local government, including cities, towns, and counties, may apply for HOZ funds. At least 51 percent of the homebuyers helped with HOZ funds must have incomes that do not exceed 80 percent of the HUD-determined area median income, adjusted by family size. There have been two competitive funding rounds for the HOZ program, one in federal fiscal year 1996 (FY 96) and one in federal fiscal year 1997 (FY 97). The amount of funding for FY 97 was $20 million. The program is administered by the Office of Affordable Housing at the HUD Office of Community Planning and Development (CPD). For more information, contact Ginger Macomber, Homeownership Zone Coordinator, 451 7th Street, SW, Washington, DC, 20410, call (202) 708-2684, TTY 1-800877-8339, or visit HUD’s HOZ website at www.hud.gov/offices/cpd/ affordablehousing/programs/hoz/index.cfm.
(iii) Homeownership Zones (HOZ) funds.
(iv) Self-Help Homeownership Opportunity Program (SHOP). HUD’s SHOP
program provides funds to home-building organizations such as Habitat for Humanity International for land and infrastructure improvements needed to build up to 2,500 homes in the United States for low-income families. Family participants in the program must contribute 300 to 500 hours of their own “sweat equity” in the building of the homes they receive. SHOP provides up to $15,000 per home to cover costs such as utility hookups, waste disposal systems, roads, and sidewalks, allowing the nonprofit organizations to use volunteer labor for home building. These organizations then sell the homes at no profit with an affordable 1
For more on New Urbanism, see www.cnu.org and www.newurbanism.org
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mortgage. Over 29,000 people have achieved the dream of an affordable home through the program, and the program was slated to receive $25 million in 2005. The program is administered by the Office of Affordable Housing Programs at HUD’s Office of Community Planning and Development (CPD), which can be reached at (202) 708-2684, TTY 1-800-8778339. Nonprofit organizations apply for funding through HUD’s NOFA process announced annually in the Federal Register. Once the notice is published, prospective applicants may obtain a copy by contacting Community Connections at 1-800-998-9999. For more information about the program, see www.hud.gov/offices/cpd/affordablehousing/programs/ shop/index.cfm. An excellent report detailing recent SHOP-funded initiatives is provided by Habitat for Humanity International at www.hud.gov/ offices/cpd/affordablehousing/programs/shop/index.cfm. The six organizations currently receiving SHOP funds are:
ACORN HOUSING CORPORATION Homepage: www.acorn.org Contact: Martin Shalloo Email:
[email protected] Telephone: (312) 939-1611
HABITAT FOR HUMANITY INTERNATIONAL Homepage: www.habitat.org Contact: Donna Golden Email:
[email protected] Telephone: (229) 924-6935 x2408
HOUSING ASSISTANCE COUNCIL Homepage: www.ruralhome.org Contact: Joe Belden Email:
[email protected] Telephone: (202) 842-8600
COMMUNITY FRAMEWORKS Homepage: www.communityframeworks.org/nrfweb/index.html Contact: Christopher Holden Email:
[email protected] Telephone: (509) 484-6733
PPEP MICROBUSINESS AND HOUSING DEVELOPMENT CORPORATION Homepage: www.ppep.org/main.html Contact: Jeanne V. Shaw Email:
[email protected] Telephone: (520) 889-4203 x2001
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8.1 GRANTS FROM THE FEDERAL GOVERNMENT
WISCONSIN ASSOCIATION OF SELF-HELP EXECUTIVE DIRECTORS, INC. Homepage: www.washed.org Contact: Angela Ramirez Email:
[email protected] Telephone: (608) 257-6773 (b)
Grants for Downpayment Assistance and Other Costs to Help LowIncome Purchasers of Single Family Homes
There are a number of grant programs and initiatives that may be available to nonprofit organizations to assist their targeted populations to purchase single-family homes. (i) Affordable Housing Program, Homeownership Set-Aside. As described in
Chapter 7, The FHLBank System also allows for each District Bank to operate a homeownership set-aside of AHP Funds. Each FHLBank may set aside up to the greater of 25 percent of its AHP funds or $3 million each year. An additional $1.5 million or 10 percent of its AHP funds, whichever is greater, may be used to establish an additional First-time Homebuyer Set Aside. Set-aside funds may be used for down payments, closing costs, or rehabilitation assistance, or counseling costs in connection with a household’s purchase or rehabilitation of an owner-occupied unit. Households must be low- to moderate-income, complete a homebuyer counseling program and other requirements set by the District FHLBank in order to be eligible to receive AHP homeownership set-aside funds. No household can receive more than $15,000 in these set-aside funds. A homebuyer who purchases or rehabilitates a home with AHP set-aside funds must keep that home for five years. More information is available at www.fhfb.gov/fhlb/fhlbp_housing_setaside.htm. (ii) HOME and CDBG Funds. HOME and CDBG funds, also described in Chapter 7, may be used for down-payment assistance and grants to create homeownership opportunities for low-income families. (iii) Individual Development Accounts. More and more nonprofit organiza-
tions, with the support of many local and national foundations, have been creating Individual Development Accounts (IDAs) to help people become homeowners. An IDA helps a potential homeowner to save for a down payment (or for other purposes as set out by the nonprofit) by matching the low-income person’s savings and providing economic literacy training (e.g., family budgeting, understanding mortgages, etc.). Matching amounts can range from $.25 for every dollar saved to $9 for
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every $1. IDAs are spreading rapidly throughout America—IDA programs exist in about 150 communities around the country. •
Twenty-five states have included IDAs in their state TANF plans (as allowed by the 1996 welfare reform law).
•
Twenty-six states have passed some form of IDA legislation; seven states have created IDA pilot programs; and five states have IDA legislation pending.
•
Several national foundations are supporting the Downpayments on the American Dream Policy Demonstration, or ADD, a 2,000-account IDA demonstration in 13 sites across the country.
•
Through the recently enacted Assets for Independence Act (sponsored by Senators Dan Coats and Tom Harkin and Representatives Tony Hall and John Kasich), IDAs are expected to reach an additional 40,000 to 50,000 working-poor Americans over the next five years.
•
Already, there is encouraging evidence from IDA programs that poor people, with proper incentives and supports, will save regularly and acquire productive assets. For example, 913 low-income families participating in ADD saved $165,225 as of December 31, 1998, and these savings leveraged another $342,775 in matching funds. Monthly deposits ranged from $30 to $70 per month. Also, recent research compiled by the Center for Social Development shows many beneficial aspects of assets: Among other outcomes, assets promote economic household stability, promote educational attainment, decrease the risk of intergenerational poverty transmission, increase health and satisfaction among adults, and increase local civic involvement.
See www.cfed.org/main/indVIAssets/BuildingTool.htm. (c)
Grants for Developing Multifamily Housing
(i) Brownfields and HOPE VI. Both of these programs described earlier and in Chapter 7 may be able to provide grant funds for multifamily housing. (ii) Youthbuild. To serve the dual goals of creating affordable housing and educating and employing disadvantaged youth, NAHA’s 1992 amendments revised Title IV of NAHA to establish a program called HOPE for Youth: Youthbuild.2 The program enables HUD to fund programs that train 2
NAHA, 1992 Act amendments, t.1, § 164; 106 Stat. 3723 (1992); 42 U.S.C. § 12899.
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and employ young adults in designing, constructing, acquiring, or rehabilitating housing for low-income, homeless, or disabled tenants. Youthbuild grants are available to public or private nonprofit agencies, public housing authorities, state and local governments, Indian tribes, or any organization eligible to provide education and employment training under Federal employment training programs. At least 75 percent of the participants in any eligible program must be low-income (as defined by the United States Housing Act of 1937) individuals between the ages of 16 and 24 (inclusive) who have dropped out of high school. The remaining 25 percent of the participants need not meet very low-income criteria or be dropouts if they have educational needs despite completion of a high school education. Participants may be enrolled in the program full-time for six to 24 months, and at least half of their time must be devoted to educational services and activities.3 At least 90 percent of the housing units in each project receiving assistance under this program must be occupied by individuals and families with incomes less than 60 percent of the area median income.4 In addition, tenants in Youthbuild projects are subject to a number of protections, including a minimum one-year lease term, a 30-day notice for any termination of tenancy, owner maintenance, written tenant selection procedures, and protection of Section 8 certificate holders against discrimination. Finally, tenants’ rental payments are limited, and in some cases they are to be given opportunities to participate in management decisions.5 Youthbuild project income and management are restricted by the statute in several ways.6 First, aggregate monthly rent must not exceed costs plus a 6 percent return on the owner’s investment.7 For-profit investors may not receive more than a 6 percent return on their equity investment, nor more than their initial investment (adjusted for inflation) when the property is disposed of.8 Any other profits must be used to provide housing for low- and moderate-income families. The project is subject to the requirements of the program for its entire useful life, and may not be conveyed without these restrictions. Youthbuild funds are to be awarded as two separate types of grants: (1) planning grants for developing Youthbuild programs and (2) implementation grants for carrying them out. Unlike the planning grant elements of the other HOPE programs, the Youthbuild planning grants are still being awarded by HUD. Planning grants, limited to $150,000, may be 3 4 5 6 7 8
42 USC Section 12899e (a)(3). 42 USC Section 12899d (a)(1)(4). The remaining 10 percent must be reserved for lowincome families, as defined by the United States Housing Act of 1937 (id.). 42 USC Section 12899d (a)(4). 42 USC Section 12899d. 42 USC Section 12899d (c)(1). 42 USC Section 12899d (c)(2).
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used for feasibility studies, site selection, architectural and engineering work, other organizing and planning activities, and application for an implementation grant.9 Recipients of planning grants are selected on the basis of their qualifications, the potential for a successful Youthbuild program, and the need for the program in the relevant communities.10 Youthbuild implementation grants may be used for architectural and engineering work; acquisition, renovation, or construction; administrative costs; education and job training programs for participants; counseling and support services; skill and leadership development activities; need-based stipends; and legal fees.11 Implementation grants are to be awarded on the basis of criteria including, but not limited to, the qualifications of the applicant, the feasibility of the project and its potential for success, the need for the project in the affected communities, the applicant’s commitment to the development of the youth participants, and the availability of other funding to the project.12 In the fiscal year 2003, a total of $60 million in grants were awarded to 106 out of 415 applicants. For more information, see www.youthbuild.org. (d)
Safe Neighborhood Action Grants Program
This program was significantly changed. See notes in Chapter 11. (e)
Grants for Developing Housing for the Elderly
Under a program called Supportive Housing for the Elderly, nonprofit sponsors may be able to receive capital advances from HUD in order to increase the supply of housing that offers supportive services for the elderly. These advances are actually loans that act like grants as long as certain uses for the property are maintained. This program is discussed more fully in Chapter 7. (f)
Grants for Developing Housing for Persons with Disabilities
Under the program, referred to as Section 811 or Supportive Housing for Persons with Disabilities, nonprofit sponsors may be able to receive capital advances from HUD in order to increase the supply of housing that offers supportive services for persons with disabilities. These advances are actually loans that act like grants as long as certain uses for the property are maintained. This program is discussed more fully in Chapter 7. 9 10 11 12
24 CFR Section 585.205. General application requirements are also listed. Id., at 3724–3725. 24 CFR Section 585.305. 24 CFR Section 585.305. 106 Stat. 3727–3728. Priority is to be given to applicants who obtain housing funding from other sources. Id.
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(g)
Grants for Developing Housing for the Homeless
In 1987 Congress passed the Stewart B. McKinney Homeless Assistance Act to fund community based efforts to fight homelessness. One of the major components of that program was the Homeless SuperNofa— competitive funding for transitional and permanent supported housing and support services for the homeless. Funding under the SuperNofa has grown to almost $700 million annually. Funding decisions are based on the quality of a community’s overall Continuum of Care—the system and strategies that help the homeless get off the streets, through emergency and transitional shelter, and into permanent or permanent supported housing. Under this concept HUD provides the funding to a community, which locally decides where to spend the money based on the gaps in their Continuum system. The amount of money given to a community depends on the local need (derived from, a HUD formula that includes poverty and housing need) and the quality of its Continuum application and process.13 (i) The Continuum of Care Application. When reviewing applications, HUD
places considerable weight on three factors: •
The definition of a continuum of care for the target jurisdiction resulting from a thorough gaps analysis.
•
Evidence of an inclusive and ongoing process for addressing the needs of the homeless.
•
Leveraging of funds.
HUD’s method for funding has evolved from individual program funding to a system that requires a description of each program’s place and priority within a continuum, including emergency, transitional, and permanent housing. Gaps in this continuum are identified using the following formula: population need, minus current housing inventory equals gaps in the continuum. Applications must describe a clear strategy for addressing homelessness by proposing solutions designed to fill existing gaps and priorities for implementation. Applicants are required to demonstrate an inclusive community planning process. The Continuum of Care process should include local government and other governmental entities, nonprofit providers, the private sector, lenders, educational institutions, and consumers. This collaboration of organizations and individuals not only plan and implement 13
This information is adapted from an article written by Jennifer Anderson, Fran Lorenzi, and Jay Marcus in Cost Cuts, a publication of The Enterprise Foundation, Spring, 1998.
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the Continuum of Care but they are also responsible for overseeing implementation to ensure that the plan is carried out. Applicants are encouraged to broaden their thinking about sources for funding and not to rely solely upon government funds. HUD places a priority on efforts to match federal spending. Each sector must bring resources to the table. HUD wants to see those resources leveraged for all proposed projects in the continuum and wants this described in detail in the application. Finally, when applying for Continuum of Care funding, applicants must pay close attention to the application requirements specified by HUD. (ii) Tips on Writing a Continuum Plan. Beyond being good public policy,
developing and writing a continuum is important for being able to fully access available HUD funds to assist the homeless. While HUD devises a need amount that each geographical area might receive, the actual amount given to localities depends a great deal on their Continuum of Care proposal. Localities can receive less than their need amount or up to three times their need amount depending on the quality of the continuum. There are several factors that localities should keep in mind to maximize scoring: •
Ongoing Continuum Process—HUD wants to know that there is ongoing communication between service providers, government, the private and religious sectors, and the homeless themselves both for establishing a vision of the continuum and to facilitate its efficient operation—not just the month or two before the application is due. While the continuum process can mean ongoing meetings by several different groups (e.g., service provider forums on specific clients, homeless hearings, HOPWA advisory committees, etc.) instead of one large group, the process must be documented.
•
Inclusive Process—When the Continuum of Care process began, many people were concerned that funding might go to more powerful and politically accepted groups rather than grass roots organizations. HUD is sensitive to that concern and wants to make sure the process includes all those working with the homeless. If different groups file individual proposals in the same locality, one will almost definitely get no funding and the other a reduced amount. It is important to document that outreach is done to include all groups and that the process is one that encourages participation. The Continuum of Care is meant to build understanding of the issues that face homeless people and to garner support for them. It is important to involve not only those who serve and advocate for 䡲
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the homeless but also corporate leaders, government agencies, foundations and grant-makers, banks, universities, and the faith community. It is also important to document that consumers of services are involved in deciding and overseeing the homeless system, since it will affect them most. •
Facilitator—The Continuum of Care process requires the discussion of a lot of research and data and dealing with politically sensitive funding decisions. It is typically a good idea to have an outside facilitator guide the Continuum of Care sessions, particularly those close to the time of the HUD application. One city recommended a conflict resolution person to assist in setting priorities for funding, though most found an outside facilitator most important.
•
Consistency between Gaps, Priorities, and Project Priorities—Many of the applications HUD receives describe the local environment and service provider system—but don’t describe how the system they are creating will assist the homeless achieve maximum personal independence and self-sufficiency. Make sure that you describe how the system you are creating and improving will lead to better care for the homeless.
Implementing a Continuum of Care in any community is the best method of moving toward an end to homelessness in America. Instead of creating a quick fix for homelessness, a continuum plan ensures that people are given a chance to become self-sufficient through housing and supportive services. Added to HUD’s favoring a continuum over single applications for funding, the Continuum of Care approach is clearly an effective way to help the homeless of communities across the nation because no one person or organization can put an end to homelessness alone. It must be said, however, that even though communities need to help those who are currently homeless, we must also continue to look for ways to prevent homelessness. Prevention programs, combined with the Continuum of Care, will go along way toward achieving that goal. (iii) The Consolidated Application. Consolidated applications (which iden-
tify multiple projects based on one Continuum of Care plan) may identify a lead agency that will administer federal funds to numerous projects. An associated application may consist of applications for numerous individual programs within a jurisdiction, submitted to HUD in a single package or mailed separately, but also with one continuum plan. In the latter case, each agency administers its own contract funds. Consolidated applications are usually submitted in cases where there is a centralized entity (such as a city housing department) that has assumed a planning and coordinating function for homeless services and 䡲
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sets policy and standards for homeless services. Such agencies frequently play the role of intermediary and have the ability to leverage funds for homeless services. Consolidated applications are also preferable in those cases where the nonprofit providers lack experience in managing federal money. When applications identify one lead agency, however, funding for overhead expenses is awarded only to that agency. Jurisdictions vary greatly in the amount of overhead they pass through to individual agencies (from 0 percent to 3 percent). Since the permitted overhead is so small (5 percent for Supportive Housing and 8 percent for Shelter Plus Care), this can lead to tension between program partners. HUD has its own manual that provides guidance on this program at: www.hud.gov/ offices/cpd/homeless/library/coc/cocguide/index.cfm. 8.2
GRANTS FROM STATE AND LOCAL GOVERNMENTS
Many state, county, and city legislatures with active housing and community development departments or housing finance agencies not only authorize these agencies to create loan programs for affordable housing development, as discussed in Chapter 7, but often provide grant funds for these projects as well. The money for these loans usually comes from a variety of sources, including federal CDBG funds, but is also available from appropriated funds (funds provided by the legislature to the government agency from tax dollars raised by the government) and funds received from the repayment of previously made loans. As with state and local government loan programs, nonprofit sponsors of affordable housing must familiarize themselves with the grant programs available in their city, county, and state. Many jurisdictions have created dedicated funding streams for affordable housing. Often these funds come from such sources as a percentage of real estate transfer fees from residential or commercial transactions or similar document tax programs. Dade County, Florida, has been a leader in this area. 8.3
GRANTS FROM PRIVATE NONPROFIT FOUNDATIONS
Local community foundations and national nonprofit foundations are possible sources of grant funds; of the two types, local community foundations are more targeted toward improving a specific community. A community foundation will be more likely to provide grant funds to a local nonprofit housing developer for a single affordable housing project or for the development of the nonprofit’s housing development capacity. No directory of community foundations exists; however, The Foundation Directory, a publication of The Foundation Center, lists all foundations with assets over $2 䡲
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million or with annual contributions in excess of $200,000. The directory identifies which foundations are community foundations. The Center also publishes The Guide to U.S. Foundations, which lists all foundations regardless of size or grant-making activity. These directories can be purchased from the Center by calling (800) 424-9836 or can be reviewed at the Center’s offices in Washington, DC, New York City, San Francisco, and Cleveland. National foundations, on the other hand, generally have greater resources and can commit them to any one project. However, they historically have not provided grants for specific affordable housing developments unless they were part of a larger effort. For example, as noted in Chapter 7, a combination of 16 major private foundations, large insurance companies, financial institutions, and HUD joined together in an unprecedented partnership to establish Living Cities, formerly the National Community Development Initiative (NCDI). NCDI was established as a private-sector fund to provide grants and loans for community development. To date, the participants have committed more than $300 million to this effort. Currently operating in 23 cities, 14 Living Cities was designed to increase and support the role of Community Development Corporations (CDCs) nationwide. By providing grants and loans from the Living Cities fund to local CDCs, Living Cities seeks to greatly increase the building and rehabilitation of affordable housing, as well as aid CDCs in their efforts to address a wide range of other needs and create stronger communities.15 Historically, the other significant national funder of housing activities has been the Fannie Mae Foundation. In 2003, the Foundation distributed over $45 million in grants, up from $38 million in 2002. In addition, the Foundation provided nearly $27 million in loans through the Community and Neighborhood Development Fund (CNDF). Accounting irregularities and increased regulatory and Congressional scrutiny of Fannie Mae in 2004 have impacted on the Fannie Mae Foundation’s activities and giving in 2005 and likely beyond. Check the Foundation’s website, www.fanniemaefoundation.org, for updates. In the past five years, the MacArthur Foundation has increased its support of housing development and housing development organizations nationwide. MacArthur has established loan and grant programs to support some of the more successful housing development organizations in the country. Find out more about MacArthur at www.macfound.org.
14 15
See list of cities in Chapter 7. Find out more about Living Cities at www.livingcities.org.
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(a)
City or Regionwide Funding Collaboratives
Over the past few years, funding collaboratives have been created by local or regional foundations and similar funding sources so limited resources could be pooled. Although no two collaboratives work exactly the same way, many of them have common attributes. For example, many collaboratives provide three types of funding opportunities for nonprofit organizations: (1) operating assistance for meeting general costs of operating the nonprofit, (2) funds to enable the nonprofit to perform an “organizational assessment,” and (3) predevelopment funds for specific projects. With the help of the Enterprise Foundation, the Ford Foundation, Local Initiatives Support Corporation and individuals at these local collaboratives, information on these emerging efforts is provided here in alphabetical order by state. In cases where little information is provided, the collaborative effort is either in the formation stage or did not respond to requests for information. The most recent contact name, address, and telephone number are provided where available. Hattie Dorsey, Chief Executive Officer Atlanta Neighborhood Development Partnership Inc. 100 Peachtree Street NW, Suite 700 Equitable Building Atlanta, GA 30303 Phone: (404) 522-2637 Fax: (404) 523-4357 E-mail:
[email protected] Website: www.andpi.org Ann Sherrill, Director Baltimore Neighborhood Collaborative 2 East Read Street, 2nd Floor Baltimore, MD 21202 Phone: (410) 727-0169, ext. 214 Fax: (410) 727-7177 E-mail:
[email protected] Ann Silverman, NDSC Director Neighborhood Development Support Collaborative c/o LISC 120 Boylston Street, 6th floor Boston, Massachusetts 02116 Phone: (617) 338-0411 䡲
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Fax: (617) 338-2209 E-mail:
[email protected] Melvin Primas, Jr., Chairman Camden Development Collaborative PO Box 42798, Philadelphia, PA 19101 Phone: (215) 225-1441 Andy Mooney, Program Director Chicago LISC 1 N. LaSalle, 12th Floor Chicago, IL 60602 Phone: (312) 360-0800 Fax: (312) 360-0183 Eric Hoddersen, President Neighborhood Progress, Inc. 1956 West 25th St., Suite 200 Cleveland, OH 44113 Phone: (216) 830-2770 Fax (216) 830-2767 E-mail:
[email protected] Columbus Housing Partnership 562 East Main Street Columbus, OH 43215 Phone: (614) 221-8889 Fax: (614) 221-8904 Website: www.chpcolumbus.org Lorenzo Littles, Director The Enterprise Foundation 100 North Central Expressway, Suite 1299 Dallas, TX 75201 Phone: 214-651-7789, ext. 111 Fax: 214-651-7231 (fax) Karen Brown, Program Manager Detroit Funders Collaborative c/o LISC 䡲
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660 Woodward Avenue, Suite 1111 Detroit, MI 48226 (313) 596-8222 E-mail:
[email protected] Website: www.liscnet.org/detroit/index.shtml Delia Ponce, Acting Director El Paso Collaborative for Community & Economic Development 1359 Lomaland El Paso, TX 79902 Phone: (915) 629-6702 Fax: (915) 532-7340 Website: www.epcollab.org Moira Carlstedt, President Indianapolis Neighborhood Housing Partnership 3550 North Washington Boulevard Indianapolis, IN 46205 Phone: (317) 925-1400 Fax: (317) 925-1408 E-mail:
[email protected] Website: www.inhp.org Kansas City Capacity Building Program c/o LISC Kansas City Neighborhood Alliance One West Armour Boulevard, Suite 10 Kansas City, MO 64111 Phone: (816) 753-0055 Fax: (816) 753-6883 Los Angeles Collaborative for Community Development c/o LISC LISC Los Angeles 1055 Wilshire Blvd. Suite 1600 Los Angeles, CA 90017 (213) 250-9550 Denis Russ, Program Director Greater Miami LISC 䡲
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150 SE 2nd Avenue, Suite 911 Miami, FL 33131-1576 Phone: (305) 381-7967 Fax: 305 372 1890 E-mail:
[email protected] Website: www.liscnet.org/greater_miami/index.shtml Una Anderson, Executive Director New Orleans Neighborhood Development Collaborative 1055 St. Charles Avenue, Suite 120 New Orleans, LA 70130 (504) 524-3919 E-mail:
[email protected] Website: www.nondc.org Newark Capacity Building and Operational Support Program Greater Newark & Jersey City LISC 60 Park Place, Suite 501 Newark, NJ 07102 Phone: (973) 624-6676 Fax: (973) 624-0990 Abdul Rasheed, President and Chief Executive Officer The North Carolina Community Development Initiative, Inc. 2209 Century Drive, 2nd Floor Raleigh, NC 27612 Phone: (919) 828-5655 Fax: (919) 834-8018 E-mail:
[email protected] Website: www.ncinitiative.org Beverly Coleman Program Director Philadelphia Neighborhood Development Collaborative 7 Benjamin Franklin Parkway, 5th Floor Philadelphia, PA 19107 Phone: (215) 665-2637 Fax: (215) 665-2531 E-mail:
[email protected] Website: www.pndc.net 䡲
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Dorothy L. Lengyel, President Pittsburgh Partnership for Neighborhood Development Regional Enterprise Tower 425 Sixth Avenue, Suite 1740 Pittsburgh, PA 15219-1840 Phone: (412) 471-3727 Fax: (412) 471-3746 E-mail:
[email protected] The Neighborhood Partnership Fund 1020 SW Taylor, Suite 680 Portland, OR 97205 Phone: (503) 226-3001 Fax: (503) 226-3027 E-mail:
[email protected] Website: www.tnpf.org David Haddock, Program Officer Consortium for Community Economic Development in Puerto Rico c/o Puerto Rico Community Foundation Edif. Torre de la Reina 450 Ponce de León Ave., Suite 203 Puerta de Tierra, San Juan, PR 00907 Phone: (787) 721-1037 Fax: (787) 721-1673 E-mail:
[email protected] Website: www.fcpr.org Mailing Address: P.O. Box 70362 San Juan, PR 00936-8362 John M. Kenny, Executive Director San Antonio Housing Trust Foundation, Inc. 2515 Blanco Rd. San Antonio, TX 78212 Phone: (210) 735-2772 Fax: (210) 735-2112 E-mail:
[email protected] Website: www.sahousingtrust.org 䡲
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Mailing Address: PO Box 15915 San Antonio, TX 78212. Judge Rafael Arreola, Chair, Community Partnership Committee Community Partnership Grants Program The San Diego Foundation 1420 Kettner Blvd., Suite 500 San Diego, CA 92101 Phone: (619) 235-2300 Fax: (858) 385-1595 E-mail:
[email protected] Website: www.sdfoundation.org Stephanie Forbes, Director SF Bay Area LISC 369 Pine Street, Suite 350 San Francisco, CA 94104 Phone: (415) 397-7322 Fax: (415) 397-8605 Jennifer Ernst, Assistant Program Officer Seattle Community Development Collaborative 1305 Fourth Avenue, Suite 906 Seattle, WA 98101 Phone: (206) 521-8965 Fax: (206) 358-1101 E-mail:
[email protected] Paul D. Williams, Senior Program Director Saint Paul Fund for Neighborhood Development C/o LISC 570 Ashbury Street, Suite 207 St. Paul, MN 55104 Phone: (651) 649-1109 Fax: (651) 649-1112 E-mail:
[email protected] Website: http://www.liscnet.org/twincities/ 䡲
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Martin Mellett, Program Director Washington Community Development Support Collaborative c/o LISC 1825 K Street NW, Suite 1100 Washington, DC 20006 (202) 785-2908 (202) 835-8931 E-mail:
[email protected] Website: www.liscnet.org/washingtondc
8.4
GRANTS FROM FOR-PROFIT CORPORATIONS
For-profit corporations may be a source of grant funds for a nonprofit housing developer. Many large corporations in the United States and elsewhere, such as Johnson & Johnson or Hitachi, will often provide such funds through their related nonprofit foundations. Others, especially if they are headquartered in, have a plant in, or are doing a significant amount of business in or with a specific community, may contribute money, land, or expertise to an affordable housing development. A nonprofit housing developer should identify the local, regional, and national corporations doing business in the community and evaluate the potential of securing funding assistance from these organizations. A listing of members of the local chamber of commerce or board of trade is a good place to start. Nonprofits also should contact their local financial institutions. Local, regional, and national banks that have CRA responsibilities and/or outstanding CRA commitments (see Chapter 6) often have a limited amount of grant funds that they will make available during any one fiscal year. Another possible way for a nonprofit housing developer to secure financial assistance from a for-profit corporation is to propose working together to create affordable housing for current or future corporate employees. This approach, often called employer-assisted housing, generally calls for the nonprofit to set aside a certain number of units for occupancy or ownership by corporate employees. This approach may be particularly useful in jurisdictions where corporations have a difficult time recruiting and maintaining staff with salaries that range from 60 percent to 80 percent of the area’s median income, because of the high cost of housing in those communities.
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C H A P T E R
N I N E 9
Sources of Capital: Equity Appendix 9A Tax Credit Information Resources: List of State and Regional Tax Credit Equity Funds 266
9.1 Creation of an Equity Fund for Housing Development 245 9.2 Use of the Low-Income Housing Tax Credit 246
Appendix 9B Partial Listing of Low-Income Housing Tax Credit Tax Syndicators 275
9.3 Other Equity Sources 259
This chapter discusses various sources that are available for securing equity for a nonprofit housing development project. 9.1
CREATION OF AN EQUITY FUND FOR HOUSING DEVELOPMENT
Generally, the nonprofit sponsor, like the for-profit housing developer, is going to need equity to complete its housing development. Sponsors who intend to develop multiple affordable housing properties should consider creating an equity fund that can be used in a number of projects. Nonprofits such as tenant associations, which intend to complete only one specific housing development, can focus on raising funds for that single project. Equity for an equity fund can be raised in a number of ways. Some nonprofits utilize some or all of the following methods: Rely heavily on the organization’s volunteer board of directors to contribute their own funds and to raise money for this purpose from other benefactors. • Arrange to have the organization’s equity fund “adopted” by local corporations, churches, synagogues, and other memberships who will run targeted fund-raising efforts for the fund, including promotional events. • Approach a community or national foundation about matching the equity funds raised. • Earmark a portion of the revenue earned by the sponsor through the operation of its existing affordable housing developments for contribution to the equity fund. •
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9.2
USE OF THE LOW-INCOME HOUSING TAX CREDIT
As part of the Tax Reform Act of 1986, Congress created the low-income housing tax credit (LIHTC). This tax credit has helped for-profit and nonprofit developers to raise the equity necessary to complete the purchase, construction, and/or rehabilitation of over 800,000 units of affordable housing. The tax credit accounts for approximately 100,000 units of affordable housing per year. It also has provided a vehicle for bringing significant corporate investment to affordable housing development.1 Nonprofit developers should be aware that this program is extremely complicated and rife with land mines for those uninitiated in this type of financing. Early in the development process, sponsors who are seriously considering a tax credit project should retain tax counsel experienced in the low-income housing tax credit.2 A summary of the low-income housing tax credit follows. (a)
Tax Credit—Generally
One must understand the benefit of a tax credit, as compared to a tax deduction, to understand how a tax credit program can be effective. A taxpayer who has the right to apply a tax credit to a year-end tax liability gets to reduce the tax liability one dollar for every dollar of available tax credits. For example, assume that Exxon Corporation had net taxable income in 2005 of $3 million, a tax rate of 33.3 percent, and therefore a potential tax liability of $1 million. If Exxon had purchased low-income housing tax credits sufficient to provide tax credits of $1 million for 2005, then Exxon would have had no tax liability because it would have been able to offset every dollar of tax liability with one dollar of tax credits. Tax deductions are far less lucrative. Tax deductions reduce the net taxable income of a taxpayer or the amount of money that a taxpayer will have to pay taxes on, not the tax liability itself. Thus, if a taxpayer’s tax rate is 33.3 percent, each dollar of tax deduction saves the taxpayer only $.33 because the taxable income was reduced, not the tax liability. Returning to the Exxon example, assume Exxon had $3 million in net taxable income, depreciation deductions of $1 million, and no tax credits. The 1
2
As explained below, many corporations have invested significantly in funds established for the sole purchase of investing in affordable housing developments funded in part by equity raised through the low-income housing tax credit program. The Enterprise Foundation, LISC, Fannie Mae, and Freddie Mac together have access to over $25 billion in equity for these types of projects. Other for-profit equity funds also have been established all over the country for this purpose. Herbert Stevens and Thomas Tracy, A Developer’s Guide to the Low Income Housing Tax Credit (1992), is an excellent and comprehensive treatment of the low-income housing tax credit and issues affecting nonprofit sponsors. Available from the National Council of State Housing Agencies, 44 N. Capitol Street, N.W., Suite 438, Washington, DC 20001.
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$1 million tax deduction would reduce Exxon’s net taxable income from $3 million to $2 million; however, it would still owe taxes of $666,000 ($2 million of net taxable income times 33.3 percent tax). The $1 million tax deduction would save the corporation only $333,000 in taxes because each dollar of tax deduction would be worth only the amount of taxes saved by the deduction ($.33 for each dollar of taxable income). The difficult aspect of the low-income housing tax credit is that nonprofits want to own and maintain control over the future use of a property beyond the compliance period (discussed below); yet the tax credit is only useful to for-profit entities in order to offset current or future tax liabilities and only available to for-profit entities if they, and not the nonprofit, own the low-income property. To resolve this problem, tax credit projects usually are owned by limited partnerships. In a partnership, all partners, general or limited, are viewed as owners. Therefore, a nonprofit can be a general partner or a limited partner with the negotiated right to purchase the property after the compliance period expires, and the forprofit investors can be limited partners, which qualifies them as owners for tax credit purposes and limits their liability to the amount of funds they have invested in the project. A more detailed discussion of ownership forms is provided in Chapter 14; partnerships and limited liability corporations (LLC) are discussed in Chapter 15. (b)
How the Low-Income Housing Tax Credit Works in Nonprofit Housing Development
The low-income housing tax credit does not change the housing development process as described in detail in previous chapters. The nonprofit developer simply must consider the tax credit as another source of potential funds to meet TDCs. Generally, the amount of equity that a sponsor can expect to obtain from the use of the tax credit is based on the amount of tax credits that can be sold on the project. The amount of tax credits that can be sold will depend on the amount of qualified costs that the sponsor will incur to acquire and/or rehabilitate the property and the lowincome use of the property. For example, as described in greater detail below, if a nonprofit sponsor is building a new structure for $1 million and the costs qualify for the 9 percent low-income housing tax credit, and if all the units will be used for low-income individuals or families, then the sponsor will be able to sell approximately $900,000 worth of tax credits to interested investors ($1 million cost times 9 percent equals $90,000 per year for ten years). The annual amount of the credit, $90,000, is available to investors for a ten-year period. Based on market realities, however, this $900,000 tax credit will likely produce only $720,000 to $810,000 ($0.80 to $0.90 for every dollar in tax credits) in equity to the sponsor. Purchasers of these credits, who
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are primarily corporate and institutional investors seeking to lessen their tax burdens, will want more than a dollar-for-dollar return on their investment. Moreover, the sponsor will incur transaction and syndication costs that will lessen the actual cash received. A description of the allowable costs, the various credit rates, and the other restrictions imposed on housing built with these tax credits follows. (c)
Tax Credit Rates and Costs
The tax credit program has costs that are eligible for a 9 percent credit and other costs that are eligible for a 4 percent credit. Costs for constructing a new building or for substantially rehabilitating an existing property that was not built with federal subsidy can qualify for the 9 percent credit.3 Costs for acquiring an existing building that is substantially rehabilitated, for constructing a new building that is federally subsidized, or for substantially rehabilitating a property that was built with federal subsidy can qualify for the 4 percent credit.4 Based on these rules, a single housing development could utilize both the 9 percent and the 4 percent credits if it acquired a property (4 percent credit) but then performs a substantial rehabilitation on the units (9 percent credit). It is important to remember that these credits are based on the allowable costs or “eligible basis” under this program. The nonprofit developer must consult with tax counsel in determining the eligible basis.5 3
4
5
A building is considered to have been “substantially rehabilitated” if, during a 24month period, the developer spends the greater of: (1) 10 percent of the depreciable basis of the building determined as of the first day of the 24-month period, or (2) an average of $3,000 per low-income unit, to substantially rehabilitate the property. I.R.C. § 42(e)(3)(A). The term “low-income unit” is defined in the next section. A building is considered to be federally subsidized if the construction or rehabilitation is financed through the use of tax-exempt bonds or a below-market-interest-rate loan made with federal dollars. I.R.C. § 42(i)(2)(A). CDBG funds or funds from the Federal Home Loan Bank’s Affordable Housing Program will not be viewed as federal subsidy, but sponsors should consult with their tax counsel to determine whether there are other ways to recharacterize federal funds passed through to local government units as nonfederal subsidy. Under the 1993 amendments to the tax credit program, a property will not be considered “federally subsidized,” and therefore ineligible for the 9 percent credit, simply because it received HOME funds as long as 40 percent or more of the aggregate residential rental units receiving assistance are occupied by individuals with 50 percent or less of median. The amount of equity that can be raised with the 9 percent credit versus the 4 percent credit is so significant that sponsors must do whatever they can to maximize the use of the 9 percent credit. A nonprofit developer who purchases an existing property will be able to use the 4 percent credit only if the previous owner owned the property for at least the past ten years and the property has not been substantially rehabilitated within the past ten years. Eligible basis can be increased to 130 percent of eligible costs if the property is located in a “difficult development area” or “qualified census tract.” I.R.C. § 42(d)(5)(C). See the case study of the Whitelaw Hotel in Chapter 12, for application of this 130 percent of eligible basis.
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(d)
Other General Requirements of the Program
(i) Low-Income Use. A specific percentage of units at a property, referred to as “low-income units,” must be set aside for use by low-income individuals or families. The developer must elect between providing 20 percent of the units to those earning 50 percent or less of the area median income (20–50 test) or 40 percent of the units to those earning 60 percent or less of the area median income (40–60 test).6 In addition, there is a special set-aside for properties that significantly restrict rents on these “lowincome units” as well, as compared to the other residential units. This special set-aside, referred to as “deep rent skewing,” requires that at least 15 percent of the low-income units be rented to tenants whose income is not greater than 40 percent of the area’s median income, and the average rent charged for non–low-income units must be at least twice as great as the rent charged for comparably sized, low-income units. These percentages must be maintained for at least 15 years. The sponsor has a significant incentive to exceed these levels: the greater the number of units actually being used by low-income individuals or families, the greater the tax credit available to the project. For example, if a project was built without federal subsidy for a cost of $1 million, but only 40 percent of the units were set aside and are being used for low-income housing, only 40 percent of the possible $90,000 annual tax credit would be available to the sponsor. (ii) Rent Restrictions on Low-Income Units. Generally, rents charged for low-
income units cannot exceed 30 percent of the income imputed onto the household, adjusted for the size of the unit rented, not actual family size. For example, for purposes of setting rents under the LIHTC, a four-bedroom is considered to house 6 persons even if only 5 persons reside there. Therefore, income based on a family of 6 would be imputed or attached to the renters, not their actual family size of 5. The rent charged the household would be determined as follows: Assuming that the unit has been set aside for families with incomes of 60 percent or less of the area’s median income, that 60 percent of the median income for a family of 5 is $14,500, and for a family of 6 is $15,750, the maximum rent that could be charged to the family would be 30 percent of $15,750 ($4,725 per year/$393.75 per month), not
6
The 1993 amendments to the tax credit allow full-time students with dependents to qualify for tenancy in low-income units.
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30 percent of $14,500 ($4,350 per year/$362.50 per month).7 A developer can receive federal rental assistance for these units in addition to the allowable rents.8 (iii) Types of Properties That Can Be Developed. The tax credit can be used
to develop rental housing, single-room occupancy housing, and certain homeless housing.9 As noted above, the unit set-aside requirements must be met for 15 years; however, for practical purposes, the law requires a total commitment of at least 30 years. If the property or more than a onethird interest in it is sold before the end of the 30-year period, the tax credits taken but not earned are recaptured with interest unless the building is expected to continue to qualify as a low-income project. In that case, recapture can be avoided by posting a bond with the U.S. Treasury. (iv) Compliance Period.
(e)
How a Sponsor Applies for the Tax Credit
To receive the tax credit, a sponsor must apply to the sponsor’s state housing finance agency.10 Each year, the federal government allocates tax credits equal to $1.75 for each person in each state.11 The state housing authority must develop an allocation plan and then allocate these credits to projects in the state. The project’s location, the housing needs of the state, the type of project, the sponsor of the project, the involvement of the community and local nonprofit organizations, and the length of public housing waiting lists are all factors in receiving an allocation. The state must complete a feasibility review of a project prior to an allocation of tax credit. If the project intends to use other HUD subsidies for the project— for example, mortgage insurance or Section 8 rental assistance—then HUD will perform a second feasibility review of the project.12 Important to nonprofits is the fact that the law requires that at least 10 percent of each state’s tax credits be made available to projects that have “material participation” by nonprofit organizations. A nonprofit will be considered to be “materially participating” if it is involved on a regular, 7
8 9 10 11 12
The 1993 amendments to the Low Income Housing Tax Credit allow an owner of a property that was developed before 1990 to irrevocably elect to use either apartment size or family size in determining maximum allowable rent levels. This option is available only if the owner enters into a compliance monitoring agreement with a state or local housing credit agency. In addition, the election applies only with respect to tenants first occupying any unit in the building after the date of the election, which must be made within 180 days after the effective date of the amendments. I.R.C. § 42(g)(2)(B)(i). I.R.C. § 42; Stewart B. McKinney Homeless Assistance Act, § 103. See the National Council of State Housing Agency web site, www.ncsha.org, for a list of all state housing finance agencies and a link to their web sites. This $1.75 increases each year by the cost of living. This process is called the subsidy layering review.
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continuous, and substantial basis in the development and operation of the project throughout the 15-year compliance period.13 This issue is considered by many to be in a very gray area. Nonprofits should consult with their tax counsel to determine whether their proposed ownership structure would qualify as “material participation” and provide the nonprofit with a greater chance of securing tax credits. Some rental housing projects financed under certain federal taxexempt bond provisions are eligible for tax credits without competing for the state’s limited tax credit allocation.14 If 50 percent or more of a building’s costs are financed with tax-exempt bonds, the entire building is eligible for 4 percent tax credits. If less than 50 percent of the cost of the land and the building is financed with tax-exempt bonds, the state must provide allocated tax credits to that portion of the building that was not bond-financed.15 (f)
Securing the Property after the Expiration of the Compliance Period
A nonprofit organization should, at an early stage, reach agreements with the other partners in the partnership to ensure that the property will be transferred to the nonprofit at the end of the compliance period. Under Code Section 42(i)(7), a nonprofit can have a right of first refusal to purchase the property for an amount equal to the sum of the outstanding debt plus any taxes due from the investors upon the transfer of the property. A nonprofit also can seek to purchase the property at a bargain sale; however, the partners cannot guarantee a bargain sale to the nonprofit at the outset of the relationship. (See the discussion of bargain sales at the end of this chapter.) (g)
Availability of Equity Funds for Tax Credit Projects
Today, equity for projects that have received an allocation of LIHTC from their states can be found easily. Nonprofit and for-profit organizations serve as the middlemen to “syndicate the tax credits” or match projects needing equity with investors needing tax credits. A number of national nonprofit intermediaries, including the Local Initiative Support Corporation (LISC) and the Enterprise Foundation, have created equity funds to assist nonprofits in completing a tax credit project. Similarly, nonprofit state and regional equity funds have sprung up across the country in the past ten years. Government-sponsored enterprises, Fannie Mae and Freddie Mac, and many financial institutions invest in nonprofit-managed 13 14 15
I.R.C. § 42(h)(3)(C)(ii)–(iv). I.R.C. §§ 42(h)(4)(A), 141(a) and (a)(7). See the discussion of exempt-facility bonds in Chapter 7. I.R.C. § 42(h)(4)(B).
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equity funds and in many of their own projects. In addition, there are a number of very successful and competitive for-profit equity funds available nationwide. This competition has worked to the benefit of the housing developer. In many cases in 2005, developers were able to receive close to or more than $1.00 of equity for every dollar of credit available. Also, many syndicators can help the developer to secure other financing in addition to LIHTC equity such as predevelopment grants, construction/ mini-permanent debt and more. Housing developers who are unfamiliar with the syndicators who work in their communities should contact their state housing finance agency. (h)
Nonprofit/Socially-Minded Equity Funds
The two largest nonprofit-related syndicators of LIHTC are affiliated with the two largest nonprofit housing intermediaries, LISC (the National Equity Fund or NEF) and Enterprise (Enterprise Social Investment Corporation or ESIC). Both work in similar ways—priding themselves on their willingness to do the more challenging projects. Both also work to meet pressing needs by helping to raise equity for projects focusing on homelessness, rural housing, special needs housing and public housing for the very poor. NEF and ESIC both raise much of their equity from local, regional and national financial institutions. They often have funds dedicated to certain locations (e.g., states or regions) or certain types of housing (e.g., special needs, rural) so check with their staff to see if your project fits into one of their funds. In addition to these two players, robust local or regional funds have been established that often cater to underserved communities that they were founded to serve. These state and local funds are discussed below as well. Since 1987, LISC’s National Equity Fund (NEF) has partnered with more than 500 nonprofit and for-profit developers to invest $4.4 billion in 1,300 low-income housing developments. That equity has funded more than 68,000 units of traditional multifamily and scattered-site single-family projects, supportive housing, assisted living, historic rehabs, and public housing revitalization in 41 states and the District of Columbia. In 2004 alone, NEF closed on $550 million in investments in 129 projects through it’s multi-investor and single-investor funds. NEF’s mission is to support local revitalization efforts by providing both equity investments and technical assistance to low-income housing developers. Through NEF’s parent, Local Initiatives Support Corporation (LISC), as well as through Rural LISC, nonprofit developers can also access funding for predevelopment work and capacity-building. (i) National Equity Fund.
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In 2005, LISC and NEF announced a five-year, $1 billion effort to support affordable housing that offers high-speed Internet connections, lowcost computers, and online content. Known as “access@home,” the initiative includes LISC/NEF grants, below-market loans and equity investments that will connect nearly 100,000 people to the vast advantage of the Internet. LISC/NEF is partnering with One Economy Corporation to help deploy the broadband options and provide customized online content for residents. In addition to the high-quality affordable housing this program helps fund, residents of access@home projects can benefit from: Broadband access, through a high-speed data network—Each apartment or home will have high-speed Internet connectivity through a data network within its development. Internet service provider costs and basic maintenance costs for the data network equipment are also included. • Online content—One Economy offers a unique opportunity for all low-income residents through the Beehive (www.thebeehive.org), a multilingual Web portal featuring tools and information about personal finance, health, jobs, and school. It is a self-sufficiency resource with online content available in Spanish, Chinese, Russian, Urdu, and Haitian Creole. • Computers—Computer purchase vouchers and low-cost financing will make getting a computer easy and affordable for low-income families. • Training—Hands-on computer training for residents, especially first-time users, is included so that they can fully realize the benefits of the Internet in their homes. •
Listed below are the basic elements NEF, Inc. looks for when investing in a project. Specifics vary from deal to deal, and particular questions should be directed to the contacts at the right. Developer/General Partner NEF, Inc. partners with both nonprofit and forprofit developers. NEF encourages joint ventures between for-profit and nonprofit partners, particularly when one of the partners is an inexperienced, first-time developer of tax-credit projects. NEF also encourage first-time developers to work with experienced consultants. Project Type NEF, Inc. invests equity in projects that have:
Low-income housing tax credits
Historic tax credits (combined with LIHTCs)
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Tax-exempt bonds
State tax credits (project-by-project basis)
NEF, Inc. invests in a full range of project types, including:
Multifamily and single-family designs
New construction and rehabilitation
Preservation projects
Public housing
Supportive housing
Mixed-income projects
NEF, Inc. focuses on inner city and rural developments that meet the needs of underserved areas. These are often very complex projects with “lasagna” financing structures that include many layers. NEF, Inc.’s staff can assist a developer in creating the most advantageous financing structure, whether the project is a simple deal with four financing sources or a ten-layer arrangement. Moreover, NEF, Inc has a supportive housing staff with in-depth knowledge of developing SRO housing, senior housing with services, and housing for the disabled, mentally ill or people with AIDS. We can also assist in structuring assisted living deals if the project meets our criteria. Deal Terms NEF, Inc. targets the following underwriting and due diligence criteria for projects in which it invests. Variations from these assumptions will be based on evidence of market and other conditions. Project Structure
A minimum of 15 units and at least $750,000 in equity.
All financing committed at the time of the NEF, Inc. investment.
A nonrecourse first mortgage with a fixed rate and a minimum term of 15 years.
Rehabilitation that will benefit residents for the full 15-year tax credit period.
A contingency of 5 percent to 10 percent of construction costs, depending on the type of construction.
Replacement and operating reserves that are appropriate for renter type, construction, location, and developer financial capacity.
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Lease-up reserve as required to fund operating shortfalls during the leasing period.
Project Operations
Expense inflation projected over the life of the project at 1 percent higher than rent inflation. Vacancy rate of 5 percent to 10 percent, depending on size and type of project and the results of the market study. A “compliance cushion” between gross rents and maximum allowable tax credit rents. Project rents that are at least 5 percent below market rents.
Debt service coverage of at least 1.15.
Due Diligence
Demonstrated ability and experience of team members (i.e., accountant, project attorney, consultant, management company, construction company). The management company should have prior low-income housing tax credit experience and be adept at compliance. Resumes and financial statements of developer and all team members. A market study that supports rent, expense and lease-up assumptions used in the 15-year cash flow. An environmental report that clearly delineates environmental issues, if any. Copies of all loan commitments and tax credit documents.
NEF Locations: Chicago Headquarters 120 S. Riverside Plaza, 15th Floor Chicago, IL 60606 (312) 360-0400
Kansas City Two Pershing Square 2300 Main St., Suite 901 Kansas City, MO 64108 (816) 448-3376
Cleveland 1956 W. 25th Street, Suite 200 Cleveland, OH 44113 (216) 830-2791
Los Angeles 1055 Wilshire Blvd., Suite 1600 Los Angeles, CA 90017 (213) 250-9550
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Minneapolis/St. Paul Hamline Park Plaza 570 Asbury Street, Suite 207 St. Paul, MN 55104 (651) 649-1109
Pittsburgh 700 River Ave., Suite 210 Pittsburgh, PA 15219 (412) 322-9330 Portland P.O. Box 82248 Portland, OR (503) 788-1212
Newark 60 Park Place, Suite 501 Newark, NJ 07102 (973) 624-6676
Providence One Richmond Square, Suite 151E Providence, RI 02906 (401) 621-2700
New York 501 Seventh Avenue, 7th Floor New York, NY 10018 (212) 455-9800
Seattle 2133 3rd Avenue, Suite 116 Seattle, WA 98121 (206) 441-5048
Philadelphia The Cast Iron Bldg. 718 Arch Street, Suite 500 S Philadelphia, PA 19103 (215) 629-7021
Washington, DC 1825 K St., NW, Ste. 1100 Washington, DC (202) 785-2908
The Enterprise Social Investment Corporation (ESIC) is one of the nation’s leading providers of community development capital for affordable housing, mixed-use, and commercial development. Founded in 1984 as a socially motivated for-profit affiliate of The Enterprise Foundation, ESIC’s core business is syndicating Low-Income Housing Tax Credit (LIHTC) equity investments. ESIC advocated for and took a lead role in the creation of LIHTC legislation. Since the program’s inception in 1986, ESIC has raised and currently manages $5 billion in equity through more than 85 investment funds, including national multiinvestor funds, private label funds, and a variety of regional funds. These investments are helping to build more than 75,000 affordable homes in 45 states, the District of Columbia, and Puerto Rico. In addition to structuring LIHTC investments that provide sound returns and address a critical social need, ESIC has been a passionate and
(ii) Enterprise Social Investment Corporation.
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forthright voice on both the national and local level to advocate issues that are important to the affordable housing and community development industry. ESIC continually seeks new opportunities to meet the needs of developers, investors and low-income residents in order to help entire communities grow and prosper. This work has sometimes meant creating innovative ways to make the LIHTC program work, even where no one else thought it could, such as in single-room occupancy and transitional housing. In 1991, when no other syndicators would consider such projects, ESIC created a special equity fund solely for housing that provides social services for its special needs residents. Today, ESIC continues to focus its efforts on creating housing for many of our nation’s most vulnerable residents. Most recently, ESIC, working with The Enterprise Foundation and the Corporation for Supportive Housing, launched the Supportive Housing Investment Partnership. This partnership is one of the largest endeavors of its kind—delivering the most comprehensive financial and technical resources to developers—to provide supportive housing to people with special needs. In 2004, ESIC partnering with The Enterprise Foundation and the Natural Resources Defense Council launched the Green CommunitiesTM Initiative. Through this five-year, $555 million initiative, Enterprise’s goal is to help build more than 8,500 homes that provide significant health, economic and environmental benefits to low-income families and communities across the country. With resources such as tax credit equity, grants, and favorably priced financing, training, and technical assistance, Green Communities is helping developers address challenges like rundown, unhealthy housing, rising transportation and energy costs, and sprawl, which ultimately affects families, neighborhoods, and government at all levels. Building upon their expertise in the affordable housing and tax credit industries through its core syndication and asset management business, ESIC’s products and services have grown and span the significant aspects of the community development industry—from tax credit investments, to community development equity, senior debt and permanent financing, to for-sale and rental development. In aggregate, these activities result in the annual investment in or direct development of $1 billion of high-quality affordable housing and related community enrichment facilities in underserved neighborhoods across the country. Today, ESIC continues to be a leader in the industry by bringing resources and expertise to developers, tax benefits and ever-more-innovative opportunities to investors, and livable housing that benefits communities all across America.
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To learn more about ESIC’s community finance products, contact Headquarters The Enterprise Social Investment Corporation 10227 Wincopin Circle, Suite 800 Columbia, Maryland 21044 Phone: (410) 964-0552 Fax: (410) 964-1376 www.esic.org
Minneapolis, MN 55407 Phone: (612) 276-0123 Fax: (612) 276-0125
ESIC Office locations:
New York, New York 80 Fifth Avenue, 6th Floor New York, NY 10011-8002 Phone: (212) 262-9575 Fax: (212) 262-9635
New England Office 22 Summer Street, Suite 9 Westboro, Massachusetts 01581 Phone: (508) 871-2387 Fax: (508) 871-2491
Baltimore, Maryland 312 N. Martin Luther King Boulevard Baltimore, Maryland 21201 Phone: (410) 332-7400 Fax: (410) 230-2129
Portland, Oregon 520 SW 6th St., Suite 700 Portland, OR 97204 Phone: (503) 223-4848 Fax: (503) 223-0955
Chicago, Illinois 230 West Monroe, Suite 2605 Chicago, IL 60606 Phone: (312) 803-0800 Fax: (312) 641-3560
San Francisco, California 160 Sansome Street, Suite 700 San Francisco CA 94104 (415) 395-9466 (415) 395-9453
Denver, Colorado 899 Logan Street Suite 700 Denver, CO 80203 Phone: (303) 573-1571 Fax: (303) 573-1574
Seattle, Washington 411 First Avenue South, Suite 401 Seattle, WA 98104 Phone: (206) 622-1818 Fax: (206) 622-1820
Los Angeles, California 315 West 9th Street, Suite 801 Los Angeles, CA 90015 Phone: (213) 833-7988 Fax: (213) 833-7989 Minneapolis, Minnesota 2801 21st Avenue, Suite 220
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State and regional equity funds have been growing dramatically over the past ten years. These funds serve two critical roles in the LIHTC community: (1) they provide investors with opportunities to invest in their own communities. This is especially relevant for financial institutions with Community Reinvestment Act requirements. (2) they insure that equity is available in often underserved or out of the way locations. A list of some of the more active state and regional equity funds can be found in Appendix 9A.
(iii) State and Regional Equity Funds.
Many for-profit enterprises now syndicate LIHTCs around the country. A list of these syndicators can be found in Appendix 9B.
(iv) For-Profit Equity Funds.
(v) Equity Investments by Government Sponsored Enterprises and Financial Institutions. Many of the equity investors who invest in nonprofit and
for-profit equity funds also invest in their own projects. Fannie Mae and Freddie Mac are two of the largest investors in LIHTC in the country, who do so on their own and with intermediaries. Many financial institutions also invest in funds through intermediaries but also do their own deals as well. Some of these institutions are listed in Appendix 9B. Wachovia,16 Key Bank,17 Bank of America,18 and Citibank19 are four of the more active financial institutions in this area. Their investments usually are made where they have a retail presence. 9.3 (a)
OTHER EQUITY SOURCES State Low-Income Housing Tax Credits
Thirty-eight states have enacted income tax credits to encourage investments in affordable housing. Most of these state programs are patterned after the federal LIHTC. Although this could be an opportunity in some cases, it can just add confusion and transaction costs in others. Issues such as requirements that the entities seeking to use the credits have an ownership interest in the development and the difficulty of finding investors who could use both a federal tax credit and a state credit have made these credits less effective.20 16 17 18 19 20
Wachovia’s Tax Credit Investment Group offers equity and other financing options to housing developers. Key Bank’s Community Development Corporation provides equity investments. Bank of America makes equity investments directly and through the Bank of America Community Development Corporation. Citibank makes its equity investments through the Citibank Center for Community Development Enterprise. Michael Sanders provides excellent guidance on these credits in the 2005 Cumulative Update of Joint Ventures Involving Tax-Exempt Organizations, 2nd ed. Hoboken, NJ: John Wiley & Sons (2000).
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(b)
Fannie Mae’s American Communities Fund
The Fannie Mae American Communities Fund (ACF) was established in 1996 to make pivotal equity investments in emerging communities.21 The Fund is dedicated to investing in neighborhoods that lack adequate access to equity capital for the development of affordable housing and related facilities. The first priority of the American Communities Fund is to invest in areas in which Fannie Mae is already working with the community to implement a local housing strategy. These areas include cities where Fannie Mae has had a Regional or Partnership Office, or has formed a Community Partnership. A list of the Partnership Offices can be found in Exhibit 11.1. The Fund’s investments are expected to have a substantial, catalytic impact on the vitality of the neighborhood. Eligible transactions include rental housing and homeownership opportunities. Mixed-use projects, commercial, retail, and other facilities that directly support residential communities will also be considered. Investments are structured to meet the transaction’s capital needs. For example, financial support can be provided as equity, participating second mortgages, mezzanine debt, or bridge financing. Funding can be used for initial working capital, land acquisition, or other project needs. The Fund may participate as a general or limited partner, a member of a limited liability company, or a stockholder in a corporation, depending on the ownership entity. The structure of each investment is negotiated to support the needs of the transaction and the Fund’s required return on investment. Investments made by the Fund range in size from $1 million to $3 million, although some may be smaller or larger. The timing and anticipated amount of return are flexible. Exit strategies are also tailored to be mutually beneficial. Day-to-day management of the Fund’s investments is provided by the sponsors. Reporting and asset protection provisions are similar to those required by other venture capital funds. Examples of ACF equity investments include: the construction and sale of a 320-unit single-family townhouse and condominium development in the Riverstation area of Minneapolis (ACF equity investment: $1,800,000); the Brownsville Renaissance Shopping Center in Miami, Florida (ACF equity investment: $700,000); building and operating of a 50,000 sq. ft. modular housing manufacturing plant in Chicago (ACF equity investment of $1,200,000); the re-development of a former American Can factory into 280,000 sq. ft. of retail and office space in Baltimore (ACF Equity Investment of $4,000,000). 21
Accounting irregularities at Fannie Mae in 2004 have impacted on an array of activities such as ACF. Contact Fannie Mae to determine the scope of ACF’s activities in 2006 and beyond.
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(c)
Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, are one of the most talked about financing vehicles for multifamily housing today. Nonprofits need to understand them not because of their applicability to the nonprofit industry but because of the impact that REITs are having and can have on a local real estate market. REITs purchase, own and manage real estate properties and/or real estate loans. Some REITs also develop properties or originate loans. REITs were established in 1960 and operate under specific provisions of the Internal Revenue Code. This legislation provides REITs with a special tax status that allows them to avoid corporate tax as long as nearly all REIT income is distributed to investors. Although the REIT structure avoids double taxation to shareholders, tax losses cannot be passed through. With over 300 corporations qualifying as REITs, approximately one-third are private with the remainder traded on public stock exchanges. There are three types of REITs: equity, mortgage, and hybrid— as defined below. •
An Equity REIT is a corporation that purchases, owns, and manages real estate properties; it does not own or originate real estate loans. It may also develop properties.
•
A Mortgage REIT is a corporation that purchases, owns, and manages real estate loans; it does not own real estate properties. It may or may not originate commercial and/or residential loans.
•
A Hybrid REIT is a corporation that purchases, owns, and manages both real estate loans and real estate properties. It has the qualities of both an equity and mortgage REIT, which is why it is referred to as a hybrid.22
In many communities, REITs are flush with cash and able to acquire large portfolios of multifamily properties or to act quickly to acquire properties. In some places, this has resulted in severe reductions in the inventory of properties that nonprofits would traditionally be interested in and/or an escalation of the price for these properties. One example of an aggressive and well-financed REIT is Apartment Investment and Management Company (AIMCO). AIMCO is a real estate investment trust with headquarters in Denver, Colorado, and 33 regional operating centers. The company holds a geographically diversified portfolio of apartment communities. Through its subsidiaries, it is the largest private provider of rental housing in the world, operating more than 2,000 22
Source: RealtyStocks, www.inrealty.com/restocks/reit.html. For more information about AIMCO, visit www.aimco.com/about.
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properties, including nearly 400,000 apartment units or one-third of all apartment units owned by the 23 publicly traded multifamily REITs, and serving approximately 1 million residents. The properties are located in 47 states, the District of Columbia and Puerto Rico. As an example of its purchasing power, in September, 1998, it purchased for approximately $13.7 million the general and limited partnership interests in 33 real estate partnerships that own approximately 29,000 apartment units.23 (d)
Historic Investment Tax Credit
Another possible equity source is the historic investment tax credit.24 Prior to the Tax Reform Act of 1976 (TRA 1976), federal tax law provided no incentives for preserving or rehabilitating old buildings. TRA 1976 added several such incentives, including 60-month amortization of certain rehabilitation costs incurred in connection with property listed in the National Register of Historic Places or located in a historic district. TRA 1976 also provided an alternative of accelerated depreciation for both undepreciated basis in used depreciable property costs associated with the rehabilitation of that property. The Revenue Act of 1978 added an alternative tax incentive to these amortization and depreciation deductions in the form of an investment tax credit equal to 10 percent of the qualified expenditures related to the rehabilitation of properties at least 20 years old. As part of the Economic Recovery Act of 1981, Congress repealed the amortization and accelerated depreciation provisions and restructured and increased the tax credit for rehabilitation expenditures. TRA 1986 made further revisions to the rehabilitation tax credit, focusing the credit on historic and certain other older buildings to insure that the credits accomplish their intended objectives of preserving historic and older buildings.25 (i) Overview.
Section 47 provides tax credits for qualified rehabilitation expenditures incurred in connection with a certified historic structure and certain other buildings originally placed in service prior to 1936. The amount of the historic investment tax credit is equal to 20 percent of rehabilitation expenditures incurred on certified historic structures, and 10 percent of the rehabilitation expenditures incurred on certain buildings placed in service prior to 1936. The following discussion focuses on the 20 percent credit for certified historic
(ii) Introduction to the Historic Investment Tax Credit.
23 24
25
Source: AIMCO. This section is excerpted form Michael I. Sanders, Partnerships and Joint Ventures Involving Tax-Exempt Organizations, Hoboken, NJ: John Wiley & Sons (1992) with the express permission of the authors. Blue Book, supra note 1, at 149.
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structures, because these are the only buildings that may be used for lodging and still qualify for the historic tax credit.26 (iii) Certified Historic Structures. A certified historic structure is any build-
ing which is listed in the National Register of Historic Places, or located in a registered historic district and certified by the Secretary of the Interior as being of historic significance to the district.27 For buildings that are not listed in the National Register, Part I of the Historic Preservation Certification Application must be completed and submitted to the appropriate state official or National Park Service (if there is no approved state program) to request certification of a building located in a registered historic district. The major factors for evaluating structures within historic districts are whether: (1) the structure’s location, design, setting, materials, workmanship, feeling, and association adds to a district’s sense of time and place and historical development; (2) the structure’s original design or individual architectural features or spaces have been maintained; and (3) the age of the structure.28 To be eligible for the historic investment tax credit, expenditures incurred in connection with the rehabilitation of a certified historic structure must be qualified rehabilitation expenditures. Qualified rehabilitation expenditures are costs related to a “certified rehabilitation” and include any amount incurred for property that is depreciable under I.R.C. § 168 and that is: (1) nonresidential real property, (2) residential rental property, (3) real property which has a class life of more than 12.5 years, or (4) an addition or improvement to property or housing described in (1), (2), or (3).29 A “certified rehabilitation” is defined as any rehabilitation of a certified historic structure which the Secretary of the Interior has certified as being consistent with the historic character of the property or the district in which the property is located.30 Owners seeking this certification are required to complete Part II of the Historic Preservation Certification Application and submit it to the appropriate state official or regional National Park Service. Following completion of the rehabilitation work, an owner must receive final certification from the Secretary of the Interior to claim the historic tax credit. The purpose of the final certification is to ensure that the rehabilitation of the structure has been completed in accordance with the plans and terms of Part II of the Certification Application as approved by the Secretary of the Interior.
(iv) Qualified Rehabilitation Expenditures.
26 27 28 29 30
§ 50(b)(2)(C). § 47(c)(3)(A). C.F.R. § 67.5 § 47(c)(2)(A). § 47(c)(2)(C).
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The historic investment tax credit is claimed by the owner only in the taxable year in which a project is placed in service. If the property is owned by a partnership, the credit may be claimed only by partners who were admitted to the partnership on the date the project was placed in service. Regulation § 1.46-3(f) provides generally that each partner’s share of the basis of any property on which the historic credit is claimed is determined in accordance with the ratio in which the partners divide the taxable income of the partnership on the date such property is placed in service. Unlike the low-income housing tax credit, the historic investment tax credit reduces the depreciable basis of the property by the full amount of the credit. In addition, if a project qualifies for both the low-income housing tax credit and the historic investment tax credit, the adjusted basis of the building for purposes of the low-income credit must be reduced by any historic investment tax credits allowed with respect to the project. Unused historic credits may be carried back three years and forward for 15 years.
(v) Claiming the Historic Tax Credit.
Example: A partnership pays $1,000,000 for a certified historic structure, which qualifies for the 20 percent historic investment tax credit. $100,000 of the purchase price is allocable to land. The partnership invests $2,000,000 on qualified rehabilitation expenditures and rents 100 percent of the building to low-income tenants who qualify under I.R.C. § 42. The partnership is eligible to claim a one-time historic tax credit in the amount of $180,000 ($900,000 × 20%). In addition, the partnership may claim low-income housing tax credits in the annual amount of $163,800 ([$2,000,000 – $180,000] × 9%). The partnership’s depreciable basis in the project is $2,720,000 ($900,000 + $2,000,000 – $180,000). (vi) Recapture Provisions. Although the historic credit is claimed in the year a building is placed in service, if, within five years after the placed in service date, the partnership or joint venture disposes of a building on which the historic investment tax credit was claimed, the partners will be required to recapture a portion of the historic investment tax credit previously claimed. The recapture percentage equals 100 percent of the historic investment tax credit claimed if the disposition occurs in the first year, and decreases by 20 percent each succeeding year, to zero in the sixth year. Recapture also occurs if a partner’s interest in the general profits of the partnership is reduced below 66 2/3 percent of such partner’s interest in the taxable income of the partnership in the year the certified historic structure was placed in service. (e)
New Market Tax Credits
On December 21, 2000, Congress enacted the New Markets Tax Credit (NMTC), which is designed to generate $15 billion in new private sector
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equity investments that will, in turn, spur business growth in low-income rural and urban communities. The NMTC will bring about $3.5 billion in capital to underserved communities in 2006 and 2007. As described below, the credits cannot be used to fund affordable rental housing but can be used to bring equity to other homeownership or mixed-use developments. Investors in a qualified community development entity (CDE) will receive a tax credit for their investment. That tax credit is spread over seven years and equals 39 percent of the amount of the investment. To access an NMTC allocation, you must be a CDE. A CDE is an organization that (i) has the primary mission of serving, or providing investment capital for, low-income communities or low-income persons and (ii) maintains accountability to residents of low-income communities through their representation on a governing or advisory board and (iii) receives certification as a CDE from the Department of Treasury. Community development financial institutions that have been certified by the CDFI Fund and specialized small business investment companies are automatically deemed to be CDEs and can register online at the CDFI Fund website. The CDE must use substantially all, or 85 percent, of the capital generated from the sale of NMTC equity to fund loans to, or equity investments in, for-profit or nonprofit businesses that are operating in low-income census tracts. Eligible businesses include commercial businesses, nonprofit childcare providers, charter schools, health care centers, housing developers (for homeownership) and commercial real estate projects, but exclude rental of residential properties. CDEs can also use the proceeds to provide financial counseling to eligible businesses, to invest in or lend to other CDEs (which in turn use the proceeds for qualified loans and investments in businesses) or to purchase qualified loans or equity investments from other CDEs.31
31
Source: National Community Capital Association, www.communitycapital.org/ financing/nmtc.html#how.
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A P P E N D I X
9 A
Tax Credit Information Resources: List of State and Regional Tax Credit Equity Funds32 Chicago Equity Fund/Illinois Equity Fund William W. Higginson, President and CEO One East Superior St., Suite 604 Chicago, IL 60611 Phone: (312) 943-2266 Fax: (312) 943-7994 E-mail: william.
[email protected]
Community Affordable Housing Equity Corporation Dana S. Boole, President and CEO 7700 Falls of the Neuse Road, Suite 200 Raleigh, NC 27615 Phone: (919) 420-0063 ext.208 Fax: (919) 420-0019 E-mail:
[email protected] Web site: www.cahec.com
Organization Description Chicago Equity Fund and Illinois Equity Fund create limited partnerships raising approximately $35– 40 million annually for the two funds. The investment capital is invested in low and moderate income housing units across the State of Illinois. Since the creation of the Chicago Equity Fund in 1985 and Illinois Equity Fund in 1992, the two funds have produced over 11,000 housing units. 32
Organization Description Created in 1992 as a 501(c)(3) nonprofit corporation, Community Affordable Housing Equity Corporation’s (CAHEC) mission is “to raise and invest equity capital in qualified low-income housing tax credit projects, to empower residents living in developments CAHEC helps finance, and to promote homeownership.” In addition to its
Source: National Association of State and Local Equity Funds
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core business of sponsoring investments in affordable rental housing, CAHEC provides an array of supportive services known as Community Programs, which are designed to empower residents living in developments that CAHEC helps finance.
to our programs by DCIC’s 39 bank members. DCIC’s programs have assisted in the creation of over 3,000 affordable housing units in the state of Delaware. Garden State Affordable Housing, Inc. Joseph Matara, Executive Director 233 West Market Street Newark, NJ 07103 Phone: (973) 639-7845 Fax: (973) 623-5489 E-mail: jmatara@ newcommunity.org Web site: www.newcommunity.org
Delaware Community Investment Corporation Doris R. Schnider, President Three Mill Road, Suite 105 Wilmington, DE 19806 Phone: (302) 655-1420 Fax: (302) 655-1419 E-mail:
[email protected]
Organization Description Garden State Affordable Housing, Inc., an affiliate of New Community Corporation, was organized in 1994 to establish and manage The New Jersey Housing Opportunity Funds. The Funds represent a perpetual source of capital to help finance multifamily rental housing through low-income housing tax credits. Garden State Affordable Housing, Inc. offers tax credit syndication, asset management, and technical assistance for all types and sizes of projects, including those with Historic Preservation Tax Credits, nonprofit components, and inner city
Organization Description The Delaware Community Investment Corporation (DCIC) is a multibank community development corporation, which was established in 1994. In addition to the Equity Fund Program, DCIC also offers loans for permanent financing of multifamily rental properties. DCIC has a commercial lending program for community revitalization such as day care centers, medical centers, charter schools, and shopping facilities in low- to moderate-income neighborhoods. Over $233 million has been committed and/or funded/invested
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locations. Over $48 million in equity has been raised for investment.
Hawaii Investors for Affordable Housing, Inc. Stacy L. Sur, President Pauahi Tower, Suite 2395 1001 Bishop Street Honolulu, HI 96813 Phone: (808) 532-3114 Fax: (808) 524-1069 E-mail:
[email protected] Web site: http://www. hcrc-hawaii.org
Great Lakes Capital Fund Mark McDaniel, CEO 1000 S. Washington Ave., Suite 200 Lansing, MI 48910 Phone: (517) 482-8555 Fax: (517) 482-8598 E-mail:
[email protected] Web site: www.capfund.net
Organization Description Hawaii Investors for Affordable Housing, Inc. (HIAHI) was formed in 1995 to further the development of affordable housing in the State of Hawaii through the creation of tax credit equity funds and by providing technical assistance to developers. To date, HIAHI has created three funds (Hawaii Affordable Housing) raising $52 million, assisting 703 housing units throughout the state.
Organization Description The Great Lakes Capital Fund (f/k/a Michigan Capital Fund for Housing and Indiana Capital Fund for Housing) was formed in 1993 and has generated more than $500 million of investment to create 10,067 units of affordable housing in Michigan and Indiana. Building upon its initial support from the Enterprise Foundation and ESIC, the Capital Fund has developed a wide array of technical and financial services including: community and project planning, predevelopment financing, construction and permanent loans, and equity investments. The Fund has three offices: Lansing, Detroit, and Indianapolis.
Homestead Capital Deborah Saweuyer-Parks, President and CEO 805 Southwest Broadway, Suite 1500 Portland, OR 97205 Phone: (503) 276-1555 Fax: (503) 276-1563 E-mail:
[email protected] Web site: www.homesteadcap.com
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nonprofit corporation. HV works in partnership with local communities to build and rehabilitate permanently affordable housing throughout the State. HV has an ownership interest in 97 properties containing more than 3,100 apartments. HV has raised nearly $100 million in tax credit equity through the LIHTC and historic rehabilitation programs.
Organization Description Homestead Capital is a not-for-profit syndicator of low-income housing tax credits, and has invested nearly $275 million in 55 projects comprising more than 2,500 units of affordable housing. The company’s success is a result of its regional expertise and regional commitment to “House People and Build Communities.” The company was formed in 1993 to encourage corporate investment in Oregon, and is now authorized to do business in eight Western states. In addition to tax credit syndication services, Homestead Capital also provides technical assistance to housing development sponsors at zero cost, and has started Homestead Community Financing, a community development loan fund.
Iowa Equity Fund Jon Hrabe, Interim Executive Director 1915 Grand Avenue Des Moines, IA 50309 Phone: (515) 280-6000 Fax: (515) 288-8443 E-mail:
[email protected] Organization Description The Iowa Equity Fund (IEF) is the largest tax credit syndicator located within the state and is one of the largest investors in Iowa’s Low Income Housing Tax Credit funded projects. IEF is a single-member limited liability company with its sole member the Midwest Housing Equity Group, Inc. (MHEG). IEF and MHEG are privately owned 501 (c) (3) self-supported nonprofit corporations that do not rely on federal or state dollars for operations. IEF works with investors to
Housing Vermont Andy Broderick, President 123 St. Paul Street Burlington, VT 05401 Phone: (802) 863-8424 Fax: (802) 660-9034 E-mail:
[email protected] Web site: www.hvt.org Organization Description Housing Vermont (HV) is a full-service housing development company formed in 1988 as a
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provide equity for development projects located in Iowa. IEF syndicates and provides technical assistance in a variety of tax credit properties including rural, difficult to develop areas, and service-intensive properties such as rent-toown and transitional housing. IEF played a key role in the passing of legislation, which allowed state historic rehabilitation and housing enterprise zone tax credits to be bifurcated when included with Low Income Housing Tax Credits.
management, and technical assistance staff. Massachusetts Housing Investment Corporation Joseph Flatley, President and CEO 70 Federal St. Boston, MA 02110 Phone: (617) 850-1028 Fax: (617) 850-1000 Organization Description MHIC was created in July of 1990 to provide financing for affordable housing throughout Massachusetts. The corporation provides construction, permanent, and acquisition financing for projects with at least a 20 percent affordable component. The corporation also purchases low-income housing tax credits through its subsidiary, The Massachusetts Housing Equity Fund, Inc. To date, the corporation’s portfolio contains approximately 6,000 rental units.
Kansas Equity Fund, LLC William Caton, Executive Director 3706 SW Topeka Blvd., Suite 408 Topeka, KS 66609 Phone: (785) 267-1901 Fax: (785) 267-1903 E-mail:
[email protected] Organization Description The Kansas Equity Fund was formed in 2000 to operate in the state of Kansas and is wholly owned by the Midwest Housing Equity Group. KEF to date has played an important role in providing capital for housing in small Kansas communities. Through its parent, KEF has topnotch underwriting, asset
Merritt Community Capital Corporation Bernard T. Deasy, President 1736 Franklin St., Suite 600 Oakland, CA 94612 Phone: (510) 444-7870 Fax: (510) 444-7874 E-mail:
[email protected] Web site: www.merrittcap.org 270
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Organization Description Merritt Community Capital Corporation is a private, nonprofit 501(c)(3) corporation providing equity financing to affordable housing developers throughout California. Since 1989, the corporation has raised more than $184 million in capital for affordable housing development. Merritt Capital currently manages eight upper-tier limited partnerships and numerous direct investments. It is in the process of forming a ninth partnership fund. These funds invest in nine percent and 4 percent Low Income Housing Tax Credit projects and Acquisition with Moderate Rehabilitation projects. Merritt Capital has provided equity that has resulted in the creation or rehabilitation of 2,900 units of affordable housing.
Organization Description Midwest Housing Equity Group, Inc., is the nonprofit corporation that operates equity funds under the names of Equity Fund of Nebraska (EFN), Kansas Equity Fund, LLC (KEF), and Iowa Equity Fund (IEF), and a Community Development Financial Institution under the name of Midwest Housing Development Fund LLC (MHDF). EFN, KEF, and IEF are independently operated tax credit syndication firms and individual members of NASLEF. Midwest Housing Equity Group, Inc., operates fully in Nebraska and is contracted by KEF and IEF to perform underwriting, asset management, compliance, and other functions including technical assistance at no cost to nonprofit and for-profit organizations. MHDF operates in Nebraska, Kansas and Iowa. MHEG companies have raised over $194 million and invested in over 2,000 affordable housing units.
Midwest Housing Equity Group, Inc. Jim Rieker, President 13057 West Center Road, Suite 20 Omaha, NE 68144 Phone: (402) 334-8899 Fax: (402) 334-5599 E-mail:
[email protected] Web site: www.mheginc.com
Mountain Plains Equity Group Donald J. Sterhan, President 490 N. 31st Street, Suite 301 Billings, MT 59101 Phone: (406) 254-1677 271
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Fax: (406) 869-8693 E-mail:
[email protected]
Organization Description The Northern New England Housing Investment Fund (NNEHIF) is a private, nonprofit 501(c)(3) corporation providing equity capital and technical assistance to affordable housing developers throughout Maine and New Hampshire. Since 1996, the corporation has raised more than $160 million in equity capital for affordable housing development. NNEHIF currently manages eight upper tier limited partnerships in Maine and New Hampshire. Since 1996, NNEHIF has invested in the development of over 1,900 units of affordable housing.
Organization Description Mountain Plains Equity Group, Inc. (MPEG) is a newly formed 501(c)(3) nonprofit company with its principal office in Billings, Montana. The organization was formed as a joint venture among the respective Housing Finance Agencies in the states of North Dakota, Montana, and Wyoming. The mission of this new company is to assist in the development and equity financing of small-to-medium-sized LIHTC projects in the three-state region of North Dakota, Montana, and Wyoming. In fulfilling its mission, MPEG functions as a syndicator of tax credits and is aggressively pursuing the development of affordable housing in its service area. MPEG was formed in April 2003.
Ohio Capital Corporation for Housing Hal Keller, President 88 E. Broad St., Suite 1800 Columbus, OH 43215 Phone: (614) 224-8446 Fax: (614) 224-8452 E-mail:
[email protected] Web site: www.occh.org
Northern New England Housing Investment Fund John Anton, President 183 Middle Street, 3rd floor Portland, ME 04101 Phone: (207) 772-8255 Fax: (207) 772-8241 E-mail: janton@housing investmentfund.org
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Organization Description The Ohio Capital Corporation for Housing (OCCH) was created in 1989 by the Ohio Housing Finance Agency. As a now independent nonprofit
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organization, OCCH has three primary activities: equity raising for LIHTC projects, financial packaging for developers of affordable housing, and asset management. OCCH raised over $545 million in equity by 2003 and financed over 10,500 units. OCCH also issues tax exempt bonds as an instrumentality of the state housing agency, administers a HUD technical assistance grant for community-based nonprofits, and is involved in Section 8 portfolio reengineering.
Under the combined fund, investors may continue to direct their investments to the St. Louis metropolitan area exclusively, or elect to invest on a statewide basis. In addition to the dayto-day activities of development and asset management, the Equity Fund also broadened its role in serving the needs of the housing community. Significant staff and financial resources were devoted to the following areas:
The continued capitalization and staff support of Community Asset Management Company (CAMCO). CAMCO, a property management company, was founded by the St. Louis Equity Fund in cooperation with Beyond Housing, to address the need for quality property management and resident support services.
The continuation of the predevelopment loan program an important resource in bringing superior housing investments to our Fund.
The creation of not-forprofit development companies in an effort to preserve and create quality units of affordable housing.
St. Louis Equity Fund, Inc. Timothy D. Barry, President 707 N. Second St., Suite 308 St. Louis, MO 63102 Phone: (314) 436-7810 Fax: (314) 436-1907 E-mail:
[email protected] Web site: www.slefi.com Organization Description Since its inception in 1988, the St. Louis Equity Fund has raised more than $119 million and financed approximately 2,500 affordable homes in over 92 projects involving both low-income and historic tax credits. Housing Missouri, the statewide affiliate, has merged with the St. Louis Equity Fund.
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The development and administration of Tax Credit Manager, a webbased database designed to answer an industrywide need for high-quality data management.
serve as a leader in the development of innovative affordable housing and revitalization of Virginia’s communities. VCDC currently manages 12 equity funds and has provided technical assistance in the financing, development, and management of 59 investment partnerships, resulting in the creation of 2,000 affordable housing units in Virginia. VCDC has secured over $125 million in equity from Corporate Investors, which has helped generate over $200 million in total development and has helped leverage additional public and private sector financing.
Virginia Community Development Corporation Ralph Nodine, President and CEO 114 East Cary St., #101 Richmond, VA 23219 Phone: (804) 343-1200 Fax: (804) 343-1043 E-mail:
[email protected] Web site: www.vacdc.org Organization Description The Virginia Community Development Corporation (VCDC) was formed in 1990 with a mission to
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A P P E N D I X
9 B
Partial Listing of Low-Income Housing Tax Credit Tax Syndicators AEGON Community Investments 505 Sansome St. #1700 San Francisco, CA 94111 Contact: David Kunhardt Phone: 415-983-5418 Email: david.kunhardt @transamerica.com
The Capital Group 2 Miranova Place, 12th Floor Columbus OH 43215 Contact: Scott M. Laufenberg Phone: 800-837-5100 Fax: 614-857-1430 Website: www. redcapitalgroup.com
Apollo Housing Capital 600 Superior Avenue, Suite 2300 Cleveland, OH 44114 Contacts: Tom Rini / Jack Griffiths Phone: 216-875-2626 Fax: 216-875-2612 Website: www.apollohousing.com
Community Affordable Housing Equity Corporation 7700 Falls of Neuse Rd., Suite 200 Raleigh, NC 27615 Phone: 919-420-0063 Website: www.cahec.com Edison Capital 18101 Von Karman Avenue, Suite 1700 Irvine, CA 92612 Contact: Lisa Swenerton Phone: 800-323-2235 Fax: 949-757-4789 Website: www.eix.com
Boston Capital One Boston Place Boston, MA 02108 Contact: Bob Moss Phone: 800-LIHTC42/ 617624-8900 Fax: 617-624-8999 Website: www.bostoncapital.com
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Phone: 703-838-8700 Fax: 703-838-8710 Website: www. franklincapitalgroup.com
The Enterprise Social Investment Corporation 10227 Wincopin Circle, Suite 800 Columbia, MD 21044-3400 Contact: Sue Wilson Phone: 410.964.0552 Fax: 410.964.1376 Website: www.enterprise foundation.org/esic
Freddie Mac 8100 Jones Branch Drive McLean, VA 22102-3110 Contact: Christine Hobbs Phone: 703-714-2894 Website: www.freddiemac.com
Fannie Mae 3900 Wisconsin Avenue, NW Washington, DC 20016 Contact: Ed Neill Phone: 202-752-7000 Fax: 202-280-2045 Website: www. fanniemae.com/ housingcommdev/ solutions/ loansdisabilities.jhtml
GE Capital 500 West Monroe St Chicago, IL 60661 Contact: Larry Mandel Phone: 312-441-7150 Fax: 312-441-7119 Website: www.gerealestate.com Guilford Capital Corporation 2600 E. South Boulevard, Suite 230 Montgomery, AL 36116 Contact: Pete Davis Phone: 334-286-6916 Fax: 334-281-9488 Website: www.guilfordcapital.com
WEST COAST Contact: Heidi McKibben Phone: 626-396-5341 First Sterling Financial 1155 Northern Boulevard Manhasset, NY 11030 Contacts: Ann Soja Phone: 800-777-7995 Fax: 516-627-8760 Website: www.firststerling.com
MMA Financial 101 Arch Street Boston, MA 02110 Contact: Jim Daily Phone: 617-772-9553/800782-7890 Fax: 617-439-9978 SAN FRANCISCO 44 Montgomery St., Suite 1710 San Francisco, CA 94104
Franklin Capital Group 118 King Street, Suite 200 Alexandria, VA 22314 Contact: Joseph E. Resende
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Contact: Catherine Talbot Phone: 800.782.7890 x561/ 415.733.9259 Fax: 415-677-5125 Website: www.mmafin.com
National Equity Fund 120 South Riverside Plaza, 15th Floor Chicago, IL 60606-3908 Contact: Tony Chandler Phone: 312-360-0400 Fax: 312-360-0185 Website: http:// www.nefinc.org/
Paramount Financial Group 4009 Columbus Road SW Granville, OH 43023 Contact: Steve Daley Phone: 740-321-1745/ 800933-4150 Fax: 740-321-9745 Website: www.paramountpfg.com
Raymond James Tax Credit Funds 880 Carillon Parkway Department 11V00 St. Petersburg, FL 33716 Contacts: Ron Diner/Steve Kropf Phone: 800-438-8088 Fax: 727-567-8455 Website: www.raymondjames.com/ taxcreditfunds/info.htm
PNC Multi-Family Capital 121 SW Morrison, Suite 1300 Portland, OR 97204 Contacts: Lisa Dias/ Bradley J. Bullock Phone: 800-635-6556 Fax: 503-808-1301 Website: www.pncrealestate finance.com/ multifamilycapital.htm
The Richman Group CONNECTICUT 340 Pemberwick Rd. Grenwich, CT 06831 Contacts: Andrew Clauer, Rich McCauley, Peter McHugh, or David Salzman Phone: 800-333-3509
John Hancock Realty Advisors, Inc. 200 Clarendon Street, T-53 Boston, MA 02116 Contact: Robert Maulden Phone: 617-572-6041 Fax: 617-572-4741 Website: www.jhancock realestate.com/reig/ affordable/overview.html
ILLINOIS 666 Dundee Rd. Suite 1102 Northbrook, IL 60062 Contact: David Brint Phone: 847-562-9400 MASSACHUSETTS 8 Forge Pond Rd. Canton, MA 02021 Contact: Phil Corbett Phone: 781-828-6800
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VIRGINIA 1800 North Kent St. Suite 904 Arlington, VA 22209 Contact: Reid Weppler Phone: 703-741-9910 x60 Fax: 703-741-9918
Los Angeles, CA 90067-6022 Contact: Mike Fowler Email:
[email protected] Fax: 310-772-6179 Website: www.sunamerica housing.com
CALIFORNIA – CARLSBAD Shannon Vanderhei 1902 Wright Place Suite 200 Carlsbad, CA 92008 Contact: Christopher Clark Phone: 760-918-5542
Wachovia Securities 301 S. College St. Charlotte, NC 28288 Contact: Paul Norris Phone: 704.383.9522 Fax: 704.715.0046 Website: www.wachovia .com/inside/page/ 0,,139_413_419_428,00.html
Simpson Housing Solutions, LLC 320 Golden Shore, Suite 200 Long Beach, CA 90802 Contact: Jeff Butcher Phone: 562-256-2083 Fax: 562-256-2004 Website: web1.simsol.us Email: jeff.butcher@ simpsonhousing.com
WNC & Associates 17782 Sky Park Circle Irvine, CA 92614-6404 Contact: Michael Gaber Phone: 800-286-1135/714662-5565 x130 Fax: 714-662-6834 Email:
[email protected] Website: www.wncinc.com
SunAmerica Affordable Housing Partners, Inc. 1 SunAmerica Center Century City
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C H A P T E R
T E N 10
Sources of Capital: Public Housing Funds BY JULIE MCGOVERN, JAIME ALISON LEE, MEGAN GLASHEEN, AND LEE RENO1
10.4
Mixing Public Housing Capital with other Capital: Mixed Finance 286
Considerations in Mixing Public Housing Development Funds with other Sources of Affordable Housing Funds 293
10.5
Uses of Public Housing Funds in Mixed-Finance Transactions 288
Elements of Public Housing Development Transactions 298
10.6
Conclusion
10.1
How Public Housing Resources Contribute to Affordable Housing 280
10.2
10.3
313
Since its creation in 1937, public housing has been a significant source of affordable housing. Today, despite repeated funding cuts in recent years, public housing authorities (“PHAs”) across the country are successfully constructing and rehabilitating great numbers of both rental and homeownership units for low-income residents. PHAs have access to significant resources for both capital and operational needs, and also for supportive programs such as job training that are integral to building strong communities. They are now empowered, through certain innovations in legislation and administrative law, to leverage these resources 1
The authors are attorneys with Reno & Cavanaugh PLLC, which is a boutique law firm located in Washington, DC specializing in affordable housing, with a focus on public housing regulatory and development matters. Additional research for this edition of this chapter was provided by Mary Grace Folwell. Original research for prior editions was also provided by Sharon Wilson Geno, and original research assistance for prior editions was provided by Deirda Proctor.
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more widely than perhaps ever before, attracting a wide range of development and lending partners from the private, nonprofit, and government sectors. Public housing funds are now routinely combined with other funding sources, such as private equity generated by the federal low-income housing tax credit program, commercial bank loans, and other government resources; in 2004, public housing grant funds generated an additional $11.4 billion dollars of investment in affordable housing.2 Many PHAs can also offer substantial amounts of real property in downtown areas that is not only ripe for redevelopment but also can typically qualify for certain tax breaks. As a result, many PHAs are today key players in sophisticated real estate transactions that not only have affordable housing as their cornerstone but are also often key components of the revitalization of the surrounding communities as well. This chapter provides an overview of these developments, which are known in industry lingo as “mixed-finance” developments. First, the chapter provides a brief introduction to public housing and the events of the early 1990s that enabled mixed-finance development, touches upon the new “Capital Fund financing” tool that applies the entrepreneurial spirit of mixed-finance to leverage allocations of annual Capital Funds from HUD, and remarks briefly on the manner in which mixed-finance is regulated. It then describes the different types of public housing funds and other sources of capital often used in mixed-finance deals, including tax credit equity and bond financing backed by public housing Capital Funds. Finally, it discusses a number of elements unique to public housing mixed-finance that require special attention and care, including the HUD review and approval process, procurement issues, use of PHA affiliates, admissions preferences and waiting lists, and special protections afforded public housing residents. 10.1
(a)
HOW PUBLIC HOUSING RESOURCES CONTRIBUTE TO AFFORDABLE HOUSING The Basics of Public Housing
Public housing authorities PHAs have traditionally been the affordable housing providers of last resort. Although PHAs are creatures of state and local governments, their affordable housing activities are shaped and governed by the U.S. Housing Act of 1937 (the “Act”). The Act authorizes federally funded housing programs including public housing and Section 8
2
See Council of Large Public PHAs, Quick Facts, HOPE VI available at www.clpha.org/page.cfm?pageID=441 (last visited June 13, 2005).
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and regulates (in detail) PHAs’ operations of public housing projects. Approximately 1.3 million households live in public housing.3 The Act originally envisioned that occupants of public housing would be short-term residents requiring shelter until they found gainful employment and moved elsewhere. However, federal social policies that reduced the quality of construction and limited the rents that PHAs can charge made public housing economically unattractive for higher-income families, failed to provide adequate subsidy for operations, and turned many public housing developments into communities of poverty. Today, the median income of households in conventional public housing is 19 percent of area median income (or about $10,754 per year),4 even though public housing is nominally open to families earning up to 80 percent of area median income. 5 In addition, the occupants of public housing are overwhelmingly minority (approximately 67 percent)6 due, in part, to past discrimination in the real estate industry and elsewhere. PHAs rely upon the federal government for funds to develop, rehabilitate, and operate public housing. Public housing residents pay 30 percent of their income for rent (called “Brooke Rents”), producing operating income at only a portion of an average PHA’s needs. Federal dollars called the “Operating Fund” cover the additional operating costs. The Operating Fund is appropriated annually by Congress and administered by HUD’s Office of Public and Indian Housing. In recent years, this appropriation has been roughly $3.5 billion annually—a sum that the public housing industry believes to be woefully inadequate. The Operating Fund is designed to fund only current operating expenses, so it is usually not sufficient to accumulate reasonable replacement reserves. Each year Congress also appropriates public housing capital funds, which are used primarily to “modernize” some of the aging stock, although they also may be used for development activity. Recently, this appropriation has been approximately $2.5 billion, which is barely more 3
4
5
6
Cited by: U.S. Dept. of Housing. & Urban Development, Department of Public and Indian Housing, Public Housing, www.hud.gov/offices/pih/programs/ph/index.cfm, last updated Sep. 28, 2004. The average annual household income for public housing residents is from HUD’s Resident Characteristics Report, as of April 30, 2005, available at http://pic.hud.gov/ pic/RCRPublic/remain.asp. The median household income for the nation in 2005 is $58,000, Estimated Median Family Incomes for FY 2005, PDR Notice 2005-01 (Feb. 11, 2005)available at www.huduser.org/datasets/il/il05/HUD-Medians-2005Notice.pdf This disparity is due in large part to the policies established in the 1960s and 1970s that required (1) that 75 percent to 85 percent of new admissions earn less than 50 percent of area median income and that (2) 50 percent of new admissions be admitted according to federal preferences primarily based upon severity of need for subsidized housing. These admissions requirements are discussed further in section 5(h) of this chapter. See supra note 2.
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than the $2 billion needed to offset annual depreciation.7 At that level of funding, PHAs can make little progress in reducing the $21 billion backlog of modernization needs. In the early 1990s, Congress essentially discontinued funding for the construction of additional public housing units. While PHAs are currently engaged in considerable development activity using both the Capital Fund and the HOPE VI Program, which is described later in this chapter, the units being built are replacements for units that were demolished, not for additional units that actually increase the total net number of units. A powerful new tool that enables PHAs to stretch their scarce Capital Fund allocations was authorized in 1998 under Section 9(d) of the Act. This section has been interpreted to permit a PHA to pledge portions of its future receipt of capital funds to the repayment of bond issuances or private loans. Using this approach, PHAs can accelerate receipt of the capital funds that it would otherwise have to wait to receive from Congress over a period of many years. Pledges of capital funds are discussed in more detail in Section 10.3(a) of this chapter. In addition, a certain type of capital funds, known as Replacement Housing Factor funds, are growing in importance as a funding source for public housing development. (b)
Public Housing’s Role in the Development of Affordable Housing
Around the time that funding for the construction of additional public housing units ended, Congress created an important new program, known as the HOPE VI program, for the demolition and reconstruction of severely distressed public housing.8 Using a combination of HOPE VI funds and certain other regulatory innovations and financing tools, including lowincome housing tax credits and bond financing, many PHAs today are leading large-scale revitalizations of distressed public housing and the surrounding neighborhoods. Following is a brief history of the genesis of the HOPE VI program, and an overview of the regulatory breakthroughs that today enable PHAs to engage in these kinds of developments. (i) The Genesis of HOPE VI. The HOPE VI Program was designed to promote fundamental changes in the way that PHAs develop and administer public housing by enabling the demolition of severely distressed units, construction of new units that compliment the surrounding neighborhood, and provision of significant supportive services to the residents. By the late 1980s, public housing was popularly viewed as being
7
8
Cited by Meryl Fincel et al., Capital Needs of the Public Housing Stock in 1998 prepared for the U.S. Department of Housing and Urban Development, Abt Associates, Inc. (2000). For more information onHOPE VI, see Chapter Eight.
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in crisis, particularly because of images of urban high rises and other overly dense family projects, due to a combination of factors, including inadequate funding, an increasingly impoverished and welfare-reliant population, obsolete architectural design, the prevalence of urban drug usage and crime, overregulation by HUD, and occasional mis- and maladministration by some of the PHAs themselves. In 1989, Congress established the National Commission on Severely Distressed Public Housing (the “National Commission”) to propose a national action plan to eradicate severely distressed public housing by the year 2000. The 1992 Final Report of the National Commission on Severely Distressed Public Housing found that 6 percent of the conventional public housing units would require modernization improvements at 60 percent or more of HUD’s total development cost guidelines and thus should be categorized as “severely distressed.” The Final Report also warned that unless corrective actions were taken immediately, the number of units categorized as severely distressed would increase dramatically. The National Commission recommended demolition of the unredeemable units, reconstruction, and replacement with contemporary lowdensity units, renewal of the sites and surrounding neighborhoods, and fundamental regulatory reforms that would enable PHAs greater flexibility to solve their problems. Congress responded to the National Commission’s Final Report in its 1993 appropriations for HUD by creating the Urban Revitalization Demonstration Program (now called the HOPE VI Program) and by appropriating $300 million for a competitive grant program. These appropriations have continued since then, totaling more than $5.8 billion through 2003 for planning, demolition, and revitalization. Although the program is enormously popular and has been crucial to dozens of large-scale revitalizations of distressed neighborhoods around the country, the George W. Bush Administration has proposed zeroing out all funding for the HOPE VI program every year from fiscal year 2004 up until the time of this writing. Congress has thus far restored funding each year, although in amounts sufficient only to fund token construction. Furthermore, the president’s proposed FY 2006 budget rescinds the 2005 HOPE VI appropriation. Even though at the time of this writing, HUD has issued a Notice of Funding Availability for FY 2005 HOPE VI funds, depending upon the final appropriations bill, applicants may not actually receive the funding offered. (ii) Innovations in Ownership Structures. Around the same time that HOPE
VI was being developed, PHAs were also pursuing important regulatory changes that would enable them to better leverage their resources with others, and to expand their capacity for the development and management of affordable housing by partnering with private sector actors. Specifically, in order to combine the PHAs’ resources and experience in affordable housing
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with additional funding available through the low-income housing tax credit program (in which private investors receive tax credits in exchange for providing equity for the construction and/or rehabilitation of lowincome housing), PHAs needed to engage in certain nontraditional activities, including (1) creating “public housing” that would be owned and operated by entities other than PHAs, such as limited partnerships receiving tax credits, and (2) providing operating funds to such limited partnerships. In 1994, in response to PHA inquiries, HUD’s then General Counsel Nelson Diaz issued an opinion (the “Diaz Opinion”) explaining that in certain circumstances, public housing could indeed be owned and operated by entities other than PHAs themselves, and could do so using operating funds provided by the PHAs.9 The Diaz Opinion explained that, in order to provide operating funds to a private owner, the PHA “would have to assure that the Operating Funds would be paid only to cover the actual operating expenses of the public housing units” and that the owners of units comply with a laundry list of statutory public housing requirements, some of which are discussed in detail in this chapter. The Diaz Opinion also noted that the Act permits development funds to be used for units not owned by PHAs, so long as the units are made available to public housing eligible families and are subject to the statutory requirements referred to above. Diaz also said that leveraged projects would be subject to a subsidy layering review according to the HUD Reform Act of 1989. Supported by the large amounts of HOPE VI funds directed toward resurrecting public housing, the legal opening provided by the Diaz Opinion and subsequent authorizing legislation, PHAs developed a new method of developing public housing—so-called “mixed finance.” (c)
The Shadow Law of Mixed Finance.
In mixed finance, a PHA often procures a developer10 to build communities using a combination of public housing funds and private financing. Typically, the PHA makes a loan, or a combination of loans and grants, to a limited partnership that is eligible for tax credits and other affordable housing resources. This increased activity outside the traditional boundaries of “public housing” has made PHAs in many cities new major players in providing affordable housing in their communities. The “mixed-finance” process consists essentially of negotiations between the PHA and its various public and private partners, followed 9
10
At the time of the Diaz Opinion, the annual operating funds distributed to PHAs by formula were called “Operating Subsidies.” In 1998, the enactment of the Quality Work and Responsibility Act of 1998 changed the name to “Operating Fund.” An outside developer is not necessary for a PHA that has development capacity or an active development affiliate.
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by review and approval by HUD of the overall development plan and of certain documents that the parties will enter into. It is governed by Section 35 of The Quality Housing and Work Responsibility Act of 1998 (the “1998 Reform Act”), which in October 1998 became one of the first thorough overhauls of the sixty-one-year-old act. The 1998 Reform Act introduced a statutory provision relating to mixed-finance, although many of its components cannot be implemented until HUD promulgates regulations.11 On a practical level, the review and approval process by HUD is largely governed by a sort of “shadow law,”12 consisting of the interim mixed-finance regulation,13 a guidebook issued to HOPE VI grant recipients, a development guidebook, and the posting on the HUD website of informal guidance, including documents known as Notices and Policy Alerts and various “model” documents, which in some cases are treated as binding and in other cases are not.14 In addition, every mixed-finance review process is subject to certain “understandings” among HUD legal and program staff, as communicated to PHAs throughout the review process.
11
12
13
14
Some of the reforms were in HUD’s previous annual appropriations acts and have an immediate effective date; their impact is easier to ascertain. This chapter will call these appropriations acts collectively, the “VA-HUD Appropriations Acts,” and individually, the “19[year] VA-HUD Appropriations Act.” Specifically, they are the Appropriations Acts for Veterans Affairs, Department of Housing and Urban Development and Independent Agencies, for the fiscal years 1992 (Pub. L. No. 101139), 1993 (Pub. L. 102-389), 1994 (Pub L. No. 103-124), 1995 (Pub. L. No. 103-327), 1996 (Pub. L. No. 104-134), 1997 (Pub. L. No. 104-204), 1998 (Pub. L. No. 105-65), 1999 (Pub. L. No. 105-276), 2000 (Pub. L. No. 106-74), 2001 (Pub. L. No. 107-73), 2002 (Pub. L. No. 107-73), 2003 (Pub. L. No. 108-7), 2004 (Pub. L. No. 108-199), and 2005 (Pub. L. No. 108447). For the evocative phrase “shadow law,” we are indebted to Stephen M. Johnson for his article “The Internet Changes Everything.” Mr. Johnson uses the phrase to describe the result of over-reliance by administrative agencies upon “informal adjudication, interpretive rules, and policy statements to administer and interpret federal law.” 50 Admin. L. Rev. 277, 288 (1998). We use the phrase to embrace the HUD practice of posting informal guidance on the web and using ad hoc decision making in reviewing and approving mixed-finance transactions and other PHA requests for regulatory relief. See 24 C.F.R. part 941, subpart F. The “Mixed-Finance Interim Rule” was published in the Federal Register on May 2, 1996. A Final Rule that addresses mixed finance in more detail, and with more relation to the practice as it has evolved, has been expected for nine years as of the time of this writing. Certain HUD guidance materials on mixed finance can be found at www.hud.gov/ offices/pih/programs/ph/hope6/mfph. The “Cost Controls and Safe Harbor Standards” for rental and homeownership projects are among the most important of these informal HUD documents. The website contains some model documents issued for comment in January 2003 that have significant flaws and should not be used without careful review for their application to the transaction at hand.
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10.2 (a)
MIXING PUBLIC HOUSING CAPITAL WITH OTHER CAPITAL: MIXED FINANCE Introduction to Mixed Finance
Conceptually, mixed finance is simple. A PHA has capital funds, such as HOPE VI funds or capital funds appropriated under Section 9 of the act. The PHA leverages those funds by obtaining some private financing, using those funds to back a bond issuance, tapping into other development programs, and by selling or leasing the proposed development site to a private party or a PHA-controlled affiliate in order to facilitate the sale of tax credits to equity investors.15 In practice, however, mixed finance is far from simple. A PHA has only a reservation of Capital Funds through HOPE VI or capital programs, not the funds themselves. It prepares a Mixed-Finance Proposal (the “Proposal”) for review by the Office of Public Housing Investments (“OPHI”), which is part of the Office of Public and Indian Housing. Upon receiving approval of the Proposal, the PHA must then bring to virtual closing a package of financing, preparing reams of agreements, policies, and certifications, and then submitting this package of “mixed-finance evidentiary documents” to HUD for review by HUD program managers and HUD attorneys. The evidentiary review process is expected to take 45 days and may extend for a longer period. Even though the other financing is in place, the PHA cannot loan or grant the funds or close with other parties until receiving HUD approval. The mixed-finance approval process is further complicated by the fact that the process is governed by shadow law16 that can make HUD objections difficult to anticipate. As HUD staff and priorities shift, the requirements of the mixed finance move as well. (b)
Advantages for PHAs
Mixed finance offers PHAs an unprecedented opportunity to enter the wider world of affordable housing development. The primary impetus for mixed finance was PHAs’ recognition that they could enhance the number of units and the quality of those units by accessing funding sources committed to development, but previously unusable by PHAs or for developing public housing, including CDBG and HOME funds and tax credits. Other benefits of mixed finance include: •
15 16
Enhanced local support and involvement—Many PHAs find that working with local housing players in order to achieve a common goal The fundamentals of this process are formalized in Section 35 of the Act. As noted previously, the general HUD website for mixed finance is www.hud.gov/ offices/pih/programs/ph/hope6/mfph.
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leads to enhanced support from local organizations and agencies, such as the state housing finance agency, the mayor’s office, the municipal community development agency, local nonprofits and community development corporations, and the community at large.
17
•
Eradication of physical and social isolation of public housing residents— In mixed finance, public housing units tend to be developed side by side with other affordable and market rate units. As a result, public housing residents live in “mixed-income” communities, which is widely perceived as beneficial, if not critical, to creating livable public housing communities.17
•
Anchoring of neighborhood revitalization—In many cases, when a PHA invests in a public housing site, the jurisdiction becomes more willing to invest in the surrounding neighborhood. As a result, jurisdictions and private entities are targeting mixed-finance neighborhoods for infrastructure improvements, affordable homeownership programs, new public facilities, and economic development investment.
•
Strengthening of PHA development expertise—For many years, PHAs have operated under a simple development paradigm: They received funds from HUD, hired general contractors, and either “modernized” existing stock or (less frequently) constructed new units. This method works well for projects such as small-scale construction or rehabilitation of housing, but is less useful for largescale revitalization of public housing and inner city neighborhoods. Working with private developers, local and state officials familiar with various programs, and other lenders and investors gives PHAs up-close experience with different ideas and techniques that enhance their vision for public housing and their ability to carry out that vision.
•
Asset Management—PHAs were originally conceived as property managers, caring for the day-to-day needs of their housing stock, and implementing long-term strategies for development of new stock and modernization of existing stock. Many PHAs use a mixedfinance development as an opportunity to step back from such concerns and into a role as the “asset manager” of its housing stock. An asset manager is the owner of a large portfolio of properties that
According to the Final Report, “it is generally accepted that in communities with a range of incomes, as opposed to a concentration of very low incomes, social norms are more widely respected; that is, crime is not tolerated to a high extent and property, both communal and individual, is not abused or vandalized. . . . It appears that public housing communities are less difficult to manage and that it is easier to provide greater benefits to all residents if there is a mix of incomes to include a greater number of households whose members are employed.”
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monitors performance toward goals, provides oversight, and guides investment decisions but does not directly oversee the site manager or get involved in day-to-day activities. (c)
Disadvantages for PHAs
The advantages of mixed finance—increased community involvement and joint efforts with other entities—create their own corresponding challenges. Mixed finance is an important entreé into other sectors of affordable housing, but, except for those PHAs who are already experienced with mixed finance, it requires PHAs to think and act in new ways. On its own, PHA development proceeds at a relatively slow pace because of the constraints of competitive procurement and intensive HUD review of proposed actions. By contrast, the private sector has the flexibility to move faster than PHAs, and both parties can become frustrated by the difference in the other’s pace. To ease this frustration, many PHAs hire private program managers familiar with public housing development to mediate between the public and private aspects of a mixed-finance transaction and to manage the many moving pieces. In addition, decisions that a PHA formerly made in relative isolation become subjects of debate by multiple constituencies—residents, HUD, local jurisdictions, lenders, developers, and equity investors. All these factors mean that mixedfinance development is more complex than traditional public housing development and produces noticeably higher transaction costs. 10.3
(a)
USES OF PUBLIC HOUSING FUNDS IN MIXED-FINANCE TRANSACTIONS Public Housing Development Funds
HUD makes a variety of grants to PHAs to construct and rehabilitate public housing (collectively “public housing development funds”). The primary sources of public housing development funds are: Although the Bush administration has repeatedly sought to end funding for the HOPE VI program, as previously noted, and although recent appropriations have dwindled, HOPE VI is currently a primary source of public housing development funds. Most development projects that use other sources of public housing development funds do so in conjunction with HOPE VI grants. As mentioned above, the HOPE VI program began in the 1993 VA-HUD Appropriations Act as the “Urban Revitalization Demonstration.” The HOPE VI Program funds have been reappropriated each year since 1993 with significant variations. Thus, each year, HOPE VI grant funds are subject to slightly different rules, which are
(i) HOPE VI Funds.
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stated in the HUD Notice of Funding Availability (“NOFA”) and the PHA’s HOPE VI Grant Agreement with HUD. In dealing with HOPE VI Grants, then, the parties should be careful to comply with the program rules for the year of award. Note that since 2000, appropriations for the HOPE VI program have been made under Section 24 of the Act rather than the VA-HUD Appropriations Act, which reduces programmatic variations among years. HOPE VI is a competitive program requiring detailed applications by PHAs. Each application must describe and justify the project to be redeveloped, describe the social services to be provided to project residents, describe the method for undertaking the redevelopment, explain the redevelopment’s economic feasibility, including identification of other funding sources and compliance with HUD limits on total development costs, and the ability of the PHA and its development team, if any, to proceed in a timely manner. Even after an award of HOPE VI funds is made, to the extent any of these developments include financing sources other than public housing funds, the PHA must still go through the mixedfinance review and approval process described in Section 10.2(a) of this chapter. The 1998 Reform Act merged two previously distinct sources of funds, development funds and modernization funds, into the “Capital Fund” previously referred to, which can be used for both development and modernization purposes, which include the development, financing, and modernization of public housing projects, including via mixed finance, vacancy reduction, deferred maintenance needs, planned code compliance, management improvements, demolition and replacement, resident relocation, and capital expenditures to facilitate programs to improve the empowerment and economic self-sufficiency of public housing residents and to improve resident participation; and homeownership activities.18 As noted earlier in this chapter, PHAs are now employing capital funds in an innovative way, which enables PHAs to stretch their scarce Capital Fund allocations and which was authorized in 1998 under Section 9(d) of the Act. This section has been interpreted to permit a PHA to pledge portions of its Capital Funds to the repayment of bond issuances (ii) Capital Funds.
18
See 42 U.S.C. 1437g(d). Prior to the 1998 Reform Act, development funds were appropriated by Congress under Section 5 of the Act and, although HUD rescinded almost all unobligated development funds in fiscal year 1995, some PHAs still have a reservation that they can reallocate for use in a mixed-finance development. Also, prior to the 1998 Reform Act, modernization funds (also referred to as “Comprehensive Grant Funds” or “Comp Grant Funds”), were appropriated by Congress under Section 14 of the Act. Section 14(q), often called “flexible mod,” permits modernization funds to be used not only for management improvements and rehabilitation, but also for development activities.
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or private loans. Using this technique, PHAs can accelerate receipt of the capital funds that it would otherwise have to wait to receive from Congress over a period of many years. PHAs use proceeds generated by these Capital Fund financings to either engage in a more comprehensive rehabilitation of a public housing project than would have been possible with piecemeal annual allocations or to develop replacement rental housing or homeownership units. At the time of this writing, a total of $2.4 billion19 has been raised by such transactions across the county. The Capital Fund is appropriated by Congress each year, and then apportioned to individual PHAs according to a formula.20 In a standard “Capital Fund financing” transaction, a PHA borrows from a private lender or tax-exempt bonds are issued either for public purchase or via a private placement, and the proceeds of the bonds or loan are dedicated to capital fund-eligible purposes, such as public housing development. The PHA’s future allocations of the Capital Fund are pledged as security to pay debt service on the bonds. Under current HUD guidelines, no more than 33 percent of a PHA’s total Capital Fund allocation in the year of closing may be pledged for such purposes. In addition, HUD must approve all Capital Fund financings under a review process that is separate and apart from any mixed-finance review (Capital Fund financings are not by themselves “mixed finance,” although the proceeds may be used in a mixed-finance transaction). While capital funds are subject to congressional appropriations, bonds backed by such funds have received investment-grade ratings from rating agencies and have become an important way for some PHAs to generate capital to support high-impact public housing activities. Future allocations of capital funds may also be used to secure a traditional bank loan to the housing authority, subject to these same general restrictions. In addition, although theoretically bonds or loans may also be backed by revenue generated by a housing development itself, such deals are extremely limited because units receiving operating subsidy cannot service debt until HUD issues regulations implementing the relevant provision of the statute, as described more fully in Section 3(c) of this chapter. Thus, mixed-finance projects that contain relatively few public housing units can theoretically benefit from lower interest rates provided by bond financing, but only the income generated by the nonpublic-housing units can service the bonds under current rules.
19
20
Figure cited by Vickie Longosz of the HUD Office of General Counsel (“OGC”) on May 25, 2005 during a brief presentation entitled “Capital Fund Financing.” The presentation was part of a training entitled “Leveraging Assisted Housing” offered jointly by HUD Public and Indian Housing and the American Bar Association Forum on Affordable Housing and Community Development. See 24 C.F.R. § 905.10 (2005).
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(b)
Eligible Uses of Public Housing Development Funds
Details of eligible uses vary by funding source and year of appropriation. HOPE VI funds, for example, are public housing development funds, but also may be used for a variety of “soft costs” such as self-sufficiency programming. The nature and extent of permissible soft costs vary widely among the VA-HUD Appropriations Acts that governed HOPE VI appropriations up to and including grant year 1998, and continue to vary widely among the HOPE VI appropriations made under Section 24 of the Act beginning in grant year 1999. Capital Funds are also restricted to certain uses. Generally, public housing development funds may be used for: •
Demolition of buildings and disposition of property.
•
Site acquisition, site improvements, and predevelopment costs.
•
Capital costs of construction, major reconstruction, rehabilitation, and other physical improvements of:
Rental public housing dwellings.
Homeownership units pursuant to the programs described in Section 5(m) of this chapter.
Associated community facilities and structures.
•
Management improvements.
•
Administration, planning and technical assistance.
•
Self-sufficiency programming.
•
Programs for the elderly and disabled.
•
Relocation and Section 8 rental assistance.
•
Planning and technical assistance.
•
As collateral or credit enhancement for other forms of public or private borrowings, including “capital fund financings” discussed in more detail in Section 10.3(a) of this chapter.
•
Establishing an “initial period operating reserve” to cover costs of operating public housing units before the project is eligible for Operating Funds.
(c)
Ineligible Uses of Public Housing Funds.
Public housing development funds and the Operating Fund should not be used for the following purposes: •
Development fee—HUD views payment of development fees from public housing development funds as ineligible, so that any development fee must be funded entirely by other sources.
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21 22
•
Guarantees and indemnification—A PHA, even when it or its affiliated nonprofit acts as the developer, may not provide broad guarantees to investors or others involved in mixed-finance transactions. HUD is concerned that by providing guarantees for a particular development, a PHA would put its entire public housing stock at risk. HUD will permit PHAs to provide limited guarantees if the legal documentation specifies that the guarantees will not be financed with the following funds except when such funds are specifically allocated to the project: (1) public housing Operating Funds, (2) public housing development funds, (3) operating receipts of the PHA derived from public housing, or (4) PHA-held operating reserves funded by operating subsidies or operating receipts, if any. In addition, the standard contract by which HUD commits funding to a public housing project prohibits the pledge or encumbrance of the mixed-finance project or any project assets without prior HUD approval. Thus, PHAs cannot agree to standard language in contracts and real estate transfer documents that require the owner or the seller to indemnify the developer or buyer for environmental or other conditions that might arise over the course of construction.21
•
Development costs over HUD-established limits—Each year, HUD publishes Total Development Cost (“TDC”) limits by locality, housing type, and number of bedrooms. PHAs cannot contribute or spend more than the applicable TDC per unit limit on a particular project. Note that the TDC calculation excludes (1) all nonpublic housing sources of funds (including HOME and CDBG funds), (2) extraordinary site costs, and (3) demolition and associated environmental remediation of units not replaced on site, and (4) costs of community and supportive services to public housing residents.22 The rules do permit a PHA to seek a waiver from this requirement.
•
Capitalizing any reserve other than an initial operating period reserve— Mixed-finance transactions typically have larger reserves than other tax credit transactions. For example, because the operating fund is subject to annual appropriations, and therefore possible reduction, investors often require developers of mixed-finance housing to create an additional operating reserve, often called an “ACC Reserve” or an “Affordability Reserve,” to cover the cost of See Form HUD-53012A (7/95), Consolidated Annual Contributions Contract, at Section 7, Covenant Against Disposition and Encumbrances. HUD-PIH Policy Alert – Frequently-Asked Questions on HUD Total Development Cost (TDC) and Housing Cost Cap (HCC) Limits (Jan. 2, 2002) available at www.hud.gov/offices/pih/programs/ph/hope6/mfph/policy_alerts/tdc-2002.pdf.
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subsidizing public housing families at the level required to maintain a healthy development if there are insufficient appropriations. Long-term reserves cannot be funded with public housing development funds.23 (d)
Operating Funds and Tenant Rents
As a general principle, operating funds may be used for any eligible public housing uses. In a mixed-finance project, determining the specific eligible uses is somewhat complex. Permitted uses include any use benefiting public housing units and found on Form HUD-52564 (Budget Worksheet), paying a management agent, replenishing existing reserves whose funds will be used for public housing uses, and funding a reserve for replacements.24 Ineligible purposes would be any not authorized, including but not limited to, payment of expenses attributable to nonpublic-housing units, funding operating reserves above an originally established level, and debt service.25 HUD’s contribution of operating funds to a PHA is based on a formula that, broadly speaking, establishes a certain maximum expense level from which it subtracts tenant rents and certain utility and other expenses. 26 Because HUD’s operating fund obligation is based in large part upon tenant rents collected, HUD has long held that tenant rents may only be used for operating-fund-eligible purposes. 10.4
CONSIDERATIONS IN MIXING PUBLIC HOUSING DEVELOPMENT FUNDS WITH OTHER SOURCES OF AFFORDABLE HOUSING FUNDS
Generally, PHAs and their development partners have access to all capital described in Chapters 7 through 9 of this book. However, there are 23
24
25
26
HUD policies on reserves are detailed. For more information, see HUD-PIH Policy Alert–Use of Operating Subsidies for Mixed-Finance Project Reserves (revised April 4, 2004), available at www.hud.gov/offices/pih/programs/ph/hope6/ mfph/policy_alerts/pol_alert_reserves.pdf. There is little specific guidance on this point other than the Policy Alert on Use of Operating Subsidies for Mixed Finance Project Reserves. The best ways to determine eligible and ineligible uses are to review the model Regulatory and Operating Agreement and model Mixed-Finance ACC Amendment, both on the mixed-finance website mentioned in previous notes, to detect the policies masquerading as contract requirements. This observation is, of course, subject to the caveat that these documents are guidance, not law. HUD has long held that operating subsidy cannot be used for debt service. The 1998 Reform Law actually authorized such use. At the time of this writing, HUD has not yet issued a regulation, although it considers requests for it on a case-by-case basis. However, it has also issued a draft formula for calculating operating subsidy that does not consider debt service as an eligible expense. See 42 USC 1437g(e); 24 CFR §990.
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some additional considerations when combining public housing development funds with other funds. These concerns are described in this section. (a)
Role of HOME Funds
Funds appropriated under the HOME Investment Partnership Act (“HOME”) can be used as an additional resource in mixed-finance transactions, although it must be done with some caution. The HOME Program administered by HUD provides federal funds to state and local governments (“Participating Jurisdictions,” or “PJ’s”) for the purpose of increasing the affordable housing stock of low- and verylow-income families in the jurisdiction.27 Affordable housing providers must apply to the PJ to receive HOME assistance. The statutory list of eligible uses of HOME funds is broad. HOME funds can be used to acquire, build, or rehabilitate affordable rental and homeownership housing. Costs of property acquisition, site improvements, demolition, relocation, reasonable administrative and planning costs, and direct tenant rental assistance are specifically listed as eligible uses.28 However, the HOME program has specific tenant income and rent limitations, as well as a host of other rules addressing what kinds of project may be assisted and what kinds of assistance are permitted, which should be consulted whenever structuring a transaction. 29 Furthermore, practitioners must determine the impact of other federal requirements such as Davis-Bacon wage rates 30 and the Uniform Relocation Act 31 to each particular HOMEfunded project. HUD has approved a number of deals that combine HOME Funds with public housing funds. These transactions present a structuring challenge due to language in the HOME statute that would seem to prohibit the use of HOME funds for a project involving public housing units, but mixed-finance practitioners and HUD counsel both support a more nuanced reading of the statute.32 The statutory language states that HOME funds cannot be used to “provide assistance authorized under section 1437g,” which establishes the public housing Capital Fund and Operating Fund, or to “carry out activities authorized under section 1437g(d)(1),” 27
28 29 30 31
32
Directive Number CPD 98-2, which addresses the allocation of costs and determining the minimum number of HOME units required in a multi-unit building, appeared to be considered by HUD as useful guidance at the time of this writing, although the directive is technically expired. For more information on HOME, see chapter Eight. See 42 U.S.C. § 12742(a). See generally 24 C.F.R. §§ 92.1 et seq. For example, Davis-Bacon applies to projects with 12 or more HOME-assisted units. See 24 C.F.R § 92.354. Under Section 104(d) of the Uniform Relocation Act, certain uses of HOME and other federal funds, such as demolition, can trigger the requirement that a replacement unit be provided. See 42 U.S.C. § 12742(d)(4-5).
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which enumerates eligible uses of the Capital Fund. Under current HUD practice, a project may have both public housing and HOME assisted units if it can be illustrated that the HOME funds are not being utilized to fund the units funded with capital funds, which can be done by showing the overall ratio of HOME-assisted units to non-HOME-assisted units is equal to the overall ratio of HOME funds to non-HOME funds.33 HUD has determined that the prohibition against “carry[ing] out activities authorized under section 1437g(d)(1)” further prohibits the use of utilizing HOME funds in public housing units in a mixed-finance transaction that contains both HOME funds and capital funds, regardless of whether capital funds are contained in the actual unit. It has been generally held that HOME funds and HOPE VI funds may be combined to develop or modernize public housing rental or homeownership units without running afoul of these statutory provisions, since HOPE VI funds are not Section 1437g funds. As of late, however, HUD has indicated that the use of HOME funds in any public housing rental units would run afoul of this prohibition. While some HUD staff have based this determination on the fact that HOME funds would be utilized as public housing operating funds (which are also Section 9 funds), it is more likely that the reason for the prohibition is that HOME funds would be utilized for a use permitted by Section 1437g (d)(1) (the use of Section 9 capital funds for development). The statute can be read in a more generous manner, but the most cautious approach is to designate HOME units as non-public-housing units and to be prepared to demonstrate that HOME and public housing units were not used in the same unit. Given the constant evolution of the law on this issue, developers and PHAs intending to utilize HOME funds with public housing funds in the rental context should obtain the advice of counsel experienced in HUD policies. (b)
Role of CDBG Funds
The Community Development Block Grant Program (“CDBG”) can be used to fund certain elements of a mixed-finance development. CDBG funds are allocated annually to cities, counties, and states to be used for projects that meet at least one of three national objectives: (1) activities benefiting low and moderate income persons; (2) activities which aid in the prevention or elimination of slums or blight; (3) activities designed to meet community development needs having a particular urgency. So long as the contemplated activity meets one of these objectives, is an eligible 33
This practice is generally acceptable to HUD where there is sufficient assurance that the public housing units are “fixed,” or at least where the public housing units and the HOME units cannot float between each other. HUD’s position on whether such units can float is in flux.
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activity of the CDBG program, and meets all other program requirements, CDBG may be used to fund the activity. The development and/or rehabilitation of low- and moderate-income housing, particularly public housing, are specifically mentioned in the CDBG regulations as eligible activities.34 Most commonly, CDBG funds are utilized to finance “hard” construction costs such as land acquisition, site improvements, infrastructure improvements, demolition, and streets required as part of a mixed-finance development. CDBG can also be spent on items such as economic development, training, relocation assistance, social services, homeownership assistance, and other activities which, although not directly related to the development of housing, will enhance a project’s chances for success. Like all federal funding, the use of CDBG funds in a mixed-finance transaction has advantages and disadvantages. Unlike other financing resources, CDBG is often allocated to a project in the form of a grant. The application process and award of CDBG funds from the local entity can create additional support for the project from politicians and government officials, but can also cause problems. All CDBG expenditures must comply with applicable program requirements (which can be onerous) and are subject to audit by the granting entity. It is also worth noting that for fiscal year 2006, the Administration proposed zero dollars in funding for CDBG, and proposed reconfiguring CDBG, along with 17 other community development programs, into a single block grant program to be administered by the Department of Commerce rather than by HUD. At the time of this writing, it is not likely that drastic change will be enacted by Congress. Given these considerations, it is important to review the CDBG regulations, as well as the benefits and drawbacks of the CDBG program, in evaluating whether or not the development should seek CDBG funding. Localities often have different priorities and procedures for allocating their CDBG allotment. As the majority of CDBG funds are awarded though a competitive local application process, all of these factors should be considered prior to making applications for funds. (c)
Role of the Low-Income Housing Tax Credit
The availability of tax credits (which are further described in Chapter 9 Section 9.2) to help fund the development of public housing has been one of the primary motivators of mixed-finance development. As mentioned earlier, once a PHA receives public housing development funds, it would then transfer these funds to a limited partnership that acquires or leases 34
24 C.F.R. 570.200(a)(3)(iv) (2004); 24 C.F.R. 570.202(a)(2) (2004). For more information on CDBG, see Chapter 8.
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the real estate and constructs the housing, financed by loan (or a combination of grants and loans). (i) Public Housing Funds with Low-Income Housing Tax Credits. Low income
housing tax credits are a vital part of mixed-finance projects. They finance amenities that would not be affordable if using solely public housing funds, and enable development of communities that unite subsidized and nonsubsidized units. The interplay of the two types of financing is highly technical, and every mixed-finance project should consult with tax counsel and experienced accountants when structuring a transaction. A PHA should structure its contribution to a project based, on part, on whether the project has 4 percent credits or 9 percent credits. Generally, grants and below-market loans of HOPE VI or other PHA funds constitute “federal subsidy” that cannot be used to calculate basis or they would make the project ineligible for 9% tax credits.35 However, those funds can be combined with 9 percent tax credits if the taxpayer elects to exclude their principal from the eligible basis of the building, or if they are lent into the project at the then-applicable long-term, compoundingannually federal rate (“AFR”) published monthly by the Internal Revenue Service. The requirement to loan public housing funds at AFR, combined with the HUD bar against using public housing resident rents or operating funds to pay the resulting debt service, means that many AFR loans can be repaid only from the proceeds of non-public-housing units or via a balloon payment after the public housing use restrictions end.36 Any balloon payment must be reasonably payable with proceeds of the property. Thus, the 9 percent credits work best in mixed-finance developments that are composed of relatively few public housing units, have tax credit allocations that cover only a portion of the eligible basis, or are located in an area where values are anticipated to appreciate. The IRS has determined that payments of operating funds made pursuant to Section 9 of the Act do not reduce a building’s eligible basis if the payments:
(ii) Treatment of Operating Funds.
•
35
36
Are made to a building owner under a contract with a PHA for the units the owner has agreed to maintain as public housing units in the building. Grants and loans obtained through CDBG and HOME are not considered to be “federal subsidy” because of exceptions in the tax credit law. 26 U.S.C. 42(i)(2)(D) and (E) (2000). As discussed in Section 10.5(c) these use restrictions continue until the later of 40 years from occupancy or 10 years after the project last receives operating funds from HUD. 42 U.S.C. 1437c(a)(2) and 1473g(e)(2)(c)(3) (2000).
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•
Are made for to units occupied by public housing residents; however, units may be considered occupied during short-term vacancies not to exceed 60 days.
•
Do not exceed the difference between the rents received from a building’s public housing residents and a pro rata portion of the building’s actual operating costs that are reasonably allocable to the public housing units (based on objective criteria such as square footage), and provided that, for this purpose, operating costs do not include any development costs of a building (including developer’s fees) or the principal or interest of any debt incurred with respect to any part of the building.37
(iii) State Allocation Plan. Under Section 42 of the Internal Revenue Code,
each state must create an “allocation plan” that sets selection criteria tailored to local conditions and gives preferences to projects serving the lowest-income people and projects obligated to serve qualified residents for the longest periods. In addition, the selection criteria must address a variety of topics, including populations with special needs and public housing waiting lists. In some states, the allocation plan sets aside allocations for HOPE VI or public housing development projects. (d)
The Role of Private Lenders
Today, many PHAs are in a position to require developers of mixedfinance projects to obtain significant additional funding from the private sector, to further leverage the public funds available from the PHAs and other governmental agencies. Commercial banks both large and small routinely participate in these deals to gain credit under the Community Reinvestment Act,38 and often become repeat players as they gain comfort with the HUD standard documents, requirements, and processes. Private lenders are often granted first priority liens over the project; however, even private lender liens must be made subject to the Declaration of Restrictive Covenants, and certain components of standard commercial loans must be adapted so that they work in harmony with public housing requirements. 10.5
ELEMENTS OF PUBLIC HOUSING DEVELOPMENT TRANSACTIONS
Mixed-finance transactions and public housing operations are highly regulated and contain many components that may be unfamiliar even to 37 38
See 26 C.F.R. 1.42-16(c) (2004). The Community Reinvestment Act, as amended, Pub. L. No. 95-128, 12. U.S.C. §§ 2901–2908 (2002).
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those experienced in affordable housing development generally or in traditional public housing development specifically. This section discusses some of the unique components that are common to mixed-finance transactions. (a)
HUD Review
Mixed-finance transactions and public housing operation are intensely reviewed by HUD, and although the process has stabilized greatly since its inception approximately ten years ago, shadow law still exists. The only promulgated law on mixed-finance development is Section 35 of the Act, which is consistent with the Interim Rule issued in 1996 prior to the enactment of Section 35,39 which provides a general description of the requirements, but does not respond to the technical issues that arise as a PHA designs and implements its transaction. Throughout the process of program development and document drafting, PHAs should consult the HUD website,40 and as necessary with HUD staff, regarding interpretation of the Interim Rule and the shadow law on ineligible uses. The answer to a question may differ from deal to deal or within a deal, and all answers are provisional until HUD program and general counsel staff complete their review of all evidentiary documents. Thus, loan documents and partnership agreements that the lender and investor partner and the PHA have negotiated and agreed upon may require alteration after review by HUD staff and its lawyers, although experienced consultants and counsel may be helpful in preventing surprises. (b)
Procurement
When spending HUD funds, PHAs must comply with the procurement regulation found at 24 C.F.R. § 85.36. Among other things, they must ensure that all goods and services are obtained through publicly announced competitive procurements in order to ensure “fair and open competition” in the award of all contracts using federal funds. All services not suitable for closed bidding must be procured through a competitive proposal process that takes into account “price and other factors.” In addition, PHAs must comply with state and local procurement laws. (i) Basic Rule for Procurements by PHAs.
There is an exception to the competitive procurement rules for services that HUD considers to be inappropriate for the competitive proposal method. PHAs
(ii) Exception for Architects, Engineers, and Development Partners.
39 40
See 42 U.S.C. § 1437z-7. Again, some HUD guidance is available on the HUD mixed-finance website, at http:// www.hud.gov/offices/pih/programs/ph/hope6/mfph, but it is simply guidance, not law or regulations.
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have long been empowered to solicit architectural and engineering professional services41 (“A/E services”) through a process known as “qualifications-based procurement,” in which the PHA selects the most qualified competitor regardless of price, then the PHA and the selected party negotiate an acceptable price. In the mixed-finance context, PHAs have recently been authorized to use qualifications-based procurement to procure a “development partner” that will have primary responsibility (along with the PHA) for the development of public housing units.42 HUD staff do not treat program managers, even those having significant responsibilities in overseeing development, as “development partners” that can be procured through qualifications-based procurement. Consequently, a PHA may procure A/E services and development partners through qualifications-based procurement, but must follow the competitive proposal method for all other professional services it procures directly, including construction managers, program managers, and legal and financial advisors. (iii) Private Entities Procured by PHAs. In essence, a proper procurement “cuts off” the procurement requirements. Once a contractor has been properly procured, it need not comply with the procurement regulations binding PHAs. However, many PHAs, mindful of their obligation to spend federal funds responsibly, do require their contractors to use competitive methods to obtain goods and services, though few impose the full rigor of part 85. (iv) Procurements of and By PHAs and their Affiliates. Although a PHA must procure all services it acquires directly, the mixed-finance regulation treats an “agency or instrumentality” of the PHA as part of the PHA itself— meaning that no procurement of the related entity is necessary.43 Even though the agency or instrumentality itself is not competitively procured, the regulation injects an element of competition by requiring a private owner entity to comply with Part 85 if “HUD determines that the PHA or PHA instrumentality exercises significant functions within the owner entity with respect to managing the development of the proposed
41 42 43
This exception does not extend to non-A/E services obtained through A/E firms. 24 C.F.R. § 941.602 (2005). 24 CFR §941.604. Guidance in this area has changed somewhat. For years, PIH verbally indicated that a PHA may use an affiliate (without defining affiliate) to be developer or owner of mixed-finance housing without triggering any need to procure the affiliate, so long as that affiliate followed Part 85 procurement requirements itself. This is consistent with a somewhat broad definition of “agency or instrumentality.” However, the 2004 Office of Inspector General Audits of PHA development activities (described more fully in the next section) has led to a more conservative position. Guidance, when issued, may more narrowly define “agency or instrumentality” than in past years.
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units.”44 Thus, if a PHA or a PHA instrumentality is the managing general partner or management agent of an owner, the owner must comply with part 85 in procuring all goods and services unless it develops an alternative procurement plan that is acceptable to HUD. (c)
Development by PHA Affiliates
While it is routine in nonprofit and for-profit development to create a related entity to develop, manage, or own housing, the issue becomes more complex for a PHA. Largely, the difficulty is due to the fact that HUD regulations are not clear about how a PHA may use an affiliate for development, an activity that also fits uncomfortably within the greater regulatory scheme of public housing that has historically been solely developed, owned, operated, and maintained by PHAs themselves. In 2004, the HUD Office of Inspector General (“OIG”) issued an audit that concluded that PHAs were engaging in unauthorized development, particularly development through affiliated entities. The OIG continues to scrutinize affiliate activities. PHAs undertaking any development activities via affiliates should take care to follow the procurement standards identified in the previous section. They should also make sure to treat the affiliate as a separate entity, with its own board meetings, allocations of staff time and affiliate costs between the PHA and the affiliate in accordance with OMB Circular A-87, and contracts for any transfers of funds. Additionally, PHAs should keep their boards informed of affiliate activities, include the affiliate in their consolidated audit if required, ensure that contracts with the affiliate are objectively fair to both sides, and ensure that federal funds are expended only on eligible activities. (d)
Declaration of Restrictive Covenants: Long-Term Use Restriction and Prohibition on Conveyance
Like many affordable housing lenders, HUD requires that the units built with its funds be restricted to affordable housing uses for a certain period of time. These requirements are embodied in the mandatory Declaration of Restrictive Covenants signed by the owner, HUD, and the PHA and recorded in the local land records. This Declaration of Restrictive Covenants governs the real property and the operation of the public housing units in the following manner: (i) Nature of the Use Restriction. While the use restrictions are in effect, any owner of the property must operate the public housing units in compliance with the PHA’s Annual Contributions Contract (“ACC”) with HUD, 44
24 CFR §941.602(d)(2).
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that is, the owner must follow all laws and regulations applicable to public housing for those units constructed and/or operated with public housing funds. In addition, the owner must obtain HUD approval prior to encumbering or disposing of the real property, the improvements, or the fixtures (except through routine leases to residents) or before demolishing any of the public housing units. In addition, HUD retains the right to require conveyance of title or possession of public housing in the event of a substantial default under the ACC. These restrictions must be superior to all other liens. Where capital funds are used, the use restriction lasts for a minimum of 40 years, beginning when the project becomes available for occupancy.45 The use restriction also lasts for ten years beyond the last date that the public housing units receive operating funds.46 Thus, if a PHA provides funds for developing public housing units, then provides subsidy to support operation of those units for the entire 40-year period, but stops after 40 years, the use restriction would be effective for a total of 50 years, unless waived by HUD. (ii) Length of the Use Restriction.
(e)
Disposition of Public Housing Property to Private Owners
An important feature of mixed-finance is that the new public housing units are owned by private parties. PHAs must obtain HUD approval before transferring public housing property by deed or long-term ground lease to those private owners. To meet site-control requirements related to tax credits, the transfer sometimes must take place well before the process of negotiating the deal is complete. Generally, a PHA must submit an application and obtain HUD approval before disposing of any public housing properties via either conveyance or a long-term ground lease47 (a lease for a term of more than one year is considered to be a disposition). 48 The application must be developed in consultation with residents and the local government; meet environmental and historic preservation laws; include certifications, 45
46 47
48
See 42 U.S.C. § 1437(g)(d)(3)(A). However, if the project is an “operating subsidyonly” project, for example, the only public housing funds in the project are Operating Funds, then the minimum period of the restriction is ten years. See 42 U.S.C. § 1437(g)(e)(3). See 42 U.S.C. § 1437(g)(e)(3). Disposition and demolition are governed by Section 18 of the Act and 24 C.F.R. part 970, as modified by HUD-PIH Notice 2003-9, Demolition/Disposition Processing Requirements Under the 1998 Act (Mar. 27, 2003) available at www.hud.gov/offices/ pih/publications/notices/03/pih2003-9.pdf. HUD published a proposed rule for the Demolition-Disposition approval process 69 Fed. Reg. 75188 (Dec. 15, 2004) and predicts that the final rule will be published in July 2005 in its Semiannual Regulatory Agenda, 70 Fed. Reg. 27008 (May 16, 2005). See 24 C.F.R. § 970.2(a)(10)(2005) and HUD-PIH Notice 2003-9, 2 at fn. 1 (Mar. 27. 2003).
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among others, that statutory relocation requirements of displaced residents are met and that the PHA’s Annual Plan authorizes the disposition; and demonstrate that the project has been offered to resident organizations for purchase. In addition, if a project is covered by any bonds,49 the PHA should determine the outstanding amount of the bonds and the best timing for repayment or availability of debt forgiveness; however, if the debt has not or cannot be forgiven, HUD will consider waiving the requirement that proceeds from the disposition be applied to repay the debt. Furthermore, environmental clearance under 24 C.F.R. Part 50 is required before the disposition or demolition of public housing. Although conveyance documents such as deeds, ground leases, and associated financing documents are scrutinized as part of the mixed-finance review process, mixed-finance approval does not constitute authorization to dispose of the property; PHAs must obtain a separate disposition approval from the centralized office in charge of disposition applications, known as the Special Applications Center. However, the disposition regulation does make an exception for conveyances relating to certain homeownership projects.50 HUD must also approve the demolition of any public housing units, which can be done via the same application and approval process as the disposition request. However, no application is required to demolish, within a five-year period, the lesser of five public housing units and 5 percent of the PHA’s inventory. 51 Also, no demolition application is required if the demolition is part of an approved HOPE VI Revitalization Plan after October 21, 1998, although HOPE VI Demolition Grant recipients must still submit demolition applications. (f)
Relocation
Relocation is an important part of the planning for mixed-finance transactions. Even temporary relocation can be traumatic and raise a number of 49
50
51
In 1987, HUD forgave loans to PHAs that were held by the U.S. government and paid by annual contributions. However, many PHAs also have bonds held by state and local governments that, obviously, were not forgiven in 1987. See 24 C.F.R. § 970.2(a)(3) (2005). In addition, although 24 C.F.R. 970.2(a)(11) purports to exempt dispositions made pursuant to an approved mixed-finance proposal before the determination of the Actual Development Cost, HUD has consistently opined that this exception would be available only where a PHA begins development under a standard development method, then switches to the mixed-finance method. Also, although 24 C.F.R. 970.2(a)(12) (2005) purports to exempt dispositions where the public housing units will be reconveyed to the PHA in a mixed-finance transaction, HUD has suggested that this exemption applies only to non-PHA owners of public housing who wish to convey public housing to PHAs, such as at the end of the tax credit compliance period. See 42 U.S.C. 1437p(f) (2000) and Demolition/Disposition Processing Requirements Under the 1998 Act, HUD-PIH Notice 2003-9 (Mar. 27, 2003) available at www.hud.gov/ offices/pih/publications/notices/03/pih2003-9.pdf.
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concerns for residents. To add to the difficulty, HUD relocation requirements can be confusing to both residents and developers. Due to the complexity and hidden costs of relocation, it is critical that the relocation program be well thought out prior to implementation. Following are three key issues related to initial relocation planning: •
Who will be responsible for overseeing the relocation activities? Some PHAs conduct relocation activities (either themselves or through a relocation consultant they procure), and others delegate that task to the developer. If a developer is responsible for relocation, it should work closely with the PHA staff regarding the development and implementation of a relocation plan, and the PHA should closely oversee the relocation process as the PHA will ultimately be responsible for complying with the applicable regulations.
•
What guidelines apply? Generally, eligible residents who are displaced either temporarily or permanently due to a project funded by any one of a number of HUD programs are entitled to benefits under the Uniform Relocation and Real Property Acquisition Policies Act of 1970, as amended (“the URA”).52 The rules regarding who is eligible for URA relocation benefits and the timing of that eligibility are somewhat complex, and all PHAs and developers should thoroughly familiarize themselves with the rules and requirements as soon as a development that would require relocation is contemplated. There is no cap on the amount of benefits a resident could be eligible to receive under the URA.
•
What will the residents’ relocation needs be? In order to sort out the applicable relocation requirements and type of benefits that relocated residents will be eligible to receive, HUD encourages the PHA to initiate a resident survey as soon as practicable. The survey should collect information that allows the PHA to determine the number and type of replacement units that will be required, services that residents will require, and any other information that will be useful in projecting moving costs. The PHA can use that information to determine if a sufficient number of replacement housing units will be available and make adjustments to a development plan accordingly.
Once the preliminary data is collected and a plan has been developed, a PHA submits the Relocation Plan (“the Plan”) to HUD for review and approval. The Plan should describe in detail the schedule 52
42 U.S.C. §§ 4601-4655 (2002). Regulations for the Uniform Relocation Act at 49 C.F.R. part 24 were revised in January 2005 (70 Fed. Reg. 590 (Jan. 4, 2005)).
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and anticipated relocation needs for the project, including the approximate number of relocations of each type, the anticipated benefits, costs, and a plan for the distribution of notices required by the URA. It should also specify the number and bedroom requirements for the Section 8 certificates or vouchers needed to provide replacement housing for displacees. Upon review and approval, HUD will issue a separate allocation of certificates or vouchers for residents who are displaced for the mixedfinance revitalization. The Plan should also describe the process for informing residents of their relocation benefits. Written notices should be provided to all residents as soon as possible. The notices should explain the project, the relocation process, and the relocation options. The timing and content of the notices are described in detail in the regulations. In addition, relocation personnel should be available to meet and answer questions from residents. In many cases, PHA staff and consultants work directly with residents to locate suitable alternative housing, make moving arrangements, and process claims for benefits. Residents who are being relocated with Secti on 8 assistance must go through the Section 8 certification process. Each replacement unit must be inspected to ensure that it is decent, safe, and sanitary, and that individuals are treated on a nondiscriminatory basis. For residents who will be returning to the site, a plan must be developed for notifying them when their unit is ready for occupancy. Transportation to employment, schools, and medical assistance may also be affected by the move, thus requiring alternative arrangements. HUD also requires that evidence of all relocation assistance be fully documented. (g)
Davis-Bacon
The Davis-Bacon wage and documentation requirements apply to contracts awarded under federal grant program legislation, including capital funds, and to units intended to be used as public housing. Note that Davis-Bacon also applies to all rental units developed using HOPE VI funds, although whether it applies to HOPE VI homeownership units depends on the year of the grant and the type of homeownership program employed. In a mixed-income project, Davis-Bacon does not apply to units that are permanently non-public housing units (although many projects do not permanently designate which units are and are not public housing, and in such cases of “floating” units, Davis-Bacon applies to all units).53 Although the rates are indexed according to various economic 53
HUD-PIH Policy Alert – Applicability of Davis-Bacon Wage Rates for HOPE VI Homeownership and Rental Development (Sept. 24, 2001) available at www.hud.gov/offices/ pih/programs/ph/hope6/mfph/policy_alerts/davis_bacon.cfm.
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factors, Davis-Bacon wages may be noticeably higher than market and can add significant additional costs to a project. The PHA is generally responsible for monitoring the developer’s compliance with this provision through periodic reports. In addition, the private owner of public housing and the management agent must pay prevailing wages to all maintenance laborers and mechanics involved in the operation of the public housing units. However, neither personnel in other job categories nor employees working at other properties are affected by the DavisBacon requirements. (h)
Operating Funds
Operating funds, as noted above, provides the owners of public housing rental developments a subsidy for operations of the project. Generally, a PHA receives a certain amount of operating funds from HUD, as determined by a regulatory formula, and then negotiates with its mixed-finance partners as to how much of the operating funds the PHA will pass along to the particular project. As of the time of this writing, HUD is still allocating Operating Funds to PHAs based on a formula known as the Performance Funding System, but drastic change is on the horizon. If enacted as proposed and published in the Federal Register, the new proposed rule54 would not only change the allocation formula to an “asset management” model whereby funds are allocated to each separate project rather than on a portfoliowide basis, but it would also result in significant cuts to the operating funds allotted to a great number of PHAs. Note, however, that the proposed rule contains a safe harbor, which attempts to mitigate the effects of such reduction in subsidy for mixed-finance projects for which HUD has received a proposal by the effective date of the new rule. It is recommended that any parties participating in mixed-finance transactions familiarize themselves with the then-current regulations on the provision of operating funds. (i)
Occupancy Issues
Admissions to and occupancy in public housing are heavily regulated. The complex web of laws and regulations that governs all aspects of public housing operation applies also to public housing units in the 54
Proposed Rule: Revisions to the Public Housing Operating Fund Program, 70 Fed. Reg. 19858 (April, 14, 2005) available at http://a257.g.akamaitech.net/7/257/2422/ 01jan20051800/edocket.access.gpo.gov/2005/pdf/05-7376.pdf.
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mixed-finance context.55 Many of the regulations are satisfied by establishing policies via an Admissions and Continued Occupancy Policy (ACOP) and/or in the PHA’s Annual Plan, both of which require public notice and comment followed by HUD review and approval. These would be implemented at the project level through a management plan, a grievance procedure, and in some cases a resident selection plan or a project-based ACOP. Many mixed-finance communities are developed under the expectation that the new public housing community will avoid the shortcomings of existing public housing by maintaining site-specific waiting lists, using strict screening criteria, admitting higher-income residents, or otherwise tweaking standard public housing practice. In order to achieve this goal, PHAs and mixed-finance owners should thoroughly understand the fundamental requirements and craft appropriate policies that communicate appropriately with both residents and HUD—and obtain explicit waivers and exceptions where necessary. In a mixed-finance transaction, occupancy-related documents and policies must be submitted to HUD with the financing documents, even if the units will not be occupied for months. These occupancy documents are typically reviewed, not by mixed-finance staff, but by field office staff. Significant occupancy issues include the following: The 1998 Reform Act empowered PHAs to use sitespecific waiting lists, also known as site-based waiting lists (SBWLs), which choose residents for a specific site based on criteria tailored to the goals, income tiering, and legal requirements of that site.56 SBWLs allow for income tiering, which guarantees a mixed-income community. For example, income tiering might require that 30 percent of residents earn less than 30 percent of area median income (AMI), 30 percent of residents (i) Waiting Lists.
55
56
The primary regulations, all located at Title 24 of the Code of Federal Regulations, are part 5 (general HUD program requirements, including pet ownership, noncitizens’ income limits, annual income, rent, and examinations); part 960 (admission to and occupancy of public housing); part 966 (lease and grievance procedures). Prior to the 1998 Reform Act, HUD required PHAs to maintain a “community-wide waiting list” for applicants to their public housing. A family applied for public housing generally, when it reached the top of the list, it had virtually no choice regarding which development or part of town it will live in (although most PHAs offered at least one opportunity to refuse housing before the family was placed at the bottom of the list). In addition, the federal government mandated that 75 percent of public housing units be reserved for those earning less than 50 percent of area median income (AMI). Today, PHAs and their development partners have greater flexibility in determining who may be admitted to certain sites. Site-based waiting lists are authorized by 42 U.S.C. 1437d(r) (2000) and implemented at 24 C.F.R. 903.7(b)(2) (2005).
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earn between 30 percent and 60 percent of AMI, and 40 percent of residents earn between 60 percent and 80 percent of AMI. SBWLs also allow for preferences based on employment status; for example, some owners restrict admissions to families that have either a full-time wage earner or an equivalent, such as a person participating in certain self-sufficiency or training programs, or disabled, elderly, or otherwise unable to work). Preferences established through a SBWL, of course, must not violate civil rights laws.57 (ii) Developments for the Elderly. In public housing, the term “elderly development” has a counterintuitive definition. Many developments that are called “elderly” are really “mixed-population,” that is, they are reserved for occupancy by both the elderly and the nonelderly disabled. This linguistic oddity is a holdover from the Act’s former definition of “elderly family” to include single persons who are handicapped or disabled. In order to operate a public housing development that is restricted to the layperson’s idea of elderly, a PHA must develop a “designated housing plan” that designates certain developments as elderly-only (or, as appropriate, as disabled-only, although this is less common), responds to fair housing concerns, and illustrates that households to be displaced by a designation will be provided with adequate alternative housing.58 Since 1997, the designation process has been governed by successive PIH Notices that supersede the regulation at 24 C.F.R. part 945.59 Any proposal to develop a “senior village” in a mixed-finance project requires a PHA to develop or update its designated housing plan, and to commit to frequent renewals over the long term.60 If elderly public housing units are also combined with non-publichousing units intended for occupancy by the elderly, the situation becomes more complex. The public housing designation process provides an exemption from otherwise applicable provisions of the Fair Housing Act that prohibit discrimination based on age but does not cover non-public-housing units. Thus, any related non-public-housing units must fit within the exemptions provided by the Housing for Older
57
58 59
60
See HUD – PIH Policy Alert - Site Based Waiting Lists (Jan. 2, 2002) available at www.hud.gov/offices/pih/programs/ph/hope6/mfph/policy_alerts/ waiting_list.cfm. 42 U.S.C. 1437e (2000). As of this writing, the effective notice is PIH 2005-2 (HA), which expires January 31, 2006, and follows Notices PIH 97-12, 98-24, 98-44, 99-21, 2000-20, 2001-17, and 200212. A PHA’s initial approval last for five years, then must be renewed in two-year increments. 42 U.S.C. 1437e(a)(1).
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Persons Act of 1995 (“HOPA”). 61 Because the eligibility analysis for HOPA is done at the project level, and because the two programs have slightly different resident eligibility criteria, it may be advisable for the project to have separate documentation for the public housing and nonpublic-housing elderly units, such as two sets of resident selection plans, building rules, marketing approaches, and waiting lists. (iii) Grievance Hearings. A resident of public housing has a right to a formal grievance hearing regarding any owner’s action or failure to act in accordance with the resident’s lease or regarding any project or owner’s regulations that adversely affect the resident’s rights, duties, welfare, or status, with exceptions for certain eviction actions conducted in courts of law. These requirements also apply to private owners of public housing, who must adopt a grievance procedure that complies with the Act and the implementing regulations (unless HUD specially approves any deviations). Private owners have developed several approaches to fulfilling this requirement. Some develop their own policies, others adopt the PHA’s policy virtually verbatim, and still others leave administration of the hearings to the PHA. (iv) Rent. A public housing family pays the greater of 30 percent of its monthly adjusted income, 10 percent of its monthly income, welfare rent if applicable, and any “minimum” rent set by the PHA, which may be up to $50.62 PHAs are also required to offer “flat rents” based on market conditions in order not to disincentivize residents who experience an increase in income.63 Tax credit developments are subject to their own regulations as to the maximum allowable rent charged, so any units that are both public housing and tax credit units must abide by both sets of regulations, except that pursuant to Section 35 of the Act, rent for units that are both public housing and tax credit units can be “flat” or “ceiling” rents set at tax credit rent limits. (v) Security Deposits, and Payment of Fees. Security deposits cannot exceed
one month’s rent or a reasonable fixed amount. Owners may adopt reasonable late fees or other penalties, but no such fee may be due until two weeks after the resident receives written notice of the charges. 61
62 63
The Fair Housing Act (Title VIII of the Civil Rights Act of 1968, as amended, 42 U.S.C. 3601-3619) (the Act) exempts “housing for older persons” from the prohibitions against discrimination because of familial status. 42 U.S.C. 3607(b)(1) (2000). Section 807(b)(2)(C) (42 U.S.C. 3607(b)(2)(C) (2000)) of the Act exempts housing intended and operated for occupancy by persons 55 years of age or older that satisfies certain criteria. HUD has implemented the “housing for older persons” exemption at 24 CFR part 100, subpart E. 24 C.F.R. § 5.630 (2004). See 24 C.F.R. § 960.253 (2005).
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(j)
Resident Empowerment
Resident empowerment initiatives are integral parts of most mixed-finance developments. In part, this arises from the National Commission’s conclusion that physical redevelopment cannot create vibrant low-income communities without accompanying strategies to assist residents in becoming more economically and physically secure. The HOPE VI Program, which was inspired by the National Commission’s Final Report and which is the primary source of development funding for PHAs, specifically requires resident input in the development of an application for HOPE VI funds. Other than the requirements under Section 3 (described below), resident empowerment is not a formal requirement for mixed-finance transactions funded by other sources, but many PHAs work to provide similar opportunities through those transactions as well. Often the PHA and/or the developer work closely with an existing resident group and schedule meetings that are open to all residents. (k)
Private Management
Increasingly, PHAs are using private management firms and private management techniques in public housing.64 This is particularly true for mixed-finance projects, where virtually all revitalized public housing is managed by private management firms. Private management raises a number of issues that should be considered in developing a mixed-finance proposal. First, a private entity that will manage housing units funded in part by public housing money must be procured in accordance with applicable federal regulations. If a properly procured developer selects a management firm, these requirements are satisfied. If the PHA or a PHA affiliate is the general partner of the owner, that procurement must be conducted through the competitive process in accordance with 24 C.F.R. Part 85. The solicitation need not consider price as the deciding factor. Second, the entity owning the mixed-finance project will negotiate a management agreement with the private manager, which will be subject to HUD review and approval pursuant to HUD’s “Cost Controls and Safe Harbor Standards.”65 It is important to note that the private management entity is required by federal law to pay prevailing wages for certain employees. The private management company must develop a management plan and operating budget for the project. Both of these documents 64
65
In July 1997, HUD published Private Management of Public Housing, which was prepared by Abt Associates. This Guidebook provides detailed and helpful information for PHAs preparing to enter into a private management contract. See www.hud.gov/utilities/intercept.cfm?/offices/pih/programs/ph/hope6/ grants/admin/safe_harbor.pdf.
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should include significant input from the PHA and will be subject to HUD review and approval. In addition, the management company may be responsible for developing and enforcing leases, grievance procedures, and admissions and occupancy policies, which will be reviewed by the PHA and HUD. The private manager must also prepare management reports that conform to the needs of HUD and the PHA, as well as the project’s investors and lenders and tax credit requirements. Finally, the private property management team should be fully integrated into the mixed-finance development process. The manager should be involved in the development of a marketing plan for the property, as well as anticipated income targets. As management will be the initial onsite link between the residents and the development entity, it should be fully informed on the construction and relocation schedules, so that it can respond effectively to resident inquiries. If an on-site community facility is the responsibility of the management entity, it will be important for the manager to have an ongoing relationship with the social service provider(s). Like other contractors, the private manager is subject to Section 3 requirements and, therefore, must work to train and hire residents, where appropriate. (l)
Condominium Form of Ownership
The use of condominium regimes are becoming more common in mixedfinance deals, since in a multifamily building that has been converted to a condominiums, some units can be sold to a tax-credit entity that will operate them as public housing and/or tax credit rental units, whereas other units in the building are sold directly to individual homebuyers, who may be either subsidized or market rate buyers. This provides a community that is not only mixed-income, but also includes a mixture of homebuyers and leaseholders. The condominium structure can be complicated because the project must be bifurcated in terms of ownership and funding, and because any potential conflicts between state condominium law and standard public housing requirements must be resolved. (m) Public Housing Homeownership
Most of the issues already raised in this chapter pertain to projects that contain public housing rental units. In addition to developing and operating rental units, however, PHAs are also authorized to construct and sell affordable homeownership units with HOPE VI and public housing Capital Funds. The PHA or its developer must prepare a “homeownership plan” describing the program in detail, giving information about applicant eligibility, supportive services such as homebuying training, construction financing for the units, amounts that applicants must produce
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for down payments and first mortgages, and the soft second mortgage program that will help make the homes affordable to low-income families. The plan and other documents must be submitted for mixed-finance review and approval by HUD, although fewer documents are required in the homeownership context than in the rental context. This streamlined review is accompanied by the submission by the PHA of additional certifications as to compliance with certain legal and program requirements. Since the inception of the HOPE VI program and the creation of mixed finance, PHAs have begun developing homeownership units in greater numbers than they had previously. A range of programs is available, including HOPE II and HOPE III programs described in Section 8.1 of this book, as well as the following programs: •
Section 24/9 Program—The 1998 Reform Act authorizes the funding of homeownership activities using capital funds (appropriated under Section 9 of the Act) and HOPE VI funds (now appropriated under Section 24 of the Act), along with any other eligible funding sources. Under the Section 24/9 program, a PHA can provide construction or permanent financing for new construction, acquisition, or rehabilitation of units; down payment or closing cost assistance; subordinate mortgages to homebuyers; and other supportive activities, such as demolition, environmental abatement, relocation, and homeownership counseling.
•
Middle Income Program (formerly the “Nehemiah-Like”Program)—This is a successor to the now-defunct Nehemiah Opportunity Grants Program, in which HUD made grants to nonprofit organizations for homeownership purposes. In the HOPE VI revival of Nehemiah, which is an eligible use only for HOPE VI funds appropriated during fiscal years 1993–1999, PHAs can provide financing for the new construction or substantial rehabilitation of homeownership units; supportive activities such as demolition, environmental remediation, marketing, homebuyer counseling programs; and down payment, closing cost, or subordinate mortgage assistance to buyers. For programs in a metropolitan area, the family income of purchasers may not exceed the higher of; (1) the median family income for a family of four in the metropolitan statistical area in which the program is located, or (2) the national median income. To promote neighborhood stability, HUD may permit modification of this requirement so that up to 15 percent of the buyers may earn between 100 percent and 115 percent of AMI for a family of four. Purchasers must not have owned a home during the 18 months immediately before purchase.
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•
Section 32 Program—This program permits a PHA to acquire new units, or to sell existing public housing units or newly constructed units, to anyone earning less than 80 percent of AMI. PHAs may sell the units to a “purchase and resale entity,” or may directly sell the units themselves. Generally, the homeownership costs cannot exceed 35 percent of the buyer’s income. Lease-purchase is an option under Section 32, as is assistance by the PHA in the form of closing costs, down payment assistance, and soft second mortgages. Note that the actual development of new units to be sold under the Section 32 units is governed by separate programs, such as the Section 24/9 or Middle Income programs just described, while the sales program is independently subject to the Section 32 review process. At the time of this writing, HUD guidance states that Section 32 requires the SAC and the field office to review a homeownership plan and development or acquisition proposal, although in at least one instance HUD has conducted a more streamlined review done in conjunction with the mixed-finance review.
Note that the HUD guidance66 discusses in detail additional requirements for the various programs, including minimum amounts that a homebuyer must provide for a down payment; how Section 8(y) vouchers may be applied to a buyer’s homeownership costs, including where the unit was developed with other public housing assistance; restrictions on resale, and requirements for the recapture of assistance or profits made on the resale of subsidized homes; and requirements that the buyer use the unit as his or her primary residence. 10.6
CONCLUSION
As the previous pages indicate, mixed-finance transactions are highly regulated, and although the passage of the 1998 Reform Act and over ten years of mixed-finance experience have clarified the basic rules and resulted in the more uniform application of those rules, we recommend that newcomers to this field—even those with extensive experience in affordable housing development—obtain consultants with previous experience in mixed-finance development. With such expert help, public PHAs and their nonprofit and for-profit development partners can best leverage the PHAs’ significant capital and operational resources, as well as the PHAs’ expertise in the management of affordable housing and HUD processes, to provide high-quality affordable housing. 66
See HUD guidance at www.hud.gov/offices/pih/programs/ph/hope6/mfph/ ho_guide.pdf.
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P A R T
F O U R 2
Enhancing Feasibility and Packaging the Project
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C H A P T E R
E L E V E N 11
Enhancing the Feasibility of an Affordable Housing Project 11.1
Increasing Access to Capital— Credit Enhancement 318
11.2
Increasing Access to Capital— Loan Sales on Secondary Market 325
11.3
Reducing Total Development Costs 344
11.4
Increasing Income
11.5
Reducing Operating Expenses 360
349
As noted in Chapter 6, a proposed affordable housing development will be considered “infeasible” at this stage if capital sufficient to cover TDCs cannot be identified from sources such as those identified in the four previous chapters. A project also will be considered infeasible if projected income cannot be expected to cover both the costs of operating the property and the costs of servicing any loans identified by the sponsor as sources of capital necessary to meet TDCs.1 To address problems caused by insufficient capital, sponsors should consider pursuing ways to make the project more attractive to lenders. In addition, TDCs should be reevaluated to determine if TDCs can be reduced or if some costs can be paid for by parties other than the sponsor. To address problems with cash flow, the sponsor should consider pursuing means of increasing income or decreasing operating expenses, including a reevaluation of initial income and expense projections. The various methods for increasing access to capital, reducing TDCs, augmenting project income, and limiting operating costs are discussed in this chapter. These methods are intended to make a project feasible or to enhance the feasibility of a project in hopes that these enhancements will secure participation by a skeptical, or cautious, funding source for the project’s financing. 1
As mentioned in Chapter 6, when evaluating the feasibility of single-family and condominium homeownership, the projected income is the income of the homebuyer. The homebuyer’s income must be sufficient to cover both the costs of operating the home plus the cost of paying debt service on the homebuyer’s mortgage.
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11.1
INCREASING ACCESS TO CAPITAL—CREDIT ENHANCEMENT
A nonprofit sponsor can significantly increase its ability to obtain a loan from a private for-profit lending institution—or even more importantly, to secure a loan in excess of the lender’s regular loan-to-value ratio—if the borrower can “enhance” the loan or make the loan more attractive in some way to the lender. Generally, a loan will be considered “enhanced” if the borrower is able to offer the lender some type of guarantee that the loan will be repaid from resources other than simply the proceeds received from a foreclosure sale of the property. A loan also may be enhanced if the borrower can show the lender that default is unlikely, given a steady and reliable source of revenue. Sponsors familiar with credit enhancement vehicles can seek to utilize them from the outset, not just after the project has had difficulty obtaining loan commitments. (a)
Third-Party Guarantees—Generally
The most common form of credit enhancement is a third-party guarantee. A third-party guarantee exists when a party other than the borrower promises the lender that it will pay all or a portion of the borrower’s debt if the borrower cannot repay the loan in full. This third party (being neither the lender nor the borrower) is called the guarantor of the borrower’s loan. Guarantors can be individuals, partnerships, corporations, or governments. Except in the case of governments and some wellcapitalized corporations, lenders usually will accept the guarantors’ guarantee as long as the guarantor has pledged its own security to ensure repayment of the loan. Lenders commonly require the guarantor further to securitize the loan by providing the lender with a secured interest in assets of the guarantor, such as personal or vacation homes, raw land, and improved buildings, or by pledging stocks and bonds. The most common forms of third-party guarantees are described here: mortgage insurance provided by federal, state, and local governments; mortgage insurance provided by private insurance companies; and pledges of personal assets. (b)
Government Mortgage Insurance
(i) Federal Mortgage Insurance Programs. The federal government has extensive loan guarantee programs that are often referred to as mortgage insurance. Under these programs, the federal government generally ensures the mortgagee (the lender) that the government will make full repayment of the loan if the borrower defaults. The government backs its promise to pay with the full faith and credit of the U.S. government. Sponsors that are considering using any HUD federal mortgage insurance programs
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should be aware that approval can take as long as 18 months. Many forprofit and nonprofit sponsors of housing have avoided these programs over the past ten years because of the government’s delays in processing the insurance applications. A summary of the active federal mortgage insurance programs follows, gleaned primarily from government sources: 1. Single-family (1–4 units) mortgage insurance programs. These programs can be used by the nonprofit as credit enhancement to enable it to acquire and rehabilitate a property that has up to four units, or to facilitate a buyer’s purchaser of a one- to four-unit property developed by the nonprofit. The programs available to insure loans to homebuyers generally are not limited to properties developed by nonprofit housing developers even though they are discussed in that context.
2
Rehabilitation mortgage insurance (Section 203(k) of the Housing Act of 1961). This mortgage loan insurance program may be able to assist in obtaining financing for the rehabilitation of oneto four-family properties. Under this program, HUD insures the rehabilitation loans to (i) finance rehabilitation of an existing property, (ii) finance rehabilitation and refinancing of the outstanding indebtedness of a property, and (iii) finance the purchase and rehabilitation of a property. An eligible rehabilitation loan must involve a principal obligation not exceeding the amount allowed under Section 203(b) of the Housing Act of 1961 home mortgage insurance. These insurance limits and other information about this program are available from the local HUD field offices that administer this program. Applications must be submitted to HUD through an approved lender.2
Homeownership assistance for low- and moderate-income families (Section 221(d)(2) of the Housing Act of 1954). This mortgage loan insurance program may be able to assist low- and moderate-income families in obtaining financing for the acquisition of one- to four-unit properties developed by a nonprofit. The program is targeted especially to provide special and favorable terms to families displaced by urban renewal. HUD insures lenders against loss on mortgage loans to finance the purchase, construction, or rehabilitation of low-cost one- to four-family housing. The maximum insurable loan for an owner-occupant is
HUD field offices can be found at www.hud.gov/. HUD approved lenders can be found at www.hud.gov/ll/code/11plcrit.htm/
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$31,000 for a single-family home (up to $36,000 in high-cost areas). For a larger family (five or more persons), the limit is $36,000 (up to $42,000 in high-cost areas). Higher mortgage limits apply to two- to four-family housing. This program is administered at the local HUD field offices.
Veterans Administration (VA) loan guarantee programs. These mortgage loan insurance programs may be able to assist veterans in obtaining financing to purchase, construct, or rehabilitate a home, including a mobile home. VA mortgage insurance generally provides a veteran with a low or no down payment, limits on closing costs, and lower interest rates. Under this program, the VA determines whether an applicant is eligible for the insurance. If eligible, the veteran is issued a certificate of eligibility that is honored by a participating lender.
2. Single-family and multifamily mortgage insurance program for condominium housing (Section 234 of the Housing Act of 1961). This mortgage loan insurance program actually is two programs in one. One program may be able to assist a nonprofit developer in securing federal mortgage loan insurance to finance the construction or rehabilitation of housing projects that the developer intends to sell as individual condominium units under Section 234(d). Insurable projects must contain at least four dwelling units and must be in detached, semidetached, row, walk-up, or elevator structures. The other program insures the mortgages made by private lending institutions for the purchase of individual family units in multifamily housing projects under Section 234(c). The maximum mortgage for a unit mortgage insured under Section 234(c) is the same as the limit for a Section 203(b) mortgage in the same area. Any creditworthy person may apply for a mortgage on individual units in a project; however, mortgages are generally limited to owner-occupants. This program is administered by local HUD field offices.3 3. Other multifamily mortgage insurance programs.
3
Supplemental loans for multifamily projects (Section 241) of the Housing and Community Development Act of 1968. The Section 241 program was one of the most active and/or most talked about HUD programs over the past 10 years. It was a crucial element of the financing structure established to facilitate the preservation of
No loans have been insured under this program for several years. Condominium developers typically obtain their own construction financing and use FHA insurance under Section 234(c) to finance the sales of the individual units.
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low-income housing under Title II, Emergency Low Income Preservation Act (ELIPA), and Title VI, Low Income Housing Preservation and Resident Homeownership Act (LIHPRHA). The Section 241 program can be used to assist current owners in receiving a return on their equity or new purchasers in securing acquisition and rehabilitation financing. The Title II and Title VI programs have both expired. This mortgage loan insurance program may be able to assist nonprofits in obtaining financing for improvements and additions to multifamily housing that already has a HUD-insured mortgage. Funds may be used for rehabilitation as well as for energy improvements and individual utility metering. In some cases, HUD also may insure a loan for energy-related improvements in properties that do not have a prior HUD-insured mortgage.
Multifamily rental housing for moderate-income families (Section 221(d)(3) and (4) of the Housing Act of 1954). This mortgage loan insurance program may be able to assist nonprofits in obtaining financing for rental or cooperative multifamily housing for moderate-income households, including projects designed for the elderly. Single-room occupancy (SRO) projects are also eligible for this mortgage insurance program. HUD insures mortgages made by private lending institutions to help finance construction or substantial rehabilitation of multifamily (five or more units) rental or cooperative housing for moderate-income or displaced families. Projects in both cases may consist of detached, semidetached, row, walk-up, or elevator structures. SRO projects may consist of units that do not contain a complete kitchen or bath. Currently, the principal difference between the programs is that HUD may insure up to 100 percent of replacement costs under Section 221(d)(3) for public nonprofit and cooperative mortgagors, but only up to 90 percent under Section 221(d)(4), regardless of the type of mortgagor. Congregate rental projects for the elderly, with central kitchens providing food services, are no longer eligible. Tenant occupancy is not restricted by income limits. This program is administered by local HUD field offices.
Existing multifamily rental housing (Section 223(f) of the Housing and Community Development Act of 1974). This mortgage loan insurance program may be able to assist nonprofits in obtaining financing for the purchase or refinancing of existing apartment projects, the refinancing of an existing cooperative housing project, or the purchase and conversion of an existing rental project to cooperative housing. Under this program, HUD may insure mortgages on
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existing multifamily projects that do not require substantial rehabilitation. A project must contain at least five units and must be at least three years old. This program is administered by local HUD field offices.
Mortgage insurance for single-room occupancy projects (Section 221(d) pursuant to Section 223(g) of the Housing and Community Development Act of 1974). This mortgage loan insurance program may be able to assist nonprofits in obtaining financing for the new construction and substantial rehabilitation of single-room occupancy (SRO) facilities. The insured SRO program is designed to expand the availability of affordable housing for low- and moderate-income people, thereby helping to reduce homelessness. Although SRO housing is intended for very-low-income persons, the program does not impose income limits for admission. An SRO project must be an unsubsidized project with five or more units. Units may contain kitchen or bathroom facilities, but the provision of those facilities within the units is not required; sanitary facilities and kitchen facilities may be shared among tenants. Units can be designed to allow for more than one occupant, but the maximum number of occupants that may reside within a unit cannot exceed the number of occupants permitted by occupancy requirements, that is, by the appropriate state and local codes and in compliance with the Fair Housing Act. Cooperative and investor-sponsor mortgagors are not eligible. This program is administered by local HUD field offices.
Nursing homes, intermediate care, and board and care facilities (Section 232 of the Housing Act of 1959). This mortgage loan insurance program may be able to assist nonprofits in obtaining financing for the construction or renovation of nursing homes and intermediate care facilities, including the installation of fire safety equipment. These facilities must accommodate 20 or more patients who require skilled nursing care and related medical services, or who are in need of minimum but continuous care provided by licensed or trained personnel. Board and care facilities may contain no fewer than five one-bedroom or efficiency units. Nursing home, intermediate care, and board and care services may be combined in one facility or may be in separate facilities. Major equipment needed to operate the property, along with facilities for day care, may be included in the mortgage. Existing projects already insured by HUD are eligible for purchase or refinancing with or without repairs under this program. Investors, builders, developers, private nonprofit corporations or associations, and public agencies (nursing homes only) or
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public entities that are licensed or regulated by the state to accommodate convalescents and patients requiring skilled nursing care or intermediate care, may qualify for mortgage insurance. Patients requiring skilled nursing care, intermediate care, and/or board and care are eligible to live in these facilities. This program is administered by local HUD field offices. (ii) State and Local Mortgage Insurance. Nonprofit sponsors may be able
to secure mortgage loan insurance from state or local government agencies. The characteristics of their programs are as follows: 1. State insurance programs. Some states have developed mortgage loan insurance programs similar to the federal insurance programs. States with their own insurance programs often insure housing loans that are provided by private financing sources or are based on proceeds of tax-exempt or taxable bond issuances where the proceeds are used for the acquisition or rehabilitation of single- or multifamily properties or energy conservation. Nonprofits should contact their state housing and community development or housing finance agency to determine the availability of state insurance programs. 2. Local insurance programs/CDBG Section 108 of the Housing and Community Development Act of 1974 loan guarantees. Local governments rarely have the resources to provide loan guarantees. However, communities that are entitled to receive CDBG may use their right to future CDBG allocations to guarantee loans for housing rehabilitation, economic development, and large-scale physical development projects. Section 108 is the loan guarantee provision of the CDBG program. Under this program, the CDBG community pledges its current and future CDBG funds as the principal security for the loan guarantee. The guarantee may secure a private loan by a borrower or a loan of a public agency. The guarantees can be used to secure loans for (1) real property acquisition, (2) rehabilitation of publicly owned real property, (3) housing rehabilitation eligible under the CDBG program, (4) related relocation, clearance, and site improvements, (5) interest payments on the guaranteed loan and issuance costs of public offerings, and (6) debt service reserves. In addition, the guaranteed loan funds may be used to finance housing construction by nonprofit organizations when undertaken as part of a project financed under Housing Development Grants (HODAG) or Nehemiah Housing Opportunity Grants programs. The HODAG and Nehemiah grant programs are two expired HUD programs.
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As with the CDBG program, all projects and activities must principally benefit low- and moderate-income people, or assist in eliminating or preventing slums and blight, or meet other community development needs having a particular urgency. This program was created to enable the U.S. Department of Housing and Urban Development (HUD) and state and local housing finance agencies (HFAs) to create new risk-sharing arrangements to help those agencies provide more insurance and credit for multifamily loans. Under this program, HUD provides full mortgage insurance on multifamily housing projects whose loans are underwritten, processed, serviced, and disposed of by qualified state and local HFAs. Qualified state and local HFAs can originate and underwrite affordable housing loans for eligible projects, which include new construction, substantial rehabilitation, refinancing, and housing for the elderly. The program provides full HUD mortgage insurance so that when HFA bonds are used they can be rated investment grade. An HFA must elect to share from 10 to 90 percent of the risk of default on the loan with HUD. The HFA reimburses HUD if a claim results from a default on the bonds, according to the terms of the risk-sharing agreement. To obtain mortgage insurance, a potential lender should consult a HUD-approved HFA. The potential lender then submits an application directly to the HFA. If the HFA refuses the application, the applicant may modify the application and reapply. While HFAs are vested with a large amount of responsibility for projects, HUD can still adjust the mortgage amount and endorse the note. To date, approvals have been issued for 118 projects with almost 14,000 housing units.
(iii) HUD/State Housing Finance Agency Risk-Sharing Program.
(c)
Private For-Profit Mortgage Insurance
Mortgage insurance for single-family and multifamily housing developments may be available from private nongovernment sources. Mortgage insurance provided by private insurance companies to purchasers of single-family homes, condominiums, and some cooperative shares is very common if the purchaser is unable to obtain government mortgage insurance. In these circumstances, a lender will usually impose the private mortgage insurance requirement because the purchaser is able to provide only a nominal down payment (sometimes as little as 0 percent) when purchasing the property. The lender generally is insured for a portion of the claim that it would have against the borrower if the borrower defaults on the loan. The borrower has to apply to a mortgage insurance company for the insurance. The mortgage insurance company will evaluate the request as (i) Single-Family Mortgage Insurance.
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if the borrower actually was applying to the insurer for the mortgage loan; the focus will be on the borrower’s ability to repay the loan. This insurance generally costs 1 percent of the loan amount at closing and 1--- of 4 1 percent each year thereafter. Lenders allow the borrower to discontinue the mortgage insurance when the outstanding debt on the loan is less than 70 percent or 80 percent of the property’s value or after a period of years (three or four) when the borrower has a track record of consistently paying the periodic loan payments when due. Mortgage insurance provided by private entities for multifamily properties is much less common. Under certain circumstances, however, some private for-profit organizations, such as investment banks or commercial banks, may insure repayment of all or a portion of a multifamily loan by providing the borrower’s lender with a letter of credit to cover the maximum amount of the insurance. Generally, the insurer will charge a borrower a fee, stated as a percentage of the loan being insured, for this service.
(ii) Multifamily Private Mortgage Insurance.
(d)
Private Nonprofit Mortgage Insurance
The Low Income Housing Fund (LIHF), described in Chapter 7, operates a mortgage guarantee program to encourage greater investment by private lenders in affordable housing projects. Pursuant to the program, LIHF provides mortgage guarantees, setting aside its own funds to cover any debt service delinquencies. (e)
Pledges of Personal Assets
The form of credit enhancement that is most easily understood is the personal guarantee. With a personal guarantee, some entity, whether an individual, a corporation, a borrower, or a third party, personally guarantees the repayment of a loan by pledging the guarantor’s own assets. Nonprofits should be aware that a lender may request that the nonprofit provide some type of additional guarantee for a loan, including the personal guarantees of board members or even of staff members. If the board or staff provide this guarantee, they must understand that their own assets, and not just the property being developed by the nonprofit, are at risk of loss. 11.2
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A nonprofit’s ability to obtain financing will be increased significantly if the loan sought by the nonprofit can be sold readily by the lender to the secondary market. A secondary market offers several benefits for lenders.
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By providing an outlet for the sale of loans, a secondary market allows lenders to hold fewer loans in their portfolio, thereby increasing their liquidity, and to reuse loan funds to make new loans and thereby increase the volume of loans they can originate with the same amount of capital (and the amount of fees they can generate from these recycled funds). Loan sales also permit lenders to share risk on the loans and may enable lenders to originate loans that are larger or are on terms they could not otherwise offer. Historically, for mortgages on single-family homes, there has been a strong secondary market, created largely by the government through Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and Government National Mortgage Association (Ginnie Mae). (These are discussed in detail below.) Only recently have efforts been made, primarily by Fannie Mae, Freddie Mac, and nonprofit intermediaries, to establish an effective secondary market for multifamily housing and community development loans. The existence of a successful secondary market can have a significant impact on the availability of affordable housing financing. Nonprofits must identify local lenders or other participating organizations that can provide the nonprofit—or the family seeking to purchase a home from the nonprofit—with financing or other assistance available through affordable housing programs created by the secondary markets. The nonprofits also must work with these lenders and with the local government to create new secondary market programs that meet the affordable housing needs of their communities. As with credit enhancement, sponsors familiar with the affordable housing programs of the secondary markets can seek to utilize them from the outset, not just after the project had difficulty obtaining loan commitments. (a)
Sales of Single Family Loans
Fannie Mae, Freddie Mac, Ginnie Mae, and to a significantly lesser degree, Neighborhood Housing Services of America, are the key organizations that have active programs to purchase single-family mortgages originated by lenders to individuals under very flexible underwriting standards. Generally speaking, these entities agree to purchase mortgages made by certain, preapproved lenders even though those mortgages were provided to borrowers who would not be approved under their traditional underwriting guidelines. These individuals will often have good credit but either too little cash to cover the traditional 10–20 percent down payment or too little income to qualify for the amount of loan being sought under traditional underwriting guidelines. Fannie Mae and
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Freddie Mac, in particular, have developed innovative programs to accelerate homeownership for minorities, the disabled, Native Americans, and rural communities. Highlights of each organization’s programs follow. Contact each entity to learn more about their special programs for targeted populations and income levels. (i) Fannie Mae. Fannie Mae has numerous offerings that attempt to provide maximum flexibility to lenders who really want to meet the needs of first time homebuyers especially minorities, teachers, firefighters, Native Americans, and people with disabilities. These products offer flexibility in one or more of the following areas: (1) reduced cash down payment or closing costs requirements; (2) ability to secure the cash that is needed at closing from others; (3) high loan to value ratios for loans (even as high as 100 percent of the value of the property); (4) extra flexibility on credit history; and (5) extra flexibility on the amount of income or debt that the borrower must have. In most cases, face-to-face homebuyer education is required for first-time homebuyers. Generally, a borrower is eligible if the household income is no more than 100 percent of the median income in the area where the home is located. Some exemptions include higher median income limits in certain high-cost (and rural areas) loans made in cooperation with government agencies that have higher income limits, if the property is located in an area designated by HUD as underserved, in an eligible minority or low-income census tract, or in a central city. More information about Fannie Mae, its products and its approved lenders can be secured from a Fannie Mae partnership office. A list of partnership offices can be found at Exhibit 11.1. Due to changes occurring at Fannie Mae at the time this book went to press, there is a question about the ongoing viability of the partnership offices. See www.fanniemae.com for the most recent information.
E XHIBIT 11.1 List of Fannie Mae Partnership Offices www.fanniemae.com/partnershipoffices/index.jhtml?p=Affordable+Housing+%26+ Community+Development&s=Partnership+Offices Partnership Office
Director
Alabama One Federal Place 1819 5th Avenue North Suite 860 Birmingham, AL 35203 Phone: (205) 297-3630
Winton Yerby
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
Arizona One Arizona Center 400 East Van Buren Suite 325 Phoenix, AZ 85004 Phone: (602) 744-6840
Elisa de la Vara
Atlanta The Hurt Building 50 Hurt Plaza Suite 1565 Atlanta, GA 30303 Phone: (404) 589-3301
Archibald Hill
Baltimore 120 E. Baltimore Street Suite 1710 Baltimore, MD 21201 Phone: (410) 659-4940
Frank Coakley
Bay Area 50 California Street Suite 3070 San Francisco, CA 94111 Phone: (415) 277-3360
Sheila Burks
Border Region 1 Riverwalk Place 700 N. St. Mary’s Street Suite 1925 San Antonio, TX 78205 Phone: (210) 228-3840
Sandra Sanchez Almanzan
Central and Southern Ohio 88 Broad Street Suite 1150 Columbus, OH 43215 Phone: (614) 222-8941
Cynthia Flaherty
Central Florida Citrus Center Building 255 S. Orange Avenue Suite 1590 Orlando, FL 32801 Phone: (407) 487-5900
Judith Kovisars
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
Central Valley 1201 K Street Suite 1040 Sacramento, CA 95814 Phone: (916) 341-1240
Michael Carroll
Chicago 1 South Wacker Drive Suite 1300 Chicago, IL 60606 Phone: (312) 368-8816
Terrence Young
Colorado 1225 17th Street Suite 2460 Denver, CO 80202 Phone: (303) 291-6260
Tony Hernandez
Connecticut 207 Main Street 2nd Floor Hartford, CT 06106 Phone: (860) 244-1240
Bob Kantor
Dallas/Ft. Worth 2828 N. Harwood Suite 1730 Dallas, TX 75201 Phone: (214) 397-1020
Effie Worrell
Delaware Brandywine Building 1000 West Street Suite 1440 Wilmington, DE 19801 Phone: (302) 429-2900
Susan Frank
Houston Two Allen Center 1200 Smith Street Suite 2335 Houston, TX 77002 Phone: (832) 397-4411
James J. Smith
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
Idaho 205 N. 10th Street Suite 200 Boise, ID 83702 Phone: (208) 345-1058 Indiana Capital Center, South Tower 201 North Illinois Street Suite 2070 Indianapolis, IN 46204 Phone: (317) 639-7915
Curt Wiley
Iowa 699 Walnut Street Suite 1375 Des Moines, IA 50309 Phone: (515) 697-3721
Joe O’Hern
Kansas City Valencia Place 444 West 47th Street Suite 530 Kansas City, MO 64112 Phone: (816) 360-3600
Sandy Goodwin
Kentucky 300 W. Vine Street Suite 810 Lexington, KY 40507 Phone: (859) 226-5141
Brenda Weaver
Los Angeles 1055 Wilshire Boulevard Suite 1450 Los Angeles, CA 90017 Also serves Orange County Phone: (213) 580-0160
Patricia W. Neal
Louisiana 1515 Poydras Street Suite 1440 New Orleans, LA 70112 Phone: (504) 636-4200
Tim Carpenter
Baton Rouge Satellite Office (225) 922-4338
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
Massachusetts 265 Franklin Street 10th Floor Boston, MA 02110 Phone: (617) 345-8040
Dennis Corrigan (Acting Director)
Michigan 211 West Fort Street Suite 1610 Detroit. MI 48226 Phone: (313) 596-6731
Rita Hillman
Minnesota Ecolab University Center 386 North Wabasha Street Suite 1026 St. Paul, MN 55102 Phone: (651) 726-0900
Missy Thompson
Mississippi 111 East Capitol Street Suite 451 Jackson, MS 39201 Phone: (601) 592-1040
Walt Laughlin
Montana 828 Great Northern 2nd Floor Helena, MT 59601 Phone: (406) 443-6941
Maureen Rude
Billings Satellite Office (406) 259-7049 Nebraska Wells Fargo Center 1248 “O” Street Suite 890 Lincoln, NE 68508 Phone: (402) 479-7701
Steve Peregrine
Nevada 3993 Howard Hughes Parkway Suite 670 Las Vegas, NV 89109 Phone: (702) 765-7600
Charlene Peterson
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
New Jersey One Gateway Center 10th Floor Newark, NJ 07102 Phone: (973) 848-2300
Timothy Touhey
New Mexico 500 Marquette, NW Suite 300 Albuquerque, NM 87102 Phone: (505) 848-3530
Steve Anaya
New York 780 Third Avenue 38th Floor New York, NY 10017 Phone: (917) 322-8960
Naomi Bayer
North Carolina 112 South Tryon Street Suite 1100 Charlotte, NC 28284 Phone: (704) 344-6960
Jon Gauthier
North Dakota 400 E. Broadway Avenue Suite 412 Bismarck, ND 58501 Phone: (701) 530-2561
Shirley Dykshoorn
North Florida 106 East College Avenue Suite 720 Tallahassee, FL 32301 Phone: (850) 577-5940
Pamela Davis Duncan
Northeastern and Central Pennsylvania 39 Public Square Suite 1000, 10th Floor Wilkes-Barre, PA 18701-2584 Phone: (570) 830-4360
Joe Terrana
Northern New England 1045 Elm Street Suite 300 Manchester, NH 03101 Phone: (603) 222-5400
Ignatius MacLellan (Acting Director)
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
Northern Ohio BP Tower 200 Public Square Suite 2510 Cleveland, OH 44114 Phone: (216) 241-4171
Kenneth Lumpkin
Northern Virginia 4100 North Fairfax Drive Suite 710 Arlington, VA 22203 Phone: (703) 276-4702
David Jeffers
Oklahoma One Leadership Square 211 N. Robinson Suite 302 Oklahoma City, OK 73102 Phone: (405) 552-2002
Rex Smitherman
Oregon 220 NW Second Avenue Suite 1070 Portland, OR 97209 Phone: (503) 552-6060
Dick Anderson
Pittsburgh Dominion Tower 625 Liberty Avenue Suite 910 Pittsburgh, PA 15222 Phone: (412) 288-3560
Howard B. Slaughter, Jr.
Rhode Island One Providence Washington Plaza Suite 500 Providence, RI 02903 Phone: (401) 276-2121
Susann Mark
San Antonio 1 Riverwalk Place 700 N. St. Mary’s Street Suite 1925 San Antonio, TX 78205 Phone: (210) 228-3800
Aurora Ortega-Geis
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
South Carolina 1122 Lady Street Suite 600 Columbia, SC 29201 Phone: (803) 212-1060
Heyward Bannister
South Dakota 101 N. Main Suite 309 Sioux Falls, SD 57104 Phone: (605) 782-2545
Bob F. Simpson
South Florida 1111 Brickell Avenue Suite 2775 Miami, FL 33131 Phone: (305) 603-2300
Ann Kashmer
St. Louis Gateway One 701 Market Street Suite 1210 St. Louis, MO 63101 Phone: (314) 444-3462
Clifton Berry
Tennessee 214 Second Avenue N. Suite 205 Nashville, TN 37201 Phone: (615) 252-4165
Ralph Perrey
Utah 15 West South Temple Suite 870 Salt Lake City, UT 84101 Phone: (801) 715-6868
Jeff Bennion
Washington, DC 901 F Street, NW Suite 600 Washington, DC 20004 Phone: (202) 752-3683
Beverly Wilbourn
Washington State 720 Olive Way Suite 1510 Seattle, WA 98101 Phone: (206) 839-1542
Heyward Watson
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E XHIBIT 11.1 List of Fannie Mae Partnership Offices (continued) Partnership Office
Director
West Virginia (Office not opened yet.)
Lisa Zukoff
Western and Central New York Key Tower 50 Fountain Plaza Suite 1370 Buffalo, NY 14202 Phone: (716) 858-4221
Robert D. Bannister
Wisconsin 111 East Kilbourn Avenue Suite 825 Milwaukee. WI 53202 Phone: (414) 274-3155
Drucilla Pasley
Wyoming 2424 Pioneer Avenue Suite 204 Cheyenne, WY 82001 Phone: (307) 432-5505
Randy Dancliff
Three of their most popular products are: MyCommunity Mortgage, Community Homebuyers, and Fannie 3/2. M YC OMMUNITY M ORTGAGE
Fannie Mae’s MyCommunityMortgage™ is a flexible mortgage product for low- and moderate-income borrowers. Key features include: • •
• •
•
Borrower contribution of just $500 toward down payment and/or closing costs. Remaining down payment can come from a wide range of sources, such as a gift from a family member; a gift, grant or loan from a nonprofit organization, municipality or employer, or the borrower’s own funds. Loan-to-value ratios permitted up to 100 percent for one-unit properties. Eligible for purchase of a single-family home or condo, or a twofamily home (3 percent borrower contribution required for twofamily home). Extra flexibility on credit histories, including consideration of nontraditional credit histories.
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•
Extra flexibility on income sources, including consideration of boarder income even if boarders are not related to the borrower.
•
Cash reserves at closing not required in many cases.
F ANNIE M AE’ S C OMMUNITY H OME B UYER ’ S P ROGRAM
Fannie Mae’s Community Home Buyer’s Program™ is a 15- to 30-year, fixed-rate mortgage loan that allows 38 percent of the borrower’s gross monthly income to be targeted for housing costs and other debts, such as credit cards or student loans, and allows up to 33 percent of the borrower’s gross monthly income to be used for housing costs (principal, interest, taxes, and insurance). Fannie Mae’s Community Home Buyer’s Program offers underwriting flexibilities that include a 5 percent down payment and no cash reserves at closing. F ANNIE 3/2
Fannie 3/2, a 15- to 30-year fixed-rate mortgage loan that allows 38 percent of the borrower’s gross monthly income to be targeted for housing costs and other debts, such as credit cards or student loans, and allows up to 33 percent of the borrower’s gross monthly income to be used for housing costs (principal, interest, taxes, and insurance). Fannie 3/2 is similar to Fannie Mae’s Community Home Buyer’s Program, but requires fewer funds directly from the borrower. This 15- to 30-year, fixed-rate mortgage also requires a 5 percent down payment, but only 3 percent of it must come directly from the borrower’s own funds. The remaining 2 percent can come from a relative; federal, state, or local government agency; employer; or nonprofit. (ii) Freddie Mac. Freddie Mac’s offerings are substantially similar to Fannie Mae’s. Like Fannie, Freddie has a network of lenders whose mortgages it purchases. Freddie Mac’s offerings seek to address the same problems described above: too little income, too little cash, and the need for a greater loan to value ratio. They also have products to encourage minority homeownership, ownership by Native Americans and rural housing homeownership. Freddie’s most popular products include Affordable Gold 97, Affordable Gold 3/2 and Affordable Seconds. More information about Freddie Mac products and their preapproved lenders can be found at www.freddiemac.com/sell/expmkts/affprod.html. Like Fannie Mae, Freddie Mac will require the homebuyer to complete an educational program in order to be eligible. A FFORDABLE G OLD 97
Freddie Mac will purchase fixed-rate Affordable Gold 97 mortgages with loan-to-value ratios up to 97 percent. Borrowers only need a 3 percent
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down payment from Borrower Funds, and they can use a variety of sources to fund closing costs, financing costs, and prepaids/escrows. Key features include: •
Purchase and no cash out refinance transactions.
•
15-, 20- and 30-year fixed-rate mortgages.
•
1-unit, owner-occupied Primary Residences.
•
38 to 40 percent debt-to-income ratio unless there is a nonoccupying co-borrower.
•
No maximum housing expense-to-income ratio.
A FFORDABLE G OLD 3/2
This popular product combines a 95 percent loan-to-value (LTV) ratio with just 3 percent of the down payment coming from Borrower Funds. The other 2 percent of the down payment can come from an expanded source of funds, including grants and unsecured loans from government agencies, nonprofit organizations, other eligible sources and Affordable Seconds® secondary financing as described below. Key features include: •
15-, 20- and 30-year fixed-rate mortgages.
•
1-unit owner-occupied primary residences.
•
1-month reserves required.
•
Allowing various sources of funds for the remaining down payment, closing and financing costs, and prepaids/escrows, including any acceptable source for unaffordable mortgage products.
•
Requires no maximum monthly housing expense-to-income ratio for easier qualification.
•
Allows additional flexibility with a combination of funding sources for down payment, with only 3 percent required from Borrower Funds and 2 percent from other sources.
A FFORDABLE S ECONDS
Freddie Mac’s Affordable Seconds program, like a similar Fannie product, helps public sector and nonprofit housing providers develop effective subsidy approaches. Homebuyers can get a first mortgage for the maximum amount under a flexible Freddie programs, like Gold 97, then get a second mortgage for the remaining amount of the purchase price that can’t be financed by Freddie from a nonprofit or public purpose lender. These second mortgages often defer payments for a number of years or until the sale of the property to help ensure affordability.
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Key features include: •
Affordable Seconds can be used for borrowers needing secondary financing to qualify for an affordable fixed-rate mortgage.
•
Freddie Mac purchases the first mortgage but not the Affordable Second.
Payments on the Affordable Second can be excluded from the borrower’s debt-to-income ratio as long as these payments are deferred for at least five years. R URAL H OMEOWNERSHIP
Both Freddie and Fannie have been reaching out in the past five years to encourage more rural homeownership. If you are involved in rural homeownership development, contact both entities. Freddie’s programs involve purchasing home loans guaranteed by the Rural Housing Service (RHS). Borrowers can finance up to 100 percent of appraised value when the value is higher than the purchase price and the additional amount of the loan is used to finance closing costs and escrows. Freddie also has a version of its Affordable Seconds program for rural homeownership. Freddie will buy a first mortgage as long as it does not exceed 50 percent loan to value and where the RHS holds and services an affordable second mortgage on the property. (iii) Ginnie Mae. The Government National Mortgage Association (“Gin-
nie Mae”) is a corporation of the United States created in 1968 to support the government’s housing objectives. Like Fannie Mae and Freddie Mac, Ginnie Mae accomplishes this goal primarily by facilitating secondary market activities in single- and multifamily mortgages and by increasing, through its mortgage-backed securities, the supply of credit available for low-income housing. Through these programs, Ginnie Mae guarantees the timely payment of principal and interest to holders of securities issued by private lenders and backed by pools of FHA, VA, or RHS insured or guaranteed residential mortgages. The guarantee is backed by the full faith and credit of the U.S. government. Since its inception, Ginnie Mae’s mortgage-backed securities programs have been successful in channeling funds from the securities market into the mortgage market. Ginnie Mae-backed securities provide investors with high-yield, risk-free, government-guaranteed securities without the servicing obligation associated with a mortgage loan portfolio, and they provide lenders with the liquidity necessary to originate additional housing loans. Since 1970, more than $550 billion in securities have been guaranteed by Ginnie Mae in support of over 11.5 million housing units.
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Ginnie Mae currently has several mortgage-backed securities programs supported by a number of different types of housing loans. Under the Ginnie Mae I program, issuers may issue securities backed by pools of single-family, multifamily, and manufactured housing loans. Multifamily mortgages may be either construction loans or permanent multifamily mortgages. As a supplement to Ginnie Mae I, the Ginnie Mae II program permits issuers to issue securities backed by pools of 30-year fixed-rate single-family loans as well as adjustable-rate, graduated-payment, growing-equity, buydown, and manufactured housing loans. Ginnie Mae II offers both geographically dispersed multiple-issuer pools and custom pools, and it provides for a mix of interest rates among mortgages within a pool.4 During the mid-1970s NHSA worked with the Ford Foundation and the Equitable Life Assurance Society of the United States to develop a pilot secondary market for nonbankable home repair loans. Since that time the scope of the loan purchase activity, and NHSA’s role in it, has expanded. Today NHSA is a lending resource to over 230 nonprofit organizations that provide neighborhood revitalization services in areas that are underserved by conventional lending. Unlike Fannie and Freddie, NHSA works through this network of nonprofits to originate loans, not lenders or banks. They also tend to focus only in the communities where these 230 organizations operate. Social investors provide the capital pools that make this work possible. As of June 30, 2004, NHSA had $1.13 billion in cumulative borrowing capacity. NHSA works closely with the NeighborWorks® America, a public nonprofit corporation that develops and provides technical support to the nonprofit organizations that comprise the NeighborWorks network. Each of NHSA’s loan purchase products and financial services was developed to meet specific neighborhood revitalization needs. They fill gaps in conventional and public loan products. They are also responsive to the problems of neighborhoods in transition and to lower-income borrowers. NHSA’s secondary market was initially created to replenish the revolving loan funds of local nonprofit NeighborWorks organizations (NWOs). The NWOs used their revolving loan funds to make home repair loans to residents who could not obtain conventional loans, and NHSA purchased these loans on a recourse basis. (iv) National Housing Services of America (NHSA).
4
The source for the information in Section (c) was Ginnie Mae.
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Later, NHSA created a secondary market for the purchase of first mortgages on a recourse basis to help these NWOs tackle the complex problems of abandoned properties. More recently, NHSA developed first mortgage nonrecourse loan purchase products that meet underwriting criteria established by NHSA, its investors, and private mortgage insurance companies. NHSA’s first mortgage nonrecourse loan purchase products were developed to expand affordable homeownership opportunities. Other nonrecourse loan purchase products include: financing for interim development and permanent mortgages for properties that are owned by an NWO. The following brief descriptions describe NHSA’s major loan purchase products. (1) O WNER- OCCUPIED H OUSING R EHABILITATION L OANS/S UBORDINATE F INANCING—WITH R ECOURSE
NHSA purchases rehabilitation mortgages at par and with recourse from local NeighborWorks® organizations. Typically, these loans are originated by the NWO to assist residents in the repair or rehabilitation of their homes or to assist them in making home purchases. The loans are structured for residents who cannot qualify to borrow from other lenders such as commercial banks. (2) O WNER- OCCUPIED H OME P URCHASE M ORTGAGES—WITH R ECOURSE
NHSA and the Prudential Insurance Company of America developed this secondary market financing tool for first mortgages in order to help local NeighborWorks® organizations tackle the problems of severely deteriorated properties. NHSA has since expanded this program to help NWOs offer home ownership loans to borrowers who cannot obtain conventional loans. This program is currently restricted to 1–4 unit buildings. Loan Purchases under this program require the nonprofit to replace or repurchase loans that are delinquent for ninety (90) days. (3) O WNER-O CCUPIED H OME P URCHASE M ORTGAGES—WITHOUT R ECOURSE
NHSA developed this first mortgage non-recourse loan purchase program with World Savings and the PMI Company. It is now available to local lenders who partner with a NeighborWorks® organization to originate first mortgage loans. Its innovations include the use of NHSA’s loan underwriting guidelines and sound and sensitive underwriting criteria. Private mortgage insurance is available for eligible borrowers whose loans have a loan-to-value ratio greater than 80 percent. The program allows borrowers to purchase, purchase with rehabilitation, or refinance with rehabilitation with a single transaction. If needed, participating
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NeighborWorks® organizations can provide borrowers with subordinate financing to cover needed rehabilitation, down payment and closing costs, or to make overall costs affordable. (b)
Sales of Multifamily Loans
The market for multifamily loans has changed and consolidated dramatically in the past ten years. Fannie and Freddie now purchase more than 44.6 percent of all multifamily loans greater than $3 million and 50 units. All other multifamily properties are harder to finance because they do not have a ready secondary market. Emerging secondary markets or intermediaries for these smaller loans are described below. Freddie and Fannie dominate this space. They both have aggressive programs that facilitate the financing of less traditional multifamily developments like lease/purchase developments, 2–4 unit properties and the development of multifamily housing in consort with state housing finance agencies. Contact Freddie or Fannie if you are working on these types of developments. (i) Sales of Large Multifamily Loans.
As noted above, a number of entities have been working to fill a niche to buy small multifamily mortgages. Two of the more interesting and possibly more useful initiatives have been birthed by the Local Initiatives Support Corporation (LISC) and the Enterprise Foundation. (ii) Sales of Small Multifamily Loans.
(1) LISC- SPONSORED, C OMMUNITY D EVELOPMENT TRUST
CDT helps to expand the flow of much-needed long-term capital to the community development industry by serving as a secondary market for affordable housing loans on both new and existing multifamily rental properties. CDT’s Debt Program focuses primarily on fixed-rate mortgages that may not be efficiently priced by traditional secondary markets— whether because of their small size ($5 million and under), configuration (scattered-site and urban rehabs), affordable aspects, or lack of rated credit enhancement. For their part, affordable housing lenders that sell loans to CDT gain a number of benefits from the transaction, including an increase in liquidity, an opportunity to expand their debt product offerings, and the ability to earn CRA credits. The core business of CDT’s Debt Program is the fixed-rate forward commitment product. Generally used to finance newly constructed communities with Low Income Housing Tax Credits, this product provides customers with a key tool for funding permanent mortgages, without assuming interest rate risk and long-term capital risk. In addition to our
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forward commitment business, CDT also purchases individual loans and portfolios of seasoned loans on a negotiated basis. CDT works with approved correspondent lenders including banks, mortgage bankers, bank consortia, housing finance agencies, and community development financial institutions: American Property Financing, Inc. AmSouth Bank Arbor Commercial Mortgage Bank of America, NA Bonneville Mortgage Company California Community Reinvestment Corporation Column Guaranteed LLC Fifth Third Bank JPMorgan Chase Bank MMA Financial NEF Mortgage Corporation Neighborhood Lending Partners, Inc. Stearns Bank The Reinvestment Fund Wachovia Bank Wisconsin Housing and Economic Development Authority Key Terms •
Eligible Loans—First mortgage loans and portfolios secured by affordable multifamily housing projects.
•
Eligible Properties—Affordable rental housing projects with at least 24 units. Projects may be scattered sites, senior apartments, affordable assisted living, limited-equity cooperatives, or single-family rental units. All projects must satisfy Community Reinvestment Act (CRA) criteria.
•
Loan Amount—$500,000 to $5,000,000.
•
Term/Amortization—Standard product is 18-year term with 30-year amortization.
•
Interest Rate—Fixed at a spread over the 10-year US Treasury for terms up to 18 years, and over comparable-term U.S. Treasuries for terms of 18 to 30 years.
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11.2 INCREASING ACCESS TO CAPITAL—LOAN SALES ON SECONDARY MARKET
•
Forward Commitment—Up to 30 months.
•
Rate Lock—Rate lock available for up to 30 months with additional spread. Forward rate lock must be secured by a combination of a secured subordinate note and 2 percent cash deposit. Loan-to-Value Ratio (LTV)—Up to 90 percent for LIHTC projects, lower for other projects. LTV includes all loans requiring debt service payments. Debt Service—Coverage Ratio (DSCR) Minimum 1.15:1.00 for LIHTC projects. 1.20:1.00 and higher for non-LIHTC projects, properties with 40 units or less, and other nontraditional projects. Servicing—Lender servicing optional. CDT’s third-party servicer will provide servicing when needed. Subordinate Financing—Subordinate financing permitted, subject to CDT approval and execution of acceptable subordination agreement. Documentation—Standard Fannie Mae documents, including Security Instrument and Note. Prepayment Terms—Standard Fannie Mae’s prepayment and yield maintenance terms. Approval Timeframe—Generally, 10 days from receipt of complete Application for credit approval. Commitment issuance and ratelock requests generally take 4 to 5 days after credit approval.
•
•
• • • • •
In just over five years, CDT has provided capital to ensure the longterm affordability of some 17,800 housing units across the country. While all CDT investments must satisfy Community Reinvestment Act criteria, the multifamily communities they invest in represent a broad mix of configurations, structure types and locations—from scattered-site developments in revitalized neighborhoods, new in-fill urban family apartments to redeveloped high-rise buildings in central city locations. The accompanying property profiles also highlight the variety of debt and equity transactions CDT has completed through its network of partners and lenders. For additional information about CDT contact: 1350 Broadway, Suite 700 New York, NY 10018-7702 Main telephone 212-271-5080 Main fax 212-271-5079 Judd S. Levy, President and Chief Executive Officer 212-271-5099
[email protected] (2) E NTERPRISE M ORTGAGE, I NC. (EMI)
EMI aims for substantially the same market. EMI was launched in 1994. As a Special Fannie Mae Delegated Lender, EMI has committed nearly
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ENHANCING THE FEASIBILITY OF AN AFFORDABLE HOUSING PROJECT
$400 million in loans for more than 135 transactions totaling more than 12,000 units of housing. Key Terms •
Loan Amounts—$1,000,000 to $15,000,000. Larger amounts may be accommodated.
•
Commitment Term—18 to 24 months from date of rate lock.
•
Amortization—25- or 30-year amortization and 18- to 30-year terms to be determined at underwriting.
•
Debt Service Coverage—Minimum of 1.25:1 for market-rate transactions. Minimum of 1.15:1 for 9 percent transactions. Minimum of 1.20:1 for 4 percent, 501(c)(3) and market-rate transactions.
•
Load to Value—Maximum of 90 percent.
•
Number of units—A minimum of 15 units.
•
Location—The project can be located on either single or contiguous sites and developed by nonprofit or for-profit entities. EMI’s guidelines express a preference for developments in central city locations and for properties with individually metered utilities.
•
Type of project—The property must be a qualified low-income project in which 75 percent of the units are affordable to residents earning 60 percent or less of the area median income. Some flexibility on affordability is available, depending on circumstances.
For additional information about EMI, please e-mail Jeffrey R. Stern at
[email protected] or contact EMI at: Enterprise Mortgage Investments, Inc. 10227 Wincopin Circle, Suite 800 Columbia, MD 21044 Phone: 410-964-0552 Fax: 410-715-9872 11.3
REDUCING TOTAL DEVELOPMENT COSTS
Greater access to capital may enable the sponsor to meet its original TDC projections. However, the sponsor also should consider reevaluating TDCs at this stage to determine whether these costs can be reduced in any way or if they can be assumed by a party other than the sponsor and, therefore, not passed on to the residents or homebuyers either through increased rents or purchase prices to homebuyers.
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11.3 REDUCING TOTAL DEVELOPMENT COSTS
Obviously, one way to reduce costs is to analyze those cost categories that constitute the largest amount of TDCs (usually acquisition and construction/rehabilitation). If, for example, the sponsor can renegotiate a lower purchase price for the property, identify an alternative property that can be acquired for a reduced or no cost, or modify the scope of the construction to reduce its costs (without destroying the integrity of the project), these cost savings will make it easier to cover TDC. TDC also can be reduced if the sponsor can identify a third party to assume some of the development costs. For example, acquisition of the property by a community land trust, as discussed in Chapter 7, could significantly reduce TDC. Sponsors should consider utilizing a number of government programs, described below, that may be able to provide low- or no-cost properties for use in affordable housing developments. (a)
HUD-Owned Single-Family Property Disposition
Since September 1994, has allowed HUD nonprofit organizations and public agencies to purchase HUD-owned single-family homes at discounts of up to 30 percent. Under the program, the properties would be repaired and sold to low- and moderate-income families or to agencies that serve the homeless. For properties that can be financed by the FHA (Federal Housing Administration), the discount will be 10 percent; this is increased to 15 percent if five or more properties are bought at the same time. Properties that cannot be financed by the FHA will be offered first to nonprofits and public agencies, and sold at fair market value less 10 percent or 30 percent if the property is located in a HUD-designated revitalization area. For properties other than vacant land with a sales price of $50,000 or less, the nonprofit will have to provide an earnest money deposit of only $500. Vacant land will require a deposit of 50 percent of the list price. For properties over $50,000, the deposit must be between $500 and $2,000. (b)
Using Surplus Non-HUD Properties for Assisting the Homeless
This program provides suitable federal properties that have been categorized as unutilized, underutilized, excess, or surplus to states, local governments, and nonprofit organizations for use in homeless programs. Homeless-aid organizations pay operating and repair costs on the surplus properties, which are leased rent-free and “as is.” Leases may run from one to 20 years, depending on the availability of the property and other factors. Surplus properties may also be deeded to the organizations. The program provides no funding.
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HUD collects information from federal agencies about their unused, underused, excess, and surplus properties and then decides which ones to assign to this program. The decision is based on information submitted by the agency controlling the property. Every Friday, HUD publishes in the Federal Register a listing of available properties. For information about a specific property, sponsors must contact the landholding agency.5 (c)
HUD Mortgagee in Possession and Foreclosed Multifamily Property Disposition Properties
Nonprofit sponsors may be able to acquire HUD-insured multifamily properties under favorable terms if HUD has become the mortgagee in possession (MIP) or the owner of these properties. In April 1994, Congress enacted the first major reform of HUD’s multifamily property disposition process in more than 20 years. Under the new law, Congress directed the Secretary of HUD to “facilitate, where feasible and appropriate, the sale [of HUD’s multifamily inventory] to existing tenant organizations with demonstrated capacity, to public or nonprofit entities that represent or are affiliated with existing tenant organizations or to other public or nonprofit entities.” HUD also can make use of short-term loans, up-front grants, and discounted sales prices as part of the disposition plan. In addition, HUD can even consider alternative uses for disposition properties, up to 5 percent of units disposed of in a year. The law gives HUD considerably more flexibility in disposing of its multifamily inventory. Under the prior law, project-based Section 8 had to be provided for all units in subsidized or formerly subsidized projects and all units in unsubsidized projects that are occupied by low-income families eligible for Section 8. Under the new law, HUD can dispose of properties that meet the definition of “unsubsidized” without Section 8 assistance; however, existing very-low-income tenants who would otherwise have to pay more that 30 percent of income for rent after the disposition would have their rent frozen for two years. These tenants also will be considered “displaced” and be given a preference for available Section 8 and public housing programs. In addition, in soft market areas, HUD can dispose of a subsidized project without project-based assistance if it makes an equivalent number of units affordable, through rent restrictions or project-based assistance, in nearby unsubsidized projects and provides tenant-based assistance to assisted families in the disposition project.
5
Source: HUD.
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11.3 REDUCING TOTAL DEVELOPMENT COSTS
For unsubsidized projects, project-based assistance would remain on assisted units upon disposition, and tenant-based assistance would be provided to families in units assisted under the Section 8 Loan Management Set-Aside (LMSA) program. (d)
Federal Deposit Insurance Corporation Disposition Properties
1. Buying FDIC Multifamily Affordable Housing Properties. FDIC sells multifamily properties under certain appraised values to eligible nonprofit organizations and public agencies during a 90-day restricted marketing period. These organizations complete a certification of their status as nonprofits or public entities, and commit to set aside 35 percent of the units for low-income tenants. All purchasers of FDIC multifamily affordable housing properties must sign a Land Use Restriction Agreement (LURA), which commits the buyer to set aside at least 35 percent of total units for lowincome tenants (those who make 80 percent or less of the area median income). This deed restriction lasts for 15 years. Set-asides, however, will not be mandatory if the buyer provides a similar restriction through third-party financing. Reserve prices are set for multifamily properties on a property-by-property basis. Eligible properties include all multifamily properties with appraised values equal to or less than the maximum allowed for an FHA-insured mortgage loan to public agencies or nonprofit organizations for multifamily structures: Efficiency:
$35,400
One bedroom:
$40,579
Two bedroom:
$49,344
Three bedroom:
$63,834
Four or more bedrooms:
$70,070
2. Buying FDIC Single-Family Affordable Housing Homes. A nonprofit organization or public agency that agrees to rent or resell an FDICowned property to lower-income families whose adjusted incomes are less than 115 percent of area median income can buy units within the FDIC inventory. Single-family homes in FDIC’s inventory that are appraised under the following limits are sold exclusively to low- and moderate-income buyers, and to nonprofit and public agencies during a 90-day marketing period: Single
(one-family unit):
$101,250
Duplex
(two-family unit):
$114,000
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ENHANCING THE FEASIBILITY OF AN AFFORDABLE HOUSING PROJECT
Triplex
(three-family unit):
$138,000
Fourplex
(four-family unit):
$160,0006
3. FDIC Affordable Housing Properties for Donation. Under certain conditions, the FDIC may donate property to nonprofit organizations and public agencies for such public purposes as providing housing for lower-income households and other special populations, such as battered women, the handicapped, and the homeless. These properties have no reasonable recovery value, but may serve particular community needs through being directed to communitybased organizations. FDIC does not donate properties to individuals or for-profit businesses. Eligible nonprofit organizations and public agencies should contact local FDIC Service Centers for detailed donation information. The FDIC works closely with local governments to review and evaluate disposition of potential donation properties. The FDIC makes final selections to donate based upon proposals which provide the best plans to finance needed repairs and manage the property, and the most feasible public use of the property. In order to be donated, a property must be deemed to have no reasonable recovery value because of one or more of the following characteristics: very low market value; significant physical deterioration; environmental conditions that adversely affect value; excessive holding costs; of lack of sale after repeated marketing attempts. For questions on any of these FDIC programs, call or e-mail the FDIC Affordable Housing Specialist in the specific Service Center that covers the state where the property is located. Find the regional office near you at www.fdic.gov/about/contact/ask/regionaloffices.htm (e)
Freddie Mac Multifamily Property Disposition Program
Freddie Mac has an inventory and a pipeline of future inventory of multifamily properties that it acquired through foreclosure. These properties may be acquired by nonprofit organizations at reduced costs. Freddie Mac has the ability to sell these properties at their true value, not the amount of debt previously on the property prior to foreclosure and to provide attractive long-term financing, if appropriate. (f)
Bargain Sale
Unlike some of the programs described above, the purchase of a property through a bargain sale may save the nonprofit purchaser a lot of money but 6
www.fdic.gov/buying/owned/affordable/affordable/ahpst.html
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11.4 INCREASING INCOME
the property will not be free or at extremely low cost. Under a bargain sale, an owner agrees to sell the property to a nonprofit organization for less than the market value and receives a charitable deduction for the difference between the purchase price and the appraised value of the property. (g)
City “In Rem” Property
Many cities have single and multifamily properties that are tax delinquent. Some local governments such as the District of Columbia, New York, and Atlanta have developed programs for transferring these “in rem” properties to nonprofit ownership and development. Nonprofits should talk to their local governments for the availability of such properties or work with elected officials to establish such a program. 11.4
INCREASING INCOME
The sponsor also should consider reevaluating income at this stage of the development process to determine whether initial income projections reasonably can be increased or if other sources of income, primarily operating subsidies, can be secured. Generally, affordable housing developers will be hard-pressed to increase the level of income that can be expected from renters and cooperative shareholders or the level of income that purchasers can be expected to have to cover housing costs beyond the original estimates because the housing was developed specially for people with specific or targeted incomes. See Chapter 5. Therefore, a sponsor may want to focus all available energies on pursuing operating subsidies. Operating subsidies, particularly rent subsidies, will enhance the viability of a nonprofit affordable housing project because they will provide the nonprofit with a stable rent stream that it can use to secure a higher loan from a profit or nonprofit lender. In many cases, multiyear government commitments to provide rent subsidies can act as a credit enhancement or additional credit enhancement for nonprofits seeking acquisition, rehabilitation, or permanent mortgages. Descriptions of existing federal subsidy programs, condensed primarily from federal government publications, are given here. (a)
Rent Subsidies Only
(i) Section 8 Rental Assistance.
There are two Section 8 Rental Assistance
Programs: 1. Housing Choice Voucher Program (HCVP). 2. Section 8 Project-Based Assistance.
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Under both of these programs, a tenant who is provided with Section 8 assistance must be “very low income” (earning 60 percent or less of the area’s median income) or “low income” (earning 80 percent or less of the area’s median income). Each tenant who is provided with Section 8 assistance generally pays rent that is no more than 30 percent of the family’s adjusted income but no less than 10 percent of the tenant’s monthly gross income. The property owner receives from the federal government, through the local public housing authority, the difference between the rent the tenant can afford and the fair market rent for that unit. The programs can be summarized as follows:
(b)
•
The Housing Choice Voucher Program (HCVP)—This is a relatively new program that combines elements of two previous programs, the Section 8 Housing Certificate and the Section 8 Existing Housing Voucher. These programs were merged by the Quality Housing and Work Responsibility Act of 1998, which went into effect in October 1999. Under the HCVP, voucher recipients may shop around for apartments. The federal government pays landlords the difference between a HUD-designated payment standard and the family contribution as calculated based on the above formula. Families may choose apartments whose rents exceed the payment standard, but they must make up the difference on their own. A detailed description of the HCVP can be found at: www.hud.gov/offices/pih/programs/hcv/index.cfm.
•
Section 8 project-based assistance—This allows a public housing authority to provide Section 8 certificates to owners who construct new buildings or substantially rehabilitate old structures. These certificates are tied to a particular property, not to particular individuals, but otherwise function the same. The housing authority can designate up to 15 percent of its Section 8 certificates to these types of properties.
Expiring Rent Subsides: Mark Up to Market
Project-based Section 8 contracts run for a fixed period of time, usually between 5 and 20 years. Upon expiration, the owner has a choice whether to renew its participation in the program or to optout. Congress and HUD have established rules and policies governing the amount of the government’s contract renewal offer. The following description of this process by the National Housing Law Project, breaks the options
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down in a simple, understandable way.7 If the building is in acceptable condition (“troubled” properties are treated differently), there are four primary ways of renewing the contract, depending greatly on a comparison of the Section 8 rent level with the market rent level. The four approaches are: The approach taken if the Section 8 rent is comparable to market rent and the owner is willing to renew his contract. The parties simply extend the contract with essentially the same terms and rents as before. Owners with Section 8 rents less than market value may choose this option to bide their time a year at a time, especially if they are seeking to avoid the administrative burden and five-year commitment of a markup. This option is also available to owners of properties that are exempt from the Mark to Market program (Section 202, Rural Housing Service Section 515, or certain bond-financed properties), even though their current rents exceed market level.
(i) Straight Renewal.
(ii) Mark Up to Market. The approach taken if the Section 8 rents are lower than the market rents and the owner of an eligible property seeks a higher Section 8 rent. In short, the contract is renewed and HUD raises the Section 8 rents to match the market rents to eliminate the financial incentive for the owner to opt out of the program. Owner must commit to remain in the Section 8 program for at least five years with only annual cost adjustments. (iii) Restructuring/Mark to Market. The approach taken if the Section 8
rent is significantly higher than the market rent. Usually, the owner cannot simply opt out of the program without suffering financial hardship because the rents would decrease too much, creating difficulties in maintaining debt service payments and operating expenses. HUD, however, only subsidize rents at “market” rents. Thus, with this approach, the contract is usually renewed and HUD lowers the rents for the property to match market rents, and the debt must be restructured (divided into two portions, one currently serviceable and the other not) or partially forgiven in order for the owner to keep the building financially viable. A Restructuring Plan could include a conversion of some or all of the project-based assistance to vouchers, pursuant to a Rental Assistance Assessment Plan.
7
www.nhlp.org/html/pres/renewals.
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ENHANCING THE FEASIBILITY OF AN AFFORDABLE HOUSING PROJECT
An approach that can be taken if the Section 8 rent is only moderately higher than the market rent for the property, such that the owner can keep the property financially viable at the (lower) market rents. HUD and the owner renew the contract, reducing the rent to market rent, without restructuring or forgiving part of the debt. Regardless of the approach, the process is complex, and HUD and the owners may disagree on any number of things, such as the appropriate rent level and the condition of the property. Tenants have specific notice and participation rights, depending on the option chosen by the owner. Most expiring contracts are currently being renewed only for one year at a time because Congress provides appropriations only for one year at a time. However, owners may obtain contracts of any length, subject to appropriations, and longer commitments are required for those using Mark to Market* restructuring or the Mark Up options. In order to administer the “Mark to Market” components of the renewal program, in 1997 Congress created the Office of Multifamily Housing Assistance Restructuring (OMHAR), originally as an entity with its own director, reporting directly to the HUD Secretary. When Congress extended the Mark to Market program for five years in 2001, it also extended the existence of OMHAR for another three years, while vesting the Federal Housing Administration Commissioner (the Assistant Secretary for Housing) with oversight of OMHAR. HUD and the Owner of these properties can transfer the properties to nonprofit ownership during this process.8 Under the Transfer Program, HUD can use its discretionary authority to mark rents up to market to facilitate a change in ownership from a for-profit owner or limited-dividend owner to a nonprofit, or from one nonprofit owner to another nonprofit owner. The current and prospective owners may not be affiliated entities. Under the Capital Needs Program, HUD will permit a Section 8 budgetbased rent increase for nonprofit projects to perform capital improvements that will maintain the long-term financial and physical viability of the project when current rents are not sufficient. Both initiatives share a number of characteristics. For example: (iv) Mark to Market “Lites.”
1. Rent increases are capped at the lesser of comparable market rents or 150 percent of the Fair Market Rent (FMR), less the interest rate subsidy adjustment factor (IRP), if applicable. 2. Requirement of a 20-year use agreement, which requires the owner to accept Section 8 contract renewals if offered by HUD1.
8
Section 8 Renewal Policy, Guidance for the Renewal of Section 8 Contracts, Chapter 15, “Nonprofit Rent Increases.”
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11.4 INCREASING INCOME
3. The same property eligibility criteria.9 4. The minimum term of the Section 8 contract is five years.10 (c)
Property Disposition Set-Aside Program
The Property Disposition Set-Aside program provides Section 8 assistance in connection with the sale of HUD-owned multifamily rental housing projects. Property Disposition is a subprogram of the Section 8 Housing Assistance Payments (HAP) program. The purpose of the program is to minimize displacement of families living in multifamily rental housing projects and to maintain the amount of decent, safe, and sanitary housing affordable to them. Property Disposition assistance was earmarked for multifamily rental housing projects being sold at foreclosure or by HUD. Project purchasers may be for-profit and nonprofit organizations or cooperatives. 9
Eligibility requirements include: 1. 2.
Comparable Market Rents below 100 percent of the FMR potential. A low- and moderate-income use restriction that cannot be eliminated by unilateral action by the owner. Examples include properties with: A Rent Supplement Contract; Flexible Subsidy Grant or Loan; Low Income Housing Tax Credits; or An approved Preservation Plan of Action.
The following eligibility restrictions apply: 1.
2.
The Capital Needs Program requires that the project have a physical inspection performed using the Uniform Physical Condition Standard [24 CFR Part 5] by the REAC with a score of greater than 30. This is not a requirement for the Transfer program. The new Section 8 contract rents may not exceed the lesser of comparable market rents, based on a rent comparability study (RCS) or 150 percent of the FMR. If the property has a subsidized mortgage, both the comparable market rents and the 150 percent of the FMR cap must be adjusted by the interest rate subsidy adjustment factor.
Note: Comparable market rents are post-rehabilitation rents where rehabilitation is scheduled. 3.
Regarding the Capital Needs Program, the nonprofit owner must be: a.
b. c.
10
In good standing and not subject to administrative sanctions (i.e., debarment suspension, unresolved adverse audit findings or has failed to correct material violations of HUD rules). In compliance with the terms of the Regulatory Agreement, Note, and Mortgage. Current in debt service and all payments, including the Reserve Fund for Replacement (or current under a workout agreement).
Note: Current owners that are subject to administrative sanctions, or otherwise violate the terms above may participate in the Transfer Program. Such owners may not receive funds from the transaction until all costs associated with bringing the project to an acceptable standard are covered. For a comprehensive discussion of the Section 8 Guidelines see Emily Achtenburg’s excellent paper at www.chapa.org/LCCS8R3w.PDF.
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This program may be available to provide nonprofits with federal payments to reduce rents for certain disadvantaged low-income persons living in properties that are privately owned and insured by the FHA under Sections 221(d)(3), 231, or 236, and by Section 202 insurance programs, as described above, or certain projects financed under a state or local program of loans, loan insurance, or tax abatement. The payment makes up the difference between 30 percent of the tenant’s adjusted income and the fair market rent as determined by HUD. However, the subsidy may not exceed 70 percent of the HUDapproved rent of the specific unit. HUD may pay the supplements for a maximum term of 40 years. Eligibility is limited to low-income households that qualify for public housing and are elderly, handicapped, displaced by government action, victims of national disaster, occupying substandard housing, or headed by a person serving on active military duty.
(i) Rent Supplements (Section 101).
As discussed in Chapter 7, HOME funds can be used by a participating jurisdiction to provide tenant-based, not project-based, rental assistance to eligible families. For rental housing, at least 90 percent of HOME funds must benefit families whose incomes are at or below 60 percent of the area median income.11 The remaining 10 percent of the funds must be invested in units occupied by families at or below 80 percent of median income. (ii) Home.
(iii) Rental Assistance Program of Rural Housing Service. Very-low-income and low-income rural families, including those with elderly members, may pay reduced monthly rents for apartments they occupy under a rental assistance program available through the Rural Housing Service (RHS). The program is designed to reduce very-low-income and lowincome families’ out-of-pocket cash payments for rent, including utilities. To be eligible to participate in the program, families must be residents of rental housing projects financed by the RHS. Very-low-income and low-income families (including the elderly) who are paying rents that exceed 30 percent of their adjusted annual income can qualify for rental assistance. The income ceiling is 80 percent of the area median income, adjusted for the size of the household. These income levels are available in any RHS office. All RHS-financed rural rental projects controlled by borrowers who have agreed to operate the housing on a limited-profit or nonprofit basis are eligible, as are farm labor housing loan and grant recipients who are public bodies, broad-based nonprofit organizations, or nonprofit organizations of farm workers.
11
See Chapter 7.
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Priority will be given to very low-income families in existing projects, who are paying the highest percentage of income toward rent. In new projects, priority will be based on community need as shown in a market survey. The terms of existing agreements are for 5 or 20 years. All new and renewal agreements are for five years. A borrower with an eligible project should apply at the RHS District Office serving the area where the housing is located. Applicants seeking rental or labor housing financing through RHS should ask for rental assistance at the same time, if it will be needed to help very-low-income and low-income families in paying the proposed rent. A directory of state and local RHS offices is available at www.rurdev.usda.gov/recd_map.htm/. Applicants seeking rental housing finance with RHS should ask for rental assistance at the same time if needed. (d)
Rent Subsidies for Homeownership
Section 8 rental assistance can be used by homeowners who acquire a share in a limited-equity cooperative. The 1992 Act also amended Section 8 of the National Housing Act of 193412 to add a new homeownership option but technical legal problems have kept this from becoming operational. The provision allows a family receiving a tenant-based Section 8 subsidy to use the subsidy to pay homeownership expenses if the family qualifies as a first-time homeowner. Participants must demonstrate that at least one adult in the family is employed and that they earn enough income to satisfy the agency’s standard of self-sufficiency. In addition, they must participate in a homeownership and housing counseling program.13 This program has not been implemented. The amount of assistance available is similar to a tenant-based subsidy under Section 8: the difference between fair market rental for the area and 30 percent of the recipient’s adjusted monthly income. However, it cannot exceed the difference between the monthly homeownership expenses and 10 percent of the family’s income; in other words, the family will contribute at least 10 percent of its income.14 To receive assistance under this program, each family must pay at least 80 percent of any down payment in connection with a loan made for the purchase of a home.15 In the event that the assisted family defaults under a mortgage, they may not receive homeownership assistance under this program for another dwelling. In most cases, they may not receive Section 8 rental
12 13 14 15
42 U.S.C. § 1437f. Id. 106 Stat. 3746. Id.
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ENHANCING THE FEASIBILITY OF AN AFFORDABLE HOUSING PROJECT
assistance either, unless they suffer penalties and comply with additional HUD requirements.16 (e)
Rent Subsidies for the Homeless
(i) Shelter Plus Care (S + C). This program grants rental assistance for up to five years, in combination with support services to homeless people with disabilities. The program primarily serves homeless people with disabilities such as serious mental illness, chronic problems with alcohol and/or drugs, and AIDS and related diseases. The support services, which must match the value of the rental assistance, are provided by federal, state, and local governments and by private sources. Funds are awarded to state and local governments on a nationwide competitive basis. HUD selection criteria give priority to homeless people living on the streets and in shelters. Rental assistance is provided through three programs:
1. Section 8 Moderate Rehabilitation Single-Room Occupancy (SRO) is project-based rental assistance administered by the local public housing agency (PHA), in concert with the state or local government applicant. As a co-applicant, the PHA contracts with owners of SRO properties. Assistance is provided for ten years. 2. Sponsor-Based Rental Assistance (SRA) provides rental assistance through an applicant to a private nonprofit sponsor who owns or leases dwelling units in which participants reside. 3. Tenant-Based Rental Assistance (TRA) offers housing to homeless people in a variety of settings, ranging from group homes to independent living units. For the first year, the homeless may be required to reside in a specific structure; for the remaining four years, they may be required by the applicant to reside in a specific area of the locality. More information about this program can be found at www.hud.gov/offices/cpd/homeless/ programs/splusc/index.cfm. (ii) Section 8 Moderate Rehabilitation Single-Room Occupancy (SRO) Program.
This program assists very-low-income, single, homeless individuals in obtaining decent, safe, and sanitary housing in privately owned, rehabilitated buildings. Under the SRO program, HUD enters into annual contributions contracts (ACCs) with PHAs in connection with the moderate rehabilitation of residential properties. The properties they seek to rehabilitate are those in which some or all of the dwelling units do not contain 16
106 Stat. 3747.
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either food preparation or sanitary facilities. The PHAs make Section 8 rental assistance payments to participating landlords on behalf of homeless individuals who rent the rehabilitated dwellings. The rental assistance payments cover the difference between 30 percent of the tenant’s income and the unit’s rent, which must be within the fair market limit established by HUD. Rental assistance for SRO units is provided by HUD for a period of ten years. Owners are compensated for the cost of rehabilitation (as well as the other costs of owning and maintaining the property) through the housing assistance payments; the amount to be compensated cannot exceed $19,000 per SRO unit (as of 2003). At the same time, each unit must need a minimum of $3,000 of eligible rehabilitation to qualify for the program. HUD selects PHAs for funding on the basis of a national competition in which applicants must demonstrate their need for the assistance and their ability to undertake and carry out the SRO program. In their applications, PHAs are required to identify the sponsors of proposed projects, specific structures to be rehabilitated, prospective sources of acquisition and/or rehabilitation financing, and a plan for providing supportive services for the homeless individuals in the units. Very-lowincome, single, homeless individuals are eligible to occupy the assisted units. An excellent handbook on this program is at www.hud.gov/ offices/cpd/homeless/library/sro/finalguidepdf.pd (f)
Rent Subsidies for the Elderly
As part of NAHA, Congress also enacted a five-year demonstration program called HOPE for Elderly Independence. This program was designed to test the effectiveness of combining rental certificates with supportive services to assist the frail elderly with living independently. In FY 1993, grants for supportive services under HOPE for Elderly Independence totaled $9.9 million. In that first round of funding, HUD awarded grants to 16 agencies for projects assisting from 25 to 150 persons for a five-year demonstration period. No new funding has been provided since FY 1993. More information on the program is available at www.hud.gov/progdesc/ hope4fin.cfm. (g)
Rent Subsidies for People with Disabilities
Under this Section 811 program, referred to as Supportive Housing for Persons with Disabilities, HUD is able to provide project rental assistance to cover the difference between the HUD-approved operating cost per unit and the amount that the resident pays. The rental assistance contracts and income restrictions are substantially the same as the Supportive Housing for the Elderly program. This rental assistance would be in
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addition to capital advances that HUD can provide to nonprofit housing developers in order to expand the supply of housing that offers supportive services for persons with disabilities. See Chapter 6 for a discussion of the capital advances aspect of this program. (h)
Rent Subsidies for People with AIDS
Under a program referred to as Housing Opportunities for Persons with AIDS (HOPWA), HUD provides 90 percent of the funds available for the program, on a formula basis, to state and local governments for housing assistance and support services, in an effort to prevent homelessness in people with AIDS. The remaining 10 percent is awarded competitively to governments and nonprofits for special projects. HUD provided $294.75 million in HOPWA funds in fiscal year (FY) 2004. These funds provide housing assistance to over 73,700 households in the form of short-term payments, ongoing rental assistance payments, and supportive housing facilities such as single room occupancy (SRO) dwellings. For more information, see www.hud.gov/offices/cpd/aidshousing/programs/index.cfm. (i)
Operating Expense Subsidies for Special Needs Populations
HUD makes grants to states, metropolitan cities, urban counties, Indian tribes, government entities, and certain private nonprofit organizations, for particularly innovative programs that meet the immediate and long-term needs of the homeless (“Supportive Housing Programs.”) These programs must include support services that enable homeless families to break the cycle of homelessness and live independently. Funds for support services are awarded in a nationwide competition. HUD selection criteria give priority to comprehensive programs that foster the highest level of independent living that a homeless person or family can achieve.
(i) Grants for Providing Support Services for the Homeless.
(ii) Grants for Providing Support Services for the Elderly and Handicapped.
This program, called Congregate Housing Services,17 was created to provide grants for support services for the elderly and handicapped. HUD makes grants to states, Indian tribes, units of local governments, or nonprofit corporations (which include PHAs). Applicants may request funding for one or more eligible housing projects for the elderly or nonelderly handicapped, under Section 202 (conventional public housing and Indian tribe housing) or Sections 514 through 516. HUD makes direct five-year renewable grants to eligible applicants for a meals program, seven days a week, and for other supportive services 17
The law and regulations concerning this program can be found in NAHA, § 802, U.S.C. § 8011, as amended.
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needed by eligible residents to prevent premature and unnecessary institutionalization. An independent professional assessment committee, in concert with a service coordinator appointed by the grantee, screens residents who apply for the program, determines individual eligibility for services, and recommends a service package to management. As noted above, Congress has enacted a five-year demonstration program called HOPE for Elderly Independence in NAHA. In this program, HUD may award grants for the provision of supportive services in addition to vouchers or certificates for rental assistance.
(iii) Grants for Providing Support Services for the Frail Elderly.
As noted in the earlier discussion of rental assistance available for persons with AIDS, HUD can provide state and local governments with funds for support services for people with AIDS.
(iv) Grants for Providing Support Services for People with AIDS.
(j)
Other Federal Operating Subsidies
(Section 201 of the Housing and Community Development Act of 1965). This program provides federal aid for troubled multifamily housing projects as well as capital improvement funds for both troubled and stable subsidized projects that are insured or held by HUD and are subsidized under various HUD insurance and subsidy programs (e.g., Sections 236 and 221(d)(3) below-market interest rate, rent supplement, and Section 202). Also eligible are uninsured projects developed by state agencies and receiving HUD financial assistance under one of the subsidy programs. The flexible subsidy is composed of operating assistance for troubled projects, and capital improvement loans (discussed in Chapter 6). The operating assistance program provides funds that will assist in restoring the financial and physical soundness of privately owned, federally assisted multifamily housing. Operating assistance focuses on correcting deferred maintenance, financial deficiencies, and replacement reserve and operating deficits. The program is designed to maintain the use of the property for low- and moderate-income people, and is conditioned on the project owner ’s ability to provide management satisfactory to HUD. A flexible subsidy can be part of a nonprofit’s Plan of Action under LIHPRHA (see Chapter 8.)
(i) Flexible Subsidy.
(ii) New Approach Anti-Drug (NAAD) Program. The NAAD Program funds comprehensive, coordinated community-based approaches to eliminate drug-related crime problems in neighborhoods with housing that is assisted by public or nonprofit private entities. This competitively awarded program can help support Neighborhood Network computer learning centers
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and/or expand initiatives to help fight drugs in a comprehensive community. The technology focused grants can provide up to $25,000 to start a new Neighborhood Networks center or $15,000 to expand eligible services at an existing center, as part of a comprehensive strategy to reduce drug-related crime. The more comprehensive grants can fund drug prevention and intervention activities on multiple properties. Eligible property owners may use grant funds to increase security measures, support tenant patrols, and develop drug-abuse prevention, intervention, referral and treatment programs. These programs can include youth services, educational programs and job training opportunities. One property may apply for up to $125,000; two or more properties may apply for a maximum of $200,000. The NAAD grant funds drug-related crime prevention and intervention activities for the entire neighborhood (serving up to 25,000 residents). 11.5
REDUCING OPERATING EXPENSES
Reducing operating expenses can enhance the viability of a nonprofit affordable housing project in a number of ways. If operating costs can be reduced, then the nonprofit may have more operating income available to pay debt service. With more money available to pay debt service, the sponsor’s debt coverage ratio will be improved and lenders may become willing to extend credit to the project or even provide a larger loan than was previously anticipated. The debt coverage ratio is described more fully in Chapter 6. Reduced operating expenses also may mean lower monthly costs for tenants. If operating costs can be reduced, the sponsor may be able to pass on the cost savings to tenants in the form of lower monthly housing costs. As with income projections, the sponsor should consider reevaluating expense projections at this stage of the development process to determine whether initial operating expense projections reasonably can be decreased or if methods for reducing operating expenses that had not previously been considered can be secured. Generally, if the sponsor developed its operating expense budget as described in Chapter 5, there should be little if any room to reduce expenses without severely harming the long-term viability of the project. Therefore, a sponsor should seek other methods for reducing operating costs such as: (a)
Reduced Property Taxes
Many local, county, and state jurisdictions have developed programs that provide property tax reductions, deferrals, forgiveness, or exemptions to developers of low- and moderate-income rental and ownership housing.
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Jurisdictions may even provide additional incentives to developers who redevelop properties that were previously abandoned or vacant or that are situated in particular geographic areas or “enterprise zones.” These tax incentives often are referred to as “payment in lieu of taxes” (PILOT) programs. Nonprofits seeking property tax reductions should check with their local, county, or state government regarding the availability of these programs and consult with the local counsel who is a member of their development team. Because property taxes are primarily local in nature, each locality tends to develop its own property tax reduction programs. For example, in the District of Columbia, property transferred to certain nonprofit housing developers or to cooperatives will be automatically exempt from property taxes if representations about the future use of the property are made.18 In other jurisdictions, however, the nonprofit developer is not entitled to any automatic tax break but instead must negotiate a deal with local taxing agencies. In those jurisdictions, the legislature usually provides the agencies with authority to negotiate tax incentives and sets the parameters for those negotiations (e.g., a percentage of the taxes may be waived based on a percentage of units set aside for low-income families, or a maximum tax reduction of 50 percent for no more than five years). (b)
Reduced Other Taxes
Many local, county, and state jurisdictions have developed programs that give developers of low- and moderate-income rental or ownership housing reductions or exemptions for other types of taxes—property transfer taxes, and mortgage and deed recordation taxes, for example. Nonprofits should check with their local, county, or state government regarding the availability of these reduction or exemption programs and consult with the local counsel who is a member of their development team. (c)
Enterprise Zones
Many states currently provide tax relief and other incentives for developing housing in targeted areas, often referred to as enterprise zones. These incentives can reduce operating expenses and development costs by providing real estate tax abatements, an exemption from sales tax for 18
This exemption applies under D.C. Code § 47-3505 to nonprofits exempt from federal taxation under I.R.C. § 501(c)(3) who intend to transfer the property within one year to a household or to 35 percent of the units in a multifamily property whose households earn less than 120 percent of the area median income. Under § 45–3503(c)(3), housing cooperatives will be exempt from property taxes for five years if at least 50 percent of the dwelling units are occupied by persons earning less than 120 percent of the area’s median income.
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materials used for construction, and reduced utility taxes. A full listing of enterprise zones around the country, with information on the contact persons, the eligibility criteria, and the incentives offered can be obtained from the National Association of State Development Agencies, 750 1st Street, N.E., Suite 710, Washington, DC 20002. (d)
Utilities Including Water and Sewer Charges
Sponsors may be able to significantly reduce their operating costs by reducing the cost of utilities. This may be accomplished by reducing the rates charged for the utilities or by reducing the amount of energy the utilities consume. Sponsors may be able to receive reduced rates for certain utilities simply because of the nonprofit nature of the housing accommodation. In fact, jurisdictions that allow their rates for water and sewer services to be less for nonprofit housing than for the general population are not uncommon. Reduced rates for other regulated utilities, such as gas and electricity, are less common. Nonprofits should check with their local, county, or state government and with their local counsel regarding the availability of these reductions.
(i) Reducing Utility Rates.
(ii) Reducing Consumption. Sponsors may be able to reduce their operating costs by reducing energy consumption. A sponsor should consider introducing energy-efficiency improvements during a rehabilitation, or installing energy-efficient systems during new construction, to reduce operating costs in the future. Common energy savings can be realized from: •
Replacing washers, shower heads, and toilets with water-saving devices.
•
Replacing doors, windows, and roof insulation with more energyefficient products.
•
Comparing the current efficiency of the property’s heating and airconditioning systems with that of new systems and performing a cost-benefit analysis.
•
Installing individual utility metering.
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C H A P T E R
T W E L V E 12
Developing the Project Feasibility Report: Six Case Studies 12.1
Introduction
12.2
The Feasibility Report and Financial Pro Formas 364
12.3
The Development of Affordable Housing: Six Case Studies 368
12.4
Conclusion
Appendix 12C Garden Terrace Reference Information 399
363
Appendix 12D The View Reference Information 406 Appendix 12E Kentucky Mountain Housing Reference Information 415
384
Appendix 12A The Whitelaw Reference Information 385
Appendix 12F LeasePurchase Reference Information 420
Appendix 12B Friendship Court Reference Information 397
12.1
INTRODUCTION
After a sponsor determines a property’s projected operating income and expenses, total development costs (TDCs), and sources of funds for meeting the TDCs (loans, grants, equity, and other proceeds from sales), it has to convince the various funding and subsidy sources that have been targeted during the feasibility phase to commit their funds to and/or otherwise support the project. The sponsor usually will develop a project feasibility report that includes a narrative description of the proposed development with financial pro formas in order to summarize the proposed development plan and the project’s underlying financial structure. The composition of this feasibility report and the financial pro formas are described in this chapter. In practice, the sponsor will have developed the financial pro formas on an interim basis during the feasibility phase, in order to test the affordability of the project. As potential sources of capital, such as loans, are identified, the sponsor “plugs” the loan amount(s) into the sources and uses statement and plugs the likely interest costs associated with that loan into the multiyear income and expense projections, to determine the loan’s impact on the project and its affordability. The sources and uses 䡲
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statement and multiyear income and expense projections are described below. If these loans enable the sponsor to meet the TDCs but cost too much in debt service to carry every month, then the sponsor must keep searching for more affordable capital and keep plugging the new sources into the pro formas until the project can be deemed feasible or infeasible. This chapter gives actual examples of project summaries and financial pro formas that were developed by nonprofit sponsors who were seeking to finance low-income rental housing, preserve existing rental housing, develop single room occupancy housing, create elderly housing, build first-time home ownership housing in rural areas, and new lease–purchase home ownership opportunities, respectively. These projects, which were completed successfully by utilizing the financing mechanisms set out in the pro formas, required the participation of multiple parties and multiple financing sources. 12.2 (a)
THE FEASIBILITY REPORT AND FINANCIAL PRO FORMAS The Feasibility Report—Generally
The feasibility report usually provides all interested outside parties with a narrative description of the project and its financial projections, commonly referred to as pro formas. The narrative often serves to describe the property, the development team, the proposed affordable housing project, and, if homeownership is being developed, the form of ownership either selected by the residents or most appropriate for the property. The pro formas set out the estimated development costs, operating expenses, income from operations and other sources, characterization of the housing as rental, home ownership, cooperative, or condominium, and amounts and sources of acquisition, construction, and permanent financing. The pro formas often will highlight any special programs that are being utilized by the sponsor to reduce the TDCs, to lower operating expenses, to subsidize monthly housing costs, to lower acquisition costs for homebuyers, or to enhance the project’s financing. (b)
Financial Pro Formas
The financial pro formas that constitute the guts of the feasibility report are the sources and uses statement and the multiyear income and expense projections. As discussed below, the sponsor may need to include other schedules in its feasibility report, to reflect the nature and type of affordable housing being developed or to describe particular assumptions or calculations in greater detail. These pro formas are the vehicles that the sponsor must use to present the results of its feasibility analysis to potential funding sources. The 䡲
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sources and uses statement and multiyear income and expense projections provide potential funders with the information gathered and analyzed by the sponsor during the feasibility phase: the TDCs, the likely sources of funds to meet the TDCs, and the projected operating income and expenses. The sources and uses statement provides interested parties with answers to the following questions:
(i) Sources and Uses Statement.
1. What TDCs are being projected for the affordable housing development and how are those TDCs broken down by expense category, for example, acquisition, construction costs, architect or legal fees, and so on. This is the “uses” aspect of the statement because it shows the planned uses of the funds that will be secured for the development. 2. From what sources—private for-profit lenders, corporate investors, or resident equity—does the sponsor expect to get the funds necessary to meet the TDCs and complete the affordable housing development? This is the “sources” aspect of the statement. The sources of funds identified by the nonprofit sponsor likely will comprise one or more of the sources of financing discussed in Chapters 6 through 11. 3. At what point in the development process (for example, acquisition, construction or permanent closing) does the sponsor expect to have access to each “source” of funds and will the amount of funds available at that time meet the costs that the sponsor will have to cover at that stage of the development. For example, if the total costs incurred to acquire the property (acquisition, closing, transfer taxes, and so on) are expected to be $1 million, the funding sources will want to know that the sponsor has identified $1 million of funds that will be available at acquisition closing to cover these costs. Although this pro forma commonly is referred to as the “sources and uses statement,” it is better understood as a “uses and sources statement” because total uses or costs of the development are what drives the project. In practice, the sponsor usually seeks to identify funding sources only after total development costs have been identified. Funders generally will consider participating in the financing of an affordable housing development only after they have been shown how their participation fits into the overall financing needs of the project. Generally, funding sources will require that the sources identified in the sources and uses statement equal—or, more often, exceed—the uses identified in the pro forma. This requirement is imposed because project costs are estimates and are reasonably subject to escalation, especially 䡲
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where construction or rehabilitation is being proposed by the sponsor.1 If the sponsor’s pro forma projects sources in excess of uses, the sponsor will have a cushion to fall back on if costs exceed original estimates. Sophisticated funding sources will require this cushion because they understand that it will be virtually impossible for the sponsor to get additional or new funding from any sources later in the project if original commitments from financing sources were insufficient to meet uses. (c)
Multiyear Income and Expense Projections
The multiyear income and expense pro forma should reflect the property’s future income and expense projections and the related assumptions developed by the sponsor. At a minimum, these multiyear projections should show: 1. Operating income and expense projections for the “interim period” or the period after the sponsor acquires the property but prior to the completion of construction, rehabilitation, or sellout of homeownership units by the sponsor. 2. Operating income and expense projections for the first full year of stable operations (operations are considered “stable” from the first day of the month after construction, rehabilitation, or sellout of the property has been completed). 3. Operating income and expense projections for a number of years after the first full year of stable operations. The number of years that a sponsor will have to project beyond the first full year of stable operations will vary based on the funding source. Many funders require at least a five-year projection beyond the “interim period.” Others require a ten-year projection. The annual income and expense projections must include replacement and operating reserves, vacancy and bad debt allowances (see Chapter 5), costs of servicing all sources of debt (e.g., mortgage payments), and debt coverage ratios (see Chapter 6). Most funding sources will expect to see income and expense costs increased annually over the period of years set out in the pro forma. These increases, often referred to as “trending,” should be tied to some reasonable basis, such as projected cost of living increases for the area where the property is located. The sponsor must clearly state the basis for this increase as well as all other assumptions built into this pro forma in a 1
See Chapter 17 for discussion of the cost concerns of lenders and sponsors who are participating in construction or rehabilitation activities.
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legend on the face of the projections or in notes provided as an adjunct to the projection itself. See the discussion of notes below. In many affordable housing developments, sponsors, often at the request of funding sources, will trend increases in expenses at one level—for example, 5 percent—and increases in income at a different and lower level—for example, 2 percent. This distinction is made in order to acknowledge the fact that incomes of many low- to moderate-income households simply do not keep pace with general cost-of-living increases in their communities. (d)
Other Schedules
In some cases, the sponsor will have to provide additional pro formas or schedules in order to address specific concerns of funding sources and to support assumptions made by the sponsor in other pro formas described above. For example, where a sponsor is converting occupied rental housing to homeownership housing or is substantially rehabilitating rental housing, funders may ask the sponsor to provide them with a schedule to show that the existing residents will be able to pay monthly housing costs at the levels projected in the multiyear income and expense pro forma. This schedule likely would reflect, for each unit, the unit number, the household income, the projected monthly housing costs after the conversion or rehabilitation, and the percentage of household income that will be required to meet the projected monthly housing costs after the conversion or rehabilitation is completed. Similarly, when ownership housing is being developed, funders may request a schedule from the sponsor to support the sponsor’s projections on the amount of equity that it will be able to raise from homebuyers to meet the TDCs. To accomplish this goal, this schedule would reflect, for each unit, the sales price, the amount of down payment required, the cash that each existing resident who is interested in purchasing a unit currently has available and can apply toward the down payment, and the source(s) of down-payment assistance that have been identified to help existing residents or other interested purchasers in meeting the downpayment requirements if their personal assets are insufficient. (e)
Notes to the Financial Pro Formas
In addition to other schedules that a sponsor might produce to assist potential funding sources in understanding a funding request, the sponsor also should provide detailed, explanatory notes with each financial pro forma. These notes should enable the persons evaluating the request to understand the assumptions and information relied upon by the sponsor when developing the pro formas. For example, the multiyear income and expense 䡲
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projection for a development that expects to receive a full property tax abatement for five years will simply reflect property taxes at zero for the first five years of operations and a significantly larger number (e.g., $40,000) in year six. The sponsor should provide notes to this pro forma that clearly state the basis for the zero property tax entry in years 1 to 5 and the basis for estimating the $40,000 in year 6. 12.3
THE DEVELOPMENT OF AFFORDABLE HOUSING: SIX CASE STUDIES
What follows are actual pro formas and project descriptions that were developed by six different nonprofit sponsors of affordable housing in order to secure project financing: 1. Rental housing for very-low-income using LIHTC. Manna, Inc., a Washington, DC sponsor of nonprofit housing, developed 35 units of rental housing for very-low-income people primarily using the federal low-income housing tax credit. 2. Preservation of at-risk housing for low-income people. National Housing Trust-Enterprise Preservation Corporation and the Piedmont Housing Alliance partnered to purchase a 150-unit family apartment building in Charlottesville, VA to keep it from being lost to the affordable housing stock. 3. Single-room occupancy (SRO) housing for adults with special needs. Foundation Communities, Inc., an Austin, Texas-based nonprofit developer, purchased and rehabilitated a nursing home into 85 single-room occupancy units for homeless, seniors, mentally ill, exoffenders, and recovering addicts. 4. Public housing for seniors. Community Preservation and Development Corporation (CPDC), a Washington, DC–area nonprofit developer, rehabilitated a 200-unit development for seniors without HOPE VI funding. 5. First-time homebuyer housing. Kentucky Mountain Housing Development Corporation (KMHDC), a rural southeast Kentucky nonprofit housing organization, built and sold 28 scattered-site homes for purchase by low-income families. 6. Lease-purchase housing for working families. Cleveland Housing Network, a Cleveland, Ohio consortium of nonprofits, developed a 180-unit scattered-site, lease-purchase project for very low-income families. All six sponsors were able to finance their projects by utilizing multiple sources of financing. Their financial pro formas comprise a sources and 䡲
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uses statement, a multiyear income and expense projection, and additional schedules as necessary. (a)
The Whitelaw Hotel, Washington, DC—Manna, Inc.
Reference information for this case study is found in Appendix 12A. Manna, Inc., a Washingtonbased nonprofit housing developer, is one of the most effective and innovative producers of affordable homeownership and rental housing in the nation. In 1992, Manna created the Whitelaw Hotel Limited Partnership in order to develop 35 units of rental housing for very-low-income families (families earning no more than 60 percent of the Washington area median income) at the site of a Washington landmark, the Whitelaw Hotel. Built in 1919 by developer and financier John Whitelaw Lewis, the hotel was unique in that it was financed entirely by black shareholders, designed by a black architect, and built by black tradesmen. In its prime, the hotel was a meeting place for such notable celebrities as Cab Calloway, Duke Ellington, Joe Louis, and others who frequented the hotel. The hotel and its surrounding neighborhood declined badly in the 1960s, and in 1981 a fire gutted the hotel and left it a hollow shell. In response to pleas from the community to resurrect the Whitelaw, Manna renovated the hotel into decent and affordable rent housing. The project was completed through the use of the low-income housing tax credit, the purchase of the land by the local government with favorable leaseback terms provided to Manna, and permanent long-term financing from a commercial bank and insurance company’s foundation, as described further below. The limited partnership form of ownership (Manna was the general partner with a 1 percent share, and the equity investors were the limited partners with a 99 percent share) was necessary in order to pass through the tax credits to the limited partners who provided the necessary equity for the project. A description of the Whitelaw Hotel, as provided by Manna, can be found in Exhibit 12A.1.
(i) Description of the Housing Development.
This project was financed by using many of the sources discussed in earlier chapters: (ii) Description of the Financing.
1. Low-income housing tax credits combined with historic tax credits. Approximately $2,720,521, or almost 63 percent of the project’s total development costs, were provided by equity investors through the use of the low-income housing tax credit in combination with the historic tax credit. The project was syndicated and the equity was generated through the National Equity Fund, Inc. (NEF), a subsidiary of the Local Initiative Support Corporation (LISC). 䡲
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2. Equity from Manna, itself ($100,000). 3. Permanent debt financing from an insurance company foundation. Permanent debt financing was secured from the Metropolitan Life Foundation (a $1,050,000 loan at 7.5 percent interest, amortized over 25 years). 4. Permanent debt financing from a commercial bank. Signet Bank provided a $250,000 loan at 10.90 percent interest, amortized over 25 years. 5. Grants and loans. Additional grant and loan funds were secured through the National Community Development Initiative (NCDI) and Manna, itself, including the deferral of fees, to provide gap financing for the project during construction. In addition to these diverse sources of funds, Manna was able to make the project affordable to very-low-income persons by reducing the TDCs. The costs of acquiring the property were incurred by a third party, who then agreed to lease the land back to Manna. Under the District of Columbia’s Land Acquisition for Housing Development Opportunities (LAHDO) program, the District purchased the land for $675,000, made approximately $125,000 of site improvements, and leased the land back to Manna for an annual rent of approximately 4 percent of the funds invested by the government in the property. The District’s cost to acquire and improve the land is not reflected in the sources and uses as a development cost to the property. In return for the District’s expenditure of over $800,000, the limited partnership agreed to set aside 25 percent of the units for families earning 50 percent or less of the area’s median income. (iii) Sources and Uses Statement. Exhibit 12A.2 is the sources and uses
statement developed by Manna for the acquisition and rehabilitation of the Whitelaw Hotel. Manna titles this pro forma “Project Development Costs and Financing.” The project’s total development costs of $4,322,516 are set out first, by cost category. The project’s multiple sources of financing, which also equal $4,322,516, are set out below the costs. This statement lists the sources of financing: Metropolitan Life ($1,050,000), Signet Bank ($250,000), deferred fees or loans from the general partner ($201,995), capital from the general partner ($100,000), and capital from the limited partners ($2,720,521). This last amount is the proceeds from the tax credit syndication. Exhibit 12A.3 is the multiyear income and expense projections for the Whitelaw Hotel. Manna titles this pro forma “Projected Annual Net Cash Flow.” This projection extends
(iv) Multiyear Income and Expense Projections.
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for the 15-year holding period required under the low-income housing tax credit program. As reflected in the second column of this Appendix, income and expenses are trended at 3 percent and 5 percent, respectively. This pro forma includes vacancy allowances as well as replacement and operating reserves (3 and 2 percent, respectively). (v) Other Schedules. Manna developed additional schedules to detail the tax credits that were generated by the project (Exhibits 12A.4–12A.5). One of these schedules, shown in Exhibit 12A.5, indicates how the eligible basis for the tax credit was determined; the applicable credit rate applied to the basis (the “9 percent credit,” given that the costs were incurred to substantially rehabilitate an existing property); the annual credit amount (multiplying the basis times the credit rate); and the distribution of this credit to the general and limited partners. The schedule also provides a breakdown as to the number of units set aside for lowincome use (35) and the number set aside for market rate use (0). Exhibit 12A.5 also was developed by Manna in order to show the total tax benefits expected to be generated by the project from the tax credits and operating losses. This appendix also reflects how these tax benefits will be allocated to the general and limited partners. (b)
Friendship Court Apartments, Charlottesville, Va—National Housing Trust/Enterprise Preservation Corporation and Piedmont Housing Alliance
Reference information for this case study is found in Appendix 12B. Located two blocks south of the Historic Charlottesville Open-Air Mall in historic downtown Charlottesville, Virginia, Friendship Court is a 150-unit family apartment community with all units reserved for low-income families. Over the past several years, the area surrounding Friendship Court has become a revitalized and vibrant retail, entertainment, and commercial district, with improving residential real estate as well. While a valuable and fully occupied affordable housing community, Friendship Court (then known as Garrett Square) was at risk for several reasons. While reasonably soundly constructed in the mid 1970s, it was showing its 25-year age and needed a major rehabilitation. The community had also unfortunately developed a reputation—somewhat undeserved—for drug and associated criminal activity. With the revitalization of Charlottesville moving toward Friendship Court, it was a valuable piece of real estate and its private owner had decided that his best strategy was to put the property up for sale. Leaders of the Charlottesville community were committed both to the preservation of affordable housing and to continued revitalization of
(i) Description of the Housing Development.
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downtown Charlottesville. To accomplish these goals, they needed to ensure that Friendship Court was maintained as an attractive, safe residential community for low-income residents. To achieve this goal, the National Housing Trust-Enterprise Preservation Corporation was asked to partner with the Piedmont Housing Alliance to purchase, rehabilitate, and manage Friendship Court. After two years of planning and assembling the necessary financing, the newly formed partnership purchased the property in October of 2002. Extensive rehabilitation work consumed 2003 and is now complete. An extensive resident services program was also instituted in 2003 and has grown in scope over the last year and a half. The success of this preservation project was due to a variety of successful partnerships and relationships: between the local government and local foundations, local and national nonprofits, the development team and local professional volunteers, and all working with the state Virginia Housing Development Authority, the federal Department of Housing and Urban Development, and the Federal Home Loan Bank of Atlanta. Each of these parties contributed both financially and by making accommodations in their programs to accommodate the needs of this affordable housing preservation project. Over 2003 and into early 2004, substantial renovation was completed at Friendship Court, including new roofs, windows, hardiplank siding, exterior doors, heat pumps, kitchens in most units, washers/dryers, garbage disposers, carpeting, community center with computer lab, playgrounds, parking lot paving, hot water heaters in most units, and considerable sidewalk replacement and repair and landscaping, including new entrances and replacement of excess paved parking areas with green space. The transformation has been dramatic. In addition to the physical rehabilitation of the property, a new resident services program was instituted with the hiring of a full-time resident services coordinator. After a year of operation, leaders in Charlottesville formed a new nonprofit services corporation, Urban Vision, Inc., to provide resident services on-site over the long term. Service programs provided to date include: after-school homework and tutoring classes sponsored by University of Virginia students as tutors, a special tutoring program for at-risk youth staffed by teachers from the local elementary school, GED classes for adult residents, job fairs sponsored by local employers, a monthly health luncheon sponsored by a local physician, tax preparation classes (particularly focusing on obtaining earned income tax credits for residents without losing a large percentage of the refund to commercial tax preparers), youth trips to University of Virginia athletic events sponsored by the University athletic department, and open computer room periods for residents to use and learn to use state-of-the-art computer equipment with Internet access. 䡲
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Friendship Court was essentially a $10 million-dollar project financed by a variety of local, state and federal sources, including:
(ii) Description of the Financing.
•
Assumption of an outstanding Virginia Housing Development Authority Loan (“VHDA”)($2.7 million).
•
VHDA permission to use existing reserves for rehabilitation ($600,000).
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Tax credit equity provided by Fannie Mae through the Enterprise Social Investment Corporation ($4.4 million).
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A grant from a local foundation ($500,000).
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A matching grant from the City of Charlottesville ($500,0000).
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A low-interest soft second loan from local foundation ($1.25 million).
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A grant from the Federal Home Loan Bank of Atlanta through Albermarle First Bank ($127,500).
(iii) Description of the Pro Forma Statements
1. Exhibit 12B.1 is the project’s sources and uses statement. 2. Exhibit 12B.2 is a summary of the projected income and expenses for the property over its first five years. (c)
Garden Terrace, Austin, TX—Foundation Communities, Inc.
Reference information for this case study is found in Appendix 12C. Serving adults with special needs, including the homeless, seniors, the mentally ill, ex-offenders, and recovering addicts, Garden Terrace SRO was constructed as the first single-room occupancy development in Austin, TX. Given its creative and independent financing, unique site selection, and breadth of services provided, the project is a model for effectively addressing special needs clients in urban areas, without stranding the development in blighted neighborhoods. Garden Terrace is a rehabilitated nursing home and features 85 separate units, each with private bath and kitchenette. One of the development’s key assets is its location, which is on a 6-acre site on a major transit corridor in a residential neighborhood of south Austin. Being outside of the downtown area enabled the developer access to more land to affordably develop high-quality housing with numerous amenities and open space, while retaining access by the residents to neighborhood services including grocery stores and city transportation systems. The
(i) Description of the Housing Development.
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project was completed with extensive community consultation and involvement, and an apparent minimization of “NIMBYism” endemic to many SRO developments. For example, zoning modifications required for construction were passed unopposed by community members, and there was ongoing input and support by the local neighborhood association. Such outreach to the local community is likely required for successful SRO development. As an SRO for special needs clients, Garden Terrace provides a variety of services for its residents. This includes long-term case management, job skills development, life-skills courses, alcohol and drug treatment, and other critical efforts. The building is designed to flexibly support a variety of programs, having the potential to hold up to 10,000 feet of common/program space. Among the 85 units, Foundation Communities adopted two methods of ensuring longterm affordability to its tenants. Fifty of the units are subsidized by HUD’s Section 8 Moderate Rehabilitation Program (with a ten-year contract for rental subsidy), and thus must be filled by homeless clients paying 30 percent of their income on rent. The remaining 35 units are reserved for residents with fixed incomes (such as the elderly and disabled), and pay a set rent of $300 per month. These residents must have an income greater than $450 per month. (ii) Description of the Financing. To finance construction of the project, Foundation Communities was able to avoid the use of tax credits and, to a significant extent, debt, and thus the restrictions associated with such financing (such as diversion of revenue to debt service instead of tenant services and rents). Instead, the $4.6 million Total Development Cost ($114 per square foot) rehabilitation was financed via government and private funds, with the assumption of some limited debt. The main sources of financing are:
1. HOME/CDBG funds: $1.8 million (0 percent interest, 60-year term, no payments required). 2. State Department of Housing and Community Affairs: $1 million (similar terms as HOME/CDBG funds). 3. Neighborhood Reinvestment Corporation: $355,700 (ten-year, 7 percent loan, paid monthly). 4. Grants from county and private donors: $625,000. 5. Federal Home Loan Bank Affordable Housing Program (AHP) Grant: $500,000. 6. Deferred Developer Fee: $200,000. 䡲
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(iii) Description of Pro Forma Statements
1. Exhibit 12C.1 is the Sources and Uses statement for the project as described in ii above. 2. Exhibit 12C.2 is a ten-year projected cash flow analysis of income and expenses for the property. The operating assumptions are set out in the statement such as a 2 percent increase in income each year, 8 percent vacancy and annual rate of expense increases at 2.7 percent. Note that no real estate taxes are included in the pro forma. Foundation Communities was able to reduce ongoing costs to enhance feasibility by being eligibility for this benefit. 3. Exhibit 12C.3 is an additional schedule that Foundation Communities entitled “Summary of Resident Statistics” to show supporters who it is serving and intends to serve with this development. (d)
The View (Edgewood Terrace III), Washington, DC—Community Preservation & Development Corporation (CPDC)
Reference information for this case study is found in Appendix 12D. In November 2001, CPDC purchased senior high-rise Edgewood Terrace III, from the District of Columbia Housing Authority, which had been operating it as public housing for very-low-income seniors and disabled persons earning well below 30 percent of area median income. DCHA retained ownership of the underlying land, which is leased to the owners of the building through a 99-year ground lease agreement. The high-rise contained 292 units, including 180 one-bedroom units and 112 efficiencies. However, the building had physically deteriorated to such a degree that a total gut rehab was necessary. CPDC’s redevelopment plan called for reconfiguration of the apartments into 200 one-bedroom units and for the creation of 20,000 square feet of common and community program space. The severity of the building’s physical problems required CPDC to get the support of an extraordinary variety of private and public funding sources. Private sector financing consisted of a letter of credit and tax credit equity from SunTrust Bank. The public sector financing consisted of tax-exempt bonds issued by the District of Columbia Housing Finance Agency (DCHFA), which qualified the project to receive 4 percent Low Income Housing Tax Credits (LIHTC), as well as a HUD Section 202 Capital Grant, a Modernization Funds Loan from the District of Columbia Housing Authority (DCHA), a Community Development Block Grant (CDBG) loan from the District of Columbia Department of Housing and Community Development (DC DHCD), and a Federal Home Loan Bank Affordable Housing Program grant (FHLB/AHP). One hundred and
(i) Description of the Housing Development.
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twenty-seven (127) newly reconfigured units are subsidized with a combination of project-based Section 8 vouchers and public housing operating subsidies, and the remaining 73 units are funded through the Section 202 Capital Advance Program. All of the units are affordable to residents earning up to 50 percent of median income. Construction, which took place in two phases and allowed 60 units to remain occupied during the process, was completed in August 2003. CPDC has expertise in complex and unique financing structures and was able to take advantage of its strong relationships with HUD and the various housing-related agencies in Washington, DC in order to generate the development and operating funding necessary to substantially rehabilitate this property to serve extremely low-income seniors. CPDC’s previous track record made the funders comfortable with providing large sums of money, knowing that the deal would be a success. CPDC’s previous experience working with residents to renovate properties in a way that encourages resident input and participation was important in getting these seniors involved in the process so that the renovations fully took into account their needs and desires. This project has enabled residents at Edgewood III to successfully age-in-place by providing programs and community space that specifically address the needs of the elderly. Residents have access to community meeting rooms, a day spa, a dining promenade, an entertainment theater, health care and support center, a library, and an arts/crafts/fitness center. For a description of Edgewood Terrace III (now called “The View”) see Exhibit 12D.1. Putting together all of the necessary funding was a challenge. At the time that the deal was put together, HUD 202 grant funds could not be combined with tax credit funds because the Section 202 property had to be owned by nonprofit entities. CPDC gained permission from HUD to subdivide the building into two ownership entities so that different financing and ownership structures could be applied to the building. Subsequently, a new law has been passed that allows the combination of tax credits and Section 202 financing. In order to maintain both of these important sources of funds, CPDC worked with the architect and the contractor to design the building in such a way that it could be effectively split into two discreet ownership spaces. Edgewood Seniors Preservation Corporation owns 36.5 percent of the square footage in the building and is a nonprofit corporation that was able to receive the HUD 202 grant funds. Edgewood Seniors Limited Partnership owns the remaining 63.5 percent of the space, and is a forprofit limited partnership as necessary to receive tax credits. Through an extensive cross-easement agreement, the property operates effectively with two ownership entities.
(ii) Description of the Financing.
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In order to keep the property affordable but well operated and maintained, CPDC worked with the District of Columbia Housing Authority to generate much-needed operating subsidies. Within Edgewood Seniors Limited Partnership (ESPC), 38 of the units are operating under a projectbased Section 8 contract, and 89 of the units are operating under an Annual Contributions Contract through which ESLP actually operates public housing units. The ESPC units are subsidized by a Project Rental Assistance Contract from HUD. Exhibit 12D.2 contains a detailed Sources and Uses of Funds Statement for the two individual transactions that compose this development: Edgewood Seniors Preservation Corporation (73 unit HUD 202) and Edgewood Seniors Limited Partnership (89 unit mixed finance transaction). The attachment also details the sources and uses for the combined 200-unit development as a whole. What follows is a narrative description of the sources of financing uses in each transaction. E DGEWOOD S ENIORS P RESERVATION C ORPORATION—73 UNITS (HUD S ECTION 202)
Edgewood Seniors Preservation Corporation (the “Corporation”) was organized by CPDC on August 10, 2000 as a District of Columbia nonstock, nonprofit corporation for the purpose of acquiring and operating a rental housing project under Section 202 of the National housing Act. The project is regulated by HUD as to the rent charges and operating methods. The Corporation also holds a 99-year ground lease from DCHA for 73 of the units.
Sources (Permanent) HUD Section 202 Capital Grant FHLB AHP TOTAL PERM. SOURCES
$6,571,400 $ 182,500 $6,753,900
Development 1. HUD Section 202 Capital Grant for $6,571,400 for development. The capital grant was utilized to pay for the substantial renovation of the building. The corporation executed a Use Agreement restricting use of the project to rental housing for eligible households as approved by HUD for a period of 40 years. The capital advance bears no interest and is not required to be repaid as long as the housing remains available to eligible very low—income households for a period of 40 years and in accordance with Section 202. 2. FHLB AHP grant for $182,500 for development. 䡲
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Operations 1. HUD PRAC (Project Rental Assistance Contract) for operations of in the initial annual amount of $300,468 ($343/unit/month). It is actually $395/unit/month less $52 for utility allowance. E DGEWOOD S ENIORS L IMITED P ARTNERSHIP—127 UNITS (89 PUBLIC HOUSING, 38 S ECTION 8)
Edgewood Seniors Limited Partnership (the “ESLP” or “Partnership”) was formed as a limited Partnership under the laws of the District of Columbia on July 31, 2000 and is the owner and operator of the 127 unit mixed-financed LIHTC component of the project. The general partner of ESLP is CPDC III Inc, a wholly owned subsidiary of the sponsor/developer, Community Preservation and Development Corporation. The operations of the property are governed by a regulatory agreement with the District of Columbia Housing Authority (DCHA) due to the fact that the DCHA ground leases the property for 99 years to the partnership and provides Public Housing Operating Subsidy for 38 units in the building (ACC). Through the use of tax-exempt financing for the construction of the property, the ESLP portion of the building qualified for and was allocated low-income housing credits pursuant to Internal Revenue Code Section 42 (“Section 42”), which regulates the use of the project as to occupant eligibility and unit gross rent, among other requirements. The project must meet the provisions of these regulations during each of 15 consecutive years in order to remain qualified to receive the credits. In addition, the partnership entered into a 30-year Extended Use Agreement with the District of Columbia. Under that agreement, the partnership is required to lease or hold for rental 100 percent of the units for qualifying tenants.
Sources (Permanent) SunTrust 4% LIHTC Equity DCHA Loan DC DHCD CDBG Loan FHLB AHP Loan Other Sources TOTAL PERM. SOURCES
$ 5,825,299 $ 7,000,000 $ 3,300,000 $ 317,500 $ 185,638 $16,628,437
Development Financing 1. Tax Credit Equity: All units are tax-credit eligible: $5,825,299 in equity from tax credits (4 percent bond). 䡲
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SunTrust Community Development Corporation purchased the project’s 4 percent LIHTC equity. The total investment amount was $5,825,299. Ten percent, or $582,530, was paid at closing. The rest of the pay-in schedule was: Installment 2: $4,077,709 at Substantial Completion of the 127 units owned by ESLP Installment 3: $582,530 Installment 4: $582,530 2. Bonds associated with tax credits for $8,000,000 (through DCHFA/ SunTrust). DC Housing Finance Agency (DCHFA) provided the project with $8,000,000 in tax-exempt bonds. The bonds were used during the construction phase only and brought with them 4 percent LIHTC. SunTrust Bank provided a letter of credit of $8,144,445 to enhance the bonds, and SunTrust Capital Markets was the remarketing agent. A swap was executed and locked the bond rate at 2.5 percent. The limited partnership paid the swap fees monthly which are the difference between the actual floating rate and the swap rate. In order to maximize tax credit basis, the bonds were drawn down after the DHCD loan had been used. Bonds could only be used for “good costs” or expenses that would go into tax credit basis. 3. DCHA loan for $7,000,000 for development (all interest and principal due at end of loan term). As part of the mixed-finance transaction that allowed for the ground lease of the building to the two ownership entities and provided public housing subsidies, the DCHA provided a $7 million loan to help pay for renovations. The source of these funds was a loan from the Bank of America to the Housing Authority securitized by the DCHA’s annual appropriation of capital funds. Principal plus interest (accruing at 1 percent) are due and payable at the end of the loan term (40 years). 4. DHCD loan for $3,300,000 for development (all interest and principal due at end of loan term). DHCD made a $3,300,000 loan of Community Development Block Grant (COBG) funds to the limited partnership and took a third deed of trust behind DCHFA and DCHA. The terms of the loan are 1 percent accrued interest only for 40 years. 5. FHLB AHP grant for $317,500 for development. CPDC applied for and received a $500,000 AHP direct subsidy for the project. SunTrust Bank in Baltimore was the immediate 䡲
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lender. These funds were drawn down in the predevelopment phase to pay for architecture, environmental, legal, and other expenses before closing. The Federal Home Loan Bank of Atlanta (FHLB) required that the funds be used by both ownership entities, which resulted in a prorated split of $317,500 for ESLP ($182,500 for ESPC). For tax credit purposes on the limited partnership, the subsidy took the form of a loan (AHP Lend Direct Subsidy) at 1 percent accrued interest only. Operations ESLP has two streams of rental subsidy through the DCHA: 1. HAP (Housing Assistance Payment—project based Section 8) contract for 38 units at an initial monthly rent of $819/unit/month. 2. DCHA ACC (Annual Contribution Contract—Public Housing) for 89 units at the initialrent of approximately $350/unit/month). It is important to note that the deal was underwritten assuming total rental income from ACC units of $450/unit/month. Due to reductions in federal ACC payments to the DCHA and a misunderstanding regarding the payment standards, rental income on the ACC units has fallen well below what was anticipated requiring significant cross subsidy from the Section 8 units. As is evident in the attached long-term operating pro forma (Exhibit 12D.3), this cross subsidy has indeed been the case during the first year’s operation and is anticipated to continue into the future. A $400,000 reserve fund was established out of proceeds from the development budget to provide a cushion against short falls in ACC funding. The Partnership can draw on these funds to cover operating deficits subject to the consent of the DCHA. (iii) Pro Forma Statements
1. Description of EWT II (Exhibit 12D.1) 2. Sources and Uses (Exhibit 12D.2) 3. Cash Flow Pro Forma (Exhibit 12D.3) (e)
Kentucky Mountain Housing Development Corporation (KMHDC) 30th Anniversary Project, Clay and Jackson Counties, KY
For reference information about this case study, see Appendix 12E. Kentucky Mountain Housing Development Corporation (KMHDC) commemorated its 30th anniversary
(i) Description of the Housing Development. 䡲
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of service to Southeastern Kentucky by constructing 28 scatter-site homes for purchase by low-income families. This region is one of the poorest in the nation, suffering from high unemployment, widespread health problems, and mountainous terrain, making affordable development difficult. KMHDC’s project has successfully provided homeownership opportunities to this population, who have traditionally been outside of the scope of most homeownership initiatives for low-income households. The average income for households served by this development is $11,846, which is below 50 percent of the area median income, in an area where the median income is far less than the national average. Additionally, construction costs in the region are generally high, because the mountainous terrain makes it unlikely to find flat sites for construction, and also makes it is difficult to obtain economies of scale from infrastructure such as septic systems, roadways, or other required utilities. In spite of these considerations, KMHDC was able to successfully develop modest and functional homes for the target population. The homes constructed rest on 28 separate sites and cost an average of $44,871 per unit ($52 per square foot) to build. KMHDC was able to ensure affordability of the homes through three tools: (1) a $10,000 perhouse write-down subsidy, (2) granting of low-interest housing loans from KMHDC’s longstanding revolving loan fund to provide financing for residents who could not find traditional financing, and (3) creative use of volunteer and local labor and materials. As a result, KMHDC was able to guarantee an average monthly housing payment of $181, or 20 to 32 percent of the household’s monthly income. In addition to developing homes that are affordable to very lowincome households, KMHDC provided extensive counseling services to prospective homeowners, to ensure homeownership readiness. This mandatory counseling included pre-purchase credit, budget, insurance, and home maintenance training, as well as post-purchase reviews of the owner ’s financial situation, in order to ensure that the home will be retained by the owner. In order to finance development of these homes (total TDC of $1,256,388 for 28 units), KMHDC successfully mined state, federal, and individual sources of funds. The following list highlights the main sources of development financing: (ii) Description of the Financing.
1. HOME Funds: $117,500 2. Kentucky Mountain Housing Development Corp. General Operating Funds: $590,000 3. Individual and Church Donations: $100,000 䡲
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4. Federation of Appalachian Housing Enterprises Construction Loan: $35,000 5. Proceeds from sales of Homes: $412,913 As with any homeownership development, the developer pays back the development financing from proceeds from the sale of the homes. Homeowners were able to purchase the homes and provide the funds needed to repay the development financing through a combination of grants and loans made to each homeowner including: 1. Grants from the: a. b. c. d. e.
Kentucky Housing Corporation, the state’s housing finance agency. USDA Housing Preservation Program. HUD’s HOME program (Kentucky’s Mountain Housing Homebuyer Project. Applachian Regional Commission. Proceeds of other homes sold by nonprofit developer.
2. Loans from: a. b. c. d.
A Federal Home Loan bank loan made to developer and relent to homeowners. Proceeds from sales of homes under the HOME CHDO program. HOME funds. Kentucky Housing Corporation loan funds for homebuyers.
(iii) Pro Forma Statements
1. Exhibit 12E.1 reflects the various sources and uses of funds for the project as described in Section 11 above. As this appendix shows, development financing was used to build the housing. The permanent financing is how each homebuyer is able to purchase a home and generate enough money to enable the developer to pay off any development financing. There is no multiyear operating expense pro forma because the units are being sold to individual homebuyers. (f)
Partnership 10 Lease Purchase Project, Cleveland, Ohio—Cleveland Housing Network
For reference information about this case study, see Appendix 12F. Partnership 10 was created as a comprehensive approach for offering stable, decent, affordable housing
(i) Description of the Housing Development. 䡲
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and hope to families living in poverty. A “typical” Partnership 10 Lease Purchase family is a single African-American woman with three children living on annual income of less than $7,500; 65 percent of the participants in this program earn 35 percent or less of the median income. An example of a typical family is a woman, formerly homeless, who has successfully completed a two-year transitional housing program and was selected as a Partnership 10 Lease Purchase family. She is a single mother with three children and is currently on public assistance. She is enrolled in the Family Development Program and is working to develop a self-sufficiency plan, which includes completing the G.E.D. and a job training program in the field of floral design. Partnership 10 was also created to offer very-low-income families their one and only opportunity to become a homeowner. In applying for the project, a family agreed to complete three homeownership training workshops and three home maintenance workshops, and also agreed to perform specific maintenance responsibilities. There is also a fundamental project condition requiring that a family be at a point of financial independence within seven years of its residency. This self-sufficiency requirement is both an incentive and a necessity; a family must have sufficient resources in order to take on the responsibility of homeownership. At the end of 15 years, the families can purchase their units for the $6,000 to 8,000 that will remain owed to the City of Cleveland. Through CHN’s Family Development Program, Partnership 10 families are given the opportunity to work intensely with a trained program “coach” over a two- to three-year period in developing a plan to move toward financial self-sufficiency. Partnership 10 is designed to assist lowincome families rise out of poverty, find opportunities for employment, and build a better future for their families. Partnership 10 was also created as a neighborhood revitalization agency. Of the 180 units involved in this project, 128 were vacant, scattered-site homes located in 12 Cleveland neighborhoods. The project is strategically impacting redevelopment in those neighborhoods. (ii) Description of the Financing.
This development was financed from
five sources: 1. HOME Investment Partnership Funds. $2,550,000 in HOME Investment Partnership dollars, from two different loans at 0.5 percent and 7.10 percent interest respectively with a 20-year term, were lent to the Partnership by Cleveland as a participating jurisdiction in this federal program. 2. Private Bank Loan. A $665,000, 15-year loan at 3.5 percent interest was provided by First Federal Bank, now Charter One of Ohio. 䡲
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3. Grants. The Partnership received $288,000 in grants from the city’s HWAP (Home Weatherization) grant program. These funds are federal funds passed through to the city. 4. Equity. The Partnership contributed its own equity contribution of $348,628 and received $4,135,294 from the Low Income Housing Tax Credit. (iii) Description of Pro Forma Statements
1. Sources and Uses Statement. The Sources and Uses Statement in Exhibit 12F.1 is the actual statement developed by the Partnership with the help of the tax credit syndicator, the Enterprise Social Investment Corporation. This statement reflects the sources of funds set out in the prior paragraph and clearly reflects how those funds were applied. Notice that the Partnership used $171,000 of development resources to prefund operating reserves. 2. Cash Flow Statement. The Cash Flow statement provided reflects the property’s operations over the life of the tax credits or 15 years. Year 16 is provided because year 1 was only part of a year. 3. Investor Limited Partner Share. Pages 5 and 6 of the Cash Flow statement actually provide the LIHTC investor with information about the flow and amount of tax benefits that will be generated by this project. 12.4
CONCLUSION
The six case studies presented here clearly reflect the complexities involved in developing affordable housing. They are proof that there is no one “right way” to present a project’s financial structure and projections. Each project secured the necessary financing, yet no two projects had pro formas that were structured or presented in the same or similar formats.
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A P P E N D I X
1 2 A
The Whitelaw Reference Information E XHIBIT 12A.1 Description of Proposed Very-Low-Income Rental Housing
GENERAL DESCRIPTION The Whitelaw Hotel at Thirteenth and “T” streets N.W. is an important landmark for Washington, DC. The Whitelaw was the premier hotel for AfricanAmericans in Washington, DC, during the first half of this century. Built in 1919 by developer and financier John Whitelaw Lewis, the Whitelaw Hotel was unique in that it was financed entirely by black shareholders, designed by a black architect, and built by black tradesmen. It was the first all black project of such a scale in the city’s history. The hotel was a centerpiece of the black cultural corridor along “U” Street. Notable celebrities such as Cab Calloway, Duke Ellington, Joe Louis, and many others stayed at the Whitelaw. The Hotel’s ballroom was a social center and gathering place of choice for community dances and other events. As the neighborhood declined in the sixties, so too did the Whitelaw. The 1968 riots nearly decimated the neighborhood, and the Whitelaw lost its allure as a landmark; it was housing mostly vagrants and prostitutes when it closed down in the early seventies. In 1981, a fire gutted the Whitelaw and left it a hollow shell. The community was unable to revive the landmark, and its historical value was the only thing that kept it from being torn down. In response to pleas from the community to resurrect the Whitelaw, Manna proposed an innovative strategy to restore it to its former majesty, and at the same time, renovate it for use as 35 units of affordable housing. To make this project work, Manna has pulled together an innovative financial package that has been hailed as a model of public/private partnership. The DC Department of Housing and Community Development has joined with Manna, the Local Initiatives Support Corporation’s National Equity Fund, the Metropolitan Life Foundation and Signet Bank in financing the $4 million project.
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E XHIBIT 12A.1 Description of Proposed Very-Low-Income Rental Housing (continued)
GENERAL DESCRIPTION The single most significant piece of financing necessary to make this project work is the $1.9 million of Low Income Housing and Historical Tax Credits (LIHTC), syndicated through the National Equity Fund. In order to comply with the requirements of the LIHTC, Manna must rent units in the Whitelaw to people with incomes below 60 percent of area median. Also, to comply with DC’s Land Acquisition for Housing Development Opportunities Program (LAHDO), nine of the Whitelaw units must be rented to people at 50 percent of area median.
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Acquisition—Land —Building Site Improvements Basic Construction/Bond Premium Construction Contingency 10.50% Architect—Design —Supervision Financing Costs & Fees Construction Interest Title & Recording Survey & Appraisal Lobby Furnishings Zoning Construction Period Real Estate Taxes Construction Period Insurance Construction Period Water & Sewer Other Construction Period Net Carrying Costs
Costs
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286 $64,688 6,857 4,200 1,514 1,614 2,972 971 407 714 343 343 329
$2,264,000 240,000 147,000 53,000 56,500 104,035 34,000 14,250 25,000 12,000 12,000 11,500
Per Unit (35 Units)
10,000
Development Budget NonDepreciable
12,000 11,500
$2,264,000 240,000 147,000 53,000 45,500 104,035 34,000 14,250 25,000 12,000
10,000
Residential Nonresidential
Depreciable Basis
Project Development Costs & Financing, Revised: 8/28/92
Sources and Uses Statement, Manna, Inc.
E XHIBIT 12A.2
$11,000
Amortized
Expensed
Legal: Transaction Organization Syndication Development Consultant Historic Preservation—Consultant Accounting Marketing & Leasing Contingency/Operating Reserve Partnership Management Fee Developer Fees Bridge Loan Interest Cost of Investor Note Financing TOTAL COSTS
Costs
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䡲 735,231 $4,322,516
350,000
18,000 15,000 19,000 104,000 10,000 5,000 30,000 53,000
Development Budget
21,007 $123,500
10,000
514 429 543 2,971 286 143 857 1,514
Per Unit (35 Units)
646,798 $718,798
53,000
$ 19,000
NonDepreciable
88,433 $3,529,718
350,000
104,000 10,000
5,000
Residential Nonresidential
Depreciable Basis
Project Development Costs & Financing, Revised: 8/28/92
Sources and Uses Statement, Manna, Inc. (continued)
E XHIBIT 12A.2
$61,000
30,000
5,000 15,000
Amortized
$5,000
$5,000
Expensed
389
䡲
201,995 100,000 2,720,521 $4,322,512
$1,050,000 250,000
Total
E XHIBIT 12A.2
(62.94% of Total) $1,501,995
201,995
$1,050,000 250,000
Non-Federal Loans & CDBG Other Federal Financing
LOAN TYPE DESIGNATORS: 1 = Amortizing; P&I, 2 = Interest Only, 3 = Deferred P&I
Tax Exempt Bonds
Type
Grants
Sources and Uses Statement, Manna, Inc. (continued)
Interest 8.00% ** Metropolitan & Signet form a combined first mortgage
Metropolitan Life** Signet** Third Mortgage Other/Grants Deferred Fees/GP Loans General Partner Capital Limited Partner Capital TOTAL FINANCING
Financing
c12.fm Page 389 Wednesday, March 15, 2006 4:29 PM
䡲
1 1
Loan Type
25 25
Term to Maturity (Years)
7.50% 10.90%
Annual Interest Rate
Terms
02/01/93 02/01/93
First Payment Date
390
䡲
TOTAL USES NET CASH FLOW
City Lease Payments Operating Reserve Replacement Reserve Deferred Developer Fees Principal Annual Partnership Management Fee Incentive Management Fee
USES Building Operating Expenses Real Estate Tax Expenses 1st Mortgage Principal Interest 2nd Mortgage Principal Interest 3rd Mortgage Principal Interest
Laundry and Parking EFFECTIVE GROSS INCOME
SOURCES Gross Residential Rental Income Vacancy (Residential) Gross Commercial Rental Income Vacancy (Comercial) Interest Income
Whitelaw ANNUAL RENT INCREASE ANNUAL EXPENSE INCREASE
c12.fm Page 390 Wednesday, March 15, 2006 4:29 PM
䡲 $ 8,000 33.33%
3.00% 2.00% $ 201,995
5.00%
5.00%
5.00%
3.00%
1991 1992
$ 252,064
$ 282,688
33,230 8,481 5,654 8,444
15,922 77,191 2,249 26,937
13,585 71,769 1,858 24,896
33,230 7,562 5,041 2,823
$ 104,580
5,941 $ 282,688
(14,566)
$ 291,313
1994
$ 91,300
5,768 $ 252,064
(12,963)
$ 259,259
1993
$ 291,169
33,230 8,735 5,823 11,272
17,158 75,955 2,507 26,679
$ 109,809
6,119 $ 291,169
(15,003)
$ 300,052
1995
Projected Annual Net Cash Flow Revised 8/28/92
$ 299,904
33,230 8,997 5,998 14,080
18,490 74,623 2,795 26,392
$ 115,299
6,303 $ 299,904
$ 309,054 (15,453)
1996
Multiyear Income and Expense Projection, Manna, Inc.
E XHIBIT 12A.3
$ 308,901
33,230 9,267 6,178 16,862
19,925 73,188 3,115 26,072
$ 121,064
6,492 $ 308,901
$ 318,325 (15,916)
1997
$ 318,168
33,230 9,545 6,363 19,612
21,472 71,641 3,472 25,715
$ 127,118
6,687 $ 318,168
$ 327,875 (16,394)
1998
$ 327,713
33,230 9,831 6,554 22,324
23,139 69,974 3,870 25,317
$ 133,474
6,887 $ 327,713
$ 337,711 (16,886)
1999
$ 337,545
33,230 10,126 6,751 24,990
24,935 68,178 4,314 24,873
$ 140,147
7,094 $ 337,545
$ 347,843 (17,392)
2000
TOTAL
Replacement Reserve
Accrued Interest @ 8% Compounded Accrued Loan Amount Amount Paid Interest/Principal Outstanding CASH ON HAND Operating Reserve
Deferred Developer Fee Principal
GENERAL PARTNER SHARE LIMITED PARTNER SHARE
Whitelaw ANNUAL RENT INCREASE ANNUAL EXPENSE INCREASE
c12.fm Page 391 Wednesday, March 15, 2006 4:29 PM
䡲
391
䡲
$ 53,000
53,000
INITIAL
$ 201,995
1.00% 99.00%
5.00%
3.00%
$ 53,000
$ 53,000
1991
$ 53,000
$ 53,000
1992
222,659
213,985
$ 65,603 $ 79,738
69,043 10,695
8,444
2,823
60,562 5,041
17,119 231,104
$ 213,985
1994
14,813 216,808
$ 201,995
1993
$ 94,296
77,778 16,518
229,200
11,272
17,813 240,472
$ 222,659
1995
Projected Annual Net Cash Flow Revised 8/28/92
$ 109,291
86,775 22,517
233,457
$ 229,200 18,336 247,536 14,080
1996
Multiyear Income and Expense Projection, Manna, Inc. (continued)
E XHIBIT 12A.3
$ 124,736
96,042 28,695
235,271
$ 233,457 18,677 252,133 16,862
1997
$ 140,645
105,587 35,058
234,481
$ 235,271 18,822 254,093 19,612
1998
$ 157,030
115,418 41,612
230,915
$ 234,481 18,758 253,239 22,324
1999
$ 173,908
125,545 48,363
224,398
$ 230,915 18,473 249,388 24,990
2000
392
䡲
TOTAL USES NET CASH FLOW
Interest City Lease Payments Operating Reserve Replacement Reserve Deferred Developer Fees Principal Annual Partnership Management Fee Incentive Management Fee
3rd Mortgage Principal
Interest
USES Building Operating Expenses Real Estate Tax Expenses 1st Mortgage Principal Interest 2nd Mortgage Principal
EFFECTIVE GROSS INCOME
Laundry and Parking
SOURCES Gross Residential Rental Income Vacancy (Residential) Gross Commercial Rental Income Vacancy (Comercial) Interest Income
Whitelaw ANNUAL RENT INCREASE ANNUAL EXPENSE INCREASE
c12.fm Page 392 Wednesday, March 15, 2006 4:29 PM
䡲 33.33%
3.00% 2.00% $ 201,995 $ 8,000
5.00%
5.00%
5.00%
3.00%
$ 347,671
6,953 27,603
10,430
33,230
4,808 24,379
$ 147,155 26,871 66,242
$ 347,671
7,307
(17,914)
$ 358,278
2001
$ 358,101
30,154
10,743 7,162
33,230
23,828
$ 154,512 28,957 64,156 5,359
839,546
7,526 $ 358,101
(18,451)
$ 369,026
2002
$ 368,844
8,804
33,230 11,065 7,377 23,830
23,214
$ 162,238 31,205 61,908 5,973
808,341
7,752 $ 368,844
$ 380,097 (19,005)
2003
$ 368,131 13,778
14,367 6,889
11,397 7,598
33,230
6,658 22,529
$ 170,350 33,628 59,485
657,341
7,984 $ 379,909
$ 391,500 (19,575)
2004
$ 376,467 14,839
15,085 7,420
11,739 7,826
33,230
21,766
$ 178,867 36,238 56,875 7,421
8,224 $391,307
$ 403,245 (20,162)
2005
Projected Annual Net Cash Flow Revised 8/28/92
$ 387,237 15,809
15,839 7,905
33,230 12,091 8,061
20,915
$ 398,459 16,679
16,631 8,339
12,454 8,303
33,230
9,219 19,967
$ 384,704 33,901
17,463 16,950
12,558 8,372
20,915
54,061 8,271
51,030 54,061 8,271
39,052
$ 207,061 39,052
$ 418,605
$ 440,637 (22,032)
2008
$ 197,201 42,083
8,725 $ 415,137
$ 427,803 (21,390)
2007
$ 187,811
8,471 $ 403,046
$ 415,342 (20,767)
2006
Multiyear Income and Expense Projection, Manna, Inc. (continued)
E XHIBIT 12A.3
$ 5,405,766 95,006
88,190 47,503
110,015 201,995
498,450 165,023
384,395
431,711 1,050,336 80,161
$ 2,347,986
107,279 $ 5,500,772
$ 5,677,361 (283,868)
Total
TOTAL
Interest/Principal Outstanding CASH ON HAND Operating Reserve Replacement Reserve
Accrued Loan Amount Amount Paid
Deferred Developer Fee Principal Accrued Interest @ 8% Compounded
GENERAL PARTNER SHARE LIMITED PARTNER SHARE
Whitelaw ANNUAL RENT INCREASE ANNUAL EXPENSE INCREASE
c12.fm Page 393 Wednesday, March 15, 2006 4:29 PM
䡲
393
䡲
$ 53,000
INITIAL 53,000
$ 201,995
1.00% 99.00%
5.00%
3.00%
$ 191,291
135,975 55,316
214,746
$ 224,398 17,952 242,350 27,603
2001
$ 209,196
146,718 62,478
201,772
$ 214,746 17,180 231,926 30,154
2002
$ 227,638
157,783 69,855
194,084
16,142 217,914 23,830
$ 201,772
2003
$ 246,634
169,180 77,454
209,610
$ 194,084 15,527 209,610
138 13,641
2004
$ 266,199
180,920 85,280
226,379
$ 209,610 16,769 226,379
$ 286,351
193,011 93,341
244,490
18,110 244,490
$ 226,379
158 15,651
148
2006
14,691
2005
Projected Annual Net Cash Flow Revised 8/28/92
Multiyear Income and Expense Projection, Manna, Inc. (continued)
E XHIBIT 12A.3
$ 307,108
205,465 101,643
264,049
264,049
$ 244,490 19,559
167 16,512
2007
$ 328,039
218,023 110,015
285,173
285,173
21,124
$ 264,049
33,562
339
2008
285,173
201,995
950 94,056
Total
394
䡲
LP SHARE—NEF’91 LP
GP SHARE
TAX SAVINGS/(COST) @ 34% TAX CREDITS—LIH Acquisition —LIH Construction —Historic Rehabilitation TOTAL TAX BENEFITS FROM PROJECT
NET TAXABLE PROFIT/(LOSS)
EXPENSES Building Operating Expenses Mortgage & Other Loan Interest Bridge Loan Interest Depreciation & Amortization Legal, Accounting, Consulting Accrued Interest Partnership Management Fee + Incentive TOTAL EXPENSES
EFFECTIVE GROSS INCOME
Whitelaw
c12.fm Page 394 Wednesday, March 15, 2006 4:29 PM
䡲 1.00% 99.00% 18 1,767
$ 1,785
1,785
7,143 707,170
703,944 $ 714,314
10,370
(85,528)
(89,580)
(90,470)
(30,500)
(5,250)
$ 376,697
3,180 312,817
3,416 338,186
$ 341,602
311,145
285,216 $ 315,976
30,457
30,760
3,402 336,822
$ 340,225
311,145
29,080
17,813
$ 372,268
17,119
14,813 $ 342,534
113,211
106,527 113,211
109,809 135,865
$ 291,169
1995
$ 30,500
104,580 137,368
$ 282,688
1994
$ 5,250
91,300 129,895
$ 252,064
1993
30,500
1992
250 5,000
1991 1996
3,387 335,277
$ 338,664
311,145
27,519
(80,938)
$ 380,842
18,336
112,961
115,299 134,245
$ 299,904
Projected Annual Profit/Loss Revised 8/28/92
E XHIBIT 12A.4
3,361 332,787
$ 336,149
311,145
25,004
(73,540)
$ 382,441
18,677
110,211
121,064 132,490
$ 308,901
1997
3,345 331,114
$ 334,458
311,145
329,324
3,327
$ 332,650
311,145
21,505
(63,250)
(68,588) 23,313
$ 390,964
18,758
110,211
133,474 128,521
$ 327,713
1999
$ 386,736
18,822
110,211
127,116 130,586
$ 318,168
1998
324,285
3,276
$ 327,561
311,145
16,416
(48,282)
$ 385,826
18,473
100,925
140,147 126,281
$ 337,545
2000
TAX CREDITS—LIH Acquisition
395
䡲
LP SHARE—NEF’91 LP
GP SHARE
—LIH Construction —Historic Rehabilitation TOTAL TAX BENEFITS FROM PROJECT
TAX SAVINGS/(COST) @ 34%
EXPENSES Building Operating Expenses Mortgage & Other Loan Interest Bridge Loan Interest Depreciation & Amortization Legal, Accounting, Consulting Accrued Interest Partnership Management Fee + Incentive TOTAL EXPENSES NET TAXABLE PROFIT/(LOSS)
EFFECTIVE GROSS INCOME
Whitelaw
c12.fm Page 395 Wednesday, March 15, 2006 4:29 PM
䡲 1.00% 99.00%
17,180 $ 393,831 (35,730)
17,952 $ 389,882 (42,211)
322,242 320,060
3,233 38,331
387
$ 38,718
$ 323,293
$ 325,497 3,255
25,929
311,145
12,789
16,142 8,804 406,460 (37,616)
100,925
162,238 118,351
$ 368,844
2003
311,145
12,148
100,925
100,925
14,352
154,512 121,214
$ 358,101
2002
147,155 123,851
$ 347,671
2001
14,606
148
$ 14,753
14,753
15,527 21,256 $ 423,302 (43,393)
100,925
170,350 115,244
$ 379,909
2004
13,339
135
$ 13,474
13,474
16,769 22,505 $ 430,937 (39,630)
100,925
178,867 111,871
$ 391,307
2005
Projected Annual Profit/Loss Revised 8/28/92 (continued)
E XHIBIT 12A.4
12,034
122
$ 12,155
12,155
18,110 23,744 $ 438,797 (35,751)
100,925
187,811 108,207
$ 403,046
2006
10,686
108
$ 10,794
10,794
19,559 24,971 $ 446,883 (31,746)
100,925
197,201 104,227
$ 415,137
2007
$
(414)
(4)
418
703,944
(418)
34,413 $ 417,376 1,229
100,925
207,061 74,977
$ 418,605
2008
4,080,435
41,217
3,111,451
306,257
1,715,618 5,000 264,049 135,693 $ 6,401,527 (900,755)
2,347,986 1,933,181
$ 5,500,772
Total
c12.fm Page 396 Wednesday, March 15, 2006 4:29 PM
THE WHITELAW REFERENCE INFORMATION
E XHIBIT 12A.5 Calculation of Tax Credits, Manna, Inc. CALCULATION OF TAX CREDITS Revised: 8/28/92
Whitelaw
Total DEVELOPMENT COSTS Less: Construction Period Bridge Interest Non-Depreciable Amortized Expensed Non-Residential Depreciation Basis Resident History Credit (Y/N) Disallowed Acquisition Basis Subtotal Eligible Basis Less: Allocable Grant Financing Allocable Federal Financing ELIGIBLE BASIS APPLICABLE FRACTION QUALIFIED CREDIT BASIS CREDIT RATE (8.76 locked-in on initial, not locked on additional)
4,322,516
Acquisition Construction 10,000
(88,433) (718,798) (61,000) (5,000)
Y Y
(703,944) (10,000) 2,735,341
2,735,341 × 3,555,944
ANNUAL CREDIT AMOUNT
311,902
× 311,145 311,145
GENERAL PARTNER SHARE LIMITED PARTNER SHARE
1.00% 99.00%
3,111 308,034
4,312,516
(88,433) (718,798) (81,000) (5,000)
(703,944) (10,000) 2,735,341
100.00%
4.00%
2,735,341 130.00% 3,555,944 8.75% 311,145 311,145 3,111 308,034
Applicable Fraction
Low Income Apartments Market Rate Apartments TOTAL APPLICABLE FRACTION Lesser of Low Income (Unit or Sq. Ft. %)
Number of Units
Fraction
Total Square Feet
35
100.00%
29,750
100.00%
35
100.00%
29,750
100.00%
100.00%
䡲
396
䡲
Fraction
c12.fm Page 397 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
A P P E N D I X
1 2 B
Friendship Court Reference Information E XHIBIT 12B.1 Friendship Court Sources and Uses
Sources Tax Credit Equity VHDA Loan Assumption Replacement Reserves Low Interest Soft Loan-Local Philantropists Grant—Local Philanthropists Grant—City of Charlottesville Federal Home Loan Grant Deferred Dev. Fee
$ 4,400,000 $ 2,700,000 $
600,000
$ 1,250,000 $
500,000
$
500,000
$ $
127,500 100,000
$10,177,500
Uses Property Acquisition Purchased Reserves Rehabiliation Development Reserves Developer Fee Resident Services Soft Costs Working Capital
$ 4,200,000 $ 600,000 $ 3,300,000 $ $
772,000 825,000
$ $ $
50,000 380,500 50,000
$22,000 Rehab per unit
$10,177,500
䡲
397
䡲
c12.fm Page 398 Wednesday, March 15, 2006 4:29 PM
FRIENDSHIP COURT REFERENCE INFORMATION
E XHIBIT 12B.2 Friendship Court Income and Expenses Over First Five Years
Eff. Gross Income Less Oper. Expenses Net Income Less Debt Service Cash Flow Debt Coverage Ratio
Stabilized Year 1
Year 2
Year 3
Year 4
Year 5
1,056,883 699,283 357,600 323,347 34,253 1.11
1,088,589 727,254 361,335 323,347 37,988 1.12
1,121,247 756,344 364,902 323,347 41,556 1.13
1,154,884 786,598 368,286 323,347 44,939 1.14
1,189,531 818,062 371,468 323,347 48,122 1.15
䡲
398
䡲
c12.fm Page 399 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
A P P E N D I X
1 2 C
Garden Terrace Reference Information E XHIBIT 12C.1 Garden Terrace SRO Sources and Uses Statement Sources of Funds Austin Housing Finance Corporation TX Dept. of Hsg & Comm. Affairs Federal Home Loan Bank - Atlanta FC Loan (of NR Grant- performing) FC Loan (of NR Grantnon-performing) Travis County Corporate Grants Charitable Foundations Individuals Proceeds from Sale of Medicaid Beds Credit from Roof Insurance Claim FC Loan Deferred Development Fee Proceeds from CoinMach
Amounts $1,775,750 $1,000,000 $ 500,000 $ 355,700 $ 108,300 $ 50,000 $ 20,000 $ 322,000 $ 130,433 $ 52,300 $ 42,767 $ 200,000 $ 8,750
TOTAL SOURCES
$4,566,000
Project Cost
$4,566,000
Uses of Funds Acquisition Costs Purchase price Title/escrow, recording fees
$1,058,222 $ 8,930
Total Acquisition
$1,067,152
䡲
399
䡲
Notes
c12.fm Page 400 Wednesday, March 15, 2006 4:29 PM
GARDEN TERRACE REFERENCE INFORMATION
E XHIBIT 12C.1 Garden Terrace SRO Sources and Uses Statement (continued) Uses of Funds Rebabilitation Costs Construction/Rehabilition General Conditions Sitework Masonry/Concrete Metals Wood Roofing & Flashings Doors & Windows Finishes
Amounts
$ 93,767 $ 153,157 $ 60,493 $ 5,291 $ 79,002 $ 72,317 $ 125,897 $ 440,346
Specialties
$
24,447
Equipment (appliances) Furnishings (window coverings) Mechanical Plumbing Electrical Taxes, Insurance, Overhead, Profit
$ 59,196 $ 3,327 $ 238,331 $ 569,275 $ 336,372 $ 152,720 $2,413,938
Subtotal Construction/ Rehabilitation Demolition/Asbestos work Other (landscaping and prints)
$ 182,970 $ 8,184
Total Renovation Costs
$2,605,092
Furniture, Fixtures, Equipment Security (equipment, locks, etc.) Signage Common Area/Office Furniture Unit Furniture Outdoor Furniture Other (office equipment and phone system)
Soft Project Costs Architectural Engineering Interior Design Consulting Legal Survey & Updates Appraisal
$ 34,795 $ 26,167 $ 82,866 $ 119,100 $ 7,403 $ 7,362 $ 277,694
$ 136,356 $ 60,734 $ 21,188 $ 7,254 $ 6,500 $ 2,320
䡲
400
䡲
Notes
(Metal Studs & Drywall, Ceramic Tile, Flooring, Paint) (Toilet Accessories, Mailbox, Interior Signage)
(Saw Cut, HVAC, Fire Sprinkler)
(Rizzo’s Construction Contract)
c12.fm Page 401 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
E XHIBIT 12C.1 Garden Terrace SRO Sources and Uses Statement (continued) Uses of Funds Phase I/Asbestos/Lead-Based Paint Report Property insurance - BIG Insurance Permits, Inspections, Plan Review Developer Fee Construction Period Expenses (utilities, insurance, permits, marketing) Operating Reserve
TOTAL USES of FUNDS Per Unit Costs, 85 Units
Amounts $ 9,268 $ 810 $ 75 $ 200,000
$ 119,558 $ 52,000 $ 616,062 $4,566,000 $ 53,718
䡲
401
䡲
Notes
85
Income Assumptions % Rate of Annual Increa Gross Residential Rents Laundry, Parking Less Subsidy on 35 units Less: Vacancy % of Gross Rent Other: Total Effective Gross Income Expense Assumptions Percentage Rate of Ann Management Fee: % of Gross Rent Legal, accounting & Audit Advertising Gas & Electric Water, Sewer, Waste Removal Supplies Payroll Insurance Pest Control Maintenance/Repair Real Estate Taxes Local & State Assessments Other: Landscaping/grounds maint
Total units:
E XHIBIT 12C.2
2.7% 5.31%
402
䡲
25,675 10,270 1,027 61,415 26,368 10,547 1,055 63,073 27,080 10,832 1,083 64,776
27,811 11,125 1,112 66,525
28,562 11,425 1,142 68,321
29,333 11,733 1,173 70,166
30,125 12,050 1,205 72,060
30,939 12,376 1,238 74,006
31,774 12,710 1,271 76,004
10 10 10 10
23,000 23,621 24,259 24,914 25,586 26,277 26,987 27,715 28,464 29,232 10 4,500 4,622 5,280 4,746 5,423 4,874 5,569 5,006 5,719 10 5,141 159,000 163,293 167,702 172,230 176,880 181,656 186,561 191,598 196,771 202,084 10 21,000 21,567 22,149 22,747 23,362 23,992 24,640 25,305 25,989 26,690 10 1,100 1,130 1,291 1,160 1,326 1,192 1,361 1,224 1,398 10 1,257 35,700 36,664 37,654 38,670 39,715 40,787 41,888 43,019 44,181 45,373 10 0 0 0 0 0 0 0 0 0 0 0 500 514 587 527 603 542 619 556 635 10 571 8,500 8,730 9,973 10,243 10,519 10,803 10 8,965 9,207 9,456 9,711
25,000 10,000 1,000 59,800
437,455 446,204 455,128 464,231 473,516 482,986 492,646 502,499 512,548 522,799 10
471,060 480,481 490,091 499,893 509,890 520,088 530,490 541,100 551,922 562,960 10 4,080 4,162 4,595 4,245 4,687 4,330 4,780 4,416 4,876 4,505 0 0 0 0 0 0 0 0 0 8.0% (37,685) (38,438) (39,207) (39,991) (40,791) (41,607) (42,439) (43,288) (44,154) (45,037) 0 0 0 0 0 0 0 0 0 0 0 0
2.0%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Garden Terrace Pro Forma Income/Expense Statement Project Name: Garden Terrace
c12.fm Page 402 Wednesday, March 15, 2006 4:29 PM
䡲
85
Other: compliance software and training Operating Reserves Replacement Reserves per unit per year: Total Expenses Op. Cost/Unit Net Operating Income Debt Service 1 Debt Service 2 Debt Service Coverage Ratio Cash Flow Residual Receipts Pymt to: Net Cash Flow
Total units:
E XHIBIT 12C.2
$4,416
12,545
1.25 12,545 11,734
1.24 11,734 10,839
1.22 10,839 9,858
1.20 9,858 8,786
1.18 8,786
7,621
1.15 7,621
6,357
1.13 6,357
4,992
1.10 4,992
3,521
1.07 3,521
1,941 10
1.04 10 1,941 10
5,000 5,135 5,867 5,274 6,025 5,416 6,188 5,562 6,355 10 5,712 0 0 0 0 0 0 0 0 0 0 0 $250 21,250 21,250 21,250 21,250 21,250 21,250 21,250 21,250 21,250 21,250 10 375,350 384,911 394,730 404,813 415,170 425,806 436,729 447,946 459,467 471,299 10 62,105 61,294 60,399 59,417 58,346 57,180 55,917 54,552 53,081 51,500 10 49,560 49,560 49,560 49,560 49,560 49,560 49,560 49,560 49,560 49,560 10 0 0 0 0 0 0 0 0 0 0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Garden Terrace Pro Forma Income/Expense Statement (continued) Project Name: Garden Terrace
c12.fm Page 403 Wednesday, March 15, 2006 4:29 PM
䡲
403
䡲
c12.fm Page 404 Wednesday, March 15, 2006 4:29 PM
GARDEN TERRACE REFERENCE INFORMATION
E XHIBIT 12C.3 Summary of Resident Statistics
Number Referral Source ARCH Caritas TV news Salvation Army Church Friends/family VA Lifeworks Foundation Communities MHMR Other: Aus. Women & Childrens Shelter, Goodwill, Newspaper, Family Eldercare, Casa Marianella, Austin Advocate, McCabe, Area Agency on Aging, Aids Services of Aus., Word of mouth, TX Dept. of HHS - Deaf, apts., Austin Recovery, Blackland Community Cntr, Referral service, N/A
22 12 8 5 5 5 5 3 2 2 16
26% 14% 9% 6% 6% 6% 6% 4% 2% 2% 19%
TOTAL
85
100%
TOTAL
38 13 5 12 2 6 2 7 85
45% 15% 6% 14% 2% 7% 2% 8% 100%
10 11 10 29 3 2 14 5 1
12% 13% 12% 34% 4% 2% 16% 6% 1%
85
100%
Last Place of Residence Shelter/streets Apartment/house Apartment-being evicted Transitional Hsg. Boarding Home Living w/friends Hospital/Trt Center Not fit for hab - cars
How Long Homeless 1–3 months 3–6 months 6 mos–1 year 1–5 years 5–10 years 10 + years Not homeless Evicted Living in a place unfit for habitation TOTAL
䡲
404
Percentage
䡲
c12.fm Page 405 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
E XHIBIT 12C.3 Summary of Resident Statistics (continued)
Number Disabling Condition Substance Abuse Mental Health Other Disability/Unknown TOTAL Working Minimum wage ($5.15–7) $7–10 $10 and above Self-employed Unknown TOTAL Other Friend Paying Rent Receiving Caritas Subsidy Receiving Govt. Assistance (e.g., SSI, VA, Workers Comp) 1 2
48% of residents working Percentage of all units
䡲
405
䡲
Percentage
12 19 20
14% 22% 24%
51
60%
13 19 5 1 3
32% 46% 12% 2% 7%
41
100%1
8 21
9%2 25%2
21
25%2
c12.fm Page 406 Wednesday, March 15, 2006 4:29 PM
THE VIEW REFERENCE INFORMATION
A P P E N D I X
1 2 D
The View Reference Information E XHIBIT 12D.1
DESCRIPTION OF EWT III Edgewood Terrace began as a modern planned community with three high rises and a series of garden apartments built on 16 acres in 1971. A good location, rents serving a range of incomes, new construction, and expert property management drew residents to the property. But by 1991, after changes in ownership and property management and those involved with drugs and crime moving in and taking control, the dream had become a nightmare. Roofs leaking, elevators not working, and water leaking from the pipes serving heat, air conditioning, baths, and kitchens were the least of the residents’ problems, for what once had been a haven had become rife with violence, crime, and drugs. A 24-hour open-air drug market operated in full view with drug dealers controlling the outdoor spaces, hallways, and access to the buildings. Residents were fearful for their lives yet desperate for an affordable place to live within their community. Edgewood Terrace had become housing of last resort. Given the overwhelming problems, some in the government believed the only solution lay with moving the residents out and razing the property. However, Community Preservation and Development Corporation (CPDC) believed that the best solution lay elsewhere and was willing to tackle the challenge of Edgewood Terrace. This willingness stemmed from the vision CPDC had for the property: The bricks and mortar would be fundamentally sound if repaired and the social issues could be addressed by working directly with the residents. Residents were those living on welfare or minimum wage. Parents were separated from their children while working long hours in dead-end jobs. Others were earning a good living selling drugs. Few had any opportunity to raise themselves out of the nightmare that had become their existence. Yet the potential for change remained. Rogerline Nicholson had moved in when Edgewood Terrace was new and stayed even when it deteriorated into a blight on the neighborhood. She held fundraisers, contacted government officials, and would give tours to anyone and everyone she thought might help effect change to her home. So with the property purchased, CPDC studied the needs of the residents to incorporate them into the plans for renovation and programs to bring the residents opportunities to enter the economic mainstream. CPDC understands that having a solid roof over one’s head or even attractive grounds does not provide the true safety that knowledge and job skills can give an individual. The residents themselves spoke of security not just in the physical premises, but in garnering the support to assess their skills, seek training, and secure jobs that would 䡲
406
䡲
c12.fm Page 407 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
E XHIBIT 12D.1
DESCRIPTION OF EWT III (CONTINUED) lead to long-term growth and fulfillment. In response, CPDC established programs in youth development, career training and skill enhancement, and community empowerment, all enhanced by technology that continues to enable residents to effect a lasting change today. However, communities do not merely comprise the young mothers or the upwardly mobile. Many Edgewood residents had moved in when the property was newly built and now were 30 years older. Edgewood Terrace was home to them. They wanted it fixed, and they wanted to stay. The elderly residents can provide valuable perspective and wisdom to their neighbors. Living cannot be rushed nor forced; the years will pass as they will. And often, it is the seasoning of life that proves the most flavorful and ultimately most useful. CPDC understands that the elderly have their own needs and desires and have worked to establish a safe haven for them as well. Edgewood III stands as a testament to collaboration from finance to construction and an inspiration for the future through the technological, medical, and nurturing programs, both current and planned, available to the residents.
䡲
407
䡲
408
䡲
TOTAL CONST. SOURCES
4% LIHTC Equity DCHA Loan City Contribution— DHCD FHLB AHP Investment Income Devel Fee paid w/ final equity Accrued Interest
Construction Tax-Exempt Bonds
$ 1,339,172 $ 62,671
$16,628,400
$ 10,545 $ 493
-
$ $ $
$ 3,300,000 $ 317,500 $ 122,967
$ 130,932
25,984 2,500 968
$ $ $ 62,992 4,587 22,863
PU
$ 8,000,000 $ 582,530 $ 2,903,560
Total
TOTAL CONST. SOURCES
FHLB AHP
Construction Section 202 Capital Grant
Sources of Funds
-
182,500
$ 6,753,900
$
$ 6,571,400
Total
$ 92,519
-
$ 2,500
$ 90,019
PU
TOTAL CONST. SOURCES
4% LIHTC Equity DCHA Loan City Contribution— DHCD FHLB AHP Investment Income Devel Fee paid w/ final equity Accrued Interest Section 202 Capital Grant
Construction Tax-Exempt Bonds
Sources of Funds
$ 23,382,300
$ 6,571,400 $ -
$ 1,339,172 $ 62,671
$ 3,300,000 $ 500,000 $ 122,967
$ 8,000,000 $ 582,530 $ 2,903,560
Total
200 units
73 units = 73 Section 202
Sources of Funds
Edgewood Terrace III High Rise— Combined
Edgewood Terrace III High Rise—Section 202
Edgewood Terrace III High Rise—Public Housing 127 units = 89 public housing + 38 Section 8
Sources & Uses
Sources & Uses
Edgewood Terrace III Sources and Uses
E XHIBIT 12D.2
Sources & Uses
c12.fm Page 408 Wednesday, March 15, 2006 4:29 PM
䡲
409
䡲 $ 130,933
$ 16,628,437
-
$ 3,300,000 $ 317,500 $ 122,967 $ 62,671
City Contribution— DHCD FHLB AHP Investment Income Accrued Interest
TOTAL PERM. SOURCES
$ 25,984 $ 2,500 $ 968 $ 493
$ 5,825,299 $ 7,000,000 $ 45,868 $ 55,118
PU
DCHA Loan
Permanent 4% LIHTC Equity
Total
TOTAL PERM. SOURCES
FHLB AHP
Permanent Section 202 Capital Grant
Sources of Funds
-
182,500
$ 6,753,900
$
$ 6,571,400
Total
$ 92,519
-
$ 2,500
$ 90,019
PU
TOTAL PERM. SOURCES
City Contribution— DHCD FHLB AHP Investment Income Accrued Interest Section 202 Capital Grant
DCHA Loan
Permanent 4% LIHTC Equity
Sources of Funds
$ 23,382,337
$ 6,571,400 $ -
$ 3,300,000 $ 500,000 $ 122,967 $ 62,671
$ 5,825,299 $ 7,000,000
Total
200 units
73 units = 73 Section 202
Sources of Funds
Edgewood Terrace III High Rise— Combined
Edgewood Terrace III High Rise—Section 202
Edgewood Terrace III High Rise—Public Housing 127 units = 89 public housing + 38 Section 8
Sources & Uses
Sources & Uses
Edgewood Terrace III Sources and Uses (continued)
E XHIBIT 12D.2
Sources & Uses
c12.fm Page 409 Wednesday, March 15, 2006 4:29 PM
䡲
410
䡲
$ 54,061 $ 11,454,781 $ 621,341 $ 347,075 $ 794,588 $ 170,500 $ 1,400,492 $ 1,785,563 $ 16,628,400 $
Uses of Funds Acquisition Construction Architectural Prof. Services and Fees Financing Partnership Expenses Carrying Costs Other Fees TOTAL USES
EXCESS (GAP) 37
Total
$ -
$ 426 $ 90,195 $ 4,892 $ 2,733 $ 6,257 $ 1,343 $ 11,027 $ 14,060 $ 130,932
PU
EXCESS (GAP)
Uses of Funds Acquisition Construction Architectural Prof. Services and Fees Financing Entity Formation Carrying Costs Other Fees TOTAL USES
Sources of Funds
$
-
$ 42,978 $ 5,631,622 $ 351,368 $ 2,300 $ 71,000 $ 5,000 $ 152,949 $ 496,684 $ 6,753,900
Total $ 589 $ 77,146 $ 4,813 $ 32 $ 973 $ 68 $ 2,095 $ 6,804 $ 92,519
PU
-
EXCESS (GAP)
Uses of Funds Acquisition Construction Architectural Prof. Services and Fees Financing Partnership Expenses Carrying Costs Other Fees TOTAL USES
Sources of Funds
$
37
$ 97,039 $ 17,086,403 $ 972,709 $ 349,375 $ 865,588 $ 175,500 $ 1,553,441 $ 2,282,247 $ 23,382,300
Total
200 units
73 units = 73 Section 202
Sources of Funds
Edgewood Terrace III High Rise— Combined
Edgewood Terrace III High Rise—Section 202
Edgewood Terrace III High Rise—Public Housing 127 units = 89 public housing + 38 Section 8
Sources & Uses
Sources & Uses
Edgewood Terrace III Sources and Uses (continued)
E XHIBIT 12D.2
Sources & Uses
c12.fm Page 410 Wednesday, March 15, 2006 4:29 PM
䡲
411
䡲
PUBLIC HOUSING INCOME Gross Potential Public Housing (Trending @ 2.5%) Estimated Tenant Payment DCHA ACC Subsidy
SECTION 202 NET OPERATING INCOME PH Units = Rent = 89 $ 391 $ 111 $ 280
250
1,013 288 446 936 140 300 4,409
73 $ 426 $ 111 $ 315
Maintenance Expenses and Contracts Maintenance Payroll Protection RE Tax Escrow/Payroll Taxes/Misc. Taxes and Permits Insurance Community Programs - Services Total
202 Units = Rent=
LP Units = 127
438,470 124,695 313,775
(2,984)
19,550
79,216 22,521 34,877 73,195 10,948 23,460 360,342
1,486 10,322 3,910 21,270 938 2,346 10,244 938 18,845 45,825
396,023 103,278 292,745 (3,960) (19,801) 4,647 376,909
2005
288,968 242,662
6moAnnlzd
(144,302)
10,888
62,078 65,407 55,627 32,909 16,148 0 428,429
329 35,025 4,703 35,490 992 8,550 4,618 5,130 37,044 64,379
300,278 167,693 132,585 (271) (9,081) 4,089 295,015
2005 Actual
Init/ Projected 12moYTD
822,240
(4,267)
21,900
40,828 44,421 67,764 25,535 21,152 21,900 385,901
1,656 19,521 3,936 21,171 1,020 8,500 4,632 9,209 34,514 60,141
405,588 128,772 276,816 (1,500) (7,512) 6,958 403,534
2006 Budget/ Projection
449,432 127,813 321,619
(4,416)
22,667
42,257 45,976 70,136 26,429 21,892 22,667 399,407
1,714 20,204 4,074 21,912 1,056 8,798 4,794 9,531 35,722 62,246
3.00% 407,904 106,377 301,527 (4,079) (20,395) 4,786 388,216
2007 2
460,668 131,008 329,660
(20,005)
23,460
43,736 47,585 72,590 27,354 22,659 23,460 396,407
1,774 20,911 4,216 22,679 1,093 9,105 4,962 9,865 19,993 64,425
3.00% 420,141 109,568 310,573 (4,201) (21,007) 4,930 399,862
2008 3
EDGEWOOD III SENIOR HIGH RISE LIMITED PARTNERSHIP - STABILIZED CASH FLOW PRO FORMA
PUPA 19 132 50 272 12 30 131 12 42 586
Replacement Reserve
E XHIBIT 12D.3 Edgewood Terrace III Pro forma
SECTION 202 EXPENSES (Trending @3.5%) Advertising and Marketing Office Salary Office Supplies Expense Managers Salaries Legal Expense Audit Expense Telephone/Fax/Computer/Network Miscellaneous Admin Expense Mgmt.Fee (5%) Common Area Utility Expense
SECTION 202 INCOME Gross Potential Rent Estimated Tenant Payment PRAC Subsidy Bad Debt (1%) Vacancy (5%) Other Revenue ($5 PUPM) Effective Gross Income
Total Senior High Rise Units = 200
c12.fm Page 411 Wednesday, March 15, 2006 4:29 PM
䡲
472,185 134,283 337,901
(22,604)
24,281
45,267 49,250 75,131 28,311 23,452 24,281 410,181
1,836 21,643 4,364 23,473 1,131 9,424 5,136 10,210 20,593 66,680
3.00% 432,745 112,855 319,890 (4,327) (21,637) 5,078 411,858
2009 4
483,989 137,640 346,349
(25,352)
25,131
46,851 50,974 77,761 29,302 24,272 25,131 424,435
1,900 22,401 4,517 24,294 1,170 9,754 5,315 10,568 21,211 69,014
3.00% 445,728 116,241 329,487 (4,457) (22,286) 5,230 424,214
2010 5
496,089 141,081 355,008
(28,254)
26,010
48,491 52,758 80,482 30,328 25,122 26,010 439,184
1,967 23,185 4,675 25,145 1,211 10,095 5,501 10,937 21,847 71,429
3.00% 459,099 119,728 339,371 (4,591) (22,955) 5,387 436,940
2011 6
508,491 144,608 363,883
(31,318)
26,921
50,188 54,605 83,299 31,389 26,001 26,921 454,446
2,036 23,996 4,838 26,025 1,254 10,449 5,694 11,320 22,502 73,929
3.00% 472,872 123,320 349,553 (4,729) (23,644) 5,548 450,049
2012 7
521,203 148,224 372,980
(34,552)
27,863
51,945 56,516 86,215 32,488 26,911 27,863 470,239
2,107 24,836 5,008 26,935 1,298 10,814 5,893 11,716 23,178 76,517
3.00% 487,059 127,020 360,039 (4,871) (24,353) 5,715 463,550
2013 8
412
䡲 7,957 5,305 52,471
Proposed Share of Cash Flow Limited Partner Annual Fee (Trending at 3%) GP - Incentive Management Fee (Trending at 3%) Housing Authority (Balance)
0
65,732
LIMITED PARTNERSHIP NET CASH FLOW
#REFI
CASH FLOW AFTER DEBT SERVICE
34,011
2,585 17,958 6,802 37,004 1,633 4,081 17,822 1,633 35,828 79,723 137,814 39,181 60,676 87,526 19,046 40,814 26,700 616,827
315,238 753,708 (7,537) (37,685) 8,084 716,570
DEBT SERVICE DHCD CDBG (Accural/Interest Only)
250
PUPA 19 132 50 272 12 30 131 12 268 586 1,013 288 446 643 140 300 300 4,643
38 $ 658
2005
65,732
Sec. 8 Units = Rent=
LP Units = 127
0
7,500 5,000 75,546
88,046
0
88,046
38,014
796 7,684 10,022 666 866 7,200 8,002 16,326 51,100 86,760 119,516 66,560 97,886 142,532 72,428 (36,000) 0 652,344
290,610 822,240 (2,292) (50,298) 8,754 778,404
2005 Actual
Init/ Projected 12moYTD
LIMITED PARTNERSHIP NET OPERATING INCOME
Replacement Reserve (Trending @ 3.5%)
E XHIBIT 12D.3 Edgewood Terrace III Pro forma (continued)
0
7,500 5,000 32,634
45,134
0
45,134
38,100
2,580 48,789 10,812 43,260 3,024 8,500 12,912 15,491 60,960 66,194 106,713 88,284 96,839 87,912 32,472 36,000 0 720,742
822,240 (4,116) (24,672) 10,524 803,976
2006 Budget/ Projection
0
8,195 5,464 75,239
88,898
#REFI
88,898
35,202
2,675 18,587 7,040 38,300 1,690 4,224 18,446 1,690 36,726 82,513 142,638 40,552 62,800 90,589 19,713 42,242 0 610,425
323,119 772,551 (7,726) (38,628) 8,327 734,524
2007 2
0
8,441 5,628 71,002
85,071
#REFI
85,071
36,434
2,769 19,237 7,287 39,640 1,749 4,372 19,091 1,749 37,646 85,401 147,630 41,972 64,998 93,760 20,403 43,721 0 631,424
331,197 791,865 (7,919) (39,593) 8,576 752,929
2008 3
EDGEWOOD III SENIOR HIGH RISE LIMITED PARTNERSHIP - STABILIZED CASH FLOW PRO FORMA
LIMITED PARTNERSHIP EXPENSES (Trending @ 3.5%) Advertising and Marketing Office Salary Office Supplies Expense Managers Salaries Legal Expense Audit Expense Telephone/Fax/Computer/Network Miscellaneous Admin Expense Mgmt.Fee (5%) Common Area Utility Expense Maintenance Expenses and Contracts Maintenance Payroll Protection RE Tax Escrow/Payroll Taxes/Misc. Taxes and Permits Insurance Community Programs - Services DCHA Asset Management Fee (Public Housing Units Only) Total
SECTION 8 INCOME Gross Potential Section 8 (Trending @ 2.5%) GROSS POTENTIAL LIMITED PARTNERSHIP INCOME Bad Debt (1%) Vacancy (5%) Other Revenue ($5 PUPM) Effective Gross Income
Total Senior High Rise Units = 200
c12.fm Page 412 Wednesday, March 15, 2006 4:29 PM
䡲
0
8,695 5,796 66,445
80,936
#REFI
80,936
37,709
2,866 19,910 7,542 41,027 1,810 4,525 19,760 1,810 38,590 88,390 152,797 43,441 67,273 97,041 21,117 45,251 0 653,150
339,477 811,661 (8,117) (40,583) 8,834 771,795
2009 4
0
8,955 5,970 61,553
76,479
#REFI
76,479
39,029
2,966 20,607 7,806 42,463 1,873 4,683 20,451 1,873 39,557 91,484 158,145 44,961 69,627 100,438 21,856 46,835 0 675,627
347,964 831,953 (8,320) (41,598) 9,099 791,134
2010 5
0
9,224 6,149 56,310
71,683
#REFI
71,683
40,395
3,070 21,328 8,079 43,950 1,939 4,847 21,167 1,939 40,548 94,686 163,680 46,535 72,064 103,953 22,621 48,474 0 698,880
356,663 852,752 (8,528) (42,638) 9,372 810,958
2011 6
0
9,501 6,334 50,698
66,533
#REFI
66,533
41,809
3,177 22,075 8,362 45,488 2,007 5,017 21,908 2,007 41,564 98,000 169,409 48,164 74,587 107,591 23,413 50,170 0 722,938
365,579 874,070 (8,741) (43,704) 9,653 831,279
2012 7
0
9,786 6,524 44,700
61,010
#REFI
61,010
43,272
3,289 22,848 8,654 47,080 2,077 5,193 22,675 2,077 42,605 101,430 175,338 49,849 77,197 111,357 24,232 51,926 0 747,827
374,719 895,922 (8,959) (44,796) 9,942 852,109
2013 8
413
䡲 534,234 151,929 382,304
89 $ 391 $ 111 $ 280
PUBLIC HOUSING INCOME Gross Potential Public Housing (Trending @ 2.5%) Estimated Tenant Payment DCHA ACC Subsidy PH Units = Rent =
(37,963)
28,838
53,763 58,494 89,232 33,625 27,853 28,838 486,582
2,181 25,705 5,183 27,878 1,343 11,193 6,099 12,126 23,873 79,195
3.00% 501,670 130,830 370,840 (5,017) (25,084) 5,886 477,457
2014 9
SECTION 202 NET OPERATING INCOME
250
1,013 288 446 936 140 300 4,409
73 $ 426 $ 111 $ 315
Maintenance Expenses and Contracts Maintenance Payroll Protection RE Tax Escrow/Payroll Taxes/Misc. Taxes and Permits Insurance Community Programs - Services Total
202 Units = Rent=
LP Units = 127
Init/ Projected 12moYTD
547,589 155,727 391,862
(41,560)
29,847
55,644 60,541 92,355 34,802 28,828 29,847 503,493
2,257 26,605 5,364 28,854 1,390 11,585 6,313 12,551 24,589 81,967
3.00% 516,720 134,755 381,965 (5,167) (25,836) 6,063 491,780
2015 10
561,279 159,621 401,658
(45,351)
30,892
57,592 62,660 95,588 36,020 29,837 30,892 520,992
2,336 27,536 5,552 29,864 1,439 11,990 6,534 12,990 25,327 84,835
3.00% 532,222 138,798 393,424 (5,322) (26,611) 6,245 506,534
2016 11
575,311 163,611 411,700
(49,344)
31,973
59,608 64,853 98,933 37,280 30,881 31,973 539,100
2,418 28,500 5,746 30,909 1,489 12,410 6,763 13,445 26,086 87,805
3.00% 548,189 142,962 405,227 (5,482) (27,409) 6,432 521,730
2017 12
589,694 167,701 421,992
(53,549)
33,092
61,694 67,123 102,396 38,585 31,962 33,092 557,838
2,502 29,498 5,948 31,991 1,541 12,844 6,999 13,915 26,869 90,878
3.00% 564,634 147,250 417,384 (5,646) (28,232) 6,625 537,382
2018 13
604,436 171,894 432,542
(57,976)
34,251
63,853 69,472 105,980 39,936 33,081 34,251 577,228
2,590 30,530 6,156 33,111 1,595 13,294 7,244 14,402 27,675 94,059
3.00% 581,573 151,668 429,906 (5,816) (29,079) 6,824 553,503
2019 14
EDGEWOOD III SENIOR HIGH RISE LIMITED PARTNERSHIP - STABILIZED CASH FLOW PRO FORMA
PUPA 19 132 50 272 12 30 131 12 42 586
Replacement Reserve
E XHIBIT 12.D3 Edgewood Terrace III Pro forma (continued)
SECTION 202 EXPENSES (Trending @3.5%) Advertising and Marketing Office Salary Office Supplies Expense Managers Salaries Legal Expense Audit Expense Telephone/Fax/Computer/Network Miscellaneous Admin Expense Mgmt.Fee (5%) Common Area Utility Expense
SECTION 202 INCOME Gross Potential Rent Estimated Tenant Payment PRAC Subsidy Bad Debt (1%) Vacancy (5%) Other Revenue ($5 PUPM) Effective Gross Income
Total Senior High Rise Units = 200
c12.fm Page 413 Wednesday, March 15, 2006 4:29 PM
䡲
619,547 176,191 443,356
(62,634)
35,449
66,088 71,904 109,689 41,333 34,239 35,449 597,293
2,681 31,599 6,371 34,269 1,651 13,759 7,498 14,907 28,505 97,351
3.00% 599,021 156,218 442,803 (5,990) (29,951) 7,029 570,108
2020 15
635,036 180,596 454,440
(67,534)
36,690
68,401 74,421 113,528 42,780 35,437 36,690 618,055
2,774 32,704 6,594 35,469 1,709 14,240 7,760 15,428 29,361 100,758
3.00% 616,991 160,905 456,087 (6,170) (30,850) 7,239 587,211
2021 16
650,912 185,111 465,801
(72,687)
37,974
70,795 77,025 117,502 44,277 36,677 37,974 639,541
2,871 33,849 6,825 36,710 1,769 14,739 8,032 15,968 30,241 104,284
3.00% 635,501 165,732 469,769 (6,355) (31,775) 7,457 604,828
2022 17
667,184 189,739 477,446
(78,104)
39,303
73,273 79,721 121,614 45,827 37,961 39,303 661,773
2,972 35,034 7,064 37,995 1,831 15,255 8,313 16,527 31,149 107,934
3.00% 654,566 170,704 483,862 (6,546) (32,728) 7,680 622,972
2023 18
414
䡲
Replacement Reserve (Trending @ 3.5%) 44,787
250
0
10,079 6,720 38,298
Proposed Share of Cash Flow Limited Partner Annual Fee (Trending at 3%) GP - Incentive Management Fee (Trending at 3%) Housing Authority (Balance)
LIMITED PARTNERSHIP NET CASH FLOW
#REFI 55,097
55,097
3,404 23,647 8,957 48,728 2,150 5,374 23,468 2,150 43,673 104,980 181,475 51,594 79,899 115,255 25,080 53,744 0 773,578
384,087 918,320 (9,183) (45,916) 10,241 873,462
PUPA 19 132 50 272 12 30 131 12 268 586 1,013 288 446 643 140 300 300 4,643
38 $ 658
2014 9
CASH FLOW AFTER DEBT SERVICE
Sec. 8 Units = Rent=
LP Units = 127
Init/ Projected 12moYTD
DEBT SERVICE DHCD CDBG (Accural/Interest Only)
LIMITED PARTNERSHIP NET OPERATING INCOME
E XHIBIT 12.D3 Edgewood Terrace III Pro forma (continued)
0
10,382 6,921 31,474
48,777
#REFI
48,777
46,354
3,523 24,475 9,271 50,433 2,225 5,562 24,290 2,225 44,767 108,654 187,827 53,400 82,696 119,289 25,958 55,625 0 800,219
393,689 941,278 (9,413) (47,064) 10,548 895,349
2015 10
0
10,693 31,335 0
42,028
#REFI
42,028
47,976
3,646 25,332 9,595 52,198 2,303 5,757 25,140 2,303 45,889 112,457 194,400 55,269 85,590 123,464 26,867 57,572 0 827,782
403,531 964,810 (9,648) (48,241) 10,864 917,786
2016 11
2018 13
2019 14 2020 15
2021 16
2022 17
2023 18
0
34,832 0 0
34,832
#REFI
34,832
49,656
3,774 26,218 9,931 54,025 2,383 5,959 26,020 2,383 47,039 116,393 201,205 57,203 88,586 127,785 27,807 59,587 0 856,298
0
27,166 0 0
27,166
#REFI
27,166
51,394
3,906 27,136 10,279 55,916 2,467 6,167 26,930 2,467 48,218 120,466 208,247 59,205 91,686 132,257 28,780 61,672 0 885,801
0
10,000 5,000 4,011
19,011
53,192
4,043 28,086 10,638 57,873 2,553 6,383 27,873 2,553 49,426 124,683 215,535 61,278 94,895 136,886 29,788 63,831 0 916,324
0
10,000 5,000 (4,659)
10,341
55,054
4,184 29,069 11,011 59,899 2,643 6,606 28,848 2,643 50,665 129,047 223,079 63,422 98,216 141,677 30,830 66,065 0 947,904
0
10,000 5,000 (13,865)
1,135
56,981
4,331 30,086 11,396 61,995 2,735 6,838 29,858 2,735 51,935 133,563 230,887 65,642 101,654 146,636 31,909 68,377 0 980,577
0
10,000 5,000 (23,633)
(8,633)
58,975
4,482 31,139 11,795 64,165 2,831 7,077 30,903 2,831 53,236 138,238 238,968 67,940 105,212 151,768 33,026 70,770 0 1,014,381
0
10,000 5,000 (33,988)
(18,988)
61,039
4,639 32,229 12,208 66,411 2,930 7,325 31,985 2,930 54,570 143,076 247,332 70,317 108,894 157,080 34,182 73,247 0 1,049,356
413,619 445,423 479,672 423,960 456,559 434,559 467,972 988,931 1,013,654 1,038,995 1,064,970 1,091,594 1,118,884 1,146,856 (10,137) (10,916) (10,390) (11,189) (9,889) (10,650) (11,469) (50,683) (54,580) (51,950) (55,944) (49,447) (53,249) (57,343) 11,526 12,595 11,872 12,973 11,190 12,228 13,362 940,785 964,361 988,527 1,013,300 1,038,693 1,064,724 1,091,407
2017 12
EDGEWOOD III SENIOR HIGH RISE LIMITED PARTNERSHIP - STABILIZED CASH FLOW PRO FORMA
LIMITED PARTNERSHIP EXPENSES (Trending @ 3.5%) Advertising and Marketing Office Salary Office Supplies Expense Managers Salaries Legal Expense Audit Expense Telephone/Fax/Computer/Network Miscellaneous Admin Expense Mgmt.Fee (5%) Common Area Utility Expense Maintenance Expenses and Contracts Maintenance Payroll Protection RE Tax Escrow/Payroll Taxes/Misc. Taxes and Permits Insurance Community Programs - Services DCHA Asset Management Fee (Public Housing Units Only) Total
SECTION 8 INCOME Gross Potential Section 8 (Trending @ 2.5%) GROSS POTENTIAL LIMITED PARTNERSHIP INCOME Bad Debt (1%) Vacancy (5%) Other Revenue ($5 PUPM) Effective Gross Income
Total Senior High Rise Units = 200
c12.fm Page 414 Wednesday, March 15, 2006 4:29 PM
䡲
c12.fm Page 415 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
A P P E N D I X
1 2 E
Kentucky Mountain Housing Reference Information
䡲
415
䡲
Amount
Permanent Financing EQUITY: Kentucky Housing Corporation (KHC) Affordable Housing Trust Fund KHC Nonprofit Housing Production & Repair Program Federal Home Loan Bank USDA Housing Preservation Grant Kentucky Mountain Housing Homebuyer Project (HUD HOME)
416
䡲 27,000 37,131 63,000 70,077 206,500
$ $ $ $ $
Kentucky Mountain Housing Homebuyer Project (HUD HOME) $117,500.00 CHDO Proceeds $412,913.00 Federation of Appalachian Housing $ 35,000.00 Enterprises Construction Loan Kentucky Mountain Housing $589,843.60 Individual/Church Donations $101,132.00 Total $1,256,388.60
Development Financing
Source
KENTUCKY M OUNTAIN H OUSING # OF U NITS 28
c12.fm Page 416 Wednesday, March 15, 2006 4:29 PM
䡲
0%
Rate
Grant (Permanent Financing to Client)
Forgivable Loan to Clients/Grants to KMHDC Grant (Permanent Financing to Client)
Grant (subsidy to client) Grant (subsidy to client)
General Operating Funds Donation
Grant Revolving Funds/Recycled Loan
Type of Financing/Funding
Project Financing
E XHIBIT 12E.1
3 months
Term
Paid off 5/13/03
Payment Schedule
KMHDC 30 TH A NNIVERSARY P ROJECT
Payment Schedule
64,200
Loan (Permanent Financing to Client)
1%
1%
30 yrs
20 yrs
Annual Principal Pmts Annual Pmts
Quarterly Interest Pmts
Loan (Permanent Financing to Client)
Term
$
Rate
KMHDC 30 TH A NNIVERSARY P ROJECT
Revolving Funds/Recycled ($186,000 loaned to clients & $23,000 grant/subsidy to clients) Grant (Permanent Financing to Client) Revolving Loan Fund (Permanent Financing to Client) Loan to Clients Recycled Home Funds (Grant/Subsidy to Client)
Type of Financing/Funding
Project Financing (continued)
E XHIBIT 12E.1
$ 209,000 $ 30,500 $445,100.60 $ 42,580
Amount
KHC Affordable Housing Trust Fund $ 61,300 Total $1,256,388.60
CHDO Proceeds ARC KMHDC HOME Loan Fund Program Income (KHC Home Receipts) DEBT: KHC Nonprofit Housing Production & Repair Program
Development Financing
Source
KENTUCKY M OUNTAIN H OUSING # OF U NITS 28
c12.fm Page 417 Wednesday, March 15, 2006 4:29 PM
䡲
417
䡲
c12.fm Page 418 Wednesday, March 15, 2006 4:29 PM
KENTUCKY MOUNTAIN HOUSING REFERENCE INFORMATION
E XHIBIT 12E.2 Project Financing—Development Costs The Fannie Mae Foundation is seeking innovative and creative projects. Although creativity in financing is often reflected in leveraging or in the combination of financing sources, the Fannie Mae Foundation also recognizes that real innovation in financing is not always reflected in loan amounts and terms. KMHDC 30 TH A NNIVERSARY P ROJECT
KENTUCKY M OUNTAIN H OUSING
Cash 1. Acquisition Costs: a. Purchase Price for land and structures $ b. Title and recording c. Off-Site improvements, carrying charges d. Relocation charges e. Other (specify) _____________________ Subtotal (Lines 1a-1e) $
In-Kind Donation
62,000 5,880 0 0 0 67,880
2. Construction Costs: a. Buildings (rehabilitation or new construction) $ 940,142.60 b. Sitework, including landscaping 84,000.00 c. Contractor’s fee 48,928.00 d. Bond premium 0 e. Lump sum contractor’s fee 0 Subtotal (Lines 2a-2e) $1,073,070.60 3. Fees: a. Architect (design and supervision) b. Legal c. Appraisal d. Marketing e. Engineering (including surveys/environmental tests) f. Developer (specify) _____________________ g. Other (specify) _____________________ Subtotal (Lines 3a-3g) 4. a. b. c. d. e. f. g.
Financing Fees and Costs: Interest on construction loan (during construction) Taxes (construction) Hazard insurance (during construction) Financing fees (both construction & permanent) Mortgage insurance premium (during construction) Financing/construction contingency Other fees (specify) _____ Subtotal (Lines 4a-4g)
䡲
418
䡲
$
$ $
$
0 14,306 0 0 0 0 0 14,306 0 0 0 0 0 0 0 0
$
$ $
$ $
$ $
$
75,000 0 0 0 0 75,000 20,532 0 0 0 0 20,532 0 0 0 0 0 0 0 0 0 0 5,600 0 0 0 0 5,600
c12.fm Page 419 Wednesday, March 15, 2006 4:29 PM
DEVELOPING THE PROJECT FEASIBILITY REPORT: SIX CASE STUDIES
E XHIBIT 12E.2 Project Financing—Development Costs KMHDC 30 TH A NNIVERSARY P ROJECT
KENTUCKY M OUNTAIN H OUSING
Cash
In-Kind Donation
5. Reserves: a. Operating reserves b. Capital replacement reserves
$ 0 $ 0 Subtotal (Lines 5a-5b) $ 0 Total: $1,155,256.60 Total Development Costs (Cash + in-kind): Cost Per Unit (Cash + in-kind): (Divide total development costs by # of units) Cost per Square Foot (Cash + in-kind): If applicable, cost of developing common physical space where services are delivered: Page 8 of 20 (Do Not Exceed Space Provided)
䡲
419
䡲
$ 101,132.00 $1,256,388.60 $ 44,871.02 $ 52 $
N/A
c12.fm Page 420 Wednesday, March 15, 2006 4:29 PM
LEASE-PURCHASE REFERENCE INFORMATION
A P P E N D I X
1 2 F
Lease-Purchase Reference Information
䡲
420
䡲
䡲
Utilities Construction Supervision Construction Design Services Developer Fee - Group Fees Developer Fee - CHN Construction Loan Interest Real Estate Taxes Insurance During Construction Environmental Study Appraisal & Survey Title and Recording Replacement Reserve Local Legal
10.0% 2,139 1,600 317 633 961 2,200 1,706 833 211 372 417 149 361 389 28
874 7,863 19,250
10%
Acquisition—Land
421
Acquisition—Buildings Construction Contingency Energy Conservation
Per Unit
TOTAL
Total
384,993 288,000 57,000 114,000 173,000 396,000 307,000 150,000 38,000 67,000 75,000 26,880 65,000 70,000 5,000
157,268 1,415,412 3,464,933
Low Income Units
E XHIBIT 12F.1
43 1
4 5 $100 $113
$ 66 $ 76 $ 86
Utility Allowance
$220 $220
$160 $185 $210
Net Rent
5,000
57,000 114,000 173,000 396,000 307,000 150,000 33,413 67,000 75,000 23,842 58,000
1,415,412 3,464,933 384,993
Depreciable
3,038 7,000 70,000
4,587
288,000
157,268
Non Depreciable
5,000
57,000 114,000 173,000 396,000 307,000 150,000 29,403 67,000 65,280 20,561 50,440
3,464,933 384,933
433,380
113,520 2,640
11,520 162,060 143,640
Total Annual Income
Amoritized
36,115
$ 9,460 $ 220
$ 960 $13,505 $11,970
Total Monthly Rent
8.30% Credit NC\Rehab
$320 $333
$226 $261 $296
Monthly Rental Allowance
Tenants Pay for Gas & Electricity
180
6 73 57
# of Units
1 2 3
# of Bedrooms
ESIC - Sources/Uses - 01-Jun-94 2
Developing the Project Feasibility Report
RENTAL ASSUMPTIONS
APPLICATION OF FUNDS
7,986,922
4,135,294
665,000 971,543 1,578,457
Amount
Limited Partners’ Capital
15 20 20
Term
288,000 348,628
First Federal CHN Loan I CHN Loan II
HWAP Grant GP Capital Contribution
Rate 3.50% 7.10% 0.50%
SOURCES:OF FUNDS
CHN Limited Partnership X: Cleveland, Ohio - 180 units
c12.fm Page 421 Wednesday, March 15, 2006 4:29 PM
䡲
Expensed
28.96% 30.14%
31.64% 30.45% 29.88%
Percent of Median
9,720 3,281 7,560
4,010
641,250
3.54 Acquisition Credit
$12,800 $13,320
$ 9,040 $10,440 $11,840
Tenant Income
Historic Tax Credit
608 608
393 471 545
Tax Credit Rent at % of median 55.0%
Fund Legal Accounting Review Cost Certification and Audit OSB Legal OSB Points Const. Loan Origination Fees Perm. Loan Origination Fees Bridge Loan Origination Fees Tax Credit Fees GHFA Grant Application Fee Bridge Loan Interest Rent-Up Reserve Operating Reserve
APPLICATION OF FUNDS
CHN Limited Partnership X: Cleveland, Ohio - 180 units
c12.fm Page 422 Wednesday, March 15, 2006 4:29 PM
䡲
422
䡲
44,372
139 6 61 28 78 292 74 6 133 1 2,263 39 950
Per Unit
7,986,922 (0)
171,000
407,386 7,000
25,000 1,000 11,000 5,000 14,000 52,500 13,300 1,000 24,000 250
Total
6,812,093
727,143
171,000 5,372,110
24,000
24,000
7,000
52,500
52,500
8.30% Credit NC\Rehab
11,000
19,250
Non Depreciable
11,000
Depreciable
ESIC - Sources/Uses - 01-Jun-94 2
Developing the Project Feasibility Report (continued)
E XHIBIT 12F.1
40,300
250
13,300 1,000
5,000 14,000
5,750 1,000
Amoritized
407,386
407,386
Expensed
665,821
3.54 Acquisition Credit
0
Historic Tax Credit
423
䡲
First Federal Principal Paid Interest-Paid Total CHN Loan I Principal Paid Interest Accrued Interest Paid Total Paid CHN Loan II Principal Paid Interest Accrued Interest Paid Total Paid
DEBT SERVICE
TOTAL EXPENSES: Net Operating Income
Gross Rental Income Less Vacancy Net Rental Income EXPENSES: Real Estate Taxes Insurance Utilities - Apartments Utilities - Common Areas Water & Sewer Contract Services Maintenance/Repair Property Management Accounting & Legal Leasing Fee Tenant Services Fee Investor Services Fee Other
RENTAL INCOME:
65,260 4,858 4,858 1,578,457 0 (0) 7,892 7,892
0 2,429 2,429 1,578,457 0 0 3,946 3,946
6.60% 0.50%
0.50%
1,578,457
971,543
34,925 22,123 57,048 971,543
YEAR 2
90,407
40,385 YEAR 1
329,538
162,220
0 73,418 0 100,116 57,845 4,635 0 0 0 0
0 35,640 0 48,600 28,080 4,500 0 0 0 0
17,010 11,514 28,524 971,543
12.00%
26,780 66,744 0
442,048 22,102 419,946
13,000 32,400 0
216,690 14,085 202,605
1995 2
665,000 3.50%
1.030
5%
1.02 yr 2-3 1.03 yr 4+
1994 1
CHN Limited Partnership X: Cleveland, Ohio - 180 Units
c12.fm Page 423 Wednesday, March 15, 2006 4:29 PM
䡲 69,644 5,184 5,184 1,578,457 0 (0) 7,892 7,892
36,167 20,881 57,048 1,036,803
YEAR 3
88,922
339,423
0 75,621 0 103,119 59,580 4,774 0 0 0 0
27,583 68,746 0
450,889 22,544 428,345
1996 3
74,322 5,532 5,532 1,578,457 0 (0) 7,892 7,892
37,453 19,594 57,048 1,106,447
YEAR 4
91,589
349,605
0 77,890 0 106,213 61,367 4,917 0 0 0 0
28,410 70,808 0
464,415 23,221 441,194
1997 4
79,314 5,904 5,904 1,578,457 0 (0) 7,892 7,892
38,785 18,262 57,048 1,180,768
YEAR 5
94,338
360,093
80,227 0 109,399 63,208 5,065 0 0 0
29,262 72,932
84,642 6,300 6,300 1,578,457 0 (0) 7,892 7,892
40,165 16,883 57,048 1,260,082
YEAR 6
97,167
370,896
90,327 6,724 6,724 1,578,457 0 (0) 7,892 7,892
41,593 15,454 57,048 1,344,724
YEAR 7
100,082
382,023
96,395 7,175 7,175 1,578,457 0 (0) 7,892 7,892
43,073 13,975 57,048 1,435,051
YEAR 8
103,085
393,483
87,666 119,543 69,069 5,535 0 0 0
85,113 116,061 67,057 5,374 0 0 0
31,975 79,695
522,703 26,135 496,568
2001 8
82,634
31,044 77,374
507,479 25,374 482,105
2000 7
112,681 65,104 5,217 0 0 0
30,410 75,120
492,698 24,635 468,063
1999 6
ESIC - CASHFLOW - 01-Jun-94 3
478,348 23,917 454,431
1998 5
102,869 7,657 7,657 1,578,457 0 (0) 7,892 7,892
44,605 12,443 57,048 1,531,446
YEAR 9
106,179
405,287
123,129 71,141 5,701 0 0 0
90,296
32,934 82,086
538,385 26,919 511,466
2002 9
109,779 8,172 8,172 1,578,457 0 (0) 7,892 7,892
46,191 10,857 57,048 1,634,315
YEAR 10
109,363
417,446
126,823 73,275 5,872 0 0 0
93,005
33,922 84,549
554,536 27,727 526,809
2003 10
Developing the Project Feasibility Report (continued)
E XHIBIT 12F.1
117,153 8,720 8,720 1,578,457 0 (0) 7,892 7,892
47,834 9,214 57,048 1,744,094
YEAR 11
112,644
429,969
130,628 75,473 6,048 0 0 0
95,795
34,940 87,085
571,172 28,559 542,613
2004 11
125,023 9,306 9,306 1,578,457 0 (0) 7,892 7,892
49,535 7,512 57,048 1,861,248
YEAR 12
113,024
445,868
134,547 77,737 6,229 0 0 3,000
98,669
35,988 89,698
588,307 29,415 558,892
2005 12
133,421 9,931 9,931 1,578,457 0 (0) 7,892 7,892
51,297 5,751 57,048 1,986,271
YEAR 13
116,505
459,154
138,583 80,069 6,416 0 0 3,000
101,629
37,068 92,389
605,957 30,298 575,659
2006 13
142,383 10,598 10,598 1,578,457 0 (0) 7,892 7,892
53,122 3,926 57,048 2,119,691
YEAR 14
120,090
472,838
142,740 82,471 6,608 0 0 3,000
104,678
38,180 95,161
624,135 31,207 592,928
2007 14
151,947 11,310 11,310 1,578,457 0 (0) 7,892 7,892
55,011 2,037 57,048 2,262,074
YEAR 15
123,784
486,932
147,022 84,945 6,806 0 0 3,000
107,818
39,325 98,016
642,859 32,143 610,716
2008 15
162,153 12,070 12,070 1,578,457 0 7,902 7,892 7,892
28,235 289 28,524 2,414,021
YEAR 16
127,588
501,450
151,433 87,493 7,010 0 0 3,000
111,063
40,505 100,956
662,145 33,107 629,038
2009 16
GENERAL PARTNER PLEDGE ACCOUNT Principal Interest from Pledge Account
REPLACEMENT RESERVE ACCOUNT Replacement Reserve withdrawals Replacement Reserve Interest
CUMULATIVE OPERATING RESERVE Int. From Reserve Account
Payments from Syndication Proceeds Operating Reserve Used CASH FLOW TO RESERVES/DISTRIBUTION
Rent-Up Reserve NET CASH FLOW
OPERATING CASH FLOW
Replacement Reserve
424 4.00%
100,000
2.00%
70,000
4.00%
CHN Limited Partnership X: Cleveland, Ohio - 180 Units
c12.fm Page 424 Wednesday, March 15, 2006 4:29 PM
䡲
䡲
100,000 2,000
70,000 2,164 1,400
102,000 4,080
69,236 10,908 2,769
75,400 1,648
0
7,000 41,200 0
34,200 0
0
0
20,610
1995 2
34,200 0
7,000 7,000
0
5,486
1994 1
106,080 4,243
61,097 13,666 2,444
111,248 3,016
0
34,200 0
(0)
(0)
18,798
1996 3
110,323 4,413
49,875 12,320 1,995
148,464 4,450
0
34,200 0
(0)
(0)
21,117
1997 4
114,736 4,589
39,550 13,501 1,582
187,114 5,939
0
34,200 0
(0)
(0)
23,494
1998 5
119,326 4,773
27,631 9,547 1,105
193,052 7,485
0
0 0
25,927
1999 6
0
0
124,099 4,964
19,189 8,120 768
200,537 7,722
0
0 0
(0)
(0)
28,418
2000 7
129,063 5,163
11,837 6,664 473
208,259 8,021
0
0 0
30,970
2001 8
0
0
134,225 5,369
5,647 5,182 226
216,281 8,330
0
0 0
(0)
(0)
33,581
2002 9
ESIC - CASHFLOW - 01-Jun-94 4
Developing the Project Feasibility Report (continued)
E XHIBIT 12F.1
139,594 5,584
691 0 28
220,936 8,651
0
0 3,675
(3,675)
(3,675)
39,926
2003 10
145,178 5,807
0 0 0
227,448 8,837
0
0 2,140
(2,140)
(2,140)
41,124
2004 11
150,985 6,039
0 0 0
232,706 9,098
0
0 3,579
(3,579)
(3,579)
42,358
2005 12
157,024 6,281
0 0 0
239,808 9,308
0
0 1,995
(1,995)
(1,995)
43,628
2006 13
163,305 6,532
0 0 0
248,731 9,592
0
0 385
(385)
(385)
44,937
2007 14
169,837 6,793
0 0 0
259,572 9,949
1,249
0 0
1,249
1,249
46,285
2008 15
176,631 7,065
0 0 0
300,950 10,383
31,428
0 0
31,428
31,428
47,674
2009 16
53,582 91,656
425
35%
䡲 1.79
0.64
Cum. Pay-In Ratio
Pay-in Ratio 1.76
337,881
188,991
148,890
4,135,294
7,260,614
Net Benefit
Project Investment
Total Credits and Credit Equivalent
Total Tx Credits 284,248
11,667
Historic ITC
272,581
53,633
Acquisition Credits
5,684,951
1,575,663
NC/Rehab Credits
Tax Credits
From Tax Losses
Tax Benefits @
INVESTOR LIMITED PARTNER SHARE @
(3,472)
1.43
1.30
160,948
527,839
688,787
568,495
545,161
23,334
120,292
(343,691)
(1,548) (153,237)
General Partner Share 1%
Limited Partner Share 99%
441,988
196,570
(347,163)
2,487
247,712
65,260
34,873
1,243
123,856
0
17,889
4,417
90,407
1995 2
(154,785)
Total Taxable Income
Total
Amortization Schedule
Depreciation
Interest Deferred
Interest Paid
Other Expensed Costs
Bridge Loan Interest
DEDUCTIONS:
99.00%
Net Operating Income 1,400
40,385
ANALYSIS OF TAXABLE INCOME
Plus: Int. on Oper. Reserve
1994 1
CHN Limited Partnership X: Cleveland, Ohio - 180 Units
c12.fm Page 425 Wednesday, March 15, 2006 4:29 PM
䡲 1.36
1.30
144,571
541,177
685,748
568,495
545,161
23,334
117,253
(335,010)
(3,384)
(338,394)
432,775
2,487
247,712
69,644
33,957
78,976
5,460
88,922
1996 3
1.33
1.29
141,204
540,177
681,381
568,495
545,161
23,334
112,886
(322,533)
(3,258)
(325,790)
423,825
2,487
247,712
74,322
33,019
66,285
6,445
91,589
1997 4
1.29
1.28
88,797
587,750
676,547
568,495
545,161
23,334
108,052
(308,719)
(3,118)
(311,838)
413,696
2,487
247,712
79,314
32,058
52,125
7,521
94,338
1998 5
1.26
1.15
85,457
585,512
670,969
568,495
545,161
23,334
102,474
(292,782)
(2,957)
(295,739)
401,496
1,687
247,712
84,642
31,076
36,380
8,590
97,167
1999 6
1.24
1.14
82,266
583,551
665,817
568,495
545,161
23,334
97,322
(278,062)
(2,809)
(280,871)
389,442
887
247,712
90,327
30,070
20,446
8,490
100,082
2000 7
1.23
79,139
580,297
659,436
568,495
545,161
23,334
90,941
(259,831)
(2,625)
(262,455)
374,036
887
247,712
96,395
29,043
0
8,495
103,085
2001 8
ESIC - CASHFLOW - 01-Jun-94 5
1.38
660,223
660,223
568,495
545,161
23,334
91,728
(262,079)
(2,647)
(264,726)
379,461
887
247,712
102,869
27,993
0
8,556
106,179
2002 9 2003 10
1.54
661,099
661,099
568,495
545,161
23,334
92,604
(264,584)
(2,673)
(267,257)
385,298
887
247,712
109,779
26,920
0
8,679
109,363
Developing the Project Feasibility Report (continued)
E XHIBIT 12F.1
1.64
377,837
377,837
284,248
272,581
11,667
93,589
(267,396)
(2,701)
(270,097)
391,579
887
247,712
117,153
25,826
0
8,837
112,644
2004 11
1.66
95,707
95,707
95,707
(273,448)
(2,762)
(276,210)
398,332
887
247,712
125,023
24,711
0
9,098
113,024
2005 12
1.68
96,944
96,944
96,944
(276,983)
(2,798)
(279,781)
405,594
887
247,712
133,421
23,574
0
9,308
116,505
2006 13
1.71
98,308
98,308
98,308
(280,879)
(2,837)
(283,716)
413,398
887
247,712
142,383
22,417
0
9,592
120,090
2007 14
1.73
99,810
99,810
99,810
(285,171)
(2,881)
(288,051)
421,785
887
247,712
151,947
21,239
0
9,949
123,784
2008 15
1.76
104,120
104,120
104,120
(297,486)
(3,005)
(300,491)
438,462
443
247,712
170,056
20,251
0
10,383
127,588
2009 16
426
䡲
665,821 5,372,110
Amount of Credit Reserved:
130% Basis Allowed?
8.30%
Total
3.54%
20.00%
NC/Rehab Credit @
Historic ITC @
Acquis Credit @
Low Income
SCHEDULE OF HOUSING CREDIT
5,372,110
665,821
581,011
partial
6,634,556
665,821
Total Qualified Basis
Total Eligible Basis Net of Grants & HITC
0
1993
1993 Constr.
40,300
5
21,300
250
TOTAL
OHFA Grant Applicat
5
1,000
15
15
0 13,300
Bridge Loan Fees
Tax Credit Fees
Perm. Loan Fees
5 5
5,750 1,000
Accounting Review
Term
6,812,093
0
6,812,093
AMOUNT
Fund Legal
SCHEDULE OF AMORTIZATION
CUMULATIVE DEPRECIATION
AMOUNT
31.5
Commercial
TOTAL
7.0 27.5
Rehab/New Const.
TERM
Furnish./Appliances
SCHEDULE OF DEPRECIATION
CHN Limited Partnership X: Cleveland, Ohio - 180 Units
c12.fm Page 426 Wednesday, March 15, 2006 4:29 PM
䡲 6,698,012
708,362
Allowed Basis for Allocation
1,243
25
100
443
0
100
575
1994 1
123,856
123,856
123,856
Jul-94 1994 1
2,487
50
200
887
0
200
1,150
1995 2
371,568
247,712
247,712
1995 2
2,487
50
200
887
0
200
1,150
1996 3
619,280
247,712
247,712
1996 3
287,119
275,334
11,785
Jul-94 1994 1
2,487
50
200
887
0
200
1,150
1997 4
866,992
247,712
247,712
1997 4
574,238
550,668
23,570
1995 2
2,487
50
200
887
0
200
1,150
1998 5
1,114,704
247,712
247,712
1998 5
574,238
550,668
23,570
1996 3
1,687
25
100
887
0
100
575
1999 6
1,362,416
247,712
247,712
1999 6
574,238
550,668
23,570
1997 4
887
887
0
2000 7
1,610,128
247,712
247,712
2000 7 2001 8
574,238
550,668
23,570
1998 5
887
887
0
2001 8
1,857,840
247,712
247,712
ESIC - DEPREC/AMORT-01-Jun-94 6
574,238
550,668
23,570
1999 6
887
887
0
2002 9
2,105,552
247,712
247,712
2002 9
Developing the Project Feasibility Report (continued)
E XHIBIT 12F.1
574,238
550,668
23,570
2000 7
887
887
0
2003 10
2,353,264
247,712
247,712
2003 10
574,238
550,668
23,570
2001 8
887
887
0
2004 11
2,600,976
247,712
247,712
2004 11
574,238
550,668
23,570
2002 9
887
887
0
2005 12
2,848,688
247,712
247,712
2005 12
574,238
550,668
23,570
2003 10
887
887
0
2006 13
3,096,400
247,712
247,712
2006 13
287,119
275,334
11,785
2004 11
887
887
0
2007 14
3,344,112
247,712
247,712
2007 14
2005 12
887
887
0
2008 15
3,591,824
247,712
247,712
2008 15
443
443
0
2009 16
3,839,536
247,712
247,712
2009 16
p05.fm Page 427 Wednesday, March 15, 2006 4:00 PM
P A R T
F I V E 2
Purchasing and Developing the Property
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C H A P T E R
T H I R T E E N 13
Securing Site Control over the Property: Signing the Option or Purchase Agreement 13.1
Introduction
13.2
Site Control Must Be Secured in Writing 429
13.3
The Use of Purchase Contracts 430
13.4
The Use of Options
13.1
Appendix 13A Documents Pertaining to Purchase Contracts 448
429
Appendix 13B Documents Pertaining to Option Agreements 457 444
INTRODUCTION
After the nonprofit sponsor determines that a project is likely to be financially feasible, it must secure some sort of control over the site sought to be developed. This control is often referred to as “site control.” Commonly achieved by purchase agreement or option, site control provides the sponsor with a legal right to purchase the property within a specified time period under specified terms. This control is crucial for two reasons: 1. It ensures the sponsor that it will be able to purchase the property if it is able to secure all the necessary loans, grants, and equity; 2. Public and private lenders and other funding sources generally will not process any requests for loans, grants, or other assistance unless the sponsor can prove site control; they will avoid spending time underwriting a project that may never happen. 13.2
SITE CONTROL MUST BE SECURED IN WRITING
The golden rule in real estate development is that every agreement concerning real property (land and buildings) must be in writing. This rule had its origins in England, where the Statute of Frauds was enacted in 1677. The Statute of Frauds was founded on these key premises: Each 䡲
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parcel of land is unique, and as long as a seller has agreed in writing to sell the land and the purchaser has agreed in writing to buy it, the purchaser will be able to force the seller to sell that unique parcel to the purchaser. Every state and the District of Columbia now have similar laws governing real property. Therefore, nonprofit sponsors must reduce to writing any agreement relating to the possible purchase of a property. A written document, whether a purchase contract, an option, or any other form of agreement, allows the nonprofit purchaser to “specifically enforce” the agreement or to force the seller to comply with its terms in a court of law. The nonprofit sponsor easily can imagine how this legal right can be valuable. For example, assume that a nonprofit secures site control by negotiating a written purchase contract for a tract of land. The nonprofit spends $20,000 determining that an affordable housing project is feasible on that site, and the seller then changes its mind and refuses to sell the property to the nonprofit. The nonprofit will be able to force the seller to sell it the land because the contract was in writing and is subject to the protections of the statute of frauds.
13.3
THE USE OF PURCHASE CONTRACTS
Documents pertaining to purchase contracts appear in Appendix 13A. Purchase contracts are the most common form of written agreement between a seller of property and a potential purchaser. In fact, the vast majority of real estate transactions that take place in the United States—the purchase and sale of single-family homes—utilize purchase contracts. A description of the provisions that nonprofits should look for in their purchase contracts is given below. Special mention is made of provisions that may be of particular interest to nonprofit organizations. As with any legal document, the terms of the purchase contract should be as clear and unambiguous as possible. Sponsors should consult with their counsel prior to entering into any written agreement. A sample real estate purchase contract for the purchase of land, improvements (buildings), and related personal property on the site is presented as Exhibit 13A.1. (a)
Parties
The purchase agreement must clearly state the identities of the purchaser and the seller and include an address where the parties must deliver any written notices required under the agreement. The address provisions may be included in a separate paragraph (see paragraph 23 in Exhibit 13A.1). 䡲
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13.3 THE USE OF PURCHASE CONTRACTS
(b)
Description of Property
The purchase contract must contain a paragraph that describes in detail the real property to be transferred and addresses how the personal property owned by the seller and located on the property will be disposed of. The description of the real property (land and whatever else is built on the land) provided in the purchase agreement may be the single most important section of the document. The sponsor will be able to “specifically enforce” or force the sale of the specific parcel of land described in the purchase agreement only if the terms of the written agreement clearly describe the property in question. The sponsor should be certain that the description included in the purchase agreement is the legal description of the property that can be found in the land records of the jurisdiction where the property is situated. Additional means of identifying the property, for example, the lot and square numbers used to identify the property for property tax purposes and the property mailing address, should be used only to supplement the legal property description. (i) Real Property.
The contract must state how the parties are going to treat any personal property (everything not permanently affixed to the land) that is located on the property on the date of transfer. This personal property usually includes such items as appliances, light fixtures, heating and air-conditioning units, lawn mowers, and so on. As a general rule, these items are transferred to the purchaser. However, the contract should state the transfer (if that is the case) or the limitations on the personal property to be conveyed. Paragraph 2 of Exhibit 13A.1 addresses this issue by having an exhibit to the contract that lists all the personal property that will be transferred.
(ii) Personal Property.
(c)
Purchase Price
The purchase contract must contain a paragraph that states a definite purchase price for the property. This paragraph also may contain details on how the purchase will be financed. The purchase contract must state a definite purchase price for the property. The final purchase price can change during the contract period, perhaps increasing by $1,000 for every day that the purchaser must extend settlement beyond the date specified in the contract. The purchase price can even be based on a formula, such as the outstanding balance on the mortgage as of the date of settlement plus a profit of 10 percent of that mortgage balance. The terms must be objectively discernible; an independent third party should be able to ascertain the sales price of the property at any given time.
(i) Purchase Price.
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The purchase contract may contain provisions detailing how the property will be financed. For example, if the seller will be providing the purchaser with a purchase money mortgage for all or part of the purchase price, then the terms of this owner take-back financing will usually be negotiated as part of the purchase contract and included in the contract itself. If no owner financing is being provided, the contract may contain only a provision that states that the purchase must be all cash or that the purchaser will be seeking conventional financing at market rates in order to complete the purchase. Specification of the type and terms of the financing sought by the purchaser generally is relevant only if the contract explicitly states that the purchaser is excused from completing its performance under the contract if it fails to secure financing terms at least as favorable as those set out in the contract. Paragraph 3 of the purchase contract included in Exhibit 13A.1 includes an all-cash provision. With this clause, the seller holds the purchaser accountable for securing the required amount of cash from whatever sources are necessary in order to complete the purchase. (ii) Financing.
(d)
Deposit and Escrow
Most real estate purchase contracts will require the purchaser to provide an earnest money deposit, which is held in escrow until termination of the contract. (i) Earnest Money Deposit.
Generally, the deposit:
1. Must be provided at the time the contract is executed. 2. Commonly ranges from 5 percent to 20 percent of the purchase price. 3. Forces the purchaser to show its financial stability by requiring it to produce a significant amount of cash early in the transaction. 4. Forces the purchaser to make a financial commitment to the completion of the sale by putting some or all of this cash at risk of loss, should closing not occur. 5. Provides the seller with a source of funds to compensate itself for lost opportunities, should closing not take place under the contract. Although these are the most common purposes of an earnest money deposit, the parties are free to negotiate the specific terms surrounding the deposit. For example, the deposit may be less than 5 percent of the purchase price; it may be “paid” with assets other than cash such as a letter of credit or the pledging of securities; and it does not have to be “at risk” of loss, should the purchaser fail to close on the acquisition. All of 䡲
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13.3 THE USE OF PURCHASE CONTRACTS
these terms are negotiable, but the amount and the form of the deposit will be easier to negotiate than the “at risk” nature of the funds. The concept that a deposit will be forfeited by the purchaser should settlement fail to occur is a longstanding tradition in American real estate. As with any market transaction, however, if the property sought by the nonprofit is not in great demand by other purchasers, then the nonprofit may be able to negotiate very favorable terms on the earnest money deposit, including its eventual return. Federal, state, and local laws and programs may provide nonprofits with more favorable earnest money deposit terms than the organization could negotiate on its own. For example, qualified purchasers under Title VI cannot be required to provide an owner with more than a 5 percent deposit at the time of contract.1 Under District of Columbia law, resident groups that enter into a purchase contract with their landlord cannot be required to provide more than a 5 percent deposit, and this deposit is not at risk as long as the organization makes a good-faith effort to perform on the contract.2 Nonprofit sponsors and their counsel should review all relevant laws and programs for special earnest money deposit provisions before entering into a purchase contract. The parties to the real estate contract will likely want the deposit to be held by a third party, someone other than the seller or the purchaser, until the contract is terminated. This third party, usually referred to as an escrow agent, may be a disinterested third party, such as a representative of the title company, or may be the attorney for the seller or the purchaser. Regardless of who serves as the escrow agent, both parties should enter into an escrow agreement (see Exhibit 13A.2) that clearly states how the moneys will be held, how they can be paid out, and what happens in case of a disagreement between the parties as to the disposition of the escrowed funds. The purchase contract should specify how the deposited funds are to be disbursed upon termination of the contract or settlement on the property. However, if this disbursement is not specified in the contract, it should be stated in the escrow agreement. Paragraph 4 of the real estate contract in Exhibit 13A.1 addresses the terms discussed above: (ii) Escrow.
1. The amount of the deposit. 2. The name of the escrow agent. 3. The terms of payment (cash or check). 1 2
See Chapter 7 for a full discussion of Title VI and the earnest money deposit provisions. D.C. Code § 45-1634(b).
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4. How the deposit will be held (insured interest-bearing account). 5. How the deposit plus interest will be disbursed if settlement occurs or otherwise (applied to the purchase price or returned to the purchaser as long as there is a good-faith effort to perform). Typically, the escrow agent makes no decisions concerning the disposition of funds and only follows identical instructions provided by the buyer and the seller. The escrow agent typically is indemnified by the buyer and the seller. (For a further discussion of the escrow agent, see Chapter 16.) (e)
Title
Most purchase contracts have a provision concerning the seller’s ability to give the purchaser clear title to the property. Under the terms of such a provision, the purchaser usually will be given an opportunity, at its own cost, to have a title search of the property conducted by a title company of the purchaser’s choice. If the title is not good and marketable—if it is subject to claims against the seller, other than reasonable covenants, rights of way, and easements and tenancies, that cannot be cured in a reasonable period of time and/or by the payment of a reasonable amount of money—then the purchaser should have the right to the return of the earnest money deposit. Under those circumstances, the seller should pay the purchaser’s cost of examining the title. The purchase contract should provide the purchaser with a reasonable amount of time to order (5 to 7 days after contract execution) and review the title report and to file written objections (7 to 14 days after issuance of the title report) with the seller concerning any claims against the title stated in the title report. The parties should negotiate and the contract should state how long the seller would have to cure these defects and how much money the seller will be required to spend to cure title defects. Liens that can be cured at settlement from funds paid by the purchaser to the seller do not make a title unmarketable. Issuance of a title insurance commitment by a title insurance company usually will be conclusive evidence that the title is good and marketable. See the discussion of title insurance in Chapter 16. Paragraph 5 of the real estate contract in Exhibit 13A.1 addresses these issues: 1. Period of time for purchaser to order a title report (seven business days after contract ratification). 2. Period of time to object to defects in the title report (15 days after issuance of title report). 䡲
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13.3 THE USE OF PURCHASE CONTRACTS
3. Determination of which defects are “curable,” based on the amount of time and money required to cure the defect. 4. Return of the earnest money deposit to purchaser if title is defective. 5. Determination of who pays the costs for the title search if the title is defective (seller pays). 6. Determination of who pays the costs for the title, survey, and other documents needed to convey the property (purchaser pays). 7. Statement that the issuance of a title insurance commitment is conclusive evidence that the title is good and marketable. 8. Treatment of events that affect the title but occur subsequent to the date of the title insurance commitment and prior to settlement. (f)
Deed
The purchase contract should state the type of deed that the purchaser will want the seller to provide at settlement. The various types of deeds are discussed in Chapter 16. Paragraph 6 of the real estate contract in Exhibit 13A.1 addresses this issue. (g)
Adjustments
The purchase contract should have a provision that requires the parties to purchase an existing rental property to make adjustments on the date of settlement for items such as rents received, taxes, water and sewer charges, insurance, interest on existing encumbrances, the cost of fuel in storage tanks, salaries and accrued benefits of employees, and other operating charges. For example, if settlement takes place on the 15th day of a 30-day month and the seller has received $10,000 in rents by that date, a provision requiring an adjustment for rents received would mean that the seller is allowed to keep rents applicable to the first 15 days of the month ($5,000) but must give the purchaser credit for the rents applicable to the second half of the month ($5,000). Similarly, if the seller paid $12,000 in insurance for the entire year in January and sold the property on March 1, the purchaser would owe the seller an additional $10,000 as an adjustment for prepaid insurance. A “security deposits” provision commonly is stated in real estate purchase contracts for tenanted properties in the “adjustments” paragraph. Generally, the purchaser should require the seller to transfer all security deposits plus interest to the purchaser at settlement or to credit the full amount of the deposits plus interest against the amount due from the purchaser at settlement. Some local laws require a landlord to provide 䡲
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SECURING SITE CONTROL OVER THE PROPERTY
tenants with a fixed amount of annual interest on their security deposits. If this law is applicable, the nonprofit purchaser must be sure that the seller is transferring or crediting funds at settlement sufficient to cover all outstanding interest, or the nonprofit may face having to pay the difference to tenants when they eventually vacate the property. Paragraph 7 of the real estate contract in Exhibit 13A.1 also addresses this issue. See Chapter 16 for a discussion of how adjustments are handled at acquisition settlement. (h)
Closing and Recording Costs
A provision should be included that specifies the responsibility of each party to pay for closing and recording costs such as title examination, tax certificates, recording fees and taxes, transfer fees and taxes, and other miscellaneous charges incurred in order to complete settlement. If no provision is included in the contract, whatever local convention is followed (e.g., seller pays transfer charges and purchaser pays recordation charges) might be imposed on the parties. Responsibility for these charges is negotiable and should be considered by the nonprofit when negotiating the terms of the contract. As discussed more fully in Chapter 11, some state and local laws may provide nonprofit sellers or purchasers with exemption from certain recordation and transfer taxes and charges. Nonprofit sponsors and their counsel should review all relevant laws for special programs that can reduce or eliminate these charges before entering into a purchase contract. Paragraph 8 of the real estate contract in Exhibit 13A.1 addresses this issue and includes language from District of Columbia law that provides transfer and recordation tax exemptions to certain nonprofit organizations. (i)
Settlement
Provisions concerning settlement, often the most lengthy in purchase contracts, usually address: 1. The date by which settlement must occur. 2. The place where settlement must occur. 3. A definition of what must be done by both parties in order to deem the settlement completed (e.g., the purchaser delivers that part of the purchase price to be paid in cash and the seller delivers an executed deed. 4. What the seller is required to deliver prior to settlement—any affidavits or other documentation that will allow the title agent to remove exceptions to the title or to assure the title agent that the seller has authority to execute the deed. 䡲
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13.3 THE USE OF PURCHASE CONTRACTS
5. What the seller is required to deliver at settlement—a bill of sale for all personal property and an assignment of insurance, contracts, permits, and licenses. 6. Any remedies available to the parties should either breach the terms of the contract (e.g., seller retains the deposit or purchaser secures the return of the deposit or sues for specific performance). Paragraphs 9 and 10 of the real estate contract in Exhibit 13A.1 address these issues. (j)
Tenancies
Provisions concerning the tenancies of existing and future residents of a tenanted property are common in purchase contracts. (i) Existing Tenants. The parties usually will use these provisions to acknowledge the fact that the property is being sold subject to the existing tenancies. A purchaser may be very concerned, however, that the seller may change the terms of these tenancies (e.g., provide life-tenancies to the seller’s family members) or terminate the tenancies (thereby cutting off cash flow to the purchaser after settlement) between the time when the contract is executed and the settlement date. The purchaser may include in the purchase contract a provision that prohibits the seller from modifying the terms or terminating any tenancies without the purchaser’s approval. These issues are addressed in paragraph 11 of the real estate contract in Exhibit 13A.1. (ii) Future Tenants. The purchaser may be very concerned about how units will be filled if they become vacant between the time when the contract is executed and the settlement date. This concern will be especially acute if the purchaser is a resident group that needs a certain percentage of existing tenants to successfully complete a purchase and conversion of a multifamily property to homeownership. This also may be an important issue to nonprofit sponsors seeking to purchase tenanted properties in jurisdictions where tenants can be evicted only for nonpayment of rent or a lease violation. Under either scenario, the purchaser will want the opportunity to place tenants who are supportive of the purchaser’s cause (in the case of a resident group), or who meet the nonprofit’s income or special needs guidelines, into the vacant units prior to settlement. Paragraph 11 of the real estate contract in Appendix 13A.1 provides one approach to this problem. Nonprofits should develop vacancy provisions that meet their particular needs. Generally, the seller should have no objection to a reasonable 䡲
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vacancy clause in the purchase contract as long as the seller is not being asked to accept high-risk tenants during the contract period. (k)
Risk of Loss
The nonprofit purchaser must demand that a “risk of loss” provision be included in the purchase contract. A “risk of loss” provision states that the seller is solely responsible for any loss or damage to the property from the date that the contract is executed until the deed of conveyance is delivered to the purchaser or recorded by the title company after settlement. Clarifying liability for the property is very important because the execution of the purchase contract actually creates a legal interest for the purchaser in the property. This provision lays the responsibility for any loss to the property clearly in the hands of the seller regardless of the purchaser’s property interest created by the contract. This issue is addressed in paragraph 12 of the real estate contract in Exhibit 13A.1. (l)
Conditions and Operation of the Property
Four basic considerations are usually addressed in this provision: 1. The seller’s concern that the purchaser knows that the property is being sold in its current condition with no additional improvements. 2. The purchaser’s concern that it is not buying liabilities caused by longstanding housing code violations. 3. The purchaser’s concern that the seller not allow the condition of the property to deteriorate further between the time that the contract is executed and the settlement date. 4. How events of fire or casualty loss and condemnation or eminent domain are handled. These considerations are addressed below. Most properties are sold in “as is” condition. “As is” condition means that the property will be conveyed by the seller substantially in its existing condition, both good and bad. If a nonprofit enters into an “as is” purchase contract, it must make sure that this clause specifies whether the “as is” condition is the condition of the property as of the date when the contract is executed or the condition of the property as of the settlement date.
(i) “As Is” Sale.
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A clause allowing the seller to transfer the property in “as is” condition as of the settlement date potentially causes two major problems: 1. The seller has an opportunity to neglect the property after the contract date, especially if the contract fails to contain a provision on further property deterioration. 2. The seller might remove some or all of the personal property on the site, especially if the transfer of personal property is not required under the contract. This issue is addressed in paragraph 13 of the real estate contract in Exhibit 13A.1. (ii) Outstanding Housing Code Violations. A purchaser of a tenanted property will want assurances from the seller that the purchaser is not buying any current liabilities for past or existing housing code violations or other violations of municipal orders or regulations such as operating the property without a business license, if required. The purchaser may require the seller to make an affirmative statement to that effect in the provisions concerning the operation of the property or in the provisions addressing representations and warranties being provided by the seller. (See Section 13.3(n).) This issue is addressed in paragraph 13 of the real estate contract under “Conditions and Operation of the Property” in Exhibit 13A.1.
The purchaser should be sure that the purchase contract requires the seller to: (iii) Further Property Deterioration.
1. Not defer normal maintenance of the property during the period from contract execution to settlement. 2. Not enter into, modify, or terminate, without the purchaser’s consent, any maintenance or service contracts relating to the property prior to settlement. 3. Maintain in force until settlement all insurance coverage, including liability and property damage insurance with respect to the property, that was in effect as of the date of contract execution. This provision will allow the property to be conserved in its condition as of the contract date and will make sure that insurance proceeds potentially will be available to the purchaser should it choose to go forward with the purchase after a fire or other casualty to the property (see the
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next paragraph). These issues are addressed in paragraph 13 of the real estate contract in Exhibit 13A.1. Many purchase contracts have specific provisions that address the rights of the purchaser and the seller in the situation where the property has been damaged or destroyed by fire or other form of casualty, or where the property has been taken, in whole or part, by government action. These provisions commonly give the purchaser the option of canceling the contract and receiving the full return of the earnest money deposit and interest if the property is destroyed, damaged, or taken by government action, or of continuing on with the contract and receiving all or some of the proceeds that the seller had the legal right to receive. A provision addressing these issues is included in paragraph 13 of the real estate contract in Exhibit 13A.1.
(iv) Fire/Casualty/Condemnation/Eminent Domain.
(m) Inspection by Purchaser
The purchase contract should provide the purchaser with the right to inspect all aspects of the property, including the books and records of the seller, and to conduct at the property all tests and studies that the purchaser decides are necessary. Because of the potential cost of addressing environmental problems, the purchaser may want to specify in the contract that it has the right to conduct a Phase I environmental study on the property. Without this clause, the seller could deny the purchaser the right to perform the environmental work, because of the potential liability that the seller could be exposed to once it had knowledge of environmental problems found by the purchaser in its study. A seller will usually require the purchaser to agree to pay all the costs of the studies and inspections performed on the site, including the costs to repair damage to the property caused by the inspection. A seller also may want copies of all reports and inspections completed. Providing these copies usually in negotiable. This issue is addressed in paragraph 14 of the real estate contract in Exhibit 13A.1. (n)
Representations and Warranties of Seller and Purchaser
Purchase contracts may include a separate provision that states the specific representations and warranties made by the parties to each other. As strictly a legal matter, warranties are promises made by the party as part of the contract (e.g., the seller warrants that all service contracts can be canceled in 30 days) and representations are assertions of material facts that commonly convince the other party to enter into the contract (e.g., the seller is the sole owner of the property and can freely transfer it). 䡲
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Generally, a breach of a warranty can result in the payment of damages to the nonbreaching party, but a misrepresentation of a material fact can result in the contract’s being set aside. Representations and warranties can cover almost any topic. The most common seller representations and warranties are that the seller has full right and authority to sell the property, that the facility currently being operated at the property is operating legally, and that the seller knows of no action, including litigation or condemnation contemplated or pending, that would affect the property. The most common purchaser representations and warranties are that the purchaser has full right and authority to purchase the property and, if a corporation, that the corporation is in good standing in its state of incorporation and in the state where the property is located, if different. Seller and purchaser representations and warranties are included in paragraph 15 of the real estate contract in Exhibit 13A.1. (o)
Choice of Law
The parties should agree that the laws of one jurisdiction apply to any disputes that arise under the contract. Most, if not all, real estate contracts have the parties and the terms of the contract subject to the laws of the jurisdiction where the property is located. This generally is an issue only if the purchaser and seller are from different jurisdictions. This issue is addressed in paragraph 16 of the real estate contract in Exhibit 13A.1. (p)
Brokerage
The purchase contract should have a provision concerning real estate brokers whether or not a broker was used to complete the sale. The exact compensation that will be due to a real estate broker for services provided to either the purchaser or the seller, if any, should be stated in the contract unless it is covered by a separate real estate listing agreement. If neither party used the services of a broker, then the contract should state that fact specifically. In some cases, the seller and the purchaser will represent and warrant to each other that neither used a real estate broker in the transaction. The parties may even agree to hold each other harmless should a broker appear and claim that one of the parties is liable for brokerage commissions. Examples of two different brokerage provisions are included in paragraph 17 of the real estate contract in Exhibit 13A.1, and in paragraph 18 of the option agreement in Exhibit 13A.2. (q)
Time of Essence
Many purchase contracts will include a “time of essence” clause. This clause serves to hold both of the parties to the timetables agreed to in the 䡲
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contract. For example, if settlement is to occur in 120 days but has not occurred as of day 121, absent other circumstances, the contract can be terminated at that time by the seller because of the time of essence clause. Unlike option agreements, as discussed below, settlement on purchase contracts usually will be continued for a reasonable time for cause if no time of essence clause is included. A sample time of essence clause is included in paragraph 18 of the real estate contract in Exhibit 13A.1. (r)
Acceptance
Many purchase contracts will include a provision that states specifically how long the seller has to accept the contract and defines the date when all the time periods begin to run, for example, 120 days until settlement. A sample date of acceptance clause is included in paragraph 1 of the real estate contract in Exhibit 13A.1. A sample “date of acceptance” clause is included in paragraph 19 of the real estate contract in Exhibit 13A.1. (s)
Binding Effect
Many purchase contracts will have one or more provisions clearly stating that: 1. The contract is binding on both parties and any future successors or assigns. 2. The contract is the final and entire contract between the parties, and they shall not be bound by any terms, conditions, statements, warranties, or representations, oral or written, express or implied, not contained in the contract. 3. The contract cannot be modified unless in writing by both parties. These issues are addressed in paragraph 20 of the real estate contract in Exhibit 13A.1. (t)
Assignment
A party’s right to assign the contract to a third party may be a significant issue to a seller. Sellers generally agree to execute a purchase contract with a specific purchaser only after they are convinced of the purchaser’s ability to complete the transaction. By providing the purchaser with a right to assign the contract, the seller is agreeing to substitute an unknown for the party it knows well. This may be particularly problematic in cases where the seller has agreed to provide the purchaser with take-back financing. Therefore, some sellers will not agree to an assignment of the contract or may demand the right to prohibit the assignment, with or without cause. 䡲
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If the nonprofit purchaser believes there is a chance that a different legal entity will be taking title to the property at settlement (e.g., a limited partnership in a low-income housing tax credit project), it should either negotiate the right to assign the contract to a third party or specify in the contract that it will designate the names of the parties who will take title to the property at settlement, including entities that are related or unrelated to the contract purchaser. An example of an “assignment” clause is included in paragraph 21 of the real estate contract in Exhibit 13A.1. (u)
General Provisions
A “general provisions” or “miscellaneous” clause is quite common in real estate contracts. This clause allows the parties to address issues such as: 1. In the event that mortgages are used rather than deeds of trust, the word “mortgage” shall be substituted automatically. 2. If this contract provides for the assumption of existing trust(s) or for purchase subject to existing trust(s), it is understood that the balance of such trust(s) and the cash down payment are approximate amounts. 3. Trustees in all deeds of trust are to be named by the parties secured thereby. 4. The property is to be conveyed in the name(s) to be designated in writing by the purchaser prior to settlement. 5. The seller shall furnish any pertinent information required by the purchaser or his or her financing agency in reference to obtaining a loan commitment and in general shall reasonably cooperate (at the purchaser’s sole expense and obligation) with the purchaser’s acquisition of the property. 6. The words “seller,” “purchaser,” and all pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular, or plural, as the identity of the person or entity and the context may require. An example of a general provisions clause is included in paragraph 22 of the real estate contract in Exhibit 13A.1. (v)
Notices
The purchase contract should require that all notices to be provided under the terms of the contract be in writing and be mailed by certified or registered mail to the addresses stated in the contract. Written notice of address changes must be sent to all parties. An example of a “Notice” clause is included in paragraph 23 of the real estate contract in Exhibit 13A.1. 䡲
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(w) Acknowledgment
The purchase contract must be signed by both parties in order to be enforceable and binding. The final clause of most real estate contracts is an acknowledgment clause whereby both parties acknowledge that they agree to all the contract’s terms. Paragraph 24 of the real estate contract in Exhibit 13A.1 is the acknowledgment provision. 13.4
THE USE OF OPTIONS
A nonprofit housing developer may consider using an option to gain site control over a specific site. For a fee, the potential purchaser may be able to purchase an option that would provide the purchaser or “optionee” with a defined period of time (“option period”), usually from 30 to 90 days, to evaluate the site, for example, to complete feasibility and environmental studies and to decide whether it wants to purchase the property. If the optionee decides to purchase the property, it “exercises” the option and settles on the property within the time period set out in the option agreement. Longer-term (multiyear) option contracts are more common in the development of raw land, where a developer seeks site control over a large tract of land but can afford to purchase and develop only one portion at a time. The long-term option contract might allow the developer to purchase one portion, develop and sell it, and then use the sales proceeds to exercise the option on the next portion of land, and so on. (a)
Differences between Purchase and Option Agreements
There are not many differences between a purchase and an option contract. In fact, an option agreement must contain many if not all of the provisions included in a purchase contract because the option essentially converts into a purchase contract if the optionee exercises its option to purchase the property. Therefore, option contracts often include many of the provisions discussed in Section 13.3 in the context of what the parties must do or provide if the option is exercised. An option contract is presented as Appendix 13B. The purchase and the option contracts do differ in the following ways: •
Unlike the purchaser of a purchase contract, who is legally committed to purchasing the property by the settlement date, the purchaser of an option is committed only to deciding whether it wants to exercise its option to purchase the property within the option period.
•
For reasons stated earlier in the chapter, purchase contracts require a significant earnest money deposit, ranging from 5 percent to 䡲
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25 percent, to “guarantee” the purchaser’s performance. Option contracts, on the other hand, generally require the purchaser to pay only a relatively small amount of money—1 percent to 5 percent of the purchase price—for the right to defer its decision on the purchase. This option fee may or may not be applied to the purchase price. The option contract should state how the option fee is to be treated.
(b)
•
An option is often viewed as a purchaser’s, not a seller’s tool, because it allows the purchaser to risk very little and requires the seller to provide the purchaser with an exclusive right to purchase the property during the option period. A seller is not likely to enter into an option contract if there is significant demand for the property in the marketplace. Sellers obviously prefer to execute a purchase contract, which carries the expectation of settlement, instead of an option contract, which carries limited expectations that the property will be transferred.
•
Optionees generally are required to act within the option period or lose their option on the property; purchasers in a purchase contract are often provided, for good cause, a reasonable period of time to complete the transaction even after the settlement date has expired. Unique Terms of an Option Contract
As noted above, option contracts usually will contain most or all of the provisions set out in a traditional purchase contract. Most of these provisions, however, will be addressed in the context of the parties’ responsibilities to each other after the purchaser has exercised its option to purchase the property. See paragraphs 7 through 23 of the option agreement in Appendix 13B for the provisions concerning settlement after exercise of the option. A full discussion of these postsettlement provisions can be found in Section 13.3. The following sections describe provisions that are unique to option agreements. As with a purchase contract, the potential purchaser must make sure that the option agreement clearly states the names of the parties, the legal description of the property, and the financial terms of the transaction, including a definite purchase price. Documents pertaining to option agreements are found in Appendix 13B. Option agreements must have a provision that specifically grants the optionee the exclusive right to purchase the property from the seller. This provision often serves three purposes:
(i) Granting of Option.
1. It states the amount of consideration paid by the optionee for the option. 䡲
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2. It states the fact that the optionee has the exclusive right to purchase the property. 3. It provides the legal description of the property to be sold. These issues are addressed together in paragraph 2 of the option agreement in Exhibit 13B.1; however, they also can be addressed separately in an option agreement. The optionee is provided the exclusive right to purchase the property for only a limited period of time. This period of time (“option period”) must be clearly and unambiguously stated in the option agreement, for example, 30 days after the date of contract specified in the option agreement. This issue is addressed in paragraph 3 of the option agreement in Exhibit 13B.1. The nonprofit may want to secure the right to extend the option period one or more times. If so, it should negotiate terms that fix: (ii) Option Period.
1. The number of times that the option period can be extended. 2. The number of days or months added in each extension of the option period. 3. The additional amount of consideration that must be paid by the optionee for each extension. 4. Whether these additional fees later will be applied toward the purchase price, if settlement goes further. 5. Whether the purchase price of the property will be increased because the optionee is postponing settlement on the purchase by extending the option period. An extension provision is not included in Exhibit 13B.1. (iii) Exercise of Option. An option agreement must include a statement of what the optionee must do to exercise the option if it wants to purchase the property, the manner by which the seller must be notified of the optionee’s exercise of the option, and any other action that the optionee must take to exercise the option, including the payment of additional funds. In the option agreement shown in Exhibit 13B.1, paragraph 4 states that, to exercise the option, the optionee must provide the seller with written notice prior to the expiration of the option period; paragraph 24 sets out how notice must be provided. Paragraph 5 includes an additional requirement. At the time it exercises the option, the optionee must provide the escrow agent with an additional deposit, in order to secure the right to purchase the property. These issues can be addressed together in one paragraph. 䡲
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The purchase price provision in an option agreement may be considerably more complicated than a similar provision in a purchase contract and may be utilized to address the following issues:
(iv) Purchase Price.
1. The purchase price of the property. 2. Whether the initial consideration paid by the optionee for the option will be applied, in whole or in part, toward the purchase price. 3. Whether the optionee will have to pay additional funds, at the time when it exercises the option, to create an “earnest money deposit” similar to the deposit required under traditional purchase contracts. 4. Whether the purchase price will increase, and the extent of this increase if the settlement date is postponed due to additional extensions of the option period by the optionee. This issue is addressed in paragraph 5 of the option agreement in Exhibit 13B.1. (v) Failure to Exercise the Option. The option agreement must explicitly state the rights of the parties, should the optionee fail to exercise the option. Commonly, the option agreement will provide that:
1. The seller is to retain all consideration paid by the optionee for the option and any extensions. 2. Neither party retains any claims against the other after the expiration of the option period. In fact, the seller may seek to include, in this provision or elsewhere in the option agreement, a statement that prohibits the optionee from recording the option in the land records of the jurisdiction where the property is situated. The statement will limit any perceived restrictions on the transferability of the property or continuing claims by the optionee upon expiration of the option. A “failure to exercise” provision is included in paragraph 6 of the option agreement shown in Exhibit 13B.1.
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A P P E N D I X
1 3 A
Documents Pertaining to Purchase Contracts E XHIBIT 13A.1 Real Estate Purchase Contract
DATE OF OFFER: _________________ 1.
PARTIES. The parties hereto, ____________________, (“Purchaser”) and ____________________, (“Seller”), desire to enter into a contract relating to the sale by Seller to Purchaser of certain property (“Contract”). In consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows:
2.
DESCRIPTION OF PROPERTY. This Contract covers the purchase and sale of the real property legally described as Lot _______, Square _______ with improvements thereon known by street address as ____________________, a together with the _______ unit apartment building in the (jurisdiction) easements, rights, privileges and appurtenances belonging to the same, and including all of the furniture, fixtures, furnishings, machinery, and equipment (“Personal Property”) owned by the Seller situated on or about said property (said real and personal property being collectively referred to herein as the “Property”). A list of all Personal Property owned by Seller that is not in individual tenanted units is attached as Exhibit 1. Seller agrees to sell and to convey to Purchaser, and Purchaser agrees to buy from Seller, the Property, upon the terms and conditions herein set forth.
3.
PURCHASE PRICE. The purchase price (“Purchase Price”) of the Property is ____________________ DOLLARS ($ _______), all cash.
4.
DEPOSIT. (name of escrow agent) , (“Escrow Agent”) will receive from Purchaser, within three (3) business days of Seller’s ratification of this Contract and the Escrow Agreement, an earnest money deposit (“Deposit”) IN EITHER , $ _______ to be CASH OR CHECK of (amount of earnest money deposit) applied at Settlement as part payment of the Purchase Price of the real property described above. The Deposit will be held in an interest-bearing account at (name of financial institution), with all interest applied as part of the Deposit, under the terms of the Escrow Agreement, attached as Exhibit 2. This Deposit plus all accrued interest is refundable to Purchaser in the event of a good faith failure of the Purchaser to perform under this Contract. If Settlement occurs, this Deposit plus interest shall be applied as part payment of the Purchase Price.
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) 5.
TITLE. Purchaser hereby agrees to order, within seven (7) business days of contract ratification, the examination of title from (name of title company) (“Title Company”), a survey (if required), and the preparation of all necessary conveyancing papers, at Purchaser’s expense; provided, however, that if upon examination, the Purchaser objects to the title as defective or unmarketable, and is not remedied as detailed below, the Seller hereby agrees to pay the cost of the examination of the title. IT IS UNDERSTOOD THAT THE PURCHASER HAS THE RIGHT TO NAME AND EMPLOY A TITLE INSURANCE COMPANY, SETTLEMENT, OR ESCROW COMPANY OR TITLE ATTORNEY OF ITS CHOICE. All claims for defects in or unmarketability of title by Purchaser shall be delivered to Seller within fifteen (15) days of issuance of the title report and shall be deemed waived if not so delivered. To the extent that any title item or matter to which Purchaser objects consists of any existing deed of trust, lien for unpaid bills for utilities (including water and sewer), real property taxes or work performed on or services provided for the Property, or other lien created by Seller’s action or inaction, the Seller shall be obligated to discharge and remove such items or matter regardless of cost. If other defects in the title are curable days and the cost to cure is not within a period of (negotiated # of days) in excess of $(negotiated amount) Dollars, ($ _______), then Seller shall be required to proceed with diligence and in good faith to remedy such defects. Any time periods within which Purchaser otherwise would be required to take any action under this Contact shall be tolled during such period but only if such period of cure actually delays Purchaser’s Settlement. Issuance by a title insurance company of a title insurance commitment naming Purchaser as the proposed insured for any owners’ policy of title insurance on American Land Title Association standard form owners marketability policy (ALTA Form B-1086, as from time to time amended), conforming to the requirements of this Contract, shall be conclusive evidence of marketability of title. In the event that, subsequent to the date of the Title Company’s commitment, but prior to Settlement, any lien, defect, encumbrance or other item affecting title arises (which were not reflected on the commitment), Seller shall provide notice to Purchaser thereof. If such matter can be removed by the payment of $(negotiated amount) Dollars, ($_______), or less in the aggregate, Seller hereby agrees to remove such matter. If such matter cannot be so removed, Seller shall immediately notify Purchaser and Purchaser may either (a) waive its objection to such matter or (b) elect to terminate this Contract, in which event the Deposit will be returned to Purchaser and neither party shall have any further liability to the other. The Property, including the aforesaid personal property, is sold free of encumbrances, except as state herein. Title is to be good of record and marketable subject, however, to covenants, rights of way, easements, conditions and restrictions of record, if any, approved by Purchaser in writing, such approval is not to be unreasonably with-held.
6.
DEED. Seller agrees to execute and deliver at Settlement a good and sufficient special warranty deed.
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) 7.
ADJUSTMENT. Rents received, taxes, water rent, sewer, insurance and interest on existing encumbrances, if any, cost of fuel in storage tanks, salaries and accrued benefits of employees (if any), and operating charges (including, without limitation, utilities charges) are to be adjusted to date of Settlement. Rental security deposits, if any, plus interest shall be transferred to Purchaser at time of Settlement. If, in Purchaser’s determination, such security deposits plus interest are less than the amount of principal and interest that should have been trans, the ferred by Seller pursuant to leases and (local law and regulations) Purchase Price shall be reduced by the amount of such difference. Taxes, general and special, are to be adjusted according to the certificate of taxes issued by the collector of taxes, if any.
8.
CLOSING AND RECORDING COSTS. Examination of title (except as otherwise provided above), tax certificate, conveyancing, notary fees, survey if required, State revenue stamps, if any, and all recording charges, including those for purchase money trust, if any are to be at the cost of the Purchaser. Transfer and recordation taxes shall be equally divided between Seller and Purchaser; however, the parties agree that if Purchaser qualifies for tax exemption under D.C. Code § 47-3503(b), Purchaser will be responsible for payment of all transfer and recordation taxes incurred in the transfer of the Property and shall receive a credit against the Purchase Price from Seller of the amount of the transfer tax that would have been due if Purchaser had not qualified for this exemption.
9.
SETTLEMENT. Within 120 days from the date of acceptance of this Contract by Seller, Seller and Purchaser agree to make full settlement (“Settlement” or “Closing”) in accordance with the terms of this Contract. After ratification of this Contract, Purchaser agrees to take all necessary actions, in a commercially reasonable manner, in order to make full Settlement in accordance with the terms of this Contract including but not limited to reviewing the title report, notifying the Seller as to defects, completing any environmental, engineering, structural or other tests that its deems necessary, and pursuing financing for the purchase of the Property. At Settlement, and as a condition to Purchaser’s obligations hereunder, Purchaser shall be able to obtain a standard ALTA Form B-1086 owners’ marketability policy at normal rates in an amount not less than $ (purchase price) , insuring that title to the Property is conveyed free of any encumbrances or defects, except as waived by Purchaser. At the Settlement, in addition to all other documents required to be delivered by the provisions hereof (a) Seller shall deliver to Purchaser a bill of sale for the Personal Property, an assignment of such insurance policies and service contracts on the Property as shall be assignable and assigned at the request of Purchaser, all books and records pertaining to the operation of the Property, an assignment of leases, such certificates, permits and licenses, with respect to the Property as shall be assignable, any plans and specifications of the Property in Seller’s possession; and (b) Purchaser shall deliver to Seller an indemnification for security deposits turned over to Purchaser.
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) As of the Settlement date (a) subject to the provisions of paragraph 13 herein, no part of the Property shall have been acquired, or shall be about to be acquired, by any governmental authority or agency in the exercise of its power of eminent domain or by private purchase in lieu thereof, nor shall there be any threat or imminence of any such acquisition or purchase; and (b) all representations and warranties a set forth in this Contract shall be true and correct. The Seller shall deliver to the Title Agent such affidavits and indemnities, and/or establish such escrow accounts, as may be requested by the Title Agent in order to remove exceptions from the title policy for unrecorded easements, unfiled mechanic’s or material-men’s liens, litigation, tax liens, unpaid special assessments, unpaid water and sewer charges, together with such other documentation and evidence as may be requested by the Title Agent concerning the right, power and authority of Seller to execute the Deed and all other documents executed hereunder. Purchaser agrees to have the deed of conveyance recorded promptly. In the event the Seller fails to consummate said sale in accordance with the provisions of this Contract, the Purchaser may sue for specific performance as Purchaser’s sole legal remedy or at its sole option, request the return of the Deposit plus accrued interest. 10.
PLACE OF SETTLEMENT. Settlement is to be made at the Title Company or other agency employed to examine the title. The parties shall be deemed to have provided good and sufficient tender of performance under the terms of this Contract by depositing that part of the Purchase Price to be paid in cash, the deed of conveyance for execution and such other papers as are required of either Seller or Purchaser by the terms of this Contract with the Title Company or such other agency within the time above provided for the consummation of this Contract.
11.
TENANCIES. The Property is sold and shall be conveyed subject to any existing tenancies. Without the prior written consent of Purchaser (which shall not be unreasonably withheld), Seller shall not modify the terms of or terminate any such tenancies, except for nonpayment of rent. Seller agrees to notify Purchaser of any vacancies in the premises within five (5) days of Seller’s knowledge of such vacancies. If vacancies arise after the Date of Agreement, Seller agrees, at Purchaser’s option, to (1) fill such vacancies from a priority list (“List”) of new tenants provided by Purchaser to Seller so long as these new tenants meet the Seller’s reasonable credit and rental history requirements or (2) keep the unit(s) vacant as long as the Purchaser requests in writing, forty-eight (48) hours after this notification is received from Seller, that Seller keep the unit(s) vacant. Seller agrees to keep such unit(s) vacant so long as Purchaser agrees to pay rent (at the rate payable immediately prior to such vacancy) to the Seller on apartments kept vacant. Under no circumstances shall Purchaser authorize any apartments kept vacant under this Contract to become occupied except by written consent of the Seller. No lease entered into after execution of this Contract may be greater than one year.
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) 12.
RISK OF LOSS. Seller assumes the risk of loss or damage to the Property by fire or other casualty until the executed deed of conveyance is delivered to Purchaser or is recorded for him by the title company making the Settlement.
13.
CONDITIONS AND OPERATION OF PROPERTY. All written notices of violations of statutes, municipal orders or regulations issued by any department of the jurisdiction in which the Property is situated, or prosecutions in any of the courts of the jurisdiction in which the Property is situated on account thereof, against or affecting the Property that have been received by Seller as of the date of this Contract shall be complied with by the Seller and the Property conveyed free thereof. Seller states that, to the best of his knowledge, there are no such notices and prosecutions. Purchaser agrees that, except as expressly provided herein, Seller has made no representations, warranty or other statement as to the physical condition, operation or any other matter or thing affecting the Property. Purchaser understands that the Property is offered in AS IS condition as of the Date of Agreement. Seller shall: (a) deliver the Property in substantially the same physical condition as of the Date of Agreement; (b) not defer normal maintenance of the Property during the period from the Date of Agreement to the date of Settlement; (c) not enter into, modify or terminate any maintenance or service contracts relating to the Property prior to the date of Settlement without the prior written consent of Purchaser and (d) maintain in force all insurance coverage (including liability and Property damage) in force with respect to the Property as of the Date of Agreement. If, subsequent to the date of this Contact and prior to Settlement, after written notification to Purchaser by Seller, the Property shall be destroyed or damaged by fire, vandalism or other casualty, or if any proceeding, judicial, administrative or otherwise, which shall relate to the proposed taking of any substantial portion of the Property by condemnation or eminent domain or any action in the nature of eminent domain, or the taking or closing of any right of access to the Property, is instituted or commenced (an “Event”), then this Contract, at the option of the Purchaser, shall become null and void and the Deposit plus any interest thereon shall be returned forthwith to the Purchaser. In the case of fire, vandalism or casualty, if the Purchaser elects not to terminate this Contract, the Seller shall be entitled to receive and shall apply to the Property insurance proceeds equal to the cost of repairing the Property to the extent necessary (1) to protect and preserve the Property until Settlement or (2) required by governmental authority. At Settlement, the Seller shall assign and/or pay to the Purchaser all insurance proceeds (and other related choses in action, if any) collected or claimed with respect to said loss or damage, plus any deductible or self-insured amount, to the extent such insurance proceeds and other amounts are not paid to Seller and applied pursuant to the preceding sentence. In the case of taking by condemnation or eminent domain, if the Purchaser elects not to terminate this Contract, the Purchaser shall be credited with or be assigned all the Seller’s right to any proceeds therefrom.
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) 14.
INSPECTION BY PURCHASER. Purchaser and/or its agent and representatives shall have the further right at any time before Settlement to enter onto the Property with prior notice to Seller, at reasonable times before Settlement, and make any or all of the tests, studies, and examinations desired by Purchaser, at Purchaser’s sole expense but Purchaser shall, at its own expense, promptly repair any damage done to the Property. Seller shall make reasonably available to Purchaser access to all common areas and dwelling units in the Property, including but not limited to lobbies, storage and laundry rooms, maintenance and mail rooms and allow Purchaser and its agents and/or representatives ingress and egress to all same for the sole and exclusive purpose of making the aforesaid studies, investigations and tests. Seller also will allow Purchaser reasonable access to Property management records. Purchaser shall have the right to conduct a Phase One Environmental Study at Purchaser’s cost.
15.
REPRESENTATION AND WARRANTIES. a.
b.
Representations of Seller. Seller makes the following representations and warranties as of the contract date, each of which shall be true on the Settlement date: 1.
Seller knows of no pending contemplated or threatened condemnation or similar proceeding or any pending, contemplated or threatened litigation affecting title to the Property or any part thereof, or any other suit involving the Property in any manner whatsoever.
2.
There are no commitments or contracts for the management, leasing or maintenance of, or the provision of any supplies or services to, the Property which are not terminable at will or upon thirty days written notice.
3.
Seller holds a valid certificate of occupancy on the Property and a current, valid apartment business license.
4.
This agreement does not violate the terms of any other contract or instrument to which Seller is a party or successor party.
5.
Seller has full right and authority to sell the Property and the persons signing this contract on behalf of Seller are authorized to do so.
6.
All bills and claims for labor performed and services and materials furnished to or for the benefit of the Property have been or will be paid in full by Seller prior to or on the settlement date, and, to the best of Seller’s knowledge, there are no mechanic’s or materialman’s liens on or affecting any part of the Property.
Representations of Purchaser. Purchaser makes the following representations and warranties as of the Contract date, each of which shall be true on the Settlement date: 1.
The Purchaser is a corporation duly organized, validly existing and good standing under the laws of the (state of incorporation).
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) 2.
The Purchaser has full power and authority to enter into this Contract and to perform the obligations required to be performed by it hereunder. The execution, delivery and performance of this Contract, including without limitation, the deliveries and other agreements of the Purchaser contemplated hereby, have been duly authorized by the Board of Directors of the Purchaser and do not require any further authorization or consent by the Purchaser.
16.
CHOICE OF LAW. This Contract, the rights and obligations of the parties hereto, and any claims or disputes relating thereto shall be governed and con. strued in accordance with the laws of the (jurisdiction)
17.
AGENT. Seller recognizes ___________ (the “Agent”) as agent negotiating this Contact and agrees to pay to Agent a commission for services rendered amounting to Percent (_____%) of the gross Purchase Price set forth herein as per listing agreement. The amount of commission as aforesaid, is hereby assigned to the Agent by Seller out of the proceeds of sale and the Deposit at Settlement. The party through or by whom Settlement hereof is made is hereby authorized and directed to make deduction of the aforesaid commission from the proceeds of sale and to make payment thereof to said Agent. Brokers commissions shall only be paid upon consummation of Settlement.
18.
TIME OF ESSENCE. The Purchaser and Seller agree that time is of the essence in this Contract.
19.
ACCEPTANCE; DATE OF AGREEMENT. This Contract must be ratified by the Seller, within _____ (_____) business days from the date set forth under the title hereof (“Date of Offer”), in order to be effectual and binding. The date of this Contract (“Date of Agreement”) shall be the date on which this Contract is ratified and accepted as aforesaid.
20.
BINDING EFFECT; ENTIRE AGREEMENT. Purchaser and Seller mutually agree that this Contract shall be binding upon them, and their respective heirs, executors, administrators, successors and assigns; that this Contract is the final and entire contract between the parties and that they shall not be bound by any terms, conditions, statements warranties, or representations, oral, or written, express or implied, not herein contained. This agreement can be modified subsequently only by written agreement, executed by both parties.
21.
ASSIGNMENT. Purchaser hereby reserves the right and option to designate the name of the party who will take title to the property at settlement, including entities that are related or unrelated to the Purchaser. The Purchaser also reserves the right to perform its obligations hereunder and to purchase the Property in conjunction with a third party.
22.
GENERAL PROVISIONS. (a) In the event that mortgages are used rather than deeds of trust, the word “mortgage” shall be substituted automatically; (b) if this contract provides for the assumption of existing trust(s) or for purchase subject to existing trust(s), it is understood that the balance of such trust(s) and the cash down payment are approximate amounts; (c) Trustees in all deeds of trust are to be named by the parties secured thereby; (d) The Property is to be
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E XHIBIT 13A.1 Real Estate Purchase Contract (continued) conveyed in the name(s) to be designated in writing by Purchaser prior to Settlement; (e) Seller shall furnish any pertinent information required by Purchaser or his financing agency in reference to obtaining a loan commitment and in general reasonably cooperate (at the Purchaser’s sole expense and obligation) with the Purchaser’s acquisition of the Property; and (f) The words “Seller,” “Purchaser,” all pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity and the context may require. 23.
NOTICES. All notices required or permitted herein shall be in writing and effective as of the date on which such notice is mailed in any United States Post Office, by certified or registered mail, postage prepaid, or hand-delivered, to Seller, the Agent or Purchaser (as shall be applicable) at the address designated herein, or to such other address as the parties may designate in writing from time to time.
24.
ACKNOWLEDGEMENT. We, the undersigned, hereby, ratify, accept and agree to the above and acknowledge it to be our Contract.
THIS IS A LEGALLY BINDING CONTRACT, PURCHASER AND SELLER SHOULD SEEK COMPETENT LEGAL ADVICE BEFORE SIGNING. ___________________________ ___________________________ Purchaser Seller DATE OF RATIFICATION AND ACCEPTANCE (DATE OF AGREEMENT) _____________, 19 _____________ _____________, 19 _____________ Address of Purchaser: Address of Seller: EXHIBIT 1 SCHEDULE OF PERSONAL PROPERTY 1 True Value, 3.5 HP Lawn Mower 3 Used Dishwashers 5 Rakes 3 Shovels 3 Boxes of Floor Tiles
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E XHIBIT 13A.2 Escrow Agreement—Earnest Money
_____________________ (“Purchaser”), _____________________ (“Seller) and _____________________ (“Escrow Agent”) agree as follows: 1.
Escrow Agent shall hold in an interest/noninterest bearing escrow account the total sum of $___________ (“Earnest Money Deposit”), under the terms of the Contract of Sale between Purchaser and Seller, dated _____________________, for the sale of _____________________ (“Property”). If the Earnest Money Deposit is held in an interest bearing account, interest shall be credited to _____________________, social security or tax identification number _____________________.
2.
Escrow Agent shall disburse the Earnest Money Deposit only as directed in writing by Purchaser and Seller. If Purchaser’s and Seller’s instructions to Escrow Agent differ, Escrow Agent shall not disburse any funds until there is agreement between Purchaser and Seller as to such instructions or until there is a final Court Order instructing Escrow Agent how to disburse the funds, by a Court having jurisdiction over Escrow Agent. All negotiations and arrangements concerning the disbursement of the Earnest Money Deposit shall be solely between Purchaser and Seller and Escrow Agent will play no role whatsoever other than as neutral stakeholder.
3.
Purchaser and Seller shall indemnify and hold harmless Escrow Agent from any and all liability of any nature which may arise from this Escrow Agreement, including but not limited to all of Escrow Agent’s attorney fees and related costs, provided that Escrow Agent does not act with gross negligence or intentional fraud.
PURCHASER
SELLER
By: ____________________________
By: ____________________________
By: ____________________________
By: ____________________________ ESCROW AGENT By: ____________________________
______________________________________________________________
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A P P E N D I X
1 3 B
Documents Pertaining to Option Agreements E XHIBIT 13B.1 Real Estate Option Agreement
Date of Offer: _________________ 1.
PARTIES. _______________________, (“Optionor”) hereby provides to _______________________, (“Optionee”), an option under the terms of this agreement (“Agreement”).
2.
GRANTING OF OPTION. For the sum of $___________ received from Optionee, Optionor hereby grants to Optionee the exclusive option to purchase the real property (“Option”) legally described as Lot _____ Square _____ with improvements thereon known by street address as ______________, a together with the _____ unit apartment building in the (jurisdiction) easements, rights, privileges and appurtenances belonging to the same, and including all of the furniture, fixtures, furnishings, machinery, and equipment (“Personal Property”) owned by the Seller situated on or about this property (this real and personal property being collectively referred to herein as the “Property”).
3.
OPTION PERIOD. The Option shall run for from the Date of this Agreement.
4.
EXERCISE OF OPTION. The Optionee may exercise this Option at any time prior to the expiration of the Option Period by providing written notice to the Optionor.
5.
PURCHASE PRICE. The purchase price (“Purchase Price”) of the Property is ___________________ DOLLARS ($________). Simultaneous with the Optionee’s exercise of the Option, the Optionee must deposit 25% of the Purchase Price (“Deposit”) with (name of escrow agent), (“Escrow Agent”). The amount of money previously paid by the Optionee for the Option will be credited in full toward the Deposit. The remainder of the Purchase Price must be paid by Optionee at Settlement, as defined below. The Deposit will be held in an interest-bearing account at (name of financial institution), with all interest applied as part of the Deposit, under the terms of the Escrow Agreement, attached as Exhibit 1.
6.
FAILURE TO EXERCISE OPTION. If the Optionee does not exercise the Option prior to the expiration of the Option Period, all amounts paid by the Optionee for the Option shall be retained by the Optionor, and neither Optionor nor Optionee shall have any further rights or claims against the other.
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E XHIBIT 13B.1 Real Estate Option Agreement (continued) 7.
SETTLEMENT. If Optionee exercises its Option to purchase the Property, Optionee must settle on the purchase of the property within _____ days from the date that the Option is exercised (“Settlement” or “Closing”). After exercise of the Option, Optionee agrees to take all necessary actions, in a commercially reasonable manner, in order to make full Settlement in accordance with the terms of this Agreement including but not limited to reviewing the title report, notifying the Optionor as to defects, completing any environmental, engineering, structural or other tests that its deems necessary, and pursuing financing for the purchase of the Property. At Settlement, and as a condition to Optionee’s obligations hereunder, Optionee shall be able to obtain a Standard ALTA Form B-1086 owners’ marketability policy at normal rates in an amount not less than $ (purchase price) , insuring that title to the Property is conveyed free of any encumbrances or defects, except as waived in writing by Optionee. At the Settlement, in addition to all other documents required to be delivered by the provisions hereof (a) Optionor shall deliver to Optionee a bill of sale for the Personal Property, an assignment of such insurance policies and service contracts on the Property as shall be assignable and assigned at the request of Optionee, all books and records pertaining to the operation of the Property, an assignment of leases, such certificates, permits and licenses, with respect to the Property as shall be assignable, any plans and specifications of the Property in Optionor’s possession; and (b) Optionee shall deliver to Optionor an indemnification for security deposits turned over to Optionee. As of the Settlement date (a) subject to the provisions of paragraph 15 below, no part of the Property shall have been acquired, or shall be about to be acquired, by any governmental authority or agency in the exercise of its power of eminent domain or by private purchase in lieu thereof, nor shall there be any threat or imminence of any such acquisition or purchase; and (b) any representations and warranties as set forth in this Agreement shall be true and correct. If Optionee exercises the Option, the Optionor shall deliver to the Title Company or other agency (“Title Company”) designated in paragraph 9 below, such affidavits and indemnities, and/or establish such escrow accounts, as may be requested by the Title Company in order to remove exceptions from the title policy for unrecorded easements, unfiled mechanic’s or materialmen’s liens, litigation, tax liens, unpaid special assessments, unpaid water and sewer charges, together with such other documentation and evidence as may be requested by the Title Company concerning the right, power and authority of Optionor to execute the Deed and all other documents executed hereunder. Optionee agrees to have the deed of conveyance recorded promptly. In the event that the Optionor fails to consummate Settlement in accordance with the provisions of this Agreement, the Optionee may sue for specific performance as Optionee’s sole legal remedy or at its sole option, request the return of the Deposit plus accrued interest.
8.
PLACE OF SETTLEMENT AND TITLE COMPANY. If Optionee exercises the Option, Settlement is to be made at the Title Company or other agency designated by Optionee in paragraph 9 below to examine the title. Optionee shall provide the Optionor with written notice of the date of Settlement at least (#of days) days prior to the Settlement. The parties shall be deemed to have provided good and sufficient tender of performance under the terms of this Agreement by depositing that part of the Purchase Price to be paid in cash, the deed
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E XHIBIT 13B.1 Real Estate Option Agreement (continued) of conveyance for execution and such other papers as are required of either Optionor or Optionee by the terms of this Agreement with the Title Company or such other agency within the time above provided for the consummation of this Agreement. 9.
TITLE. Optionee hereby agrees to order, within seven (7) business days of the exercise of the Option, the examination of title from (name of title company) (“Title Company”), a survey (if required), and the preparation of all necessary conveyancing papers, at Optionee’s expense; provided, however, that if upon examination, the Optionee objects to the title as defective or unmarketable, and is not remedied as detailed below, the Optionor hereby agrees to pay the cost of the examination of the title. THE OPTIONEE HAS THE RIGHT TO NAME AND EMPLOY THE TITLE INSURANCE COMPANY, SETTLEMENT AGENT, ESCROW COMPANY OR TITLE ATTORNEY OF ITS CHOICE. All claims for defects in or unmarketability of title by Optionee shall be delivered to Optionor within fifteen (15) days of issuance of the title report and shall be deemed waived if not so delivered. To the extent that any title item or matter to which Optionee objects consists of any existing deed of trust, lien for unpaid bills for utilities (including water and sewer), real property taxes or work performed on or services provided for the Property, or other lien created by Optionor’s action or inaction, the Optionor shall be obligated to discharge and remove such items or matter regardless of cost. If other defects in the title are curable within a period of (negotiated # of days) days and the cost to cure is not in excess of $ (negotiated amount) Dollars, ($_______), then Optionor shall be required to proceed with diligence and in good faith to remedy such defects. Any time periods within which Optionee otherwise would be required to take any action under this Agreement shall be tolled during such period but only if such period of cure actually delays Optionee’s Settlement. Issuance by a title insurance company of a title insurance commitment naming Optionee as the proposed insured for any owners’ policy of title insurance on American Land Title Association standard form owners marketability policy (ALTA Form B-1086, as from time to time amended), conforming to the requirements of this Agreement, shall be conclusive evidence of marketability of title. In the event that, subsequent to the date of the Title Company’s commitment, but prior to Settlement, any lien, defect, encumbrance or other item affecting title arises (which were not reflected on the commitment), Optionor shall provide notice to Optionee thereof. If such matter can be removed by the payment of $(negotiated amount) Dollars, ($_______), or less in the aggregate, Optionor hereby agrees to remove such matter. If such matter cannot be so removed, Optionor shall immediately notify Optionee and Optionee may either (a) waive it objection to such matter or (b) elect to terminate this Agreement, in which event the Deposit will be returned to Optionee and neither party shall have any further liability to the other. The Property, including the aforesaid personal property, is sold free of encumbrances, except as stated herein. Title is to be good of record and marketable subject, however, to covenants, rights of way, easements, conditions and restrictions of record, if any, approved by Optionee in writing, such approval is not to be unreasonably withheld.
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E XHIBIT 13B.1 Real Estate Option Agreement (continued) 10.
DEED. Optionor agrees to execute and deliver at Settlement a good and sufficient special warranty deed.
11.
ADJUSTMENT. Rents received, taxes, water rent, sewer, insurance and interest on existing encumbrances, if any, cost of fuel in storage tanks, salaries and accrued benefits of employees (if any), and operating charges (including, without limitation, utilities charges) are to be adjusted to date of Settlement. Rental security deposits, if any, plus interest shall be transferred to Optionee at time of Settlement. If, in Optionee’s determination, such security deposits plus interest are less than the amount of principal and interest that should have been transferred by Optionor pursuant to leases and (local law and regulations) , the Purchase Price shall be reduced by the amount of such difference. Taxes, general and special, are to be adjusted according to the certificate of taxes issued by the collector of taxes, if any.
12.
CLOSING AND RECORDING COSTS. Examination of title (except as otherwise provided above), tax certificate, conveyancing, notary fees, survey if required, State revenue stamps, if any, and all recording charges, including those for a purchase money trust, if any are to be at the cost of the Optionee. Transfer and recordation taxes shall be equally divided between Optionor and Optionee; however, the parties agree that if Optionee qualifies for tax exemption under D.C. Code § 47-3503(b), Optionee will be responsible for payment of all transfer and recordation taxes incurred in the transfer of the Property and shall receive a credit against the Purchase Price from Optionor of the amount of the transfer tax that would have been due if Optionee had not qualified for this exemption.
13.
TENANCIES. The Property is sold and shall be conveyed subject to any existing tenancies. After exercise of the Option by Optionee, Optionor shall not modify the terms of or terminate any such tenancies, except for nonpayment of rent without the prior written consent of Optionee, which shall not be unreasonable withheld. No lease entered into after execution of this Agreement may be greater than one year. After exercise of the Option, Optionor agrees to notify Optionee of any vacancies in the premises within five (5) days of Optionor’s knowledge of such vacancies. If vacancies arise, Optionor agrees, at Optionee’s option, to (1) fill such vacancies from a priority list (“List”) of new tenants provided by Optionee to Optionor so long as these new tenants meet the Optionor’s reasonable credit and rental history requirements or (2) keep the unit(s) vacant as long as the Purchaser requests in writing, forty-eight (48) hours after this notification is received from Optionor, that Optionor keep the unit(s) vacant. Optionor agrees to keep such unit(s) vacant so long as Optionee agrees to pay rent (at the rate payable immediately prior to such vacancy) to the Optionor on apartments kept vacant. Under no circumstances shall Optionee authorize any apartments kept vacant under this Contract to become occupied except by written consent of the Optionor.
14.
RISK OF LOSS. Optionor assumes the risk of loss or damage to the Property by fire or other casualty until the executed deed of conveyance is delivered to Optionee and is recorded for him by the title Company making the Settlement.
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E XHIBIT 13B.1 Real Estate Option Agreement (continued) 15.
CONDITIONS AND OPERATION OF PROPERTY. All written notices of violations of statutes, municipal orders or regulations issued by any department of the jurisdiction in which the Property is situated, or prosecutions in any of the courts of the jurisdiction in which the Property is situated on account thereof, against or affecting the Property that have been received by Optionor as of the date of this Agreement shall be complied with by the Optionor and the Property conveyed free thereof. Optionee agrees that, except as expressly provided herein, Optionor has made no representations, warranty or other statement as to the physical condition, operation or any other matter or thing affecting the Property. Optionee understands that the Property is offered in AS IS condition as of the Date of Agreement. Optionor shall: (a) deliver the Property in substantially the same physical condition as of the Date of Agreement; (b) not defer normal maintenance of the Property during the period from the Date of Agreement to the date of Settlement; (c) not enter into, modify or terminate any maintenance or service contracts relating to the Property prior to the date of Settlement without the prior written consent of Optionee and (d) maintain in force all insurance coverage (including liability and Property damage) in force with respect to the Property as of the Date of Agreement. If, subsequent to Optionee’s exercise of the Option and prior to Settlement, the Property shall be destroyed or damaged by fire, vandalism or other casualty, or if any proceeding, judicial, administrative or otherwise, which shall relate to the proposed taking of any substantial portion of the Property by condemnation or eminent domain or any action in the nature of eminent domain, or the taking or closing of any right of access to the Property, is instituted or commenced (an “Event”), then this Agreement, at the option of the Optionee, shall become null and void and the Deposit plus any interest thereon shall be returned forthwith to the Optionee. In the case of fire, vandalism or casualty, if the Optionee elects not to terminate this Agreement, the Optionor shall be entitled to receive and shall apply to the Property insurance proceeds equal to the cost of repairing the Property to the extent necessary (1) to protect and preserve the Property until Settlement or (2) required by governmental authority. At Settlement, the Optionor shall assign and/or pay to the Optionee all insurance proceeds (and other related choses in action, if any) collected or claimed with respect to said loss or damage, plus any deductible or self-insured amount, to the extent such insurance proceeds and other amounts are not paid to Optionor and applied pursuant to the preceding sentence. In the case of taking by condemnation or eminent domain, if the Optionee elects not to terminate this Agreement, the Optionee shall be credited with or be assigned all the Optionor’s right to any proceeds therefrom.
16.
INSPECTION BY OPTIONEE. Optionee and/or its agent and representatives shall have the further right at any time during the Option Period to enter onto the Property with prior notice to Optionor and to make any or all of the tests, studies, and examinations desired by Optionee, at Optionee’s sole expense. Optionee shall, at its own expense, promptly repair any damage done to the property. Optionor shall make reasonably available to Optionee access to all common areas and dwelling units in the Property, including but not limited to
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E XHIBIT 13B.1 Real Estate Option Agreement (continued) lobbies, storage and laundry rooms, maintenance and mail rooms and allow Optionee and its agents and/or representatives ingress and egress to all same for the sole and exclusive purpose of making the aforesaid studies, investigations and tests. Optionor also will allow Optionee reasonable access to Property management records. Optionee shall have the right to conduct a Phase One Environmental Study at Optionee’s cost. 17.
CHOICE OF LAW. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto shall be governed and construed in accordance with the laws of the (jurisdiction) .
18.
BROKERAGE. Optionor and Optionee agree to indemnify and hold the other party harmless from any and all costs, expenses, or damages resulting from any claims for brokerage fees or other similar forms of compensation made by any real estate broker or any other person or entity because of the sale of the Property hereunder.
19.
ACCEPTANCE; DATE OF AGREEMENT. This Agreement must be ratified by the Optionor, within (# of days) business days from the date set forth under the title hereof (“Date of Offer”), in order to be effectual and binding. The date of this Agreement (“Date of Agreement”) shall be the date on which this Agreement is ratified and accepted as reflected below.
20.
BINDING EFFECT; ENTIRE AGREEMENT. Optionee and Optionor mutually agree that this Agreement shall be binding upon them, and their respective heirs, executors, administrators, successors and assigns; that this Agreement contains the final and entire Agreement between the parties hereto, and that the parties shall not be bound by any terms, conditions, statements warranties, or representations, oral, or written, express or implied, not herein contained. This Agreement can be modified subsequently only by written agreement, executed by both parties.
21.
ASSIGNMENT. The Optionor or Optionee may assign its rights, duties, and obligations under this Agreement.
22.
GENERAL PROVISIONS. (a) In the event that mortgages are used rather than deeds of trust, the word “mortgage” shall be substituted automatically; (b) if this Agreement provides for the assumption of existing trust(s) or for purchase subject to existing trust(s), it is understood that the balance of such trust(s) and the cash down payment are approximate amounts; (c) Trustees in all deeds of trust are to be named by the parties secured thereby; (d) The Property is to be conveyed in the name(s) to be designated in writing by Optionee prior to Settlement; (e) Optionor shall furnish any pertinent information required by Optionee or his financing agency in reference to obtaining a loan commitment and in general reasonably cooperate, at the Optionee’s sole expense and obligation, with the Optionee’s acquisition of the Property; and (f) The words “Optionor,” “Optionee,” all pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, and the identity of the person or entity and the context may require.
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E XHIBIT 13B.1 Real Estate Option Agreement (continued) 23.
NOTICES. All notices required or permitted herein shall be in writing and effective as of the date on which such notice is mailed in any United States Post Office, by certified or registered mail, postage prepaid, or hand-delivered, to Optionor or Optionee (as shall be applicable) at the address designated herein, or to such other address as the parties may designate in writing from time to time.
24.
ACKNOWLEDGEMENT. We, the undersigned, hereby, ratify, accept and agree to the above and acknowledge it to be our Agreement.
______________________________ Optionee
_____________________________ Optinor DATE OF RATIFICATION AND ACCEPTANCE (DATE OF AGREEMENT)
______________________, 19_____ ______________________, 19____ Address of Optionee: Address of Optionor: _____________________________________________________________
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C H A P T E R
F O U R T E E N 14
Prepurchase Considerations 14.6
Applying for Financing and Operating Subsidies 465
Determining the Ownership Entity—Factors 470
14.7
Establishing the Ownership Entity: Divided Ownership and Leasehold Interests 476
14.3
Determining the Ownership Entity—Generally 466
14.8
14.4
Determining the Ownership Entity— Corporations 466
Interviewing and Selecting the Management Company 477
14.9
Developing Plans for Renting or Selling Units 478
14.1
Introduction
14.2
14.5
14.1
465
Determining the Ownership Entity—Partnerships 468
Appendix 14A Monthly Management Reports 483
INTRODUCTION
After site control is secured, the sponsor must make preparations to acquire the property. Prior to acquisition, the sponsor must apply for financing and operating subsidies; determine the identity of the ownership entity that will take title to the property; in the case of multifamily properties, select a management company; and develop plans for renting or selling units to be developed by the sponsor. 14.2
APPLYING FOR FINANCING AND OPERATING SUBSIDIES
The sponsor must devote significant resources toward applying for the various financing and subsidy programs that were identified during the feasibility phase as being necessary for ensuring affordability. Given the multiple layers of financing that are often required for affordable housing developments, the sponsor will probably have to complete a separate loan application for every private-sector lender (for acquisition, construction, and permanent loans) and every public-sector lender (city, county, and state). In addition, applications for other financial resources— credit enhancement; private or public mortgage insurance; state or federal
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operating subsidies; local, state, federal, or foundation grants; and local tax abatements—may be required. This process will be frustrating and time-consuming, but there is no way around it. Soon after the feasibility phase is completed, the sponsor should take its sources and uses statements and its multiyear income and expense projections, including subsidies, if any (see Chapter 12), and confer with the primary sources of these loans, grants, or subsidies. These discussions should be open and frank concerning the availability of these or similar resources and the requirements that will be imposed on the sponsor by these entities prior to and after these resources are committed to the project. 14.3
DETERMINING THE OWNERSHIP ENTITY—GENERALLY
The nonprofit organization must determine whether it is going to take title to the property in its corporate name or in the name of a corporation or partnership created for the purpose of acquiring and/or operating the property. This chapter discusses the ownership options available to a nonprofit and the factors that must be considered in determining which ownership form is best suited for each particular project and each nonprofit organization. 14.4
DETERMINING THE OWNERSHIP ENTITY— CORPORATIONS
Corporations and partnerships (discussed in Section 14.5) are the two basic forms of ownership used in real estate development. Increasingly, the limited liability corporation (discussed in 15.2(c)) is being used as well.1 (a)
Corporations Defined
A corporation is a legal entity created under state law. Corporations are owned or controlled by individual stockholders or members (hereinafter, stockholders and members will be referred to as “members”); however, the organization’s existence and stated purposes continue regardless of any changes in the membership of the corporation. The primary benefit of the corporate form of ownership is that a member cannot be held liable for any debts or obligations incurred by the corporation beyond the amount the member has invested in the corporation. If corporate debts 1
A growing alternative to partnerships are limited liability corporations (LLCs). LLCs can provide limited liability to all owners, while, if properly structured, also establish a pass-through entity for purposes of federal income taxation. For more information on LLCs, see Chapter 15, Section 2(c).
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exceed corporate assets, the corporate form shields members from creditors seeking payment of the corporate debts. This is true whether the owner(s) of the corporation is an individual (or group), another corporation(s), or a partnership(s). Corporations are managed by a board of directors that is elected by and serves at the pleasure of the members. The board is responsible for the day-to-day operations of the corporation. Members generally do not participate in the management of the corporation except to the extent that they elect the board of directors. (b)
Profit versus Nonprofit
A corporation may be a for-profit or a nonprofit corporation. Each state sets different requirements for nonprofit and for-profit corporations to meet in order to secure the protection of that state’s corporation laws. A for-profit corporation’s purposes are to make money for its stockholders through the payment of dividends and/or the appreciation of stock prices if publicly traded. A for-profit corporation whose annual income exceeds the corporation’s annual expenses must pay taxes on that profit. These taxes are over and above any taxes owed by individual tax-paying stockholders as a result of dividends paid by the corporation during the tax year. The purposes of a nonprofit corporation, on the other hand, are to accomplish charitable or other social endeavors, without making a profit. Nonprofit corporations incorporated under state nonprofit corporation laws usually can apply for and receive exemptions from state and local taxes. However, these organizations must apply to the Internal Revenue Service (IRS) if they wish to be exempt from paying federal income taxes. Most nonprofit corporations receive their tax exemption under Section 501(c) of the Internal Revenue Code (the “Code”).2 The most sought-after designation under Code Section 501(c) is “501(c)(3) organization.” These organizations are: Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation . . . and does not participate in, or intervene in . . . any political campaign on behalf of (or in opposition to) any candidate for public office. 2
Code Section 501(c) organizations include organizations such as foundations, churches, civic associations, labor and agricultural organizations, chambers of commerce, country and social clubs, fraternal societies, teachers’ retirement funds, credit unions, some insurance associations, and some trusts and cemeteries.
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Many 501(c)(3) organizations that develop affordable housing were organized for such charitable purposes as: 1. Promoting social welfare. 2. Providing low-income housing. 3. Lessening neighborhood tensions. 4. Combating community deterioration.3 Not only are 501(c)(3) organizations exempt from federal taxation, but contributions to these nonprofits from individuals, corporations, and partnerships are tax-deductible to the contributor for federal income tax purposes. A 501(c)(3) organization also is more likely to receive grants from other 501(c)(3) organizations and from private nonprofit foundations, because record-keeping requirements of the grant-making organizations are reduced significantly if they provide grants to 501(c)(3) organizations. The Code provides 501(c)(3) corporations engaged in affordable housing development with an additional important benefit. Under Code Section 145, 501(c)(3) organizations can issue tax-exempt bonds for the development of affordable rental housing. A discussion of this financing tool can be found in Chapter 7. 14.5
DETERMINING THE OWNERSHIP ENTITY—PARTNERSHIPS
A partnership is an association of two or more persons or corporations formed to carry out as co-owners a business for profit. There are two basic forms of partnerships: general and limited. In a general partnership, the partners share the partnership’s profits and losses under the terms of a partnership agreement. Unlike corporations, where members are shielded from the entity’s liabilities, each partner in a general partnership is liable personally for all the debts of the partnership. A limited partnership has elements of both a general partnership and a corporation. In a limited partnership, one or more general partners manage the partnership and are jointly and individually responsible for the partnership’s liabilities. In addition to the general partners, however, the partnership has limited partners who contribute capital to the partnership but are then treated more like corporate shareholders. They share in profits but incur no liability for the partnership debt beyond the limited partners’ capital contribution. 3
For an excellent discussion of tax-exempt organizations, see Bruce R. Hopkins, The Law of Tax-Exempt Organizations, seventh edition (1998).
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Many real estate projects are referred to as joint ventures. In reality, joint ventures are a subset of the partnership form of ownership. In fact, state laws govern whether there can even be a legal entity known as a joint venture or whether it must be referred to as a partnership. In a joint venture, two or more parties join together to carry out as co-owners a business for profit. Unlike other partnerships, however, real estate joint ventures usually are established for a limited purpose (e.g., developing one piece of property) and a limited duration (e.g., the life of the tax benefits). Joint ventures can be general or limited partnerships. Partnerships are considered “pass-through” entities for income tax purposes. All items of income earned and all expenses incurred by the partnership pass-through the partnership to the individual partners. Assume, for example, that a partnership comprises two general partners who have equal interests in the profits and losses of the partnership. If the partnership had net income for the year of $10,000 and made a charitable contribution of $5,000, the partners would each have to report $5,000 in income ($10,000 partnership net income divided between two partners) from the partnership on their individual tax returns. The partners would include a $2,500 charitable contribution deduction ($5,000 partnership deduction divided between two partners) on their income tax returns. States often require partnerships to register their partnership with the state and to disclose the identity of the partners. Many states have enacted the Uniform Partnership Act and the Uniform Limited Partnership Act, which treat partnerships uniformly from state to state. However, nonprofits must ensure that their corporate and/or development team counsel is familiar with the partnership laws in the state where the proposed housing development is located. A nonprofit organization must work closely with its counsel to structure its role in a partnership carefully. As defined above, a partnership is formed to carry out a business for profit. The nonprofit’s participation in a profit-motivated transaction may not only subject the organization to taxable income but may even threaten the organization’s tax-exempt status.4 Many programs, such as the low-income housing tax credit discussed in Chapter 9, establish “safe harbors” for nonprofits, or parameters that nonprofits can follow, so they do not jeopardize their tax-exempt status when participating in for-profit endeavors.
4
For a detailed discussion of a nonprofit organization’s role in for-profit enterprises, see Chapter 15 in Michael I. Sanders, Partnerships and Joint Ventures Involving NonProfit Organizations (1993).
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14.6
DETERMINING THE OWNERSHIP ENTITY—FACTORS
The nonprofit organization must consider a number of factors when determining whether title should be vested in the sponsoring organization or in another corporation or partnership created to take title to the property. These factors include: whether the project will be for rental or for sale (homeownership housing), the size and nature of the nonprofit organization, and the financing structure and requirements for the project. (a)
Rental Housing
One important factor in determining the ownership structure is whether the project will be rental housing (condominiums or cooperatives) or forsale homeownership housing (fee-simple, single-family homes). Whether title is taken in the name of the sponsor or in the name of a corporation formed by the sponsor is discussed in 14.6(c). Unless financing requirements dictate otherwise, as noted in 14.6(d), sponsors of rental housing who intend to own the rental property usually take title to the property as a corporation or LLC in order to protect the sponsor from liability. As noted above, the corporate and LLC forms shield the members of the nonprofit organization from liability. Liability is a significant consideration to a nonprofit owner of rental housing because the nonprofit will have a long-term ownership interest in the property. The longer a property is owned, the greater the possibility that there will, in fact, be some liability simply because of the law of averages and the passage of time. A nonprofit’s exposure for liabilities originating from property damage or personal injury to a tenant, guest, or employee is greater for rental housing than for homeownership housing because individual homeowners generally are responsible for these types of liabilities. Similarly, the risk of contract liability or liability for expenses incurred by the project in excess of project income is greater for a rental property because the sponsor has to face the monthly task of collecting rents sufficient to meet or exceed operating expenses. The sponsor does not face this risk on a continuing basis when it develops and sells out homeownership units because the sponsor’s relationship to the units ends upon their sale and the expiration of the warranty period, if any. In either event, the nonprofit organization should be conservative and acquire as much liability insurance as the project can reasonably afford, to protect against liability from personal injury or property damage. Regardless of the form of ownership, the owner is only liable for claims in excess of the liability insurance coverage or for claims outside the scope of coverage. A $1 million insurance policy, for example, does not cover the last $500,000 of a $1.5 million judgment.
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(b)
Homeownership Housing
The sponsor’s decision on whether to create a cooperative, a condominium, or single-family homes at the property will be one of the key factors in determining the identity and the form of the ownership entity that will take title to the property. Brief summaries of cooperative and condominium housing follow, and the likely ownership forms created for each type of development are discussed. Sponsors must keep in mind that state and local laws, as well as the cooperative and condominium organizational documents, may affect virtually every aspect of the general descriptions provided here. A more detailed comparative description of these forms of ownership is provided in Chapter 19. Issues concerning the identity and form of ownership of an entity that is developing single-family homes are included in the discussion of condominiums. The apartment building(s) in a feesimple cooperative housing development is owned by a nonprofit cooperative corporation. The structure and operation of the cooperative corporation are governed by the laws of the state in which the corporation is incorporated. However, incorporation does not have to be in the same state as the location of the housing accommodation. As a corporation, a cooperative must be established under articles of incorporation (also called a charter) and operate according to its bylaws. These legal documents almost always require each member to buy a share (also called a membership) in the cooperative, entitling the member to exclusive occupancy of a unit and participation in the operation of the corporation. Usually, to ensure democratic rule within the cooperative, each member is entitled to one vote, regardless of the size of the unit the member occupies. Shares can be transferred from one shareholder to another only with approval of the cooperative. As with any corporation, the members elect a board of directors to make policy decisions on behalf of the membership. The board may manage operation of the building directly, contract with a management company, or utilize some combination. In any case, the ultimate decisionmaking resides with the board and, through it, with the membership. Each member executes an occupancy agreement (also called a membership agreement or proprietary lease) with the cooperative. The occupancy agreement usually requires a one-time membership price (also called an initial payment or deposit) from each member, who agrees to pay monthly carrying charges (also called occupancy payments or housing charges, not rent). The monthly carrying charges cover all principal and interest payments and operating costs, including property taxes for the building(s) as a whole. Utilities may be paid by the cooperative or by individual members directly for the amount consumed. (i) Cooperative Housing—Overview.
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Monthly charges go up only with increases in taxes and operating costs, because there are no outside investment interests to consider and the cooperative is not trying to make a profit. Because individual members are not personally liable for the cooperative’s debt for the building, each member’s liability is limited to the membership price, monthly carrying charges, and material damage. The occupancy agreement also commits the member to live by all cooperative rules (also called house rules) and regulations. For example, prior approval by the board is often required before a member may make improvements within a unit. As a rule, as long as an individual acts as a responsible member of the community, that member can expect to live there indefinitely. In most cases, shareholders in a cooperative corporation may include the amount of mortgage interest and property taxes paid by the cooperative on their behalf as itemized deductions on their individual federal and state tax returns. 5 Cooperative corporations financed with taxexempt bonds, however, cannot pass through these tax benefits to their shareholders. (See the discussion of tax-exempt bond financing of cooperative corporations in Chapter 7.) (ii) Identity and Form of Cooperative Ownership. If the project will be a coop-
erative, the owner will have to be a cooperative corporation by the time the housing is completed and ready to convey shares to the ultimate members and occupants. Either the nonprofit (or a subsidiary) will own the property during development and convey it to the cooperative corporation upon completion, or the cooperative corporation will acquire and maintain ownership through development and management. The choice between these options will largely depend on the transfer costs in the 5
I.R.C. § 216 provides for this treatment. At the end of every fiscal year, the cooperative corporation determines the total amount of mortgage interest and property taxes that were paid that year. These amounts then are allocated to each shareholder based on the shareholder’s percentage share of the overall cooperative expenses. For example, if the cooperative is comprised of ten one-bedroom units, then each shareholder will be responsible for one-tenth of all the cooperative’s expenses. If the cooperative spent $50,000 in a given year on mortgage interest and $10,000 on property taxes, each shareholder would be allocated $5,000 of the mortgage interest expense ($50,000 multiplied by 1/10) and $1,000 of the property tax expense ($10,000 multiplied by 1/10). The shareholder can use these allocations as deductions on itemized federal and state tax returns. Sponsors and their development team members must keep in mind that this tax benefit is only beneficial to families who itemize deductions on their tax returns. Most families with incomes at or below 80 percent of an area’s median income often pay less taxes by utilizing the standard deduction and not itemizing their deductions. Sponsors who are targeting homeownership opportunities to persons at these income levels should be careful not to unnecessarily raise expectations that homeownership will greatly reduce the family’s tax burden because of mortgage interest and property tax deductibility.
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jurisdiction, lender requirements, and accounting considerations. A discussion of the transfer cost issue follows. The lender and accounting issues are generic to all affordable housing development entities and are discussed in 14.6(d). Most nonprofit sponsors of cooperative housing will take title to a property in the name of the cooperative housing corporation because of transfer cost savings. As discussed in Chapters 4 and 12, most jurisdictions assess a transfer tax, sometimes as much as 1 to 3 percent of the transfer price, each time a property changes hands. If the nonprofit or its subsidiary takes title to the property at acquisition and then transfers the property to a cooperative corporation upon completion of the rehabilitation, two transfers and two transfer taxes are required. If title is taken by the cooperative corporation at acquisition, this first transfer and the related transfer tax are avoided. In some jurisdictions, one or more of these transfers may be exempt from transfer and recordation taxes, and costs as a significant factor may be neutralized. However, in almost all jurisdictions, there will be some costs in both time and money in carrying out two transfers instead of one. (iii) Condominium Development and Single-Family Homes—Overview.
Single-family homes generally are owned and maintained solely by the home-owner. The owner of a single family home holds title to the land as well as the building situated on the land. In a condominium, each individual unit is owned separately, and only shared areas, such as structural walls, hallways, and elevators, are owned in common by all of the individual condominium owners. A condominium association is established under a declaration, which is comparable to the cooperative corporation’s articles of incorporation, and operates under bylaws. The condominium documents establish a council or association of coowners, which usually delegates management authority to a board of directors. Neither the council nor the board owns any part of the building(s). The owners in common hold title to all shared areas; the purpose of the council and board is solely to manage. Unlike a typical cooperative, a condominium does not necessarily restrict each owner to one vote. Voting power may be determined by the percentage of the building owned by the condominium owner, who may own more than one unit. The condominium owner holds title to an individual unit, but each owner agrees to abide by all rules and regulations set by the condominium association and its board of directors. The most important of these regulations is payment of the monthly and special assessments. The monthly condominium fee covers the management costs and other charges common to all units; it does not include property taxes on the individual unit. Special assessments are one-time charges for extraordinary expenses, such as major capital improvements to the building(s).
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Unlike the cooperative member, the condominium owner generally may make any changes within the unit without approval or knowledge of the board, as long as he or she does not affect joint walls or other shared areas. The condominium owner may also sell the unit to any purchaser at any price. Thus, even though the initial price may be affordable to low-income purchasers, there is no assurance that the resale price will be affordable to future low-income purchasers. Owners of condominiums, like owners of single-family homes, may deduct, as itemized deductions on their federal and state tax returns, the amount of mortgage interest and property taxes that they paid during the calendar year. (iv) Identity and Form of Ownership for Condominiums and Single-Family Homes. A sponsor who is developing condominiums and single-family
homes usually will take title to the property in the name of the entity that will be transferring the condominium units to purchasers. Whether the sponsor will be that entity or whether it will create another corporate or partnership entity formed for that specific purpose will be more a function of the purpose and maturity of the nonprofit than a transfer tax consideration. Transfer fees cannot be avoided, unless exemptions for housing sold to low-income persons exist in the particular jurisdiction, because two transfers must take place—one from the prior owner to the sponsor, and another from the sponsor to the individual homeowner. (c)
Purpose and Maturity of the Nonprofit
The purpose and maturity of the nonprofit sponsor also will affect whether the sponsor will take title in its own name or in the name of another entity created by the sponsor. A corporation, partnership, or both may be set up by the sponsor for the sole purpose of owning a particular project. These entities often are referred to as “single-purpose” partnerships or corporations. “The 123 Apple Street Limited Partnership” created to acquire and own 123 Apple Street and “The 456 Banana Street Corporation” created to acquire, develop, and sell the condominium units at 456 Banana Street are examples of single-purpose organizations. If a nonprofit sponsor is created solely for a particular project or is newly created and a housing development is its first project, then that corporation will most likely be the ownership entity. There is little reason to explore other options, unless the new nonprofit envisions significant expansion in the future. If the nonprofit has done or plans to do multiple projects, it will want to explore the possibility of setting up a single-purpose corporation, LLC, or partnership to own each particular project. A separate corporation or partnership may shield the parent nonprofit from liability, to the extent possible. By establishing separate legal entities with separate books and
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accounts for each project, the sponsor may be able to protect its successful projects from being adversely affected by an unsuccessful project. Unfortunately, a separate legal entity actually may not shield the sponsor from liability to the extent desired. The key entities that the sponsor would like to protect itself from, such as lenders and construction contractors, likely will not contract with a single-purpose corporation, LLC, or partnership without a guarantee of performance from the parent entity or from some other entity that will look to the parent entity in case the guarantee ever needs to be fulfilled. This fact is even more evident with a new organization that does not have a successful track record. Although the single-purpose corporation, LLC, or partnership may be of limited utility to these parties, it still may be of some value to the extent that utility companies, the government, and other contractors do not require guarantees of performance. Single-purpose corporations, LLCs and partnerships are not for every organization. Legal costs and governmental filing fees are associated with setting up separate legal entities. Each entity must maintain its separate identity in order to be effective in meeting the intended purposes of shielding liability and protecting against the unsuccessful project’s bringing down the successful ones. To maintain separate identities, there must be separate boards of directors, boards of directors meetings, minutes, corporate resolutions, corporate checking accounts, financial reports, audits, and so on. The level of cost, time, and effort required is often not justified by the limited benefits. Single-purpose organizations or any other organization different from the sponsor can create accounting issues that could alienate potential lenders and make the development more difficult. For example, if a separate organization is established for a development, are construction loan funds run through the sponsor’s accounts or through the new organization’s accounts? If additional equity funds are needed for the development in order to cover shortfalls, who will be expected to provide these funds, the sponsor or the new organization? If the sponsor provides the additional equity, are these funds loans or contributions to the newly created organization? How will those funds be recovered? How does the sponsor maintain control over the funds? There are answers to all of these questions, but the process necessarily will be more complicated than having the nonprofit sponsor own the property throughout the development phase. The more sophisticated and larger the parent nonprofit, the more likely that setting up separate ownership entities will be cost-effective and justified. Conversely, the smaller, less experienced, and less sophisticated the parent nonprofit, the less likely that setting up separate ownership entities will be cost-effective and justified.
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(d)
Financing and Subsidy Requirements
The type of financing and subsidy sought by a sponsor may be the single most significant factor influencing the sponsor’s decision to take title to a property in its own name or in the name of another corporate or partnership entity created by the sponsor. As described in Chapters 6 through 11, many financing and subsidy programs are available only to certain types of ownership entities that are developing certain types of affordable housing. The Low Income Housing Tax Credit (LIHTC) is an excellent example of this point. A sponsor of low-income housing can raise equity for a development from investors by offering the investors multiyear tax credits. However, the Internal Revenue Code, which created the LIHTC, requires that the housing developed be rental housing. Moreover, realities of the investment world require that the rental housing development be owned by a partnership because of the “pass-through” nature of a partnership. The partnership form allows the tax credits that inure to the partnership to pass through to the equity investors. These tax credits could not pass through to the equity investors if the corporate form of ownership was utilized. When a partnership is formed for LIHTC purposes, the partnership likely will consist of the nonprofit sponsor (or a subsidiary corporation set up by the nonprofit for this purpose) as general partner and investor(s) as the limited partner(s). The Manna, Inc./Whitelaw Hotel case study in Chapter 12 describes an LIHTC project developed by a nonprofit organization. As noted earlier here and in Chapters 7 and 15, there are significant issues relating to the nonprofit’s Code Section 501(c)(3) tax-exempt status if it becomes a general partner in a tax credit project or any other partnership. The nonprofit should seek the advice of tax counsel familiar with these issues before becoming a general partner in this type or any other type of partnership. In short, a weighing and balancing of all of the factors discussed above must be done by the sponsor before concluding which type of ownership entity will be most appropriate for each project. 14.7
ESTABLISHING THE OWNERSHIP ENTITY: DIVIDED OWNERSHIP AND LEASEHOLD INTERESTS
Financing such as the LIHTC may dictate the form of ownership, but financing also may affect the legal interest acquired by the sponsor. To reduce total development costs and secure the property for low-income usage for the long term, the sponsor may acquire the building and a government agency or community land trust may acquire the land, at
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acquisition settlement.6 The owner of the land then leases it to the owner of the building for an extended term, such as 20 years, 50 years, or 99 years. The government or the land trust purchases the land for two purposes: 1. To impose severe use restrictions on any party who leases the land, in order to ensure that the land and improvements are used only for affordable housing. 2. To ensure that the land is not sold in the future if land values increase significantly. This concept of preserving land in perpetuity for affordable housing uses is often referred to as “owning the land in the public trust” or “land banking” the property. A more detailed description of land trusts can be found in Chapter 7. The fact that ownership is divided may not influence directly the sponsor’s decision to acquire title to the building in its own name or in the name of a single-purpose corporation or partnership. However, it may limit the sponsor’s access to other financing programs or to private forprofit lenders that require the sponsor to have fee simple title to the land. 14.8
INTERVIEWING AND SELECTING THE MANAGEMENT COMPANY
For the reasons set out in Chapter 3, the sponsor of a multifamily rental or homeownership community should select a management company as early in the development process as possible. However, if a management company has not been selected, the property to be acquired is occupied with tenants, and acquisition settlement is imminent, the selection of a management firm should be the sponsor’s highest priority. A discussion of the various issues that a sponsor should consider when selecting a management company follows. (a)
Experience in Multifamily Housing
Experience is the most important qualification of a management company. The sponsor should interview and select management companies that have experience managing the exact type of multifamily property or homeownership community proposed by the sponsor. For example, a management company should be selected to manage a cooperative housing development occupied by very low-income persons only if the 6
The property could be acquired by the government agency or land trust at acquisition settlement, or the nonprofit could convey the land to the government or the land trust later, in a separate transaction.
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management company actually has a track record of similar cooperative or other multifamily homeownership projects. As part of the interview and selection process, sponsors should obtain from the management company references from other owners of similar housing developments who are clients of the management company being considered. These references will shed light on the management company’s ability to be trusted and to work closely with the sponsor. (b)
Monthly Reporting
As part of the interview and selection process, sponsors should request that all prospective management companies provide examples of the monthly management reports generated by these companies for their existing clients. Management companies that cannot develop clear and simple monthly reports should not be selected. A sample monthly management report can be found in Appendix 14A. (c)
Fees
The sponsor must insist that management companies under consideration disclose fully all the fees associated with managing the property. Many companies will charge a sponsor a management fee based on a perunit charge or based on a percentage of actual rents or fees collected. This fee usually covers the company’s collection of monthly housing costs, the payment of bills when due, monthly meetings with the ownership entity, and preparation of the monthly income and expense reports. This fee, however, does not cover other costs such as on-site personnel and costs to complete repairs, which are charged separately to the sponsor. Even though a management company’s monthly fee may be reasonable, the additional charges to the sponsor for certain services may make the company uncompetitive. For example, some management companies charge an additional fee per month for computer services, including the generating of monthly income and expense reports and paychecks for on-site personnel. Larger management companies with maintenance staff who service multiple properties may charge this staff out at unreasonably high prices. The sponsor should be fully aware of these costs so it can fairly compare one company’s total costs with another’s before making a decision. 14.9
DEVELOPING PLANS FOR RENTING OR SELLING UNITS
A sponsor must often develop a sales or rental plan prior to acquisition settlement. This is especially true where the sponsor will be acquiring a
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partially occupied rental property or where the acquisition lender requires a certain level of presales of homeownership units prior to acquisition settlement. In cases where no significant number of vacant rental units exist or no presales are required, the sponsor will develop its sales or rental plan while the property is being rehabilitated or under construction. The sponsor should take the following factors into consideration when developing these plans. (a)
Fair Housing Laws
A sponsor is going to be subject to the Fair Housing Act whether it is operating rental property or selling homeownership units. The sponsor’s sales or marketing staff must be familiar with the following provisions of the Fair Housing Act.7 The Act states that it is unlawful:
7
•
After making a bona fide offer, to refuse to sell or rent, to refuse to negotiate for the sale or rental, or to make unavailable or deny a dwelling to any person because of race, color, religion, sex, familial status, or national origin.
•
To discriminate against a person in the terms, conditions, or privileges of sales or rental (or in the provision of services or facilities in connection therewith) because of race, color, religion, sex, familial status, or national origin, for example, to quote different prices in order to discriminate.
•
To make, print, or publish (or cause to be made, printed, or published) any notice, statement, or advertisement with respect to sale or rental that indicates any preference, limitation, or discrimination based on race, color, religion, handicap, familial status, sex, or national origin.
•
To represent to a person because of race, color, religion, sex, handicap, familial status, or national origin that a dwelling is unavailable for inspection, sale, or rental when such a dwelling is available.
•
For profit, to induce or attempt to induce a person to sell or rent a dwelling by representations regarding the entry or possible entry into the neighborhood of a person of a particular race, color, religion, sex, handicap, familial status, or national origin, for example, to tell a white homeowner to sell because his or her property value will lessen once a new non-white family moves in down the street.
•
To discriminate in a sale or rental or to make unavailable or deny a dwelling to any buyer or renter because of a handicap. 42 U.S.C. § 3601 et seq.
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•
To discriminate against a person in the terms, conditions, or privileges of sale or rental of a dwelling because of a handicap:
Discrimination includes a refusal to permit, at the expense of the handicapped person, reasonable modifications of existing premises if such modifications are necessary to afford the handicapped person full enjoyment of the premises. In case of rental, the landlord may condition permission for modification if the renter agrees to restore the interior of the premises.
Handicap is defined as a “physical or mental impairment which substantially limits one or more of such person’s major life activities,” excluding illegal use of or addiction to a controlled substance.8
AIDS sufferers and others afflicted with disease are protected under the law. However, the law does not cover those “whose tenancy would constitute a direct threat to the health or safety of other individuals or whose tenancy would result in substantial physical damage to the property of others.”9
It is unlawful for a person or entity whose business includes real estaterelated transactions to discriminate against a person or to make unavailable such transactions. (b)
Plans for Achieving Maximum Occupancy and Total Sell-Outs
Developers of affordable rental housing and homeownership housing often do not have problems achieving full occupancy in their rental properties or selling out their homeownership units to families earning incomes within the income range targeted by the sponsor. In most communities, the demand for low-income rental and homeownership housing far exceeds the supply being provided by the marketplace. The problems that these sponsors face are: how to choose rationally among the applicants when applications exceed the available number of units, how to maintain a safe and secure living environment for all residents, and how to develop the right unit mix (e.g., the right number of efficiency, one-, two-, and three-bedroom units). Many sponsors choose among multiple applicants by establishing nondiscriminatory threshold requirements that applicants must meet. For example, the sponsor may require good references from the applicant’s two prior management companies, proof that no serious criminal record exists, and a “home visit” by the sponsor’s management staff to the applicant’s current home. Sponsors who are considering imposing
(i) When Demand Exceeds Supply.
8 9
42 U.S.C. § 3602(h)(1). 42 U.S.C. § 3604(f)(9).
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these types of threshold reviews should discuss them with their local counsel to ensure that no local or federal laws or regulations prohibit such actions. Sponsors also may take some threshold actions to ensure that no new residents create health or safety hazards at the property. For example, tuberculosis (TB) has become a significant problem in low-income communities throughout the nation. Some sponsors of affordable housing, especially in developments for the homeless community, are requiring applicants to take a TB test as part of the application process. Those who are diagnosed with TB and who are offered housing opportunities by the sponsor may have to agree, as a condition of their continuing occupancy, to medically treat the illness until it is cured. If the resident fails to complete the required treatment for TB, the tenancy will be terminated. Sponsors seeking to impose this or similar tests should consult with their local counsel prior to the tests’ imposition. As part of the initial feasibility analysis, the sponsor should determine the right mix of unit sizes for the development through market research, both formal (market studies) and informal (resident and community surveying). The sponsor should be comfortable that a market exists for all unit types and sizes to be developed in the property. This is especially true if the sponsor plans to develop significant numbers of efficiency and one-bedroom units that often do not meet the needs of families. Where the supply of affordable rental or homeownership housing exceeds the demand, the sponsor should aggressively seek out possible sources of tenants or homeowners who meet the sponsor’s targeted income guidelines. Possible sources of applicants include:
(ii) When Supply Exceeds Demand.
•
Public housing authority waiting lists for public housing units and/or Section 8 rental assistance vouchers or certificates.
•
Community self-sufficiency programs often operated by public housing authorities.
•
Local places of worship.
•
Social service agencies.
•
Locally or federally funded housing counseling agencies and homeownership counseling organizations.
Sponsors should approach all of these sources as possible feeder organizations for future residents or homebuyers, in the hope that a number of referrals from each of these sources will meet occupancy or sales needs. Manna, Inc., the nonprofit housing developer highlighted for its low-income tax credit development in Chapter 12, has created another
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program called the Manna Mutual Homebuyers Club (the “club”), which has been successful in providing Manna with a pipeline of qualified potential homebuyers for its homeownership projects. The club is a voluntary association of households who meet once a month in groups of 12 to 15 to discuss, work on, and learn about financial planning (budgeting, credit ratings, and savings), the home purchase process (downpayment assistance, signing contracts, applying for financing, going to settlement), basic home maintenance (repairs, annual maintenance inspections), counseling, and support. The club is founded on the principles of mutual support and shared leadership. Club members are required to attend the monthly meetings, to let the group know when they must miss a meeting, to meet or talk together between monthly meetings, to help each other, and to report on progress and difficulties. Manna has established the club to allow members to move through several stages over a period of time. During the first stage, usually 3 to 6 months, a member gets a credit report, studies budgeting, sets financial goals, and begins working and saving money to meet these goals. During the second stage, usually 1 to 2 years, when the member has become committed to meeting the financial goals and to the mutual support of the Club, the member continues to save for down payments, pays off old bills, works out credit problems, applies for down-payment assistance, shops for a home, applies for a mortgage, and settles on the purchase of a home. In the third and final stage, the new homeowner continues participating in the club in order to share what has been learned with others. As an incentive to continued participation, the club provides members with a free home maintenance inspection on the anniversary of their purchase.
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PREPURCHASE CONSIDERATIONS
A P P E N D I X
1 4 A
Monthly Management Reports E XHIBIT 14A.1 Summary of Monthly Management Reports
Monthly financial activity is reported by management companies to owners in many different formats. No two management companies use exactly the same format or provide the exact same types of reports to owners. However, the issues covered by the reports included here are commonly addressed by management. The following reports are provided solely as samples of actual monthly reports, not necessarily as models. 1.
Narrative Review. Many management companies provide the owner with a narrative review of the financial highlights of the past month. The report entitled Financial Review provides the owner with information about the financial condition of the property (e.g., income and expenses) as well as the physical condition of the property (e.g., needed repairs).
2.
Monthly Income and Expense Report. All management companies provide the owner with a summary of the prior month’s income and expenses. The reports almost always are “comparative,” meaning that they show the prior month’s financial activity (income and expenses) with either the amount that was originally budgeted to be spent that month or with actual financial activity from prior months or both. The reports also commonly provide the owner with a summary of income earned and expenses incurred to date. The sample reports—Summary Comparative Income Statement and Monthly Spread Report—provide the owner with current financial information (from the prior month that just ended), budgeted amounts, and a year-to-date income and expense summary, in the aggregate and on a monthly basis. The Summary Comparative Income Statement compares the prior month’s activity with the amount originally budgeted for that same month. This report also reports the total income and expense activity that has occurred for the entire fiscal year and compares the year-to-date figures with the budgeted year-to-date figures. The Monthly Spread Report allows the owner to compare the prior month’s income and expenses with the income and expenses from the earlier months in the fiscal year.
3.
Accounts Receivable Status. Management companies should provide owners of multifamily housing with a monthly accounts receivable report. This report should clearly show the owner which units owe the property money. The report entitled Accounts Receivable Status provides the owner with the name of the resident, the unit number, the type of charge due (rent versus cooperative fee), the amount due from the prior month and the total amount of unpaid charges, if any, over any above the prior month’s unpaid charges. Reports of this nature often
483
c14.fm Page 484 Friday, March 10, 2006 1:53 PM
MONTHLY MANAGEMENT REPORTS
E XHIBIT 14A.1 Summary of Monthly Management Reports (continued) have additional information such as the age of the receivable (how long has the resident not paid back charges). 4.
Monthly Cash Receipts and Cash Disbursement Summaries. Some management reports also include separate schedules itemizing the sources of cash received (e.g., residents, commercial income, laundry income) and the sources of cash disbursed (e.g., gas, electricity, mortgage). The sample reports provide a separate summary for cash receipts and for cash disbursements.
D URING
THE
N ARRATIVE C OOPERATIVE F INANCIAL R EVIEW M ARCH , 2005 M ONTH OF M ARCH THE FOLLOWING C HANGES O CCURRED IN YOUR C ASH A CCOUNTS :
Total Cash: Less Restricted Funds Replacement Reserves: Operating Cash:
Prior Month
Current Month
Increase (Decrease)
$24,702
$17,977
($ 6,725)
-0$24,702
-0$17,977
-0($ 6,725)
The decrease of $6,725 in operating cash is summarized as follows: Cash was provided by: 1. Decrease in Prepaid Insurance 2. Increase in Accrued Expenses 3. Increase in Prepaid Assessments 4. Increase in Federal W/H Taxes 5. Increase in State W/H Taxes 6. Surplus Total: Cash was used for: 1. Increase in A/R Delinquent Assessments 2. Decrease in Accounts Payable Total: Total Operating Cash:
$
479 793 783 8 58 470 $ 2,591
$ 1,080 8,236 $ 9,316 ($ 6,725)
The decrease in operating cash is primarily due to a decrease in accounts payable. This was partially off set by an increase in accrued expenses and prepaid assessments. REPLACEMENT RESERVES CHANGE: Regular Monthly Contribution Less Expenditures Net Change
$ $
484
-0-0-0-
c14.fm Page 485 Friday, March 10, 2006 1:53 PM
PREPURCHASE CONSIDERATIONS
E XHIBIT 14A.1 Summary of Monthly Management Reports (continued) INCOME AND EXPENSES:
Total Income Total Expenses Reserve Contribution March Totals:
INCOME Other Income ADMINISTRATION
Month
Year
$17,604 (17,133) -0$ 471
$ 45,659 (64,911) -0-
Month
Year-to-Date
$16,335 1,269
$43,061 2,598
1,996
17,633
($19,252)
Major expense for the month was management fees. PAYROLL Monthly pay plus health insurance and maintenance fees.
1,829
UTILITIES Electricity had a $543 credit adjustment for the month of March.
(144)
REPAIRS & MAINTENANCE Steam leaks were a major expense this month. Apartments 20 & 50 had steam leaks. The basement area had a large steam leak (40 foot pipe was removed). Several adjustments were made to the hot water temperature, and Apt. 5 had a faucet leak which was repaired previously but paid for this month. MAINTENANCE SERVICE AGREEMENTS *Elevator contract *Trash contract was not paid this month. TAXES & LICENSES Major expense was mortgage payments.
5,224
4,827
3,494
6,432
158
1,395
9,800
29,400
DELINQUENCIES Total delinquencies for the month were $10,216. The accounts carrying a balance greater than one month’s assessment total $6,695. Name
Account #
(22) (40) (24)
48530 48590 48685
485
Amount $2,612 1,171 2,912
Status Holding Called Last pymt. was August
c14.fm Page 486 Friday, March 10, 2006 1:53 PM
MONTHLY MANAGEMENT REPORTS
E XHIBIT 14A.1 Summary of Monthly Management Reports (continued) ADMINISTRATION Taxes The following accountants were asked to give bids on the preparation of Monterey’s 2005 taxes: 1. $1,000–$1,500 2. $ 3. $ To date I have not received prices from ___________ and ___________. However, I will call them before the meeting to see if they are prepared to give me a verbal price over the phone. Roof Leaks Apartments 55 & 56 have experienced water damage in their apartments due to roof leaks. _____ has agreed to repair the roof in both places and repair and paint both apartments for $1,000. To date, the roof has been patched in both places and Apartment 56 repairs have been completed. In addition to a roof leak in Apartment 55, they found a hot water pipe (with several holes) which needed to be replaced before patching the ceiling. The work in Apartment 55 should be completed by next week. Balcony Leaks I am meeting with [Maintenance person] at the building on Tuesday, April 20, 2005, to inspect the balcony on Apartment 42. I will have an update at the meeting. Special Note Happy Spring!
486
0 0 0 0 0 0 0 0
0
1,996 1,829 144– 3,494 158 9,800 17,133 471
471
487
471
1,996 1,829 144– 3,494 158 9,800 17,133 471
16,335 16,335 1,269 17,604
NET SURPLUS OR DEFICIT
19,252–
17,633 5,224 4,827 6,432 1,395 29,400 64,911 19,252–
43,061 43,061 2,598 45,659
0
0 0 0 0 0 0 0 0
0 0 0 0
19,252–
17,633 5,224 4,827 6,432 1,395 29,400 64,911 19,252–
43,061 43,061 2,598 45,659
0
0 0 0 0 0 0 0 0
0 0 0 0
TOTAL BUDGET
0 0 0 0
VARIANCE
16,335 16,335 1,269 17,604
3000* INCOME 3010 ASSESSMENTS NET ASSESSMENTS 3300 OTHER INCOME TOTAL INCOME 4000* EXPENSES 4010 ADMINISTRATIVE: 4200 PAYROLL 4400 UTILITIES 4600 REPAIRS AND MAINTENANCE 5000 MAINTENANCE CONTRACTS 5200 TAXES & LICENSES TOTAL OPERATING EXPENS OPERATING SURPLUS OR DEF 5460 REPLACEMENT RES CONT 5465 REPLACEMENT RESERVE EXP 5465 TRANSFERS FROM RESERVES
ACTUAL BUDGETED
VARIANCE
ACCOUNT
PAGE 21
BUDGETED
D EPARTMENT 4850
ACTUAL
FOR
YEAR TO DATE - JAN 01, 2005 TO MAR 31, 2005
S UMMARY C OMPARATIVE I NCOME S TATEMENT
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
CURRENT PERIOD - MAR 01, 2005 TO MAR 31, 2005
c14.fm Page 487 Friday, March 10, 2006 1:53 PM
488 0 0 0 0 0
0 0 0 0
1,036 198 35 1,269
17,604
5 6 0 479 5 6 0 479
17,604
1,036 198 35 1,269
16,335
4010 ADMINISTRATIVE: 4040 COPIER-PHOTOSTAT 4060 LEGAL 4070 AUDITORS 4080 INSURANCE
4000* EXPENSES
3699 TOTAL INCOME
3300 OTHER INCOME 3330 COMMERCIAL RENT 3400 LAUNDRY 3490 INTEREST INCOME 3589 TOTAL OTHER INCOME
3299 NET ASSESSMENTS
20 1,664 4,219 1,437
45,659
1,942 594 62 2,598
43,061
0 0 0 0
0
0 0 0 0
0
0 0 0
0
3010 ASSESSMENTS 3020 COOPERATIVE FEE 3030 APARTMENT RENTS 3199 TOTAL 42,098 963 43,061
16,335
12,793 3,542 16,335
20 1,664 4,219 1,437
45,659
1,942 594 62 2,598
43,061
42,098 963 43,061
0 0 0 0
0
0 0 0 0
0
0 0 0
TOTAL BUDGET
0 0 0
VARIANCE
12,793 3,542 16,335
3000* INCOME
ACTUAL BUDGETED
VARIANCE
ACCOUNT
PAGE 47
BUDGETED
D EPARTMENT 4850
ACTUAL
FOR
YEAR TO DATE - JAN 01, 2005 TO MAR 31, 2005
C OMPARATIVE I NCOME S TATEMENT
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
CURRENT PERIOD - MAR 01, 2005 TO MAR 31, 2005
c14.fm Page 488 Friday, March 10, 2006 1:53 PM
0 0 0 0 0 0 0 0 0 0 0
127 29 33 1,212 428 1,829
737– 0 20 573 144–
489
737– 0 20 573 144–
127 29 33 1,212 428 1,829
1,473 20 3 0 10 0 1,996 357 133 99 3,315 1,320 5,224 303 6,361 60 1,897– 4,827
4400 UTILITIES 4410 ELECTRICITY 4420 FUEL 4430 GAS 4440 WATER AND SEWER 4499 TOTAL UTILITIES
3,189 137 4 10 26 6,927 17,633
4200 PAYROLL 4210 FEDERAL PAYROLL TAXES 4220 UNEMPLOYMENT TAXES 4230 GROUP HEALTH INSURANCE 4260 BUILDING MANAGERS 4275 MAINTENANCE 4399 TOTAL PAYROLL
4090 MANAGEMENT FEES 4110 TELEPHONE 4130 MISCELLANEOUS 4140 OFFICE SUPPLIES 4170 POSTAGE 4195 UNCOLLECTIBLE CHARGES 4199 TOTAL ADMINISTRATIVE
0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0 0
303 6,361 60 1,897– 4,827
357 133 99 3,315 1,320 5,224
3,189 137 4 10 26 6,927 17,633
0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0 0
TOTAL BUDGET
0 0 0 0 0 0 0
VARIANCE
1,473 20 3 0 10 0 1,996
ACTUAL BUDGETED
VARIANCE
ACCOUNT
PAGE 47
BUDGETED
D EPARTMENT 4850
ACTUAL
FOR
YEAR TO DATE - JAN 01, 2005 TO MAR 31, 2005
C OMPARATIVE I NCOME S TATEMENT
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
CURRENT PERIOD - MAR 01, 2005 TO MAR 31, 2005
c14.fm Page 489 Friday, March 10, 2006 1:53 PM
490
0 0 0 0
0 0 0
9,800 9,800 17,133
0 0 0 0 0 0 0 0 0 0
0 873 0 2,389 232 0 0 0 0 3,494
40 425 307– 158
BUDGETED
ACTUAL
9,800 9,800 17,133
40 425 307– 158
0 873 0 2,389 232 0 0 0 0 3,494
VARIANCE
CURRENT PERIOD - MAR 01, 2005 TO MAR 31, 2005
c14.fm Page 490 Friday, March 10, 2006 1:53 PM
121 1,274 0 1,395
29,400 29,400 64,911
5000 MAINTENANCE CONTRACTS 5010 EXTERMINATOR 5030 ELEVATOR 5090 TRASH REMOVAL 5199 TOTAL SERVICE AGREEMENT 5200 TAXES & LICENSES 5205 MORTGAGE PRINC & INTEREST 5239 TOTAL TAXES & LICENSES 5300 TOTAL OPERATING EXPENS
163 1,570 1,068 2,821 232 15 419 60 84 6,432
4600 REPAIRS AND MAINTENANCE 4660 ELECTRICAL REPAIRS 4690 HEATING REPAIRS 4710 PAINTING 4720 PLUMBING REPAIRS 4730 EQUIPMENT/APPLIANCE REPAI 4770 GENERAL REPAIRS 4860 GENERAL SUPPLIES 4940 ELEVATOR REPAIRS 4950 MISCELLANEOUS 4999 TOTAL REPAIR & MAINTENA
0 0 0
0 0 0 0
0 0 0 0 0 0 0 0 0 0
BUDGETED
29,400 29,400 64,911
121 1,274 0 1,395
163 1,570 1,068 2,821 232 15 419 60 84 6,432
VARIANCE
0 0 0
0 0 0 0
0 0 0 0 0 0 0 0 0 0
TOTAL BUDGET
PAGE 48 YEAR TO DATE - JAN 01, 2005 TO MAR 31, 2005
D EPARTMENT 4850
ACTUAL
FOR
ACCOUNT
C OMPARATIVE I NCOME S TATEMENT
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
471
471
0
0
471
471
VARIANCE
5999 NET SURPLUS OR DEFICIT
5465 TRANSFERS FROM RESERVES
5465 REPLACEMENT RESERVE EXP
5460 REPLACEMENT RES CONT
5350 OPERATING SURPLUS OR DEF
19,252–
19,252–
ACTUAL
0
0
19,252–
19,252–
VARIANCE
0
0
TOTAL BUDGET
BUDGETED
BUDGETED
ACCOUNT
D EPARTMENT 4850
ACTUAL
FOR
YEAR TO DATE - JAN 01, 2005 TO PAGE 48 MAR 31, 2005
C OMPARATIVE I NCOME S TATEMENT
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
CURRENT PERIOD - MAR 01, 2005 TO MAR 31, 2005
c14.fm Page 491 Friday, March 10, 2006 1:53 PM
491
ACCOUNT
492
4000 ** EXPENSES 4010 * ADMINISTRATIVE: PRINTING & STATIONER COPIER-PHOTOSTAT LEGAL AUDITORS INSURANCE MANAGEMENT FEES FINANCIAL CONSULTANT TELEPHONE MISCELLANEOUS OFFICE SUPPLIES
TOTAL INCOME
0 7 1590 4219 479 858 0 96 0 0
18708
0 0 1619 198 14 0 1831
0 16877
TRF OF OWNERSHIP NET ASSESSMENTS
3300 * OTHER INCOME LATE CHARGES ATTORNEY COLLECTION COMMERCIAL RENT LAUNDRY INTEREST INCOME MISCELLANEOUS-OTHER TOTAL OTHER INCOME
11424 5453 0 16877
ACTUAL
3010 * ASSESSMENTS COOPERATIVE FEE APARTMENT RENTS COMMERCIAL RENT TOTAL
3000 ** INCOME
JAN
0 7 67 0 479 858 0 20 1 10
9347
0 0 713– 198 13 0 502–
0 9849
17881 8032– 0 9849
ACTUAL
FEB
M ONTHLY S PREAD R EPORT
c14.fm Page 492 Friday, March 10, 2006 1:53 PM
0 5 6 0 479 1473 0 20 3 0
17604
0 0 1036 198 35 0 1269
0 16335
12793 3542 0 16335
ACTUAL
MAR
FOR THE
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
APR
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
MAY
TO
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
JUNE
YEAR J AN 01, 2005
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
JULY
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
SEPT
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
OCT
P ROJECT 4850
BUDGET
FOR
BUDGET
AUG
D EC 31, 2005
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
NOV
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
DEC
0 19 1663 4219 1437 3189 0 136 4 10
45659
0 0 1942 594 62 0 2598
0 43061
42098 963 0 43061
ANNUAL
0 0 0 0 0 0 0 0 0 0
0
0 0 0 0 0 0 0
0 0
0 0 0 0
BUDGET
APPROVED
R UN D ATE 4/02/05 PAGE 1
117 58 33 1076 428 1712
304 3852 21 2987– 1190
0 0 1068 13 0 0 0 0 0 0 485
4200 * PAYROLL FEDERAL PAYROLL TAXE UNEMPLOYMENT TAXES GROUP HEALTH INSURAN BUILDING MANAGERS MAINTENANCE TOTAL PAYROLL
4400 * UTILITIES ELECTRICITY FUEL GAS WATER AND SEWER TOTAL UTILITIES
4600 * REPAIRS AND MAINTEN ELECTRICAL REPAIRS HEATING REPAIRS PAINTING PLUMBING REPAIRS EQUIPMENT/APPLIANCE GENERAL REPAIRS STRUCTURAL ROOFING & WATER PROO GENERAL SUPPLIES JANITORIAL SUPPLIES ELEVATOR REPAIRS
493
163 697 0 419 0 15 0 0 419 0 425–
737 2509 19 517 3782
113 46 33 1027 463 1682
10 6927 8379
6 0 7255
POSTAGE UNCOLLECTIBLE CHARGE TOTAL ADMINISTRATI
FEB ACTUAL
JAN ACTUAL
ACCOUNT
M ONTHLY S PREAD R EPORT
c14.fm Page 493 Friday, March 10, 2006 1:53 PM
0 873 0 2389 232 0 0 0 0 0 0
737– 0 20 573 144–
127 29 33 1212 428 1829
10 0 1996
ACTUAL
MAR
FOR THE
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
APR
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
MAY
TO
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
JUNE
YEAR JAN 01, 2005
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
JULY
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
SEPT
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
OCT
P ROJECT 4850
BUDGET
FOR
BUDGET
AUG
D EC 31, 2005
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
NOV
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
DEC
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
163 1570 1068 2821 232 15 0 0 419 0 60
304 6361 60 18974828
357 133 99 3315 1319 5223
26 6927 17630
ANNUAL
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0 0
0 0 0
BUDGET
APPROVED
R UN D ATE 4/02/05 PAGE 2
ACCOUNT
494
NET SURPLUS OR DEFIC
TRANSFERS FROM RESER TOTAL TRF FROM RES
5465 * TRANSFERS FROM RESE
TOTAL REPL. RESERVE
5465 * REPLACEMENT RESERVE
TOTAL REPLACEMENT
5460 * REPLACEMENT RES CON
2815–
0 0
0
0
2815–
21523
TOTAL OPERATING E
OPERATING SURPLUS O
9800 0 0 9800
16905–
0 0
0
0
16905–
26252
9800 0 0 9800
81 849 307 0 0 1237
84 1372
0 1566
0 0 0 0 0 0
ACTUAL
ACTUAL
5200 * TAXES & LICENSES MORTGAGE PRINC & INT INCOME TAXES LICENSES, FEES & PER TOTAL TAXES & LICE
5000 * MAINTENANCE CONTRAC EXTERMINATOR ELEVATOR TRASH REMOVAL SECURITY PAGERS TOTAL SERVICE AGRE
MISCELLANEOUS TOTAL REPAIR & MAI
FEB
JAN
M ONTHLY S PREAD R EPORT
c14.fm Page 494 Friday, March 10, 2006 1:53 PM
471
0 0
0
0
471
17133
9800 0 0 9800
40 425 307– 0 0 158
0 3494
ACTUAL
MAR
FOR THE
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
APR
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
MAY
TO
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
JUNE
YEAR J AN 01, 2005
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
JULY
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
SEPT
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
OCT
P ROJECT 4850
BUDGET
FOR
BUDGET
AUG
D EC 31, 2005
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
NOV
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
DEC
19249–
0 0
0
0
19249–
64908
29400 0 0 29400
121 1274 0 0 0 1395
84 6432
ANNUAL
0
0 0
0
0
0
0
0 0 0 0
0 0 0 0 0 0
0 0
BUDGET
APPROVED
R UN D ATE 4/02/05 PAGE 3
495
COOPERATIVE
* * * BUILDING# 48515 48530 48541 48551 48590 48600 48605 48610 48620 48631 48635 48690 48695 48705
10,216.00
DELINQUENT 7,627.00 2,589.00
FIRST NAME
CODE FE MONTHLY FEE BF BALANCE FORWARD GENERAL CREDIT TOTALS
E XHIBIT 14A.1
1,876.00– 1,876.00–
PRE-PAID
8 22 24 26 40 42 43 44 46 51 52 RE025 RE026 RE051
UNIT MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE MONTHLY FEE RENT RENT RENT 901.00 653.00 416.00 887.00 1,171.00 616.00 555.00 655.00 964.00 635.00 609.00 562.00 887.00 635.00
REGULAR MONTHLY CHARGE
ACCOUNTS RECEIVABLE STATUS
Summary of Monthly Management Reports (continued)
RESIDENT LAST NAME
3/25/05
c14.fm Page 495 Friday, March 10, 2006 1:53 PM
** PROJECT TOTAL 8,340.00
WASHINGTON, D.C. 20008 901.00 2,612.00 2,912.00 637.00 1,171.00 631.00 15.00 315.00CR 9.00CR 728.00 609.00 30.00CR 887.00CR 635.00CR
CURRENT BALANCE
PAGE 145
BUILDING PROJECT
4850
4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850 4850
4850 4850
3/16/05
3/10/05 3/09/05 3/06/05 3/02/05 3/05/05 3/05/05 3/05/05 2/24/05 3/10/05 3/12/05 3/01/05 3/02/05 3/10/05 3/11/05 3/04/05 3/03/05 3/06/05
3/01/05 3/05/05
496
RE005 RE006
8 20 30 31 32 33 34 35 35 40 41 43 45 46 50 53 56
E XHIBIT 14A.1
ACCOUNT NUMBER
48660 48665
48515 48520 48555 48561 48565 48570 47575 48580 48580 48590 48595 48605 48615 48620 48626 48642 48655
LAUNDRY
PAY CODE
RESIDENT RECPTS RESIDENT RECPTS
RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS
TOTAL MISC. RECEIPTS
** M ONTHLY C ASH R ECEIPTS **
Summary of Monthly Management Reports (continued)
3400-4850-0000
UNIT
COOPERATIVE
DATE
4850
3/25/05
c14.fm Page 496 Friday, March 10, 2006 1:53 PM
609.00
901.00 1,116.00 832.00 550.00 674.00 298.00 409.00 608.00 608.00 1,171.00 613.00 555.00 589.00 964.00 700.00 450.00 936.00 427.00
198.00
198.00
AMOUNT
.00
MACKE LAUNDRY
CONTRIBUTION AND DEPOSITS
PAGE 1
RE021 RE023 RE025 RE026 RE036 RE051 RE055 48675 48681 48690 48695 48716 48705 48711
ACCOUNT NUMBER RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS RESIDENT RECPTS
PAY CODE
PROJECT TOTAL
4850 4850 4850 4850 4850 4850 4850
3/10/05 3/02/05 3/04/05 3/05/05 3/04/05 3/02/05 3/22/05
UNIT
** M ONTHLY C ASH R ECEIPTS **
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
TOTAL OWNER RECEIPTS
BUILDING PROJECT
COOPERATIVE
DATE
4850
3/25/05
c14.fm Page 497 Friday, March 10, 2006 1:53 PM
497
17,272.00
17,074.00
405.00 350.00 562.00 887.00 700.00 635.00 525.00
AMOUNT
.00
.00
CONTRIBUTION AND DEPOSITS
PAGE 1
498
3/18/05
3/18/05
3/18/05 3/18/05
3/02/05
3/02/05
DATE DISBURSED
DEPT. PAID TO
c14.fm Page 498 Friday, March 10, 2006 1:53 PM
ACCOUNT TOTAL
ACCOUNT TOTAL
ACCOUNT TOTAL
4690-4850-0000
ACCOUNT TOTAL
HEATING REPAIRS
4430-4850-0000
GAS
4410-4850-0000
ELECTRICITY ELECTRICITY
4275-4850-0000
MAINTENANCE
ACCOUNT TOTAL
GROUP HEALTH INSURANCE
PURPOSE OF EXPENDITURE
4850
4230-4850-0000
DISBURSEMENT ACCT
COOPERATIVE
MONTHLY DISBURSEMENTS SUMMARY
$500.00
500.00
$ 19.47
19.47
$ 18.95
8.40 10.55
$428.25
428.25
$ 32.97
32.97
AMOUNT DISBURSED
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
21796
21878
21844 21844
20285
20285
CHECK NUMBER
AP2350
3/18/05 3/18/05
3/18/05
3/25/05 3/25/05
DATE DISBURSED
DEPT. PAID TO
c14.fm Page 499 Friday, March 10, 2006 1:53 PM
499
ACCOUNT TOTAL
$23,192.99
$23,192.99
BANK TOTAL
4,900.00 4,900.00
232.14
232.14
210.00
$ 9,800.00
$
$
80.00 130.00
AMOUNT DISBURSED
ACCOUNT TOTAL
TOTAL DISBURSED FOR PROJECT
5205-4850-0000
MORTGAGE PRINC & INTEREST MORTGAGE PRINC & INTEREST
4730-4850-0000
EQUIPMENT/APPLIANCE REPAIR
ACCOUNT TOTAL
PLUMBING REPAIRS PLUMBING REPAIRS
PURPOSE OF EXPENDITURE
4850
4720-4850-0000
DISBURSEMENT ACCT
COOPERATIVE
MONTHLY DISBURSEMENTS SUMMARY
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
22005 22006
21893
22554 22554
CHECK NUMBER
AP2350
500
3/02/05
3/25/05
3/11/05
3/04/05 3/04/05 3/04/05 3/18/05 3/18/05 3/18/05 3/18/05 3/18/05 3/18/05 3/18/05 3/18/05 3/25/05 3/25/05 3/25/05
DATE DISBURSED
DEPT. PAID TO
c14.fm Page 500 Friday, March 10, 2006 1:53 PM
ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE ACCOUNTS PAYABLE
PURPOSE OF EXPENDITURE
4850
2020-4850-0000 ACCOUNT TOTAL FEDERAL W/H TAXES PAYABLE 2030-4850-0000 ACCOUNT TOTAL COPIER-PHOTOSTAT 4040-4850-0000 ACCOUNT TOTAL LEGAL
DISBURSEMENT ACCT
COOPERATIVE
MONTHLY DISBURSEMENTS SUMMARY
6.49
$10,788.41 228.59 $ 228.59 4.86 $ 4.86
424.59 243.88 162.92 80.00 120.00 430.91 62.52 1,000.00 1,852.47 200.00 500.00 1,509.02 983.40 3,218.70
AMOUNT DISBURSED
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
20282
22739
21423
20639 20646 20650 21852 21852 21852 21876 21915 21915 22010 22011 22627 22728 22729
CHECK NUMBER
AP2350
3/25/05 3/02/05
3/11/05
3/02/05
DATE DISBURSED
DEPT. PAID TO
c14.fm Page 501 Friday, March 10, 2006 1:53 PM
501
PURPOSE OF EXPENDITURE
4850
4090-4850-0000 ACCOUNT TOTAL TELEPHONE 4110-4850-0000 ACCOUNT TOTAL POSTAGE 4170-4850-0000 ACCOUNT TOTAL FEDERAL PAYROLL TAXES 4210-4850-0000 ACCOUNT TOTAL
4060-4850-0000 ACCOUNT TOTAL MANAGEMENT FEES
DISBURSEMENT ACCT
COOPERATIVE
MONTHLY DISBURSEMENTS SUMMARY
6.49
858.00 $858.00 20.48 $ 20.48 9.86 $ 9.86 34.52 $ 34.52
$
AMOUNT DISBURSED
Summary of Monthly Management Reports (continued)
E XHIBIT 14A.1
20285
22739
21202
20277
CHECK NUMBER
AP2350
c14.fm Page 502 Friday, March 10, 2006 1:53 PM
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C H A P T E R
F I F T E E N 15
Partnerships and Joint Ventures 15.1
Issues Concerning Organization’s Tax-Exempt Status 503
15.2
Options for Structuring the Relationship 510
15.3
Partnerships and the Use of the Low Income Housing Tax Credit 518 Appendix 15A Joint Venture Checklist 523
Nonprofit organizations increasingly are working together with other profit and nonprofit organizations, in partnerships or joint ventures (hereinafter, “joint ventures”), to help them to complete projects and meet their missions. These business relationships can provide the nonprofit with much needed capital, credibility, and expertise but they also have the potential to put the very tax-exempt status of the nonprofit at risk. An entire chapter on these legal entities reflects the growing importance of these issues to nonprofit organizations. This chapter explains the basic issues that must be addressed in structuring these relationships to preserve an organization’s tax-exempt status, describes the different legal structures that can be utilized, and provides detailed guidance for using the partnership structure with the Low Income Housing Tax Credit. This chapter was adapted and excerpted from Michael I. Sanders’ excellent book Partnerships and Joint Ventures Involving Tax-Exempt Organizations (John Wiley & Sons 2000), with the express permission of the author.1 15.1
ISSUES CONCERNING ORGANIZATION’S TAX-EXEMPT STATUS
The primary issue that a nonprofit organization must address in pursuing any venture where it will serve as a general partner in a limited partnership is whether or not the relationship will jeopardize its tax-exempt status, in the view of the Internal Revenue Service (“IRS” or “Service”). Generally, the IRS will closely scrutinize such relationships using a two-prong test: (1) it 1
This chapter provides a basic foundation that should enable nonprofit organizations to understand the important issues related to partnerships and joint ventures. Organizations serious about entering into such legal relationships should refer to Mr. Sanders’ book in its entirety and to appropriate legal counsel.
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furthers a recognized charitable purpose, and (2) it insulates the tax-exempt organization from liability, it can be operated exclusively in furtherance of the charitable purpose, and no private benefits will be conferred on forprofit members. (a)
The Charitable Purpose Test: First Prong
The partnership must further the tax-exempt purposes of the nonprofit organization. Although the ownership and operation of low-income housing has been held in particular circumstances to further an organization’s charitable purpose, there are now IRS safe harbor rules that provide a nonprofit with some level of comfort that an individual housing development developed by a partnership will be held to have a “charitable purpose” if developed within these parameters. These rules, commonly referred to as “IRS Low-Income Housing Safe Harbor Rules,” actually are used by the IRS to determine if a nonprofit organized to develop affordable housing should be granted tax-exempt status. However, it is widely believed that if an organization that has already been granted federal tax-exempt status creates a partnership to produce affordable housing and does so within these rules, the partnership activities will meet the charitable purpose test. Under these rules, housing where: (1) at least 75 percent of the units are occupied by low-income tenants;2 and (2) at least 20 percent of the units are occupied by tenants who are very low income or 40 percent of the units are occupied by tenants whose income does not exceed 120 percent of the very low-income threshold will meet the “charitable purpose” test.3 Up to 25 percent of the units, however, may be made available for lease (at “market rate”) to persons whose income exceeds the area median.4 In addition, the project must be affordable to the charitable beneficiaries, 5 must share the same grounds if made up of multiple buildings, 6
2 3
4 5
6
Announcement 95-37 was superseded by a final Revenue Procedure 96-32. Rev. Pro. 96-32, § 3.01(a)(b). These income levels are determined by reference to the periodically issued Housing and Urban Development publications. Currently, “low income” is defined as 80 percent of an area’s median income. “Very low income” is defined as 50 percent of an area’s median income. Rev. Proc. 96-32, § 3.02(1). The guidelines provide that the project will continue to satisfy the safe harbor even if, subsequent to qualification, a tenant’s income increases, provided the income does not exceed 140 percent of the applicable income limit. Rev. Proc. 96-32, § 3.01(1). Rev. Proc. 96-32, § 3.01(2) and (3). The affordability requirement may be satisfied by the adoption of a rental policy that follows government-imposed rental restrictions or otherwise provides relief for the poor and distressed. In practice, if the unit rent does not exceed 30 percent of the tenants’ income, the rents will qualify as affordable. Rev. Proc. 96-32, § 3.01(4).
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15.1 ISSUES CONCERNING ORGANIZATION’S TAX-EXEMPT STATUS
and must actually be occupied by poor and distressed individuals within a reasonable time after completion.7 If the project fails to meet the safe harbor rules, a facts and circumstances test may be applied to determine eligibility for the § 501(c)(3) exemption, or for our purposes consideration as furthering “charitable purpose” organizations. (i) Facts-and-Circumstances Test. If a property fails to meet the safe harbor requirements, it may still qualify as charitable under a facts-and-circumstances test.8 The Service has set forth a number of factors which it considers persuasive in a facts-and-circumstances examination:
1. A substantially greater percentage of tenants than required by the safe harbor with incomes up to 120 percent of the very-low-income threshold.9 2. Minimal variance from the safe harbor percentages.10 3. Rent restrictions to ensure affordability.11 4. Participation in a government housing program that provides lowincome housing.12 5. Operation through a community-based board of directors, particularly if the selection process demonstrates that community groups have input into the organization’s operations.13 6. Provision of additional social services that are affordable to the lowincome residents.14 7. Affiliation with an existing § 501(c)(3) organization that has, for at least the last five years, been active in low-income housing, and which has control over the operations of the prospective § 501(c)(3) organization.15 8. Acceptance of residents who, although they do not meet the income guidelines, have extremely low disposable income due to extreme medical costs.16
7 8 9 10 11 12 13 14 15 16
Rev. Proc. 96-32, § 3.01(2). Rev. Proc. 96-32, § 4.01. Rev. Proc. 96-32, § 4.01(1). Rev. Proc. 96-32, § 4.01(2). Rev. Proc. 96-32, § 4.01(3). Rev. Proc. 96-32, § 4.01(4). Rev. Proc. 96-32, § 4.01(5). Rev. Proc. 96-32, § 4.01(6). Rev. Proc. 96-32, § 4.01(7). Rev. Proc. 96-32, § 4.01(8).
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9. Participation of the organization in a program designed to provide home ownership opportunities to families who could not otherwise afford adequate housing.17 10. Affordability covenants that run with the land.18 If the facts and circumstances test is not met, the development can, of course, still qualify as charitable under one or more of the IRC § 501(c)(3) provisions19 (that is, lessening the burdens of government,20 combatting community deterioration, lessening neighborhood tensions). These safe harbor guidelines represent an effort on the part of the IRS to guard against the attempted misuse of the safe harbor guidelines by for-profit developers, while addressing the difficulties confronting legitimate housing associations in obtaining exemption rulings. (b)
The Insulation from Liability Test, et al: Second Prong
(i) Structure of the Limited Partnership: Insulate Exempt Organization and No Private Benefit. Once charitability has been determined, the second prong
of the test requires that the limited partnership arrangement be examined for potential conflicts that can arise because of the general partner’s statutory obligations.21 The IRS will examine the limited partnership to ensure two things: First, the exempt general partner has not placed its charitable assets at risk;22 and second, the exempt organization is permitted to operate exclusively in furtherance of its charitable purposes with only incidental benefits bestowed upon the for-profit partners.23
17 18 19 20
21 22
23
Rev. Proc. 96-32, § 4.01(9). Rev. Proc. 96-32, § 4.01(10). See § 501(c)(3); Reg. § 1.501(c)(3)-1(d)(2); See generally Sanders, Chapter 2 and Section 4.2(d)(ii). Rev. Rul. 85-1, 1985-1 C.B. 177, and Rev. Rul. 85-2, 1985-1 C.B. 178, provide that the government must specifically recognize a particular activity as burdensome, making this a more difficult standard to meet. See Uniform Limited Partnership Act, supra note 42; Revised Uniform Limited Partnership Act, supra note 42. Gen. Couns. Mem. 39,005 (Dec. 17, 1982). This is necessary because a general partner’s personal assets may be subject to partnership debts. Mery v. Universal Sav. Ass’n, 737 F. Supp 1000 (S.D.Tex. 1990). This was the original second prong of the double prong test. More guidance has been provided in Revenue Ruling 98-15. Substance of this ruling is included in this chapter. § 501(c)(3); Reg. § 1.501(c)(3)-1(d)(ii). The private benefit aspect is highlighted by the IRS in Gen. Couns. Mem. 39,862 (Nov. 21, 1991). See, e.g., Rev. Rul. 78-86, 1978-1 C.B. 151, considered in Gen. Couns. Mem. 37,166 (Jun. 15, 1977); Rev. Rul. 76-152, 1976-1 C.B. 151, considered in Gen. Couns. Mem. 35,701 (Mar. 4, 1974). In a recent trend, the IRS analysis has focused on whether the arrangement permits the exempt organization to act exclusively in furtherance of its exempt purposes and not for the benefit of the for-profit, limited partners. Gen. Couns. Mem. 39,862 (Nov. 21, 1991).
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15.1 ISSUES CONCERNING ORGANIZATION’S TAX-EXEMPT STATUS
The IRS regulations provide that an organization is not organized or operated for charitable purposes unless it serves public rather than private interests.24 However, an organization that serves a charitable purpose with incidental benefits conferred upon private individuals is permissible.25 This proposition is simply an expression of the basic principle underlying § 501(c)(3): Exempt assets must be devoted to purposes that are considered beneficial to the community in general, rather than to particular individuals.26 Factors in a partnership or LLC arrangement that the IRS considers to be favorable in determining whether the assets of the exempt organization are adequately protected, include the following:27
(ii) Favorable Factors.
24
25
26 27
28 29 30
•
Limited contractual liability of the exempt partner.28
•
Limited rate of return on the invested capital of the limited partners (a stated ceiling that is reasonable under the circumstances).29
•
An exempt organization’s right of first refusal on the sale of partnership assets.30 Reg. § 1.501(c)(3)-1(d)(1)(ii). Protecting charitable organizations from private inurement serves important social purposes. A charitable organization is viewed under common law and the Internal Revenue Code as “a trust whose assets must irrevocably be dedicated to achieving charitable purposes.” Gen. Couns. Mem. 39,862 (Nov. 21, 1991). The prohibition against private inurement or benefit serves to prevent anyone in a controlling position in the exempt organization from impermissibly exploiting income or assets for personal use. Reg. § 1.50(a)-1(c). See also American Campaign Academy v. Commissioner, 92 T.C. 1053, 1066 (1989); Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978) (prohibited private benefit applies to unrelated third parties). Rev. Rul. 69-545, 1969-2 C.B. 117; Gen. Couns. Mem. 39,762 (Oct. 24, 1988) (private benefit must be incidental in both a qualitative and quantitative sense); Gen. Couns. Mem. 37,789 (Dec. 18, 1978). See, e.g., St. Louis Union Trust Co. v. United States, 374 F.2d 427 (8th Cir. 1967) (when activity serves both exempt and nonexempt purposes, the organization is exempt only if charitable purposes are predominant). By contrast, in Sonora Community Hosp. v. Commissioner, 46 T.C. 519 (1966), aff’d, 397 F.2d 814 (9th Cir. 1968), the benefits bestowed upon two doctors from the activities of the hospital were more than “incidental.” In Sonora, the doctors, who previously owned the hospital, ran a for-profit laboratory and x-ray facility in the now tax-exempt hospital. The Tax Court ruled that serving the private interests of the physicians was inconsistent with the requirement that the hospital exclusively further its exempt purposes. Gen. Couns. Mem. 37,789 (Dec. 18, 1978); IV A. Scott on Trusts, § 348 (3rd ed. 1967). These factors were originally enunciated in Plumstead, amplified in Gen. Couns. Mem. 39,862 (Nov. 21, 1991) and again in Revenue Ruling 98-15. See also Marcus Owens, Director, IRS Exempt Organizations Technical Division, at the Georgetown University Law Center Tenth Annual Conference, “Representing and Managing TaxExempt Organizations” (Apr. 30, 1993) (Owens, in providing an IRS perspective, listed factors utilized in determining whether a joint venture arrangement sufficiently insulates the exempt organization from conflict). Gen. Couns. Mem. 39,005 (Dec. 17, 1982). Plumstead, 74 T.C. at 1334. Gen. Couns. Mem 39,005 (Dec. 17, 1982).
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•
The presence of additional general partners obligated to protect the interest of the limited partners.31
•
Lack of control over the venture or the exempt organization by the for-profit limited partners (i.e., no limited partner serves as an officer or director of the exempt organization) except during the initial start-up period.32
•
The absence of any obligation to return the limited partners’ capital from the exempt organization’s own funds.33
•
Absence of profit as a primary motivation.34
•
All transactions with partners are at arm’s length.
•
Management contract (1) terminable for cause by the LLC,35 (2) with a limited term, (3) with renewal subject to approval of the LLC,36 and (4) preferably with an independent entity.37
•
The nonprofit organization’s having effective control over major decisions as well as day-to-day operations.38
•
Written commitment in the joint venture governing document to the fulfillment of charitable purposes in the event of a conflict with a duty to maximize profit.39
(iii) Unfavorable Factors. Factors that may cause the IRS to look unfavor-
ably upon an exempt organization’s participation in a partnership or LLC include the following: •
31 32 33 34 35 36 37 38 39 40
A disproportionate allocation of profits and/or losses in favor of the limited partners.40 See id. Gen. Couns. Mem. 39,862 (Nov. 21, 1991); Plumstead, 74 T.C. at 1334; Rev. Rul. 98-15. Plumstead, 74 T.C. at 1333-34; See Priv. Ltr. Rul. 97-31-038. Gen. Couns. Mem. 39,005 (Dec. 17, 1982). Id. Id. Id. Id. Id. Gen. Couns. Mem. 39,862 (Nov. 21, 1991). See, e.g., Priv. Ltr. Rul. 97-39-036 (June 30, 1997); Priv. Ltr. Rul. 97-39-037 (June 30, 1997); Priv. Ltr. Rul. 97-39-038 (June 30, 1997); and Priv. Ltr. Rul. 97-39-039 (June 30, 1997) (IRS ruled that the participation by three § 501(c)(3) hospitals and the for-profit subsidiaries of two of such tax-exempt hospitals in a joint venture to operate a diagnostic laboratory, while raising private benefit issues under the joint venture’s operating agreement, did not result in private benefit where the participants’ profits and losses were not allocated based on invested capital, but instead were specially allocated among the participants based on source, differentiating between the patient and nonpatient sources following the principles set forth by the IRS in Rev. Rul. 85-110, 1985-2 C.B. 166, and Rev. Rul. 68-376, 1968-2 C.B. 246), which are discussed in greater detail in Section 11.2.
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•
Commercially unreasonable loans by the exempt organization to the partnership.
•
Inadequate compensation received by the exempt organization for services it provides, or excessive compensation paid by the exempt organization in exchange for services it receives.41
•
Control of the exempt organization by the limited partners or lack of sufficient control by the exempt organization to ensure that it is able to carry out its charitable functions.42
•
Abnormal or insufficient capital contributions by the limited partners.
•
A profit motivation by the exempt partner.43
•
Guarantee of the limited partner’s projected tax credits or return on investment to the detriment of the general partner.44
Caveat: Although prudent planning would lead to the inclusion of favorable factors and avoidance of unfavorable factors, it must be noted that this is an area that is continuously developing as new cases come before the IRS and the courts.
41 42
43 44
Plumstead, 74 T.C. at 1333. Gen. Couns. Mem. 39,862 (Nov. 21, 1991); Gen. Couns. Mem. 39,005 (Dec. 17, 1982). “Control” of the partnership can occur in many ways. For example, if the general partner grants a power of attorney to the limited partner to carry out certain partnership business; if the limited partner has the right to amend the partnership agreement; if “special limited partners” exist that may step into the shoes of the general partner under certain circumstances; or if the limited partner has sole discretion to approve or disapprove of the sale of partnership assets. In each of the foregoing examples, excessive limited partner control may exist. See 1996 CPE at 62-4; see also Gen. Couns. Mem. 39,005 (Nov. 21, 1991); Plumstead, 74 T.C. at 1334. In Priv. Ltr. Rul. 97-36-039 (Sept. 15, 1997), discussed in Section 17.6, the IRS was concerned that a taxexempt, co-general partner in a limited partnership formed to provide affordable housing could not cause the partnership to carry out its exempt objectives because it lacked control over the partnership’s substantive obligations due to its minority (in fact, de minimis) interest. In response to such IRS concerns, the parties amended the partnership agreement to “redistribute control” among the general partners. Their amendment delegated to the charity substantive authority that was formerly reserved jointly for the general partners. Under the amendment, the charity maintained its authority as managing partner over the partnership’s “day-to-day” operations, which demonstrated to the IRS that the exempt organization could ensure that the joint venture was serving a charitable purpose, whereas lack of control suggested the possibility of private benefit. Gen. Couns. Mem. 39,862 (Nov. 21, 1991). See Sanders, Section 4.2(d)(ii).
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15.2
OPTIONS FOR STRUCTURING THE RELATIONSHIP45
The nonprofit is likely to structure its relationship with another organization, whether taxable or tax-exempt, in a number of ways: as a general partner in a limited partnership, as a limited partner, or as a shareholder in a limited liability corporation (LLC). (a)
General Partner in a Limited Partnership
In cases where the relationship meets the two tests described in 15.1, the organization may serve as a general partner, with operational responsibilities for the project.46 This role obviously exposes the organization to the most liability and responsibility. Therefore, the organization may also choose to form a subsidiary or affiliate to serve as the general partner. See Section (d) below. (b)
Limited Partner in a Limited Partnership
In other cases, particularly where the “charitable purpose” test cannot be met, the organization may serve as a limited partner. As a limited partner, the exempt organization and its assets would not be exposed to unlimited liability. Furthermore, the exempt organization would not have a statutory or fiduciary obligation to maximize the profits for the investors. However, there may be tax consequences for the exempt limited partner, depending on the type of activity, charitable or for-profit, engaged in by the partnership. If the activity furthers the charitable purposes of the exempt organization, the income received by the exempt limited partner would not constitute unrelated business income tax (UBIT).47 (c)
Limited Liability Companies (LLC)
One alternative to the use of a partnership is a limited liability company (LLC). An LLC is a relatively recent state law creation that provides limited liability to all owners while, if properly structured, also establishes a pass-through entity for purposes of federal income taxation. The major advantage of an LLC is that all of its members have limited liability,
45 46 47
See Sanders, Chapter 1. General partnerships are defined in Chapter 13. For an understanding of possible tax consequences to tax-exempt organizations from joint venture activities, see Sanders.
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15.2 OPTIONS FOR STRUCTURING THE RELATIONSHIP
even those who participate in the management of the entity. Thus, an individual who would act as a general partner in a partnership (and would otherwise be personally liable) is protected by limited liability, and such a person may participate in management without losing his or her limited liability protection. The single most attractive feature of an LLC is that it enables closely held businesses to benefit from certain corporate advantages without jeopardizing treatment as a partnership for federal income tax purposes. The important ruling in the area of joint ventures, Rev. Rule 98-15,48 involved two scenarios of hospital joint ventures between for-profit and nonprofit entities; both used an LLC as the venture entity. In Rev. Rul. 98-15, the IRS employs criteria similar to the double-pronged test of Plumstead49 to analyze whether a joint venture would jeopardize the exempt organization’s tax-exempt status. The Internal Revenue Service (IRS) will closely scrutinize the structure of an LLC joint venture arrangement to determine whether the exempt organization’s duty to operate exclusively for exempt purposes conflicts with any duties it may have to advance the private interests of the LLC’s for-profit members.50 To determine whether the exempt organization’s assets benefit the LLC’s for-profit members, the IRS will scrutinize any guarantee or capital call provisions, the management and control of the LLC, and, for private foundations, excess business holding issues.51 The chief concerns of the IRS are that an LLC joint venture arrangement will expose the assets of the exempt member to liability for the LLC’s debts and will further, more than incidentally, the private interests of the LLC’s for-profit members.52 To determine if the exempt organization’s assets benefit the LLC’s for-profit members, the IRS will scrutinize any guarantee or capital call provisions; the management and control of the LLC; and, for private foundations, excess business holding issues.53 These complex issues are discussed fully in Sanders, Chapter 17.
48
49 50 51 52 53
Rev. Rul. 98-15, 1998-12 I.R.B. 6. See also “Whole Hospital Joint Ventures,” Exempt Organizations Continuing Professional Educational Technical Instruction Program for FY 1999 (hereinafter “1999 CPE”), and statement of IRS Exempt Organizations Division Director Marcus Owens, “Exempt Organizations Get Plenty to Chew on in L.A.,” Tax Notes (Nov. 16, 1998): 829. For details on how the two-prong test applies to LLC joint ventures, see Sanders, Section 17.6. See Sanders, Section 4.2(c). See Gen. Couns. Mem. 39,005 (June 28, 1983). Remarks of Marcus Owens, Meeting of the ABA Tax Section (Aug. 5, 1995). Id. Remarks of Marcus Owens at the meeting of the ABA Tax Section (Aug. 5, 1995).
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(d)
Use of a Subsidiary as Participant in Partnership
As an alternative to direct participation in a joint venture,54 an exempt organization may form a for-profit subsidiary.55 Through the use of a subsidiary, an exempt organization can indirectly be involved in a for-profit activity without jeopardizing the parent’s exempt status. Furthermore, because the income of the subsidiary is fully taxable, the parent will not be subject to UBIT on the subsidiary’s income.56 On the other hand, a subsidiary that is an S corporation or LLC “taxable” as a partnership, will not pay tax, but will pass its income and deductions through to the parent.57 The use of a for-profit subsidiary protects the status of the exempt parent and insulates its assets from possible liability.58 If the exempt parent were to undertake these activities, and if involvement in these activities were more than insubstantial, its tax exemption could be jeopardized.59 Furthermore, exempt organizations may choose to place an activity in a
(i) Protects Parent’s Exempt Status and Insulates Parent’s Assets.
54 55
56
57
58
59
This discussion applies to a subsidiary created as a limited liability company, S corporation, or other entity. Tech. Adv. Mem. 89-38-002 (May 31, 1989). The IRS held that an exempt organization’s status was not jeopardized by its participation, through its for-profit subsidiary, which served as general partner, in seven limited partnerships. See Gen. Couns. Mem. 39,598 (Jan. 23, 1987), clarified in Gen. Couns. Mem. 39,646 (June 30, 1987); Gen. Couns. Mem. 39,326 (Jan. 17, 1985); Priv. Ltr. Rul. 91-05-029 (Feb. 1, 1991). See also Priv. Ltr. Rul. 93-08-047 (Dec. 4, 1992); Priv. Ltr. Rul. 93-49-032 (Sept. 17, 1993) (exempt organization participated in low-income housing joint venture through its wholly owned subsidiary. In addition, the exempt organization performed all management and administrative functions for the venture and earned fees therefrom. The IRS, utilizing the Plumstead analysis, held that the exempt organization could participate in the venture through its subsidiary without jeopardizing its exempt status and that the management fee income was not subject to UBIT). See Priv. Ltr. Rul. 93-08-047 (Dec. 4, 1992). Here, the IRS ruled that an exempt organization did not jeopardize its exempt status by owning all of the stock of a for-profit subsidiary. Furthermore, sharing office facilities, equipment, and supplies with the taxable subsidiary did not constitute private inurement, provided that the costs are allocated based on actual use and each pays the fair market value for any facilities or services used. Finally, the taxable income of the subsidiary was not UBI to the exempt parent. See Section 17.3(c) for a discussion of pass-through treatment. In view of the recent promulgation of the check-the-box regulations (see Sections 3.3 and 17.5), tax-exempt organizations have been able to generate substantial funds in the secondary market by selling up to 90 percent of the for-profit subsidiaries’ interest as general partner in a partnership or joint venture that utilizes the low-income tax credit (LIHTC). Banks are often encouraged to invest in low-income housing to meet the CRA requirements. Thus, a secondary market has been created allowing the tax-exempt parent to sell interests in the partnership to raise new equity. Orange County Agricultural Soc’y, Inc. v. Commissioner, 893 F.2d 529 (2nd Cir. 1990) (operation of an unrelated business by an exempt organization will cause loss of exempt status if the business becomes a too important part of the activities of the organization); Priv. Ltr. Rul. 93-08-047 (Dec. 4, 1992). Gen. Couns. Mem. 39,326 (Jan. 17, 1985).
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separate subsidiary to insulate the parent corporation from legal liability for the activity. A parent corporation is not generally liable for the debts or tortious acts of its subsidiary. Frequently, investors and creditors will more readily invest or lend capital to for-profit entities than to taxexempt organizations. One reason is that in the event of insolvency of the exempt organization, an involuntary bankruptcy cannot be filed against it by creditors.60 Furthermore, a for-profit entity has the capacity to raise capital from the general public through a conventional stock issue. With the creation of the minority enterprise small business investment company (MESBIC) and the small business investment company (SBIC), these capital sources are reinforced. For example, the MESBIC program involves tax-exempt organizations providing seed capital for the establishment of organizations to serve as catalysts to obtain loans for minority businesses. In this case, the government has guaranteed these funds, permitting further leveraging through financial institutions.61 (ii) Sources of Capital Are Expanded.
The independence of operations such as management, administration, and accounting provide two key functions: (1) the subsidiary will be viewed as a distinct entity from the exempt parent, thereby preserving the parent’s exempt status and limiting the liability of the parent, and (2) the use of a subsidiary allows for growth within the subsidiary in its activities, whereas if the parent directly engaged in the activity and the operations were successful, exempt status may be adversely affected.62
(iii) Provides Flexibility in Operations.
60
See 11 U.S.C. § 303(a), which provides that: an involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation.
61 62
The Senate Judiciary Committee specifically stated in a report that “eleemosynary institutions, such as churches, schools and charitable organizations and foundations, likewise are exempt from involuntary bankruptcy.” S. Rep. No. 95-989, 95th Cong. (1983). Cerny, “Tax-Exempt Organizations and Economic Development,” Exempt Organization Panel, ABA Section on Taxation (Feb. 7, 1993). Gen. Couns. Mem. 39,326 (Jan. 17, 1985). See also Priv. Ltr. Rul. 93-05-026 (Nov. 2, 1992). In this letter ruling, the for-profit subsidiary had separate and independent management from the exempt parent. The majority of the directors of the subsidiary consisted of individuals unrelated to the exempt parent. The exempt parent was not involved in the day-to-day management of the subsidiary. Finally, all transactions between the parent and the subsidiary were conducted at arm’s length. Under these circumstances, the IRS held that the parent corporation that owns 100 percent of the subsidiary will not jeopardize its exempt status. Thus, the subsidiary’s income and activities will not be attributed to the parent and the dividends paid by the subsidiary to the parent will not jeopardize its exempt status and are not taxable to the parent under § 512(b).
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The subsidiary must be established with a bona fide intention that it will have a real and substantial function.63 That function need not be an inherently commercial, for-profit activity.64 The IRS noted that: (iv) Bona Fide Function.
the first aspect is the requirement that the subsidiary be organized for some bona fide purpose of its own and not be a mere sham or instrumentality of the parent. We do not believe that this requirement that the subsidiary have a bona fide business purpose should be considered to require that the subsidiary have an inherently commercial or forprofit activity. The term “business,” as used in the context of this text, is not synonymous with “trade or business” in the sense of requiring a profit motive. Instead, we believe the term “business” was simply carried over from Moline and Britt, . . . which involved for-profit corporations, and in which the determination as to the existence of a business purpose of activity was an appropriate test for requiring substance over form given the factual circumstances of the particular case.65
Hence, a parent corporation and its subsidiary are separate taxable entities so long as the subsidiary engages in, or carries on, independent business activities. 66 That is, when a corporation is organized with the bona fide intention that it will have some real and substantial business function separate and apart from the parent, its existence generally may not be challenged for tax purposes.67 The subsidiary must not, in reality, be a mere arm, agent, instrumentality, or integral part of the parent.68 Ownership of stock and the power to appoint an entire board of directors does not necessarily indicate sufficient control to make the subsidiary a mere arm of the exempt parent. However, factors such as involvement in the (v) Not a Mere “Arm” of Parent.
63 64 65
66 67
68
Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943); Britt v. United States, 431 F.2d 227 (5th Cir. 1970). Gen. Couns. Mem. 39,598 (Jan. 23, 1987); Gen Couns. Mem. 39,776 (Feb. 9, 1989). Gen. Couns. Mem. 39,598 (Jan. 23, 1987). See also Priv. Ltr. Rul. 94-21-006 (May 27, 1994) (wholly owned subsidiary of exempt organization was held to have a bona fide business purpose, even though it operated in a manner that was not inherently commercial or a for-profit activity). Moline Properties, 319 U.S. at 436. See also Gen. Couns. Mem. 39,598 (Jan. 23, 1987). Britt, 421 F.2d at 234; Gen. Couns. Mem. 39,598 (Jan. 23, 1987); Priv. Ltr. Rul. 92-05-026 (Nov. 12, 1992) (exempt parent provided job-training services to unemployed and disadvantaged individuals; subsidiary performed complementary yet different function of providing job placement services to individuals trained by parent). Krivo Indus. Supply Co. v. National Distiller & Chem. Corp., 438 F.2d 1098 (5th Cir. 1973). See also Gen. Couns. Mem. 39,326 (Jan. 15, 1985).
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day-to-day affairs and arm’s length transactions between the two are critical. The IRS noted that: the second aspect of the test is the requirement that the parent not be so involved in, or in control of, the day-to-day operations of the subsidiary that the relationship between parent and subsidiary assumes the characteristics of the relationship of principal and agent, i.e., that the parent not be so in control of the affairs of the subsidiary that it is merely an instrumentality of the parent.69
In examining any control element, the IRS looks at: control through ownership of stock, or power to appoint the board of directors, of the subsidiary will not cause the attribution of the subsidiary’s activities to the parent. We do not believe that the GCM should be read to suggest, by negative inference, that when the board of directors of a wholly-owned subsidiary is made up entirely of board members, officers, or employees of the parent there must be attribution of the activities of the subsidiary to the parent.70
The extent to which the parent is involved in the day-to-day management of a subsidiary is the factor that must be considered, along with the bona fide and substantial purpose of the subsidiary, in determining whether the subsidiary entity is so completely an arm, agent, or integral part of the parent that its separate corporate identity should be disregarded. As discussed earlier, the doctrine of corporate identity is well established, and the courts, in considering whether to disregard corporate identity, have articulated a very demanding evidentiary standard requiring clear and convincing evidence of the subsidiary’s lack of independent status. Hence, the activities of the subsidiary should not ordinarily be attributed to its parent organization unless the facts provide clear and convincing evidence that the subsidiary is in reality an arm, agent, or integral part of the exempt parent.71 (vi) National Geographic Ruling: Use of a For-Profit Subsidiary. In 1995, the
IRS released the text of a significant private letter ruling72 involving the 69 70 71
72
Gen. Couns. Mem. 39,598 (Jan. 23, 1987). Gen. Couns. Mem. 39,598 (Jan. 23, 1987). Gen. Couns. Mem. 39,866 (Dec. 30, 1991); Gen. Couns. Mem. 39,326 (Jan. 17, 1985); Gen. Couns. Mem. 39,598 (Jan. 23, 1987). See also Priv. Ltr. Rul. 92-45-031 (Nov. 6, 1992); Priv. Ltr. Rul. 93-05-026 (Nov. 12, 1992) (majority of subsidiary’s directors not officers or directors of parent); Priv. Ltr. Rul. 93-05-026 (Nov. 12, 1992) (no active participation by parent in business planning or day-to-day operations of subsidiary); Priv. Ltr. Rul. 94-01-034 (Jan. 7, 1994) (all parent-subsidiary transactions conducted at arm’s length); Priv. Ltr. Rul. 94-02-031 (Jan. 14, 1994) (separate books and records). Priv. Ltr. Rul. 95-42-045 (July 28, 1995).
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use of a for-profit subsidiary by a charitable organization to conduct unrelated business activities. The ruling confirms a number of previous IRS positions and discusses issues of importance to exempt organizations that have, or contemplate the use of, one or more for-profit subsidiaries. In order to meet IRS scrutiny, it is vital that a subsidiary be able to demonstrate a substantial business purpose, as well as a separate corporate existence from its parent. This ruling provides guidance on both of these issues. The facts of the letter ruling indicate that for many years, the charity73 (either on its own or through the Public Broadcasting Service (PBS)), was able to secure corporate sponsorship to underwrite the production costs of its educational films. For the 1995 calendar year, however, neither PBS nor the charity was able to secure adequate funding for this purpose. Accordingly, the charity agreed to produce a five-hour program for a commercial network, for which the network would underwrite the production costs and pay the charity a fixed fee, in no way based on advertising revenue. Concerned that its broadcast on a commercial network might be viewed by the IRS as an unrelated business activity and that such activity could conceivably jeopardize its tax-exempt status, the charity proposed an arrangement that would minimize any UBIT risks. The charity planned to transfer its film library, subscription lists, cash, and certain other property to a newly created for-profit subsidiary (Y), in exchange for all of the stock of the subsidiary. The charity also planned to license its name and mailing lists to subsidiary Y. In addition, the charity proposed to create Z, a second for-profit subsidiary, to engage in “strategic planning activities” on behalf of the charity, and transfer to it its stock in Y, in exchange for stock in Z. In this manner, Y would become a wholly owned subsidiary of Z and a second-tier subsidiary of the charity.74 For the first six months after its capitalization, officers of the charity were also to serve as officers of Y and Z. Moreover, after the six-month interim period, some overlap of officers would continue, but the president/chief executive officers (CEOs) of Y and Z were to be independent 73
74
Although the names of the taxpayers are not revealed in published private letter rulings, it is commonly believed that Priv. Ltr. Rul. 95-42-045 was issued to the National Geographic Society (“the charity”), a publicly supported charitable and educational organization within the meaning of §501(c)(3). In this particular case, the charity chose to use a two-tiered subsidiary structure, presumably because it allows the charity to avoid the “control” provisions of §512(b)(13), which provide that otherwise passive income (i.e., rents, royalties, etc.) will be characterized as UBIT if the entity actually making the payments to the exempt organization is a “controlled” subsidiary. §512(b)(13) does not require attribution between entities, and thus payments from a second-tier subsidiary to the parent organization are not implicated by the restriction. See Section 4.6(c). The use of a second-tier subsidiary also provides a means through which a charitable organization can further insulate its assets from liability and minimize any possible UBIT implications where the charity is involved in a number of separate unrelated activities.
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of the charity. Finally, although there would be some boards of directors overlap, a majority of the board of each subsidiary was to be independent of the charity.75 From the IRS’s perspective, the composition of the officers and board of directors is of vital importance in demonstrating that a subsidiary has a separate legal existence from its parent and will be respected for federal tax purposes. Although it is not unusual for a newly formed for-profit subsidiary to share some officers or directors with its tax-exempt parent until it “gets on its feet,” the length of this start-up period and the extent to which overlap is permissible has been the subject of some debate. In this regard, Priv. Ltr. Rul. 95-42-045 confirms the following:
75
•
First, it is important for a for-profit subsidiary to have an independent board of directors from its tax-exempt parent, even if the directors may be elected by the board of the parent organization. This ruling seems to indicate that at least a majority of the board of a for-profit subsidiary should (even during the start-up period) be independent of the tax-exempt parent in order to meet the separate entity test.
•
Second, although some overlap of officers is permissible, it is important that the key positions (i.e., president and/or CEO) of the parent and subsidiary be held by different persons. The CEO is the individual who is generally responsible for the day-to-day affairs of the organization and most clearly represents it in the public domain. Accordingly, the potential for confusion is great if one person fills this position for both organizations.
•
Third, the IRS ruling provides some assurance that during a short interim period (six months under these facts), it is permissible for an exempt parent and its for-profit subsidiary to have a significant overlap of officers and directors, so long as the long-term goal is to achieve independence in this regard.
In the ruling request, the charity proposed that its president and executive vice president be the “sole members of the [Y and Z] Boards of Directors for an interim period, not to exceed six months.” When replying to the ruling request, however, the IRS stated that “for an interim period of time represented to be no longer than six months . . . the officers of [the charity] will also serve as officers of [Y and Z]. A majority of the Board of Directors of Y and Z will be independent of [the charity], i.e. will not be Charity Board members, officers or staff persons” [emphasis added]. Apparently, the IRS misunderstood (or misstated) the facts by assuming that the boards of the subsidiaries would at all times be made up of a majority of individuals who were independent of the charity. This statement by the IRS suggests the importance the IRS places on the independence of the board of directors.
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(e)
Single-Member Nonprofit LLCs
As noted earlier, an increasingly popular entity is the limited liability company (LLC), which combines the pass-through attributes of partnerships with the liability protection of corporations.76 Pursuant to the “checkthe-box” regulations,77 as described fully by Sanders, an exempt entity is deemed to be taxable as a corporation.78 On the other hand, an unincorporated organization with one owner can choose to be taxable as a corporation or disregarded for federal tax purposes—that is, all tax attributes are passed through to the owner/member.79 An issue that is unresolved as of the writing of this edition involves the single-member LLC established by a nonprofit for exempt purposes. This type of LLC has only one member and can therefore be disregarded for federal income tax purposes under the check-the-box rules.80 If a single-member entity does not elect to be taxable as a corporation, it defaults to being disregarded as a separate entity.81 IRC §508 requires an entity that seeks exempt status to file Form 1023 within 15 months of formation. The question before the IRS is whether these single-member LLCs, considered “disregarded” under check-the-box regulations, must file for exemption pursuant to §508. According to former IRS Exempt Organizations Director Marcus Owens, the question is in a “fast track” and may not be resolved by the issuance of “broad guidance” but rather by ruling on the individual cases.82 15.3
PARTNERSHIPS AND THE USE OF THE LOW INCOME HOUSING TAX CREDIT
The most common joint venture in affordable housing is the limited partnership created to allow the nonprofit organization to get access to the Low Income Housing Tax Credit (LIHTC) as described in Chapter 9. Limited partnerships for LIHTC purposes, and the nonprofit’s role in them, are explained in this section. Because widely held C corporations are not subject to the passive loss or at-risk rules that individuals are held to, these corporations are the most likely investors in LIHTC projects. Corporations may invest in tax credit projects either through a direct investment in a project or through syndicated equity funds. These funds, which are sponsored by national 76 77 78 79 80 81 82
See Sanders, Chapter 17. See Sanders, Chapter 17. Reg. §301.7701(b)(2). Reg. §301.7701-(a)(4). Id. Reg. §301.7701-3(b)(1)(ii). “IRS Questioning If LLCs Set Up by Exempts Should Apply for Separate Tax-FreeStatus,” Daily Tax Report (Nov. 20, 1998): G-5.
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organizations such as the Enterprise Foundation and Local Initiatives Support Corporation, have been organized to assist corporations to invest in projects that qualify for the LIHTC. Examples of such funds include: the Housing Outreach Fund, Corporate Housing Initiatives, and the California Equity Fund. Corporate equity funds are structured as limited partnerships in which the sponsor or its affiliate is the general partner and the corporate investors are limited partners. The funds invest in limited partnerships, which own projects eligible for the LIHTC. These local partnerships acquire, construct, own, and manage the low-income housing projects, and are commonly referred to as operating or project partnerships. Operating partnerships generally consist of a local tax-exempt organization or its wholly owned for-profit subsidiary, which serves as general partner, and an equity fund (or a single corporate investor), which is admitted as a limited partner. The equity fund or other investor generally receives a 99 percent interest in partnership profits, losses, deductions, and credits (including the LIHTC) in return for a capital contribution to the partnership. The tax-exempt or wholly owned for-profit subsidiary typically retains a 1 percent general partnership interest. The equity investor contributes its capital to the operating partnership either in a lump sum payment at its admission or in annual installments subject to certain conditions. If the investor pays in installments, the operating partnership may have to obtain a “bridge loan” to finance the costs of construction or rehabilitation of the project pending receipt of the investor’s equity contributions. The bridge loan is subsequently repaid annually with the investor’s equity contributions. In certain cases, the operating partnership may grant the tax-exempt organization or an affiliate a right of first refusal to buy the property following a 15-year period known as the compliance period. 83 Section 42(i)(7) provides that a qualified low-income building will remain eligible for the LIHTC if the owner of the building grants the tenants, a nonprofit organization, a tenant cooperative, or a resident nonprofit corporation a right of first refusal to purchase a project after the end of the compliance period for a price not less than the minimum purchase price set forth in § 42(i)(7)(B). The minimum purchase price is generally equal to the outstanding indebtedness on the project plus any taxes attributable to the sale. In some cases, investors may demand a higher price that includes the amount of anticipated tax benefits which the investor did not receive during the compliance period. In any event, if the fair market value of the
83
See infra Section 12.2(e) for a discussion of the requirements that a project must satisfy during the compliance period.
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project exceeds the sales price to the nonprofit, the investor may be entitled to a charitable contribution deduction.84 As general partner of the operating partnership, the tax-exempt organization maintains control of the project. The tax-exempt organization is responsible for managing the day-to-day operations of the partnership and the project, including developing and managing the project. As developer, the tax-exempt entity is responsible for hiring the contractor and overseeing the construction or rehabilitation of the project. The exempt organization is typically required to guarantee the completion of the construction or rehabilitation of the project. In addition, the exempt organization acts on behalf of the partnership with respect to various other matters in connection with the development of the project, including obtaining zoning and occupancy permits, appraisals required by lenders and investors, environmental reports, and market studies. In return for these development activities, the tax-exempt entity is typically paid a development fee from the investor’s equity contribution or other project financing.85 The amount of the development fee is usually 10 to 20 percent of the total development cost of the project. The tax-exempt organization is also responsible for engaging a property manager for the project. In some cases, the tax-exempt entity itself acts as property manager if it has the experience and personnel to manage a low-income housing project. Otherwise, a professional management company with experience in managing low-income buildings should be selected. The partnership pays the property manager a fee of approximately 5 to 10 percent of project rents to manage the project. Therefore, it is beneficial if the tax-exempt can develop the expertise necessary to manage the project.
84
85
See supra Section 3.11(e)(f) for a more detailed discussion of the “bargain-sale” rules which would apply to the charitable disposition of a low-income housing project. A bargain sale of property is treated, in part, as a charitable contribution and, in part, as a sale or exchange of property. The taxpayer generally receives a charitable contribution deduction in an amount equal to the excess of the fair market value of the property over the purchase price (i.e., the assumed mortgage plus any cash received); the gain or loss from the sale is equal to the purchase price less an allocable portion of the adjusted basis of the property. This allocable portion is equal to the portion of the adjusted basis which bears the same ratio to the adjusted basis of the property as the purchase price bears to the fair market value of the property. The balance of the adjusted basis is allocated to the gift part of the transaction. § 1011(b); Reg. § 1.1011-2(b). A taxpayer generally recognizes no gain or loss on a gift of appreciated property. Thus, the taxpayer in a bargain sale ordinarily recognizes no gain or loss on the charitable contribution regardless of the fact that the fair market value of the gift is greater or less than the portion of the property’s adjusted basis allocable to the gift. See Rev. Rul. 60–370, 1960-2 C.B. 203. The development fee is includable in a project’s eligible basis. See Section 12.2(i).
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(a)
Partnership Allocations and the Impact of the Tax-Exempt Leasing Rules
The partnership agreement between the tax-exempt organization or its wholly owned for-profit subsidiary and the equity investor will typically provide that all items of income, gain, loss, deduction, and credit are allocated 99 percent to the investor and one percent to the tax-exempt organization. In many tax credit partnerships, upon a sale or refinancing of the project, the general partner will be entitled to a 50 percent distribution of the sale or refinancing proceeds after certain priority distributions are made. If a tax-exempt organization is the general partner, a detailed set of rules, known as the tax-exempt leasing rules, will apply to the project.86 When forming an operating partnership, a tax-exempt organization must be aware of the impact of the tax-exempt leasing rules. If a portion of the partnership property is classified as tax-exempt use property, the partnership will be required to depreciate the property over an extended period of time, causing a reduction in depreciation deductions during the 15-year compliance period and a corresponding reduction in losses flowing through to the equity investor. For this reason, the equity investor may be unwilling to grant a tax-exempt general partner an increased interest in the project’s sale or refinancing proceeds because such an increase will not be a qualified allocation and will cause the property to be considered tax-exempt use property. To alleviate this problem, the tax-exempt organization should consider forming a wholly owned for-profit subsidiary to serve as the general par tn er an d making the req uisite election un der I.R.C. § 168(h)(6)(F)(ii). Under this scenario, the general partner may be allocated an increased interest in the project’s sale or refinancing proceeds without the partnership property being considered tax-exempt use property; however, pursuant to the election, the tax-exempt parent will be required to treat any gain recognized on the disposition of an interest in the general partner (and any interest income or dividend received from the general partner) as UBIT (unrelated business income). In addition, the nonprofit organization must own an interest in the project and “materially participate” in its development and operation.87 A tax-exempt organization will generally be considered to “materially participate” if it serves as general partner of a partnership that owns the project.88 If a non-profit organization creates a subsidiary to act as general partner, the nonprofit will be treated as satisfying the ownership and material participation tests if the nonprofit, by itself or together with another qualified nonprofit, owns 100 percent of the stock of the subsidiary. 86 87 88
For a detailed discussion of tax-exempt leasing rules, see Sanders, Chapter 10 § 42(h)(5)(B). Except as otherwise provided in the regulations, a limited partner is not treated as a material participant. § 469(h).
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As noted above, following the end of the 15-year compliance period, the partnership will typically grant the tax-exempt general partner or other tax-exempt entity a right of first refusal to buy the project or an option to buy the investor’s interest in the partnership. The partnership may also transfer the project to the tax-exempt general partner or other charitable organization in the form of a charitable contribution after the end of the compliance period. Such a transfer would be treated for tax purposes as part sale and part gift.89 The partnership would recognize taxable gain on the sale portion and would be entitled to deduct as a charitable contribution the excess of the project’s fair market value over its sale price. Under I.R.C. § 1011(b), the partnership’s adjusted basis for determining its gain on the transfer is that portion of the adjusted basis which bears the same ratio as the amount realized by the transferor bears to the project’s fair market value. The amount realized by the partnership includes the outstanding indebtedness secured by the project, whether or not the charity agrees to assume or pay the indebtedness. In most cases, because the project is subject to the minimum longterm commitment to low-income housing for an additional 15 years beyond the compliance period (the “extended use period”)90 or a longer restriction period imposed by a state or local agency, the project’s fair market value will be substantially limited to reflect these restrictions, thereby minimizing the partnership’s charitable deduction under the part sale and part gift rules. The excellent Joint Venture Checklist, developed by Michael I. Sanders, can be found in Appendix 15A. It is a fantastic summary of everything the nonprofit must consider and address when developing these new relationships.
89 90
See supra Section 3.11(e)(f); 12.2(c)(i) for a discussion of the “bargain-sale” rules. See Section 12.2(e) for a discussion of the extended use period.
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A P P E N D I X
1 5 A
Joint Venture Checklist Set forth below are several factors that can be used as guidance in making a determination as to whether a joint venture arrangement allows a nonprofit to operate exclusively for charitable purposes. These questions were developed from a review of recent court opinions and IRS administrative materials on joint ventures, including the IRS EO Technical Topics on Whole Hospital Joint Ventures.91 While these factors are not exhaustive, they can serve as a starting point for practitioners structuring joint venture arrangements.92 IN GENERAL 1. Does the participation of the exempt organization in the joint venture further its exempt purposes? The IRS will deny or revoke exemption of an organization that enters into a joint venture where the primary motive is to make a profit. 2. Are the assets of the exempt partner adequately protected? The exempt organization can avoid a negative conclusion by ensuring that (i) it has taken steps to limit its contractual liability in the joint venture; (ii) the rate of return on the invested capital of the forprofit partner is limited (reasonable under the circumstances, perhaps subject to a reasonable cap); and (iii) there is no obligation on the part of the exempt partner to return the for-profit partner’s capital from the exempt partner’s own funds. 91 92
Mary Jo Salins, Judy Kindell, & Marvin Friedlander, “Exempt Organizations Technical Topics, Part A: Whole Hospital Joint Ventures,” 1999 CPE. In Priv. Ltr. Rul 200304041, an exempt organization initially enters into a joint venture with another exempt organization. Immediately after the limited liability company is formed, one of the exempt participants withdraw and a physican group is admitted as a member of the joint venture. Where the two participants are exempt organizations, the IRS is less concerned with the issue of control. However, the issue of control becomes important if the joint venture arrangement involves exempt and for-profit participants. In this letter ruling, the for-profit physician group holds a 48 percent membership interest in the joint venture, while the exempt participant holds a 52 percent interest and also appoints three of the LLC’s five-member board of governors. The IRS held that because it had voting control over major decisions of the board of governors, the exempt participant will exercise effective control over the major decisions of the LLC and over the operations and activities of the facility.
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3. Does the exempt partner have a right of first refusal on the sale of the assets of the joint venture and/or the right dissolve the joint venture if the charitable purposes of the exempt partner are not being fulfilled? 4. Has the tax-exempt partner obtained a written, reasoned, and comprehensive opinion from counsel prior to proceeding with the joint venture transaction? 5. Is the tax-exempt partner the tax matters partner? It is advisable that the exempt partner be the tax matters partner in the joint venture since this will allow it to control all IRS audit and related issues. 6. Has the tax-exempt partner received an ownership interest in the joint venture commensurate with the value of the assets it contributed? 7. Do the joint venture participants receive distributions of earnings in proportion to their capital contributions? 8. Has the exempt partner entered into a noncompete agreement or restrictive covenant that would cause it to yield significant market advantages and competitive benefits to the for-profit partner? 9. Does the joint venture engage the services of independent attorneys and accountants who do not also represent the for-profit partner? 10. Were any financial or other inducements offered to the executives of the nonprofit or members of the governing board for approval of the affiliation? 11. Is the tax-exempt partner providing any guarantees? While not all guarantees are problematic, the IRS views certain guarantees, especially in the low-income housing area, that have the effect of insulating the for-profit partner from potential risk as problematic, since the guarantees increase the potential risk to the nonprofit. (See Section 6.4B for a discussion of low-income housing guarantees.) BOARD INVOLVEMENT 12. Does the tax-exempt partner have voting control of the board of the joint venture so that it can exercise effective control over policies, major actions, and decisions that affect its tax-exempt purposes? 13. What criteria are used by the joint venture to select its governing board? 14. What are the qualifications of the members of the governing board of the joint venture, and how much input did the exempt organization have in the selection of these people? 䡲
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15. Have the board members signed conflict of interest guidelines? 16. Are the members of the board “representative of the community”? 17. Do the governing documents impose on the governing board members a duty to promote the charitable purposes of the nonprofit, which should take precedence over any other fiduciary duty, such as maximizing profits? 18. Does the exempt board have the right to (i) amend or modify the joint venture’s governing documents; (ii) approve the venture’s annual capital and operating budgets; (iii) approve distribution of income and additional capital contributions; (iv) approve the venture’s acquisition and disposition of healthcare facilities and equipment; (v) approve large contracts and assumption of indebtedness by the venture; (vi) approve changes in the types of services offered by the venture; and (vii) select key executives of the venture and of the healthcare facilities, hire and fire employees, compel an audit, and ensure adequate reserves? 19. Does the operating agreement of the joint venture include a dispute resolution provision that would ensure that, in the event that a disagreement arises between the board and the members over the actions or policies of the joint venture, resolution would favor the exempt partner’s charitable purposes? DAY-TO-DAY MANAGEMENT 20. Is there a management firm responsible for day-to-day activities? If so, how is it selected? Is there a requirement that the venture engage the services of a management firm that is affiliated with the forprofit partner? 21. What are the terms of the management contract? Is it comparable to similar arrangements in the marketplace? Is the management agreement one that is for a stated and reasonable time period (not to exceed five years)? May it be extended without the consent of the nonprofit? Is the management fee a contingent fee based on revenues generated by the joint venture? The IRS views long-term management contracts and revenue-based management fees unfavorably. 22. Is the management agreement terminable by the exempt partner if it determines that the management company is not acting in furtherance of its exempt purpose? 23. Is the management company under a binding and enforceable obligation to further the charitable purposes of the nonprofit? 䡲
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24. Does the management company have the power to restrict the authority of the exempt partner’s board representatives to initiate or react to decisions that would ensure that charitable goals are promoted? 25. Are the duties and responsibilities of the exempt partner within the joint venture meaningful?
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C H A P T E R
S I X T E E N 16
Purchasing the Property: Settling on Acquisition 16.1
The Settlement Process— Generally 527
16.2
The Role of the Settlement Agent 527
16.3
Title Insurance
16.4
Selecting the Settlement Agent 529
16.5
Preparing for Settlement
16.1
528
16.6
Settlement
533
16.7
Postsettlement
16.8
Lender Requirements
16.9
Governmental Regulations
537 538
539
Appendix 16A Settlement Checklist and Sample Documents 541
531
THE SETTLEMENT PROCESS—GENERALLY
When all of the prepurchase considerations and steps have been completed and the nonprofit is ready to go forward with the purchase of the property itself, a whole new set of issues and concerns arises. The settlement process, in a nutshell, involves payment by the purchaser of the acquisition price, signing of the deed of conveyance of the property by the seller, and recording of that deed among the land records of the jurisdiction in which the property is located. This chapter focuses in detail on the various steps in this acquisition settlement process. The reader should keep in mind, throughout this and later chapters, that many of the issues raised throughout this chapter relating to acquisition settlement, such as title insurance and escrowed funds, also apply to settlements that occur later in the development process. 16.2
THE ROLE OF THE SETTLEMENT AGENT
The first step is to understand the role of the settlement agent. The settlement agent acts as the neutral “referee” of the settlement. The settlement agent does not represent any of the parties at the settlement, but instead carries out the instructions of all the parties—the purchaser, the seller, the lender (if any), and the local government. 䡲
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The main reason that a settlement agent is needed is because it is virtually impossible to carry out the fundamental aspect of a sale directly between purchaser and seller without a level of trust that is not justified by normal market considerations. The seller has to sign the deed conveying the property to the purchaser; the seller does so in exchange for payment of the purchase price. The purchaser has to pay the purchase price, but only when the purchaser can be assured that the seller does indeed have good and marketable title to convey to the purchaser. Without the involvement of the neutral settlement agent, the seller could not be assured that the purchaser was providing all of the required acquisition price (including all funds being provided by third-party lenders or investors). Similarly, the purchaser and the purchaser’s lenders and investors could not be assured that their acquisition funds were being used to acquire a deed to a property that the seller has the authority to convey. The settlement agent holds in escrow the deed and the acquisition funds from all relevant sources until the settlement agent can successfully record the deed and ensure that no unidentified claims have been recorded against the property. Even though the settlement agent plays a neutral role, in many jurisdictions the settlement agent wears more than one hat by representing one of the parties—the purchaser, seller, or lender. Whether the settlement agent may play multiple roles largely depends on what the local custom and practice permit. Where multiple roles are permitted, the reasoning is that if a conflict does arise between the neutral role and the representative role, the title insurance company can resolve the dispute by making the decision from a neutral perspective. Title insurance and the role of the title insurance company is discussed in the following sections. 16.3
TITLE INSURANCE
The second step is understanding title insurance. At acquisition settlement, the purchaser obtains an owner’s title insurance policy and the lender obtains a lender’s or mortgagee’s title insurance policy. Generally, both policies are paid for by the purchaser. The title insurance policies ensure the purchaser and the lender that the seller had good and marketable title to the property, that all required actions to transfer the property to the purchaser were accomplished in accordance with local law, and that no private or public party has any claim against the property. In addition, the lender’s policy ensures that the lender has a valid security interest, which has priority over all liens except those specifically noted as exceptions. If any private or any public party makes any such claim at any time in the future, the title insurance policy will protect the purchaser and/or the 䡲
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lender against the claim, including the cost of defending the claim. Claims of public parties would specifically include any claim for unpaid taxes or water and sewer fees. In other words, the title insurance policy ensures the purchaser and the lender that the purchaser is beginning ownership of the property with a clean slate. 16.4
SELECTING THE SETTLEMENT AGENT
The next step is to select the settlement agent. The designation of a settlement agent, like virtually every other aspect of the acquisition settlement process, is governed to a large extent by local custom and practice. Normally, settlement agents are title insurance companies, law firms, or settlement companies. Under the federal Real Estate Settlement Procedures Act of 1974, as amended (RESPA), the purchaser has the right to select who will act as the settlement agent. However, the options from which to choose will be dictated by who acts as settlement agents in the particular jurisdiction. A title insurance company almost always will be involved in an acquisition settlement, even if the title insurance company does not act as the settlement agent, because a title insurance policy is issued for virtually every purchaser. A purchaser would be beyond foolish if it spent thousands or millions of dollars to acquire an expensive property but neglected to pay the relatively small one-time premiums (typically $2 to $3 per thousand dollars of coverage) for title insurance to make sure that the purchaser is indeed starting out with a clean slate. Virtually no lender will lend for acquisition (or for construction or any other purposes) without a lender’s title insurance policy. (a)
Title Insurance Company
The purchaser will have the option of settling on the acquisition with the title company as the settlement agent. In that event, the title company will play the broader role of settlement agent and will not solely be the issuer of the title insurance policy. Normally, the purchaser should select a title insurance company as the settlement agent unless one of the reasons discussed below for selecting a law firm or a settlement company applies. The title insurance company should be able to conduct the settlement more efficiently and less expensively than the other options, because the title insurance company will ultimately be making the decisions on how to resolve any risk questions and how to charge for those risks. Moreover, the title insurance company does not need to share any of the income with an agent if it conducts the settlement itself, which may allow cost savings to be passed on to the nonprofit sponsor. 䡲
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(b)
Law Firm or Settlement Company
A law firm or a settlement company may be a preferable option, for a variety of reasons. Before discussing those reasons, it is necessary to understand that the law firm or settlement company will have an agent relationship with the title insurance company. That is, subject to the limitations in the agency agreement, the law firm or settlement company will have the authority to determine whether to issue a title insurance policy and to actually issue it on behalf of the title insurance company. The title insurance company will have the ultimate liability to pay for any claims, but the title insurance company and the settlement agent will share the title insurance premium. Both the title insurance company and the law firm or settlement company profit from this relationship. The title insurance company obtains business it might not otherwise have, and the settlement agent is able to provide a service and collect fees it would not realize without the agency relationship with the title insurance company. The reasons why a purchaser might be better served by selecting a law firm or a settlement company rather than a title company are varied. First and most important, the purchaser may have an established relationship with a law firm or settlement company. That established relationship may include a fundamental level of trust, which alone would outweigh any reason to consider selecting any other settlement agent. This level of trust may have been developed during the prepurchase phase of the process or from settlements in earlier purchases. Title companies, usually national or multistate in scope, serving commercial customers are likely to be unfamiliar with the unique characteristics of nonprofit housing development, as discussed throughout this book, such as special transfer tax exemptions or tax abatement programs for nonprofit developers. A particular law firm or settlement company, on the other hand, may specialize in nonprofit housing development or may at least have more detailed knowledge and experience with nonprofit development. This specific knowledge and experience in nonprofit housing development may enable the nonprofit to take full advantage of these special provisions, especially if the other members of the development team have limited experience in the field. Last but not least, a nonprofit should look for a settlement agent that will discount settlement charges. The settlement and title insurance business is very competitive in most jurisdictions; the nonprofit should shop around for the least expensive charges. Most charges for a settlement are within the discretion of the settlement agent to discount. Those costs include the settlement fee or settlement attorney fee, the title report fee, the title examination or underwriting fee, the title insurance binder or commitment fee, the document preparation fee, and the notary fee. Each 䡲
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settlement agent chooses from these different fees, and perhaps other similar fees, and charges only some of them. The nonprofit, when shopping for the lowest cost, must ask the correct questions; that is, the settlement agent should be asked to list each and every settlement cost, however it is denominated. A settlement agent may say that the settlement fee is only $100, compared to a $250 settlement fee quoted by a competing settlement agent; however, the second agent may be less expensive because the first agent charges an additional $250 in other charges and the second one does not charge any of the added-on fees. The largest single cost from most settlement agents is the one-time premium for the title insurance. Normally, the title insurance rates are set by the title insurance company, and the settlement agent must charge what the company requires. In some states, the law requires that title companies file with a state commission the rates that the title companies will charge for all title insurance policies. However, even in those states, the filed rates for different companies may be different and, as discussed above, the settlement agent can discount other charges. In states that do not set filed rates on premiums, substantial discounts can be offered on title insurance premiums, particularly for larger projects and for nonprofit projects. Even without negotiating a special discount, most title companies offer discounts called reissue or substitution loan discounts. These discounts range from 20 percent to 60 percent or more. They are available where the same property and either the borrower or the lender (or both) is involved in the subsequent transaction. For example, a title company might offer a 60 percent discount for the title insurance policy for a permanent loan if that same title company previously had insured the construction loan for the same property. The nonprofit should select the settlement agent by balancing each of these factors. 16.5
PREPARING FOR SETTLEMENT
This step involves providing all information requested by the settlement agent and the lender in order to produce all documents necessary to complete the settlement. Typically, the lender or lender’s counsel will compile a checklist of standard loan materials that the borrower must provide prior to settlement. A sample checklist is shown in Exhibit 16A. 1. The settlement agent will identify materials needed for settlement. (a)
Title Insurance Commitment
Prior to settlement, the title insurance company, either directly or through the settlement agent, orders or conducts a title report showing the existing 䡲
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owner and any claims against the property and issues a title insurance commitment (also known as a binder or a pro forma policy). The commitment states the requirements that must be met before a policy can be issued to insure the proposed owner and the proposed lender(s). The requirements always include recording of a deed vesting title in the proposed owner, and payment of all property taxes and water and sewer fees. They also include removal of all existing liens or encumbrances, such as existing deeds of trust or mortgages, judgment liens, covenants, rights of way, and easements. Alternatively, any of the liens or other encumbrances may remain of record and not be removed if the purchaser and the purchaser’s lender(s) agree. In that event, the title insurance policy specifically will take an exception to the effect of the named liens or encumbrances. (b)
Property Location Survey
The purchaser will need to order a property location survey that shows the property’s boundaries and where any buildings are located within the property lines. The lender will determine how detailed the survey needs to be. The more detailed it is the higher the cost will be. A sample survey can be found in Exhibit 16A.2. The ALTA/ACSM survey is normally the most expensive. The settlement agent can recommend a surveyor with which the settlement agent works. (c)
Property Insurance
The purchaser needs to make sure that the property is protected against hazard and liability claims, with insurance that is effective as of the date of the settlement. Hazard insurance protects against physical damage to the property, such as by fire, wind, and similar types of damage. Liability insurance insures against claims arising from personal injuries: A ceiling may cave in and injure people or someone may be injured by equipment being used in the construction process. A third type of insurance that the nonprofit will want to consider is directors and officers insurance which protects against claims made against directors and officers for decisions made by them in their capacity as directors or officers. Insurance coverage is very important for the nonprofit; however, the various types of policies are confusing and complex, as are the costs associated with the purchase of various types of insurance coverage. The nonprofit will be well served by establishing a relationship with a well-informed and trustworthy insurance agent who can assist the nonprofit in wending its way through the insurance maze.
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16.6 SETTLEMENT
(d)
Utility Transfers
The purchaser needs to make sure that all applicable utilities are transferred to the name of the purchaser, effective as of the date of settlement. Unlike water and sewer service, which typically conveys with the property, all other utilities—oil, gas, electricity, and telephone—do not. The new owner is not liable for any delinquent utility bills owed by the former owner, except for delinquent water and sewer bills. The purchaser should be protected from the seller’s delinquent water and sewer bills by the title insurance policy. 16.6
SETTLEMENT
This step is understanding what happens at the settlement itself. Typically, the purchaser and seller appear at the settlement agent’s office at an agreed-on time to sign all of the settlement documents. Lenders typically send the loan documents to the settlement agent to obtain signatures, with instructions as to recording, disbursement, and related requirements. Again, depending on local custom, the lender’s representative may attend the settlement, or the settlement may be conducted at the lender’s office. The settlement statement and the deed are the central documents presented, discussed, and signed at the settlement. (a)
The Settlement Statement
The settlement statement is a one-page, two-sided document that details all income and expenses connected with the settlement. A sample settlement statement, which includes the HUD certification, is presented in Exhibit 16A.3. The settlement statement shows the transaction from the perspective of the purchaser (referred to as the borrower) in the left column and from the perspective of the seller in the right column. The top half of the front page shows the expenses to the purchaser— acquisition price, total settlement costs, property tax, water and sewer adjustments, and so on. Because property taxes typically are paid for a six-month or annual period and a settlement is held at one time, the purchaser must reimburse the seller at settlement for property taxes paid in advance by the seller. For example, if property taxes are paid through December 31 and a settlement is conducted on October 1, the purchaser must reimburse the seller for the prorated portion of the taxes that cover the period from October 1 through December 31. Conversely, if the seller has not paid the property taxes because they are not yet due by the time of settlement, then the seller must provide to the purchaser a credit equal to the amount of the prorated, unpaid taxes. For example, if property 䡲
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taxes in the applicable jurisdiction are owed for the period from July 1 through December 31 but do not have to be paid until September 30 and the settlement is held on August 31, the seller would have to provide the purchaser with a credit for the prorated, unpaid taxes for the period from July 1 through August 31. The prorated taxes owed to the seller by the purchaser are reflected in the top half of the settlement statement in the purchaser’s (left) column. In the bottom half, the settlement statement shows the amounts paid by or on behalf of the purchaser—earnest money deposit, acquisition loan(s), any loan assumptions, any credits (including property tax credits for amounts owed but unpaid by the seller), and the balance of funds needed to pay at settlement for all expenses listed in the top half. The reverse side details all settlement costs—loan fees and related costs, reserves, settlement company and title insurance charges, governmental recordation taxes and charges, and any other costs that need to be paid at settlement. The total of all such settlement costs is carried over to the top half of the purchaser’s side of the front page. The right column of the settlement statement shows the seller’s transaction. The top half shows the amounts owed to the seller—the acquisition price, prorated property tax adjustments, and so on. The bottom half shows deductions from the seller’s proceeds—settlement costs to the seller (carried over from the reverse side), payoffs of existing loans secured against the property, the prorated property taxes unpaid by the seller, and water and sewer charges not yet paid by the seller (the process described for adjusting property taxes applies to water and sewer adjustments), any credits to the purchaser, and any other deductions. The bottom half then shows the balance to be paid to the seller. The reverse side details all settlement costs to be paid by the seller—real estate commissions, any loan-related costs that the seller has agreed to pay on behalf of the purchaser, any governmental transfer or related taxes or charges to be paid by the seller, and any other expenses to be paid by the seller. If there is only a borrower and no seller, because the transaction is for a refinancing loan, a construction loan, or some other type of loan, the settlement statement is limited to the left side; the right side is blank. Otherwise, the settlement statement is completed as described above. The settlement agent is responsible for collecting all necessary information from the purchaser, the seller, the lender(s), the government, and other relevant parties, and for reflecting the income and expenses accurately on the settlement statement in the appropriate spaces. Ideally, the settlement agent should provide a draft of the settlement statement to the purchaser and seller in advance of the settlement; at worst, the draft is provided at the settlement itself. The purchaser and seller then need to review the draft, determine whether it accurately reflects the transaction 䡲
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as they understand it, and ultimately agree on the exact numbers to be shown on the signed settlement statement. The purchaser and seller must decide whether they want to reflect on the settlement statement other relevant aspects of the sales transaction, such as security deposit adjustments, proration of rents, repair credits or adjustments, and similar issues. For example, with the sale of occupied property, the seller must convey to the purchaser all security deposits plus applicable interest and prorated rents collected in the month of settlement. The sales contract should identify how to handle these matters; in that event, the sales contract controls. However, sales contracts often do not address such issues or, more often, address them in an imprecise fashion. As a result, the purchaser and seller must decide at, or shortly prior to, settlement how to handle these matters. With respect to security deposits, state or local law normally dictates at least some of the major requirements, such as the minimum interest rate to be paid on security deposits, what circumstances justify deductions from the security deposits, and so on. Normally, the purchaser and seller decide whether to reflect the security deposit adjustments on the settlement statement itself. Typical reasons for showing them on the settlement statement include having the whole financial transaction detailed on one piece of paper and reducing the cash the purchaser must produce for settlement (the security deposits may be shown as a credit against funds the purchaser would otherwise have to produce). A typical reason for not showing them on the settlement statement is that, if the adjustments have not been fully calculated by the time of settlement, they can be finalized between the purchaser and seller after the settlement is completed without otherwise delaying the settlement. (b)
The Deed
Besides the settlement statement, the other key document signed at the settlement is the deed of conveyance, which may be a general warranty, a special warranty, or a quitclaim. A general warranty deed warrants that the seller/grantor generally has good title and conveys good title to the purchaser/grantee. A special warranty deed warrants only that the grantor had good title while the property was owned by the grantor. A quitclaim deed means that the grantor conveys only such title as the grantor has, which may not be good title at all. As a practical matter, as long as the purchaser has a title insurance policy, the type of deed is irrelevant to the purchaser. It only has meaning to the extent that there is a claim and the title company seeks indemnification from the grantor. That is, as long as title is insurable, the title company will issue a title insurance policy regardless of the type of deed that 䡲
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is used. The types of problems that would make a title uninsurable (again, regardless of the type of deed used) include a break in the chain of title, that is, a deed to a former owner which was from a party who did not have clear title to the property. For example, an owner dies and leaves the property to three sons, but the deed to the next owner is signed by only one of the sons. That would cause a break in the chain of title because the other two sons, who did not sign the deed, would still have an ownership interest in the property. Another common type of defect that would make a title uninsurable would be a lien that was not released. The lien could be a deed of trust or mortgage, a judgment lien, a mechanic’s lien, or a tax lien. The deed of trust and the mortgage are discussed in the next paragraph. A judgment lien is a claim against an owner’s property, based on a successful lawsuit against the owner, which resulted in a judgment against the owner that required the owner to pay money to some other party. The judgment is filed as a lien if the defendant (owner) fails to pay the judgment creditor the amount of the judgment. A mechanic’s lien is a lien against an owner’s property filed by a contractor, subcontractor, or materials supplier, as a result of that party’s not being paid for improvements made to the property. Each state has its own judgment lien and mechanic’s lien laws, and the procedures and rights of the various parties differ according to the particular law. Finally, nonpayment of federal, state, or local taxes of any type (income, property, corporate, withholding, and so on) constitutes a lien against the owner ’s property. Any of these kinds of liens, if not removed, would make a title uninsurable. (c)
Other Settlement Documents
In addition to the deed and the settlement statement, the settlement agent will record all lender documents, such as the deed of trust and financing statements, and typically will have the seller sign a real estate transaction information return, a nonforeign affidavit, an owner’s affidavit, and a settlement statement addendum. Samples of all of the documents referenced under this heading may be found in Exhibit 16A.4. Different jurisdictions use different types of lender security instruments. The most common are the deed of trust or the mortgage. They share the basic concept that they give the lender the right to foreclose on the owner/borrower if the borrower defaults under the terms of the loan. They differ primarily in the procedures that the foreclosing lender must follow and the rights granted to the borrower. In particular, foreclosure under a mortgage requires a judicial proceeding and foreclosure under a deed of trust is a nonjudicial proceeding. The typical financing statement, a UCC-1, providing the lender a security interest in the borrower’s personal property may be found in Exhibit 16A.5. 䡲
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16.7 POSTSETTLEMENT
The first two nonlender documents—the real estate transaction information return and the nonforeign affidavit—are required by IRS regulations. The purpose of the return and the affidavit is to report to the IRS a sale that generates a gain and, thus, taxable income. The purpose of the owner’s affidavit is to disclose any potential claims against the property that are not a matter of public record—contracts of sale, latent but unfiled mechanic’s liens for nonpayment of contractor charges, and so on. The purpose of the typical settlement statement addendum is to protect the settlement agent against any liability because inaccurate information was provided to the settlement agent in the process of preparing for and conducting the settlement. 16.7 (a)
POSTSETTLEMENT Generally
Following the settlement, the settlement agent searches the records to make sure that no claims against the property have been recorded from the time of the initial search of the records until the time of recording the deed. Then the deed and applicable lender documents are recorded. Once these final steps have been completed, the purchaser has become the insured owner of the property, and the settlement agent distributes the funds collected at settlement in accordance with the details reflected on the settlement statement. The settlement agent pays not only the seller but also the government, for all taxes and water and sewer fees owed; the real estate agent, for the commission; the lender, for origination and related fees; the settlement agent and title insurance company, for settlement charges and the title insurance premium; and all other parties to whom payments are owed, as reflected on the settlement statement. In some jurisdictions, the settlement agent distributes the funds at the settlement table, before the deed is actually recorded. Even in those jurisdictions, the same steps are followed, only in a slightly different order and with the settlement agent accepting a higher risk. The settlement agent can make sure that the requirements for title insurance have been met by recording the deed and searching the records for any new claims since the original title report. Further, by making all disbursements, the settlement agent can make sure that any lienholder whose lien needs to be released of record is paid the agreed amount for the release. If the amount to cause a release to be recorded or to ensure that property taxes and water and sewer fees have been paid is not known at the time of settlement, the settlement agent can hold in escrow from the seller ’s funds an estimated amount to cover such costs when they become known after settlement. Similarly, the settlement agent may hold 䡲
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in escrow funds from the seller to cover incomplete repairs. This type of escrow can benefit the purchaser as well as satisfy the settlement agent’s concerns that a contractor or subcontractor might file a mechanic’s lien against the property, which might become the liability of the title insurance company. A sample postsettlement escrow agreement appears in Exhibit 16A.6. (b)
Title Insurance Policy Issues
Because most title insurance companies are national or multistate in scope, the American Land Title Association (ALTA) has set national standards and created form documents that are used across the country. Even though the basic forms are uniform, a wide variety of changes may be made, depending on local custom and practice. Everything from the type of security documents (deeds of trust or mortgages) to when the settlement agent will disburse funds may be different, depending on local circumstances. In addition, significant variations from the standard title insurance policies may be possible upon request by the purchaser or the lender. One type of variation, known as affirmative coverage, provides the purchaser and the lender with title insurance even when encumbrances have been identified as exceptions to the title insurance coverage. Examples of typical exceptions on a title insurance policy include any claims arising from property taxes and water sewer fees incurred after the settlement; discrepancies in boundary lines, which an accurate survey would disclose; covenants and rights of way that affect the property; claims arising out of bankruptcy and creditors’ rights laws; and claims arising from tenants or other parties in possession. Examples of typical affirmative coverage for these exceptions include language ensuring that the unpaid taxes and water and sewer charges do not constitute liens under local law; language deleting the survey exception by noting the specific discrepancies that are reflected on a survey done for the particular property at issue; and language ensuring that, even though the property is encumbered, violation of a particular covenant will not cause the title to the property to be forfeited or reverted to a former owner. Affirmative coverage will not be routinely provided; it needs to be requested and/or negotiated with the title insurance company or settlement agent. 16.8
LENDER REQUIREMENTS
Ultimately, virtually every aspect of the presettlement, settlement, and postsettlement processes described above may have to be changed to accommodate the particular and peculiar requirements of the lenders in 䡲
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each transaction. By and large, the purchaser/borrower is not in a position to argue too strenuously with how the lender wants to carry out these processes. Even where local custom and practice call for a particular approach, the lender’s requirements will ultimately control. For example, if the lender wants the borrower to use the lender’s counsel as the settlement agent, there is nothing in RESPA that prevents the lender from requiring the borrower to do so as a condition of obtaining the loan. Similarly, the lender will decide which type of survey and surveyor’s certificate, as well as which title company and which type of affirmative coverage and exceptions will be acceptable. 16.9
GOVERNMENTAL REGULATIONS
After settlement, the nonprofit developer needs to comply with all applicable governmental regulations related to construction, occupancy, and ownership of property. These laws are almost exclusively state or local laws, although some federal environmental requirements may be applicable (see Chapter 4). The most common state and local requirements are for housing business licenses, rent control, building permits, and certificates of occupancy. (a)
Housing Business Licenses
Many jurisdictions regulate the operation of housing accommodations through the licensing of housing businesses. A housing business license, where required, indicates that the owner of the property has complied with all applicable requirements for owning and operating a housing business. Again, depending on local law, a housing business may include a landlord, a real estate sales developer, and/or a construction contractor. The nonprofit must be careful to learn of all the requirements and to comply with them. (b)
Rent Control
Many jurisdictions control procedures relating to rents and evictions and to conversion and demolition of occupied properties. The nonprofit must find out whether such regulations exist and how to comply with them. (c)
Building Permits and Certificates of Occupancy
Virtually all jurisdictions require that a building permit be issued prior to beginning construction work on a property, whether it is new construction or renovation of an existing property. Similarly, construction lenders require a borrower to produce the building permit before settling on the construction loan; sometimes, the building permit is required before even 䡲
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settling on the acquisition, if timing of the construction is important to the lender, that is, if the project cannot afford to cover the interest and other carrying costs of ownership, such as taxes and insurance, while the nonprofit is attempting to obtain a building permit. The certificate of occupancy is issued at the other end of the project, when the construction is completed and the property is ready for occupancy. Again, the local government usually issues the certificate of occupancy. The certificate indicates that the local government has inspected the work and is satisfied that all requirements and conditions of the issuance of the building permit have been met and the property complies with all applicable housing and building codes in that jurisdiction. Building permits and certificates of occupancy are discussed further in Chapter 17. (d)
Special Treatment of Nonprofits by Government
Typically, developers have to pay fees to local and/or state governments in order to comply with housing and building regulations. For example, local governments usually charge a developer a fee to obtain a building permit, and the amount of the fee usually is a function of the amount and expense of the construction to be completed at the property. Nonprofit sponsors should check with their local jurisdictions to determine whether more favorable provisions have been developed for nonprofit housing developers. Many localities provide nonprofits with exemptions from certain regulatory requirements, and reductions or exemptions from the payment of applicable fees.
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A P P E N D I X
1 6 A
Settlement Checklist and Sample Documents E XHIBIT 16A.1 Preliminary Checklist of Items to Be Provided by the Borrower at Settlement 1.
Certified copy of the Articles of Incorporation of the borrower and/or any guarantor.
2.
Certified copy of amendments, if any, to the Articles of Incorporation of the Borrower and/or any guarantor.
3.
Evidence acceptable to the bank’s counsel of good standing of the borrower and/or any guarantor.
4.
Authorizing resolutions of the borrower and/or any guarantor with respect to this transaction.
5.
Copy of the corporate bylaws of the borrower and/or any guarantor.
6.
Certified copy of the limited partnership certificate of the borrower and/or any guarantor and all amendments.
7.
Copy of the partnership agreement of the borrower and/or any guarantor and all amendments thereto.
8.
Any of the foregoing items 1 through 7, inclusive, pertaining to any general partner of the borrower and/or any guarantor, in the event the borrower and/or any guarantor is a limited or general partnership or joint venture.
9.
Schedules containing information to the best of borrower’s knowledge after reasonable inquiry as to any pending or threatened litigation with respect to the borrower and each of the guarantors.
10.
Current financial statements for the borrower and each guarantor, and evidence satisfactory to the bank and its counsel that no material adverse change in the financial condition of the borrower or any guarantor has occurred since the date of the statements.
11.
Copies of valid licenses, permits and authorizations with respect to the project, together with evidence that the project conforms to existing zoning laws and specified variances, if any, and any other permits required for the completion of the construction or rehabilitation work.
12.
Evidence of compliance with applicable laws, rules, regulations, and administrative requirements (e.g., building and zoning requirements).
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E XHIBIT 16A.1 Preliminary Checklist of Items to Be Provided by the Borrower at Settlement (continued) 13.
Evidence that no governmental action or proceeding is pending or threatened with respect to the revocation or suspension of any permits or authorizations to the best of borrower’s knowledge after reasonable inquiry.
14.
Plans, drawings and specifications relating to the construction work.
15.
Engineering plans, studies and reports.
16.
Executed copy of the borrower’s contracts with any contractors architects, engineers or other professionals and any major subcontracts (collectively, the “Contracts”), with respect to the project.
17.
Pro forma payment, performance and completion bonds, if any.
18.
A detailed cost breakdown for the construction or renovation of the project.
19.
Certification by surveyor or other professional acceptable to the bank that the project is or is not located in a federally designated flood hazard area.
20.
Flood insurance policy, if required.
21.
Pro forma mortgagee title insurance policy, together with pro forma usury, comprehensive (ALTA Form 100 or equivalent), zoning and location endorsements.
22.
Paid receipts for insurance and copies of insurance policies, properly endorsed to show the interest of the bank, relating to: a.
Property insurance coverage (effective throughout term of Loan).
b.
Comprehensive hazard, fire and extended coverage (effective throughout term of Loan).
c.
Comprehensive general liability and personal injury liability coverage (effective throughout term of Loan).
d.
Workers’ Compensation coverage for all persons employed in connection with the borrower’s operation of the project and any construction work.
The endorsement referenced above shall show _____ as mortgagee, loss payee and additional insureds of the closing date and shall show _____ as mortgagee, loss payee and additional insured as of the conversion date. 23.
Pro forma opinions of counsel to borrower and any guarantors as to the matters specified in the commitment.
24.
In the event the project is in use or to be used for residential purposes, evidence of compliance with the local rent stabilization laws.
25.
Any and all additional documents or items which may be determined reasonably necessary by the bank or its counsel.
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E XHIBIT 16A.2 Survey
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E XHIBIT 16A.3 Settlement Statement
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E XHIBIT 16A.3 Settlement Statement (continued)
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E XHIBIT 16A.4 Sample Documents
PART 1: OWNERS AFFIDAVIT OWNERS AFFIDAVIT
(To Induce Sale of and/or Loan on Premises and Title Insurance Coverage) STATE OF ____________) COUNTY OF ____________) The undersigned owner(s) being first duly sworn on oath, depose(s) and say(s) that they are the owner(s) of property known as: Mechanics That at no time within 120 days of the date hereof has any Liens work, services, or labor been done, or any fixtures, apparatus or material been furnished, in connection with, or to, the said premises, except such material, fixtures, work, apparatus, labor or services as have been fully and completely paid for; that there is no claim or indebtedness to anyone for any labor, fixtures, apparatus, material, services, or work done to, upon, or in connection with, the said premises; that there is no claim or indebtedness; that there is no mechanics lien claim against said premises, whether of record or otherwise; Contracts & That no agreement or contract for conveyance, or deed, Conveyances conveyance, written lease, or writing whatsoever, is in existence, adversely affecting the title to said premises, except that in connection with which this affidavit is given; Possession That there are no parties in possession of said premises other than the . . . Judgments That there are no judgments affecting the premises; Taxes & That there are no unpaid or delinquent property tax assessAssessments ments or charges against said premises; Water & That there are no unpaid or delinquent water or sewer serSewer vice charges against said premises; This affidavit is made to induce the Purchase of and/or a Loan secured by premises described herein and insurance of the lien thereof. __________________________ (L.S.) __________________________ (L.S.) Subscribed and sworn before me, a notary public, in and for the county and state aforesaid, this _____ day of _____, 20. _______________________________ Notary Public My commission expires: 䡲
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E XHIBIT 16A.4 Sample Documents (continued)
PART 2: ADDENDUM TO SETTLEMENT SHEET ADDENDUM TO SETTLEMENT SHEET
THIS ADDENDUM is attached to, and made a part of the Settlement Statement between _____ (PURCHASER) and _____ (SELLER). PURCHASER and SELLER mutually agree as follows: 1.
The accuracy of information furnished to _____ (“Settlement Agent”) as to items listed on the Settlement Statement, is not guaranteed by Settlement Agent or any of its employees and they assume no liability for inaccurate information provided to them. However, every reasonable effort has been made to ascertain this information accurately.
2.
Settlement Agent may make subsequent proper adjustments in the event any information and/or items on the Settlement Statement furnished to Settlement Agent prove incorrect, or escrow or other funds prove insufficient, or any calculations prove to be inaccurate, and the appropriate party will pay and/or reimburse Settlement Agent any further sums thus found to be due. Conversely, if there have been overpayments, Settlement Agent will reimburse such amounts.
3.
The Purchaser acknowledges that Settlement Agent has disclosed that it is a licensed agent of the title insurance company involved in this transaction and that it will receive a percentage of the title insurance paid by Purchaser as a commission. Purchaser consents to such commission.
4.
The Purchaser and Seller acknowledge that Settlement Agent is acting as a neutral agent with respect to this settlement and that the settlement fee(s) does not include any attorney fees for legal advice and/or representation for either the Purchaser or Seller. Notwithstanding the previous sentence, Settlement Agent may have provided legal advice and/or representation to either the Purchaser or Seller under a separate financial arrangement. In that event, that fact has been disclosed to the other party.
_______________________________ Seller
_______________________________ Purchaser
_______________________________ Seller
_______________________________ Purchaser
Seller’s Forwarding Address: _________________________________________________________________ _________________________________________________________________
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E XHIBIT 16A.4 Sample Documents (continued)
PART 3: REAL ESTATE TRANSACTION INFORMATION RETURN THIS IS IMPORTANT TAX INFORMATION AND IS BEING FURNISHED TO THE INTERNAL REVENUE SERVICE. IF YOU ARE REQUIRED TO FILE A RETURN, A NEGLIGENCE PENALTY OR OTHER SANCTION WILL BE IMPOSED ON YOU IF THIS ITEM IS REQUIRED TO BE REPORTED AND THE IRS DETERMINES THAT IT HAS NOT BEEN REPORTED. 1. Name and Address of Agent or Approved Attorney (Payer)
2. Payer’s Federal Tax Identification No. 3. Agent or Approved Attorney Number 4. Case/File No.
INSTRUCTIONS FOR RECIPIENT:
You are required by law to provide the closing agent identified above with your correct taxpayer identification number. If you do not provide the closing agent identified above with your correct taxpayer identification number, you may be subject to civil or criminal penalties imposed by law. Brokers, including real estate brokers, and barter exchanges must report proceeds from transactions to the Internal Revenue Service. This form is used to report these proceeds. Report amounts from your Forms 1099-B in the applicable parts of Schedule D (Form 1040). 5. Seller’s (Recipient’s) Name [First, Middle, Last] Street Address
City, State, and ZIP code 9. Property Description (Including Address)
10.
This is a property service transaction This is not a property service transaction
6. Seller’s Tax Identification No. 7. Date
Box 7—For real estate transactions, the date of closing is shown. 8. This Seller’s Share of the Gross Sale Price $ Box 8—Shows the proceeds from a real estate transaction. If the real estate was your principal residence, file Form 2199, Sale or Exchange of Principal Residence, for any gain. Box 9—Shows a description of the real estate for for which the proceeds are being reported. Box 10—States whether or not property (other than cash and consideration treated as cash in computing gross proceeds) or services has been received or is to be received by you as part or the consideration for the real estate.
UNDER PENALTIES OF PERJURY, I CERTIFY THAT THE NUMBER SHOWN ON THIS STATEMENT IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER. By: ___________________________ (Signature of Seller) 䡲
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E XHIBIT 16A.4 Sample Documents (continued)
PART 4: CERTIFICATION OF NON-FOREIGN STATUS-ENTITY Section 1445 of the International Revenue code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform the transferee that withholding of tax is not required upon the disposition of a U.S. real property interest by ______________, the undersigned hereby certifies that following on behalf of ______________. 1.
______________, is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);
2.
______________’s U.S. employer identification number is ______________; and
3.
______________’s office address is ______________. ______________ understands that this certification may be disclosed to the Internal Revenue Service by the transferee and that any false statement contained herein could be punished by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief, it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of ______________. Date: ____________________________ _________________________________ By: ______________________________ Case No. _________________________ Property Address: __________________________________________________ ____________________________________________________________________
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E XHIBIT 16A.5 Financing Statement
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E XHIBIT 16A.6 Escrow Agreement—Postsettlement
ESCROW AGREEMENT—POSTSETTLEMENT _____________________ (“Purchaser”), _____________________ (“Seller”) and _____________________ (“Escrow Agent”) agree as follows: 1.
Escrow Agent shall hold in an interest/noninterest bearing escrow account the total sum of $___________ (“Escrow Amount”), as reflected on Line _____ of the Settlement Statement for the sale of _____________________ (“Property”). If the Escrow Amount is held in an interest-bearing account, interest shall be credited to _________________, social security or tax identification number ___________ ___________.
2.
Escrow Agent shall disburse the Escrow Amount only as directed in writing by Purchaser and Seller. If Purchaser’s and Seller’s instructions to Escrow Agent differ, Escrow Agent shall not disburse any funds until there is agreement between Purchaser and Seller as to such instructions. All negotiations and arrangements concerning the disbursement of the Escrow Amount shall be solely between Purchaser and Seller and Escrow Agent will play no role whatsoever other than as neutral stakeholder.
3.
Purchaser and Seller shall indemnify and hold harmless Escrow Agent from any and all liability of any nature which may arise from this Escrow Agreement, including but not limited to all of Escrow Agent’s attorney fees and related costs, provided that Escrow Agent does not act with gross negligence or intentional fraud.
PURCHASER
SELLER
By: __________________________
By: __________________________
By: __________________________
By: __________________________ ESCROW AGENT By: ______________________________
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E XHIBIT 16A.7 Samples of Affirmative Title Insurance Coverage 1.
An examination of a plat of survey by _____, dated _____ provided by the borrower herein for matters adverse to the title herein insured disclosed the following: a.
Party walls to _____ side. Policy will insure that adjoining owners have reciprocal rights in and to the use of said party walls.
2.
Any violations, present or future, will not result in forfeiture or reversion of title.
3.
Subsequent to date of settlement, a lien not yet due and payable.
4.
This commitment guarantees that any past, present or future violations of the restrictions, covenants, building setback lines, easement area, widening strips, partition walls, or other limitations and restrictions will not work a forfeiture or reversion of the title or result in a lien or charge superior to the interest of the mortgagee to the insured herein, and that the same have not been violated as of the date of this commitment.
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C H A P T E R
S E V E N T E E N 17
Constructing or Rehabilitating the Property: Settling on the Construction Loan and Surviving the Construction Process 17.1
Introduction
17.2
Settling on the Construction Loan 554
17.3
The Construction Process—The Participants and Their Responsibilities 555
17.4
17.1
553
17.5
Negotiating the Construction Contract and Bidding 577
17.6
Elements of the Construction Contract 593
17.7
Rehabilitating an Occupied Property 602
17.8
Completion of Construction
Technology in 21st Century Affordable Housing Construction and Rehabilitation 575
603
Appendix 17A Construction Process Checklist and Sample Contractor Agreements 605
INTRODUCTION
The construction phase of the development process carries the greatest risk to both the sponsor and the lender. Because of the nature of construction or rehabilitation (hereinafter referred to as “construction” in this chapter, unless otherwise stated), there is always a risk that construction cost estimates developed by the sponsor will be understated. This understatement can be a result of poor cost estimation by the development team; defects in the property’s fundamental systems (plumbing, electrical, roofing, HVAC) that could not be detected until walls were opened; unforeseeable property conditions, such as subsurface conditions that make excavation in portions of the property unmanageable or timeintensive; or acts of God or job actions that affect the ability of key suppliers to deliver essential building materials.
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In addition, cost overruns can be caused by unscrupulous general contractors and inexperienced or careless architects or sponsors. As discussed in this chapter, inexact contract documents prepared by the architect, and general contractors committed to increasing costs through change orders can increase project costs dramatically. Because of these risks, the sponsor, working closely with the construction lender where possible, must select its architect, general contractor, and construction manager 1 with care. In fact, many construction lenders will prohibit a sponsor from working with certain contractors and architects because of problems encountered with their work on previous projects. 17.2
SETTLING ON THE CONSTRUCTION LOAN
Settlement on the construction or rehabilitation loan (hereinafter referred to as the “construction loan,” unless otherwise noted) may take place simultaneously with the sponsor’s acquisition of the property, if the sponsor is prepared to begin construction immediately. Settlement on the construction loan will otherwise be delayed until the sponsor completes all the necessary construction documents, selects a general contractor, and secures all necessary work permits, as discussed later in this chapter. In many cases, as noted in Chapter 6, acquisition lenders also are construction lenders. In these cases, the acquisition loan and the construction loan essentially are one and the same. If the sponsor is ready to begin construction at acquisition, the sponsor’s first draw on this acquisition/ construction loan might be used both to acquire the property and to pay the initial costs of construction (e.g., reimburse the contractor for insurance or for the purchase of initial materials). Proceeds from construction loans, unlike acquisition and permanent financing, are provided to the sponsor through a series of “draws” or periodic requests for funds. For example, a construction lender may commit to fund a construction loan in a set amount, say, $1 million. This $1 million, however, will be lent to the borrower only after work is completed, the project architect or construction manager has certified that the work for which payment is requested is completed, and actual invoices for work performed are provided. A more detailed discussion of these “draws” is provided later in the chapter. The construction loan, like the acquisition loan before it, will have to have title insurance (see Chapter 16).
1
The potential role of the construction manager is discussed later in this chapter.
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17.3
THE CONSTRUCTION PROCESS—THE PARTICIPANTS AND THEIR RESPONSIBILITIES
As stated in Chapter 3, the initial responsibility of the nonprofit sponsor is to establish a skilled and experienced development team. The individuals and groups participating in the project will vary, depending on the financing, geographic location, size, and complexity of the proposed development. The collective skills and experience of the players will determine the team’s ability to anticipate, analyze, avoid, resolve, or mitigate the problems that will inevitably arise during the construction process, and must be sufficient to convince a construction lender that the team itself reduces the inherent risks of the construction process. The members of the development team who are crucial to the construction process are the sponsor, the architect, and the general contractor (referred to in most construction documents and for purposes of this chapter as the “owner,” the “architect,” and the “contractor”). The roles, expectations, and responsibilities of these players in the construction process are discussed below. Familiarity with the responsibilities of each of the parties will increase the nonprofit’s ability to hire the right party for each phase of the job, contract prudently for the services provided, and focus carefully on the sponsor’s risks and responsibilities. (a)
The Participants’ Roles—Generally
The standard construction contract establishes a relationship among the owner, the architect (or designer), and the contractor. Typically, the owner contracts separately with the architect and the contractor and no contractual relationship exists between the architect and the contractor. The owner is the ultimate authority for the project and must coordinate the work of the other parties. The architect translates the owner’s ideas and budget into drawings and supervises construction as the agent of the owner. The contractor builds the project and supervises the work of all subcontractors required for the job. This triumvirate is typical of all construction projects and the relationships established require coordination by the owner in order to avoid conflict. Most construction projects and most contracts executed between the owner and each of the members of the construction team (the architect, contractor, and the construction manager) utilize the standard construction contracts designed by the American Institute of Architects (AIA). These standard contracts, referred to throughout this chapter, often serve as the baseline from which the parties negotiate, deleting certain terms and adding others, as appropriate. The standard contract provisions that cause the most controversy or are most frequently modified by the parties are discussed throughout this chapter.
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(b)
The Role of the Owner
The owner is the force behind the project and is seen by the other members of the team as the one party who will benefit most from the successful completion of construction. Typically, the owner will have the greatest financial stake in the project and will assume a correspondingly high risk. Ways of mitigating or reducing this risk are discussed throughout this chapter. One of the owner’s key responsibilities is to select the architect, the contractor, and the construction manager, if appropriate. The owner, in selecting these professionals, must ask: 1. Is the architect capable of developing cost estimates and making day-to-day field decisions that reflect the owner’s goals and aspirations for the project? 2. Does the contractor have the integrity and capability, and sufficient inducement through payments or contractual obligations, to complete the proposed development? The answers to these questions will determine the selection of both parties and the ultimate success of the project. The role of the architect as both designer and owner’s agent during construction must be considered during the selection process. Many architects see themselves as creative artists and shun the administrative aspects of their profession, such as providing realistic cost estimates, obtaining building permits, and aggressively supervising the general contractor. Others view their responsibilities in a more holistic manner—helping the owner to solve design and budget problems as they arise and working to ensure that the owner receives the biggest bang for the construction dollars available. Prior to hiring or engaging an architect, the owner should determine each architect’s view of his or her role through personal interviews and a thorough evaluation of all client references provided by each candidate being considered. An architect’s ability to understand or even enhance the owner ’s design ideas does not necessarily qualify the architect to manage a construction contract. If the architect’s skills in construction management are weak but the sponsor wants to hire the architect anyway, or if the architect hired turns out to have weak management skills, the owner may choose to hire a construction manager to act as the owner’s agent and administrator of the project. (Construction managers are discussed later in this chapter.) A sponsor may even decide to complete a project without an architect, if few or no design services are required. In those cases, the sponsor
(i) Selecting the Architect.
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may choose a general contractor that has an in-house design staff. The advantage or disadvantage of this approach, as discussed below, is that one company will design and build the project under a single contract with the owner. The standard AIA contract between an owner and an architect is AIA Document Form B141. (ii) Selecting a General Contractor. Contractors, in general, suffer from very
bad press. Nearly everyone has had or has heard of a horror story involving a contractor, on jobs as small as a home repair or as large as construction of a skyscraper. The unfortunate truth is that there are bad contractors. The fact that there have been bad contractors for a long time is reflected in the terms of the standard AIA construction contract and the growth of an industry of consultants and experts who specialize in construction management. However, new projects are completed every day, and contractors are building them. Knowing what to expect from a contractor is essential to the success of even the smallest real estate project. A contractor can be selected through competitive bidding or interviews (often referred to as negotiated bids), or a combination of both. Many affordable housing projects, utilizing government funds, are required to use the competitive bidding process. This process is expected to result in the project’s being completed at the lowest possible cost because of open and free competition. (A detailed description of the competitive bidding process can be found later in this chapter.) If the circumstances and financing allow, the owner may select a contractor through a negotiated bid process or interviews and recommendations and determine the one company most qualified and experienced for the work. A detailed description of the “negotiated bid” process can be found later in this chapter. To the extent possible, experienced nonprofits often use a single contractor whom they know and trust for all of their development work. The interview process also may be used to select the contractors who will be invited to bid on the project or to select the contractor most suitable for the job after the bidding is complete. The standard AIA contracts between an owner and a contractor, Forms A101 (stipulated sum) and A111 (cost plus fixed fee with guaranteed maximum price), are included in Appendix 17A as Exhibit 17A.2 and Exhibit 17A.3, respectively. (iii) The Owner’s Responsibilities to the Architect and Contractor. After a con-
tractor and architect are selected, the owner is responsible to them for a number of tangible and intangible items and duties. Many of the items and duties that follow are set out in AIA Document 201, “General Conditions of the Contract for Construction” (Exhibit 17A.4), which is commonly made a part of contracts between owners and general contractors,
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regardless of the type of contract. See Section 17.5 below. Other duties are implied by tradition and experience; all of them are reasonable. 1. Funding the construction. The owner does not have to disclose to the Contractor the conditions, arrangements, or agreements that affect the project’s financing. The contractor, on the other hand, has no obligation to begin or continue work if reasonable evidence of funding cannot be shown. A contractor expects payments for work completed and reimbursement for materials purchased, contract expenses, or changes to the work. Establishing and maintaining a well-documented and expeditious payment process is critical to the success of a project. Periodic payments are discussed later in the chapter. Failure of the owner to manage this payment process can have devastating effects on a project. For example, if a multifamily housing project is planned and is to utilize cost-saving prestressed concrete planks as a structural system, the subcontractor supplying the planks will manufacture them well in advance of the installation date. If project payments are delayed, the supplier may refuse to deliver the planks to the site. If a new floor is not in place, the other trades involved—plumbers, electricians and masons—will also be delayed. This domino effect can easily shut down an entire project. 2. Securing surveys and defining easements, rights-of-way, or utility locations. The owner is responsible for obtaining an accurate and up-todate description of the property and of the existing conditions and improvements on the site. A project can be delayed significantly because of an unknown condition on the property, such as the lack of certain utility connections. As in the concrete planks example above, all work can be stopped, at considerable cost, while adjustments are made or plans are redesigned to include this previously unknown condition. Existing surveys should be reexamined for new or unrecorded conditions when a new survey is infeasible. Easements, rights-ofway, and utility locations can be checked with the municipal entity responsible for recording plats and deeds. The previous owner also should be consulted regarding any conditions that may have been granted but not recorded. The accuracy of these data is important because local laws and contracts often entitle the contractor to additional compensation for delays or work completed based on inaccurate data. 3. Securing all necessary approvals from local, state, and federal authorities. Construction plans and specifications must be approved by the local building department, but they represent only the existing and
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proposed physical building conditions for the site. Additional approvals often are required for affordable housing projects. For example, in urban locations, zoning restrictions may preclude multifamily housing on the selected site or the use of wood frame construction for a three-family dwelling unit. Rural locations may encounter the need for a wetlands approval or specific water rights. The examples of approvals are endless, but the responsibility for obtaining them lies solely with the owner and the owner’s consultants. Real estate counsel, consultants, and other expediters familiar with the local laws are essential in obtaining the necessary authority to proceed with the project. This is especially true if the project or building is outside the normal community or purview of the sponsor. 4. Providing evidence that any fees, assessments, or charges for use of the site have been paid. These costs are related to access to and use of the site. The sponsor may have acquired clear title to the property; however, additional costs may be necessary in order to make the property usable. Water and sewer connection fees, tax assessments, waste disposal fees, and temporary utility connection costs all may be required prior to or during construction. The construction contract should state explicitly whether the owner or the contractor is responsible for these costs. In addition, affordable housing projects often make efficient use of the site for economies of scale. A “tight” site may require additional land on a temporary basis to facilitate construction. Staging areas, storage, parking, or crane access are just a few examples of the needs that may arise during construction. The need for additional space should be apparent to the contractor at a preconstruction site inspection, but the owner is responsible for acquiring the area necessary to accomplish the work proposed. All acquisition costs are the owner’s responsibility. 5. Completing all investigations and studies necessary to accomplish the work. The owner is responsible for completing extensive site investigations. These may include surveys of existing conditions, soil surveys of subsurface conditions, traffic surveys, and environmental surveys. (Soil and traffic surveys are discussed below; surveys of existing conditions and environmental surveys are discussed in Chapter 4.) The owner is responsible for hiring the consultants necessary to complete these studies. The number and type of studies required are very sitespecific. The studies listed above offer good examples of the research and due diligence necessary for real estate development.
Soil Surveys—The subsurface conditions of a site are typically the biggest unknown on a new construction project. Existing
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properties, scheduled for rehabilitation, normally do not require extensive soil surveys unless an addition is proposed or telltale cracks in the floors and walls indicate unstable subsurface conditions. A soil survey will reveal the composition of the soil, the bearing capacity, the existence of rock, and the level of groundwater. All of these data are necessary to accurately calculate the foundations of a building, the extent of excavation or backfill required, and the drainage capacity of the site. The accuracy of this information is critical to evaluating the costs of construction. The more precise the contractor’s calculations, the smaller the contingency for unknowns and the lower the overall cost of the project. Another reason for precision and accuracy here is that the contractor will rely on the data supplied by the owner and proceed accordingly. If the data are inaccurate or incomplete, the contractor may be entitled to additional compensation. The cost of an extensive subsurface investigation should be weighed against the anticipated cost savings during construction.
Traffic Studies—Many localities, especially in urban areas, have made traffic studies an integral part of an environmental impact study required of sponsors of residential and commercial developments. The proposed project may generate only a handful of cars on existing streets, but the same is true for the other projects on the block and around the corner. Suddenly, what was once a quiet neighborhood street becomes a busy thoroughfare. The neighbors complain about the increased level of auto emissions and noise, and the city planners propose acquiring front yards to widen streets in order to mitigate the problem. This sounds extreme, but these issues are common and occur regularly in municipalities around the country. The owner should be aware that something as simple as a traffic study for a zoning variance could have a significant impact on a community and could mire the project in the government approval process for years.
6. Coordinating and warranting the work of the other professionals involved. As stated earlier, the owner contracts separately with the architect and the contractor, and no contractual relationship will exist between the architect and the contractor. The architect will be acting as the owner’s agent through the construction phase of the development process, and the architect’s instructions, interpretations, and guidance should be considered as originating from the owner. This, unfortunately, is the source of a great many conflicts, delays, and crises during the construction process.
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The contractor may not trust the judgments or statements of the architect on site, and the architect may not be able to convince the contractor of his or her authority as the owner’s agent. In either case, the owner will hear about the problem and is ultimately responsible for its expeditious resolution. The contractor looks to the owner to coordinate all of the professional entities involved in the project, not only the architect. The owner is responsible for the work of the architect, including an implied warranty that the project can be built as indicated by the plans and specifications. This is an important issue for the owner to understand; it will be discussed in detail later in this chapter. 7. Cooperating in a timely and reasonable manner. This responsibility is self-explanatory. The owner is responsible for cooperating with the requests of the contractor and the architect in a timely and reasonable manner. 8. Disclosing any information necessary for the completion of the project. This responsibility also is self-explanatory. The owner must disclose any information that is necessary for the completion of the project so as not to frustrate the basic purpose of the construction contracts—to complete the established scope of work within an established time frame. 9. Exercising final authority for all interpretations and decisions. As noted above, the owner, and no one else, has to make the final decisions on all aspects of the construction process. (c)
The Role of the Architect
(i) The Owner’s Responsibilities to Hire and Contract with Low-Income Persons and Targeted Businesses. If a nonprofit receives significant reha-
bilitation or construction funds from HUD, the nonprofit will have an obligation to see that low-income persons are hired and businesses owned by or employing low-income persons are awarded contracts with these HUD dollars. Section 3 of the Housing and Community Development Act of 1968 was enacted by Congress in 1968 and amended in 1992 in order to: insure that employment, contracting and other economic opportunities generated by HUD financial assistance be directed to low- and verylow-income persons and to businesses which also provide employment and assistance to such persons to the greatest extent feasible.
This section highlights the most important provisions of this law and the related federal rules that interpret the law. If your organization is not
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going to directly train or hire individuals with Section 3 funds, but will be contracting with parties who are, then you must ensure that your contractors meet the goals set out in the Section 3 program. (ii) Important Definitions •
Section 3 Covered Community Development Assistance—Section 3 applies to a project only if the nonprofit receives $200,000 or more in “Section 3 covered community development assistance.” “Section 3 covered community development assistance” or “Section 3 funds” is money provided by HUD to any entity under any HUD housing or community development program in connection with housing rehabilitation, housing construction, or other public construction.
•
Section 3 Covered Contracts—Nonprofits will have to make sure that any contract that is entered into in excess of $100,000 imposes the Section 3 employment and contracting requirements on the contractor. These contracts are termed “Section 3 covered contracts” for purposes of the Section 3 rules. Section 3 covered contracts do not include:
Contracts awarded under HUD’s procurement program; or
Contracts for the purchase of supplies and materials, unless they are combined with installation of the materials.
•
Section 3 Residents—The low-income persons for whom Section 3 is intended to provide job and contracting opportunities for are called “Section 3 residents.” A Section 3 resident is either a resident of public housing or a low- or very low-income person who lives in an area where Section 3 covered community development assistance is being provided. A person is considered low-income if his or her income does not exceed 80 percent of the median income for the area. A person is considered very low-income if his or her income does not exceed 50 percent of the median income for the area.
•
Section 3 Business Concerns—The businesses for which Section 3 is intended to provide contracting opportunities are called “Section 3 business concerns.” A business is considered a Section 3 business concern if:
It is 51 percent or more owned by Section 3 residents; or
At least 30 percent of its full-time employees are currently Section 3 residents or were Section 3 residents within three years of the first date of employment; or
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It can provide evidence of a commitment to subcontract more than 25 percent of the contract amount to a business that meets the 51 percent ownership or 30 percent full-time employee requirements just mentioned.
(iii) Numerical Goals. Nonprofit recipients of Section 3 funds will be
expected to show that they created a minimum number of jobs for Section 3 residents and that they awarded a minimum number or percentage of all contracts to Section 3 residents or Section 3 business concerns from their “Section 3 covered community development assistance.” (iv) Jobs. The nonprofit and its contractors will be expected to hire Section 3 residents before hiring any other persons, other than its existing full-time staff, to complete work paid for with Section 3 funds. These additional employees are called “new hires.” Generally, the nonprofit and its contractors can demonstrate compliance with this goal by committing to employ Section 3 residents as 10 percent of the aggregate number of new hires for each year over the duration of the Section 3 project. These employment goals are more stringent if the Section 3 funds are awarded to an entity that is affiliated with a managing general partner of management agent that controls 500 or more units in a given year. In that situation, a nonprofit can demonstrate compliance by committing to employ Section 3 residents as: •
10 percent of the aggregate number of new hires for the one-year period beginning in FY 1995.
•
20 percent of the aggregate number of new hires for the one-year period beginning in FY 1996.
•
30 percent of the aggregate number of new hires for the one-year period beginning in FY 1997, and continuing thereafter until the project is completed.
Remember, these goals are minimum goals, apply to new hires, and reflect aggregate hires. A nonprofit and its contractors must hire new hires based on the following preferences: (v) Preferences for Jobs.
•
Section 3 residents who reside in the area in which the Section 3 covered project is located.
•
Participants in HUD Youthbuild programs.
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•
Homeless persons residing in the area in which the covered project is located, when the project is assisted under the Stewart B. McKinney Homeless Assistance Act.
•
Any other Section 3 residents.
(vi) Contracting for Services. A nonprofit and its contractors will be expected to commit to award to Section 3 business concerns: •
At least 10 percent of the total dollar amount budgeted for building trades; and
•
At least 3 percent of the total dollar amount of all other Section 3 covered contracts.
Nonprofits and their contractors must award contracts for services based on the following preferences:
(vii) Preferences for Contracting.
•
Section 3 business concerns that provide economic opportunities for Section 3 residents in the area.
•
Applicants selected to carry out HUD Youthbuild programs.
•
Other Section 3 business concerns.
If a nonprofit does not meet these goals, the nonprofit and its contractors will have to explain why they failed to do so. The nonprofit will have to explain any problems that it encountered in trying to do so or describe “other economic opportunities” that it provided instead. The Section 3 rules provide guidance as to what “other economic opportunities” could be provided by the recipient or contractors to stay within compliance, including:
(viii) Other Activities If Numerical Goals Not Met.
•
The use of “upward mobility,” “bridge,” and trainee positions to fill vacancies.
•
Hiring Section 3 residents in part-time positions, or management or maintenance positions in other housing developments.
•
Formation of Section 3 joint enterprises in which an association of business concerns agrees, by written joint venture agreement, to engage in a business venture for which the businesses combine their efforts and the Section 3 business concern is responsible for a clearly defined portion of the work, holds management responsibilities, performs at least 25 percent of the work, and is contractually entitled to compensation proportionate to its work.
•
Use of labor-only contracts for building trades.
•
Purchase of materials and supplies from resident-owned businesses.
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Nonprofits also will have to comply with the following Section 3 requirements if they receive Section 3–covered community development assistance:
(ix) Additional Responsibilities.
•
Implement procedures designed to notify Section 3 residents of economic opportunities.
•
Notify potential contractors for Section 3 covered projects of the relevant requirements.
•
Facilitate the training and employment of Section 3 residents and the award of contracts to Section 3 business concerns.
•
Actively cooperate with the assistant secretary in obtaining compliance of contractors and subcontractor.
•
Document actions taken to comply with these requirements.
The Section 3 rules describe the types of activities that HUD expects nonprofits to undertake to meet these responsibilities. The owner should be aware that, in the typical contractual relationship among the owner, architect, and contractor, the owner is ultimately responsible for the work of the architect. Owners frequently attempt to modify the standard AIA contract between the owner and the architect (AIA Document B141) in order to shift some of this responsibility back to the architect. Nonetheless, the responsibilities of the architect in the development process, as outlined below, should be read by the owner as extensions of the owner’s own responsibilities and obligations. (x) Developing a Building Program. The architect has several roles to play in the development of an affordable housing project. Initially, the architect’s job is to listen to and evaluate the owner’s needs and budget for the project and to translate these needs into a building “program.” This program, which establishes the parameters used to design a proposed structure or to rehabilitate an existing structure, often is a compromise based on the limited funds available to the sponsor for the project. The program will include the cost, number, size, and type of rooms or spaces necessary to accommodate the owner’s needs, while accounting for all applicable building and zoning codes and the limitations of the project’s budget. The design of the structure, generated by this program, will be documented in the form of plans and specifications. The plans spell out in graphic and notational form the size, location, and configuration of the building’s elements—the siting, foundations, structure, windows and doors, plumbing, and so on. The specifications dictate the type and quality of these elements and the materials used to create them. The two documents work in tandem to fully define the proposed project.
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The architect must evaluate the proposed design for its feasibility and cost of construction. The feasibility of the design is determined by code compliance, accuracy, and buildability. The building must comply with the building and zoning codes or have waivers or special permits for any deviations. The plans and specifications must be accurate, to ensure that the parts will ultimately fit together and to estimate the actual cost of labor and materials needed. The project must be buildable. This implies not only structural integrity but also a consideration for normal standard construction techniques and practices. Plans and specifications are discussed in greater detail later in the chapter. The cost of construction, as determined by the architect, is a preliminary estimate of what a contractor would bid to build the project. This figure must correlate with the owner’s construction budget and allow sufficient contingencies for the inevitable changes and alterations. In some jurisdictions, the architect’s fee is determined, by convention, as a percentage of the overall construction budget for the project.
(xi) Evaluating the Design for Feasibility and Cost.
The architect acts as the owner’s representative on the project during the construction phase. During this period, the architect is responsible to the owner for an evaluation of the contractor’s work. This evaluation assures the owner that the property is being developed in accordance with the proposed design. The components of this evaluation, which follow, explain the interaction of the parties during construction:
(xii) Acting as Owner’s Representative During Construction.
1. Review and approval of shop drawings. The plans and specifications, as prepared by the architect, are often done at a scale and level of detail that are insufficient to actually fabricate many of the elements of a building. Supplemental drawings are prepared by subcontractors to show the true configuration of these elements. These large-scale, detailed documents are known as shop drawings. The architect’s task is to review these shop drawings to determine whether they comply with all applicable codes and are compatible with the overall design. For example, shop drawings are often prepared for cabinets in kitchens and bathrooms. They illustrate the small details not shown on the architect’s plans: how the cabinets meet the wall or each other; how the countertops are adhered to the bases; and how the drawers and doors are designed and finished. Without these drawings, significant decisions affecting the appearance of the cabinets would be left up to the contractor or the contractor’s employees. 2. Coordination and approval of change orders. A change order is the industry term for a documented alteration, during the construction
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process, in the design or scope of work. Change orders can be necessary for a variety of reasons and often result in an increase in the project’s cost and a delay in the construction schedule. Because these cost increases or project delays can create significant problems, responsibility for a change order is often disputed. The contractor may claim the change was necessary because of a decision by the owner or an omission by the architect. The architect may claim the change is a result of an unknown site condition or a new and varied product design. The owner may claim the change is due to market conditions or the financing of the project. Whatever the reason or whoever originates the change, resolution of the conflict is the owner’s responsibility. The construction process will be seriously impeded if an owner is not prepared to deal with the inevitable changes that will occur. An owner must determine, early in the negotiations with the contractor, how these and other conflicts will be resolved. Change orders and conflict resolution are discussed later in the chapter. 3. Evaluation and approval of payment requisitions. Contractors normally request periodic, often monthly, requisitions for payment of work completed. The requisitions are referred to as “progress payments,” “draw requests,” or “draws.” They are evaluated by the architect to determine whether the payments requested correspond with the work completed on site. The architect and owner normally sign off on each payment requisition as an indication of agreement. The lender or financing agency may also evaluate and approve each requisition following the architect’s and owner’s review. Draw requests are discussed later in this chapter. 4. Site inspections. The architect is responsible for periodic site inspections. An owner signing off on the monthly requisitions often relies on the architect’s skill and experience in determining the extent and value of the work completed. To make these determinations, the architect tours the site and discusses with the contractor any issues that may have arisen. A regular schedule for site visits should be included as part of the architect’s contract with the owner. Site inspections also allow the architect to resolve conflicts on site that could not be resolved by reviewing the plans, specifications, or shop drawings. For example, cabinet finishes that do not turn out as expected, bricks that are no longer manufactured or available, mirrors that are specified without mounting hardware, and wallboard that mildews and must be washed or replaced are just a few examples of the problems that could arise and must be resolved on site. Although a qualified contractor could resolve each
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one, the architect, as the owner’s representative, has the authority to determine the manner in which these problems will be solved. The architect is also responsible for interpreting the design documents, providing any additional information required, answering questions, and making the evaluation and inspection in a reasonable and timely manner. The owner will find that a large number of the problems that will arise on the site are caused by disagreements between the architect and contractor. Careful consideration should be given to the compatibility of these two parties during the selection process. A great deal of time and money can be saved if these players have a good working relationship. (d)
The Role of the General Contractor
The general contractor is responsible for completing the building as shown on the drawings, at a specified cost, and within a certain time period. The general contractor (or “contractor”) almost always hires subcontractors to complete the various specialized tasks required under the drawings and specifications. Unlike the owner and the architect, the contractor will have very little input into the design or programming of a specific project. This limited scope can be the source of numerous problems and disagreements later on. For example, an owner might expect the contractor to review the drawings and specifications and offer constructive suggestions as to how the project could be built more efficiently and at a lower cost, but such actions are not required of the contractor. Unfortunately, many contractors will have bid the project at the lowest possible cost, and any review of the plans and specs will be toward itemizing possible change orders down the road. There are contractors who do not “fish” for potential change orders, but it is a fairly standard practice in a very competitive industry.2 If a contractor’s contract is narrowly written or the available compensation is too lean, a contractor may be forced to take advantage of all changes to the work in order to derive the necessary compensation. The owner should have frank and open discussions with potential contractors during the negotiation and selection process so as to limit disruptions and cost overruns later. A number of responsibilities that the contractor has to the owner and to the project in general, in addition to the technical responsibility of 2
A contractor is considered “fishing” for potential change orders or “hungry” when the contractor executes a contract for construction knowing that it intends to propose change orders later in the process based on questions or deficiencies identified during the bidding process.
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constructing the proposed project, are set out in AIA Form A201 (General Conditions) and discussed below. This form, often modified by the parties, is made a part of the construction contract itself by reference. See Section 17.5. Modifications to the provisions of AIA Form A201 that will benefit the owner, concerning the contractor’s responsibilities are included in the following discussion. (i) Review of Contract Documents. The contractor must review the agree-
ment between the owner and the contractor (often referred to as the Owner-Contractor Agreement), the conditions of the agreement or contract, the drawings, the specifications, and all other documents related to the project which have been specifically incorporated into the contract documents. These would normally include all addenda issued prior to and after the execution of the contract, and any modifications such as change orders, amendments, and orders for minor changes to the work. A further discussion of the elements of the contract documents is included in Section 17.5. Section 3.2.2 of AIA Form A201 requires the contractor to review these documents and to point out to the owner any errors, omissions, or inconsistencies that may exist. (AIA Form A201, Section 3.2.2). This due diligence on the part of the contractor is often known as the “duty to inquire.” In practice, however, this concept is not as clear as it sounds. The contractor normally reviews the contract documents for the first time during the bidding process. This may be for a period of only a few days or weeks. The documents themselves may have taken the architect and the owner months to prepare. From the contractor’s viewpoint, the owner and architect will have had sufficient opportunity and time to resolve any errors prior to submitting them for bids. To the extent that errors or inconsistencies exist, some contractors view them as a source of future cost increases through change orders. For others, this is an opportunity to assist the project by adding the contractor’s expertise and experience. For example, assume that, in a renovation of a 100-year-old building, the property lines are reflected on a tax map, which is incorporated into the plans as part of the contract documents. The contractor has the right to assume that these property lines are accurate and warranted by the owner and architect. Assume, however, that the contractor recently completed work on a similar building nearby and that the contractor knows that the building actually extends beyond the tax lot indicated on the map. The contractor may rely on the architect and owner’s warranty of accuracy, but the best approach for the project would be for the contractor to come forward with his or her recent experience to inform the owner of the potential problems with the site and the potential project delays that could result while the conflict is being resolved. If the contractor raises the issue early, the cost to the project likely will be
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minimized; if the contractor raises the issue after construction has begun, the cost to the project and the additional fees paid to the contractor likely will be substantial. Owners should attempt to gauge what approach each potential contractor takes to these types of issues, through reference checks and other means, prior to selecting the contractor. The owner also may seek to modify Section 3.2.2 to put on the contractor an affirmative burden of discovering and raising errors, omissions, and other pertinent information. As noted above, the contractor is normally selected for a project based on the contractor’s ability to construct the building within a certain time period and for a specified price. The contractor is solely responsible for all construction procedures and methods required to complete the job and for the supervision of all personnel, including subcontractors and specialty trades hired by the contractor. There is a tendency for some owners to get personally involved in the construction process, especially if the project is small or seemingly simple to build. This tendency is problematic for two reasons:
(ii) Supervision and Construction Procedures.
1. It dilutes and confuses the liability and responsibility for construction means and methods which, by standard contract, lie solely with the contractor. 2. Comments, recommendations, and changes suggested by the owner may carry the weight of amendments or change orders to the scope of work when carried out by a “hungry” contractor or one who aggressively seeks additional fees through change orders. The owner could then face an increase in project costs, rather than the savings that were anticipated as a result of the owner’s personal involvement. (iii) Labor and Materials. The contractor’s responsibility for all personnel hired for the project includes paying the labor, coordinating the various trades, and providing the necessary tools and equipment for the job. The language of the standard AIA contracts explicitly lists “machinery, water, heat, utilities, transportation and all other facilities and services necessary for the proper execution and completion of the work . . .” as additional items that the contractor must provide.
The contractor must guarantee the materials used on the job and the labor of the contractor’s employees. This warranty is in addition to any applicable manufacturer’s warranties provided on appliances, heating/ventilating and air-conditioning (HVAC) equipment, or roofing. Owners should articulate in their contract agreements with the contractor that all warranties relating to materials and labor should be
(iv) Warranty.
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assigned to them and should further stipulate that all installation work is to be performed in a manner that preserves the manufacturer’s warranties. This stipulation usually requires the contractor to provide follow-up maintenance and adjustments to all warranted equipment for a specified period of time. An owner also should negotiate from the contractor a warranty that the project will be free of liens or adverse interests in the property once payment for work performed has been provided by the owner to the contractor. This additional warranty would be added to Section 3.5 of the General Conditions. (v) Taxes. The contractor is responsible for all applicable taxes related to work performed or materials purchased for the construction. (vi) Permits, Fees, and Notices. On a normal construction project, the owner
is responsible for obtaining the building permit, and the contractor is responsible for all other permits and fees required to complete the work. In large municipalities, like New York City, the list of permits, fees, and notices required for a development can be extensive and may involve many different agencies and bureaucracies. To differentiate between the contractor’s and the owner’s responsibilities for permits, fees, and notices, the standard AIA contracts assign to the owner the obligation for everything prior to bidding and signing the contract, and to the contractor everything necessary once the contract is signed. The responsibility for these documents should be clearly expressed in the contract documents and, if possible, attached to a calendar or schedule so that all parties know who is responsible for what and when it will be provided. Occupancy of multimillion-dollar projects has been delayed for want of a single card or slip of paper that no one was responsible for. This issue is of particular importance on jobs that are “fast-tracked”— work proceeds on some elements of the building while others are being designed and developed. High construction financing costs and limited availability of materials are two possible reasons for fast-tracking a project. For example, a housing project might use steel as a structural system. In some areas of the country, prefabricated steel must be ordered months in advance of delivery. A prudent owner might develop the structural drawings and order the steel prior to completing the preliminary design for the rest of the project. Knowing exactly who is responsible for the permits, fees, notices, and tests for steel construction would be essential to this project. In every construction project, there are unknowns, just as there are conflicts and problems. Allowances are budget items that, for
(vii) Allowances.
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some reason, cannot be fully defined or specified at the time when the project is bid. The owner knows that these items will be used on the job and provides a budget amount to cover the expected costs. There is commonly a provision in the contract for an adjustment to the allowance amount once it can be fully defined. A typical allowance might be for wood beams in a renovation project, where the owner and architect have determined that some of the wood beams in the building will have to be replaced. However, without extensive demolition and testing of the existing beams, an accurate replacement cost cannot be established. An allowance is made for beam replacement, but it will be further defined and adjusted after demolition is complete. Contractors will calculate their bid for the project using this allowance amount as part of the contract price. AIA Document A201, General Conditions, Section 3.8, defines what the contractor can and cannot include in the cost for allowance items. The standard provision states that allowances shall be used to “cover the cost to the contractor, less any applicable trade discount, of the materials and equipment required by the allowance, delivered at the site, and all applicable taxes.” The contractor’s costs “for unloading and handling on the site, labor, installation costs, overhead, profit and other expenses . . .” are to be included in the contract price and not in the allowance. These standard provisions are necessary because some contractors view allowance items as windfalls. The contractor may enjoy a windfall in two ways: 1. The contractor has no incentive to hold costs below the allowance amount set out in the budget and will, accordingly, receive the contractor’s overhead and profit as a percentage of these costs. 2. Where the contract provides for the allowance to be adjusted without limitation, the contractor can increase the cost of performing the work beyond the allowance amount and thereby increase its overhead and profit as a percentage of this cost. The contractor is a businessperson with a staff and subordinates or partners. The standard General Conditions provisions of AIA Document A201, Section 3.9, provide that some individual on the contractor’s staff will be the superintendent for the project. It further provides that all communication with the superintendent shall be as binding as with the contractor directly. The superintendent is required to be in attendance on site during the construction process. This establishes a clear channel of communication between the owner and the contractor. There is no reciprocal clause for the owner other than direct communication with the project architect.
(viii) Superintendent.
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Section 3.10 of AIA Document A201, General Conditions, requires the contractor to prepare a construction schedule immediately after being awarded the job. This standard contract provision states that the schedule should provide the “expeditious and practicable execution of the work” and shall be revised by the conditions of the work. These requirements are insufficient from the owner’s point of view, however, because they do not articulate the form, content, or level of detail necessary to properly manage a construction project. A prudent owner should modify this standard contract language to require from the contractor a detailed schedule that:
(ix) Contractor’s Construction Schedule.
1. Articulates the phases of construction. 2. Establishes milestones that the owner can use to evaluate the progress of construction. 3. Provides for revisions and potential delays. This schedule will provide an agreed-on device for determining progress and a fair baseline for resolving allegations of delay. The schedule should be made part of the contract documents through incorporation into the construction contract. The contractor is required to keep these items at the project site for reference and review by the owner and architect and their agents. This is a useful requirement for several reasons. First, the drawings, specifications, and shop drawings are constantly being revised to incorporate the latest changes to the work. These documents are dated with each revision, and the latest revision becomes the record copy. If work is completed from an earlier version that does not incorporate the latest change, serious cost increases and delays could result. By having the record copy on site, the architect can be assured that all changes to date have been incorporated into the actual work. Second, many elements of a building are selected from catalogues by the project architect during the design and development phase of the project. Other elements are selected by what is known as a performance specification. This type of spec describes what the element is supposed to do without actually selecting a particular product or material. The contractor may select the particular product to be used, provided that it meets the performance standards of the specification. By having samples of these items on site, the architect and contractor can evaluate clearly any issue that may arise concerning their use on the project and expedite any approvals that may be required.
(x) Documents, Samples, Shop Drawings, Project Data.
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Because the contractor is responsible for the procedures, methods, and means of the construction process, this item, Section 3.13 of the General Conditions document, simply states that these operations must take place on authorized land and without “unreasonably encumbering” the site. What this provision does not do is articulate the on-site uses that may be detrimental to the owner. On renovation projects, the owner may not want the contractor’s employees using the lavatories of other units, making lunch in the kitchens, parking in the tenant spaces, or posting signs on the site without prior approval. These are just a few of the uses a prudent owner might object to. Careful consideration should be given to what an owner will allow on the site, to avoid unnecessary costs and problems. An additional consideration, which ties into the indemnification clause that follows, is the liability that an owner might be exposed to, based on the contractor’s use of the site. Many municipalities have “safe place to work” statutes that must be considered during the construction phase. The owner must protect itself through property insurance and the contractor’s insurance from any liability that occurs as a result of the site’s condition, for example, where a delivery truck driver is injured at the site while trying to avoid a new shipment of bricks stacked by the contractor. (xi) Use of Site.
(xii) Indemnification. This item, Section 3.18 of the General Conditions
document, requires the contractor to indemnify and hold harmless the owner and its agents against any claims resulting from the performance of the contractor’s work. The legal and insurance aspects of this clause will vary from site to site and are beyond the scope of this chapter. Prudent owners should take all necessary steps to limit their exposure to circumstances and conditions over which they have direct control. Shifting additional liability to the contractor by modification of this clause may be problematic because these standard provisions are widely accepted and understood. The time finally comes when the job is complete and purportedly ready to be occupied. However, the hallways are strewn with rubbish, the units are littered with the debris of construction, and four spaces of the parking lot are occupied with a dumpster filled to overflowing with old appliances, mattresses, furniture, and debris. The contractor is gone, and the final payment due the contractor is not enough to pay the carting expenses. This scenario is more common than might be imagined. There is little an owner can do in this situation, and it is best avoided. Under AIA Document A201, Section 3.15, the contractor is responsible for keeping the premises “free from accumulation of waste materials or rubbish caused (xiii) Cleaning Up.
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by the contractor ’s operations.” This responsibility should be strictly enforced throughout the construction process. Failure by the contractor to maintain a clean project site can cause fires, accidents, and delays to the project schedule. The cleaning-up provision of the standard contract allows the owner to clean the site and charge the contractor. The prudent owner will not wait until the final contract payment to exercise this option. (e)
The Role of the Construction Manager
As mentioned earlier, some construction projects require or could benefit from the services of a construction manager. The construction manager can play multiple and varied roles. A construction manager can be used to supplement the construction experience of the project architect during the design phase and to anticipate or avoid problems that may otherwise have been overlooked. Issues such as construction sequencing, materials selection and availability, and coordination of individual trade contractors and subcontractors all require more than a working knowledge of standard construction practice. The input of an experienced construction manager should result in time and cost savings that far exceed the construction manager’s fees. In addition, the architect selected for the project may be unable or unwilling to take on the role of owner’s agent during the construction phase of the project, or the scale of the project may be too large for an architect’s field representatives to handle in a timely manner. The construction manager could step in and manage the construction process in place of the architect. Finally, where a limited scope of rehabilitation is being proposed, the owner may act as its own general contractor and use a construction manager to supervise and coordinate the work of the subcontractors. The standard AIA contract between an owner and a construction manager is AIA Document Form B801/CMa. 17.4
TECHNOLOGY IN 21ST CENTURY AFFORDABLE HOUSING CONSTRUCTION AND REHABILITATION
Technology is the single more important issue for developers to consider when building 21st century affordable housing. It has the potential to allow affordable housing to serve as a launch pad for people to improve their quality of life and economic position as never before possible. How? By making the Internet and everything that is has to offer available to all tenants in the privacy and dignity of their homes. As noted throughout this edition, my nonprofit organization, One Economy Corporation, has been helping affordable housing developers to achieve this
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goal of “Digital Access” over that past six years. We have assisted developers in three ways by: (1) integrating the necessary wiring and hardware into the design and specifications of their low-voltage construction specifications; (2) selecting the most affordable Internet access provider; and (3) building the Beehive, www.thebeehive.org, our online self-help destination, into property and self-sufficiency operations. The first two issue above are addressed below. The third, the Beehive, is discussed in greater detail in Chapter 19. (a)
Bringing Connectivity to Individual Units
Connectivity is how Internet access gets to a building or group of buildings and then is distributed to individual units. In a way, one needs to think of this process backwards, with Internet access in every unit being the final, rather than first component. The first component is “infrastructure” or a data network comprised of wiring and networking equipment. The physical wiring runs through the building—just like electrical lines—that carries data signals rather than electricity. “Networking” equipment or sophisticated telephone or electrical junction boxes have names like “hubs,” “switches” and “routers.” The Internet service comes to the building at the hub, the central source. The service is distributed to each unit over the wires, using the routers and switches to get it throughout the development. In some cases, wireless technology can be used instead of physical wiring. However, “wired” solutions continue to be the most stable and affordable to maintain. Developers must make sure that this infrastructure, as detailed in the specifications for the installation of the wiring and the networking equipment, is made a part of the contract documents. Infrastructure costs should be included in the total development costs of the project.3 The final piece of connectivity is the actual access to the Internet. There are many different options for bringing the Internet access to the development including satellite, DSL, and commercial broadband, including whole or partial T1 lines. Two main points with access: (1) access is purchased from some type of Internet Service Provider, historically a regional telephone company at costs ranging from hundreds to thousands of dollars per month based on the number of households being serviced; and (2) access costs are borne by the operating budget or passed through to the tenants, not the development budget.
3
See the discussion of the One Economy Fund at the National Equity Fund in Chapter 10, Section 10. A special pool of tax credit equity is available to make sure that these data networks and other elements of digital access are included in all projects financed by the Fund.
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17.5
NEGOTIATING THE CONSTRUCTION CONTRACT AND BIDDING
The previous section presented the overall responsibilities and obligations of each of the major parties involved in a construction project—the owner, architect, contractor, and construction manager. With each of these responsibilities comes an element of risk that the affected party must assume. The owner assumes a financial risk and the liability for cost increases and project delays. The architect assumes a technical risk for the drawings and specifications, as well as for the design and coordination of the project. The contractor assumes both a financial and technical risk for completing the job at the specified price in a safe and timely manner. The construction manager assumes a portion of the architect’s risk and, through skill and experience, attempts to alleviate the risks of the owner. This section discusses three methods that an owner can utilize to select a contractor, once the owner has determined the level and extent of the risk they are willing to accept during the construction process: (a) competitive bidding with complete specifications and work write-up, (b) negotiated contract with gross maximum price, and (c) design/build contract. Each has advantages and disadvantages for the owner. Common elements to be provided in construction contracts are discussed in Section 17.6. (a)
Competitive Bidding with Complete Specifications and Work Write-Up
(i) Generally. Building or rehabilitating affordable housing is an extremely
capital-intensive process. The owner’s financial risk is always of utmost concern, and anything that can be done to control costs warrants consideration. Competitive bidding, or securing bids from multiple contractors, is one means for obtaining the lowest cost of construction possible. The bidding process is designed to allow qualified contractors the opportunity to make an offer, or bid, for the construction of a project. These bids will be derived from a set of documents referred to as the “bid documents.” They normally include the following: a copy of the proposed construction contract defining the proposed agreement and all terms and conditions for the project, a copy of the insurance and bonding requirements for the project as defined by the owner, a copy of the drawings and specifications as prepared by the architect, and the bidding requirements. These documents are discussed in greater detail below. Each potential bidder will be provided a copy of the bid documents and will be required to submit an offer at the same time, after a specified review period. The bids are read and the contract is awarded to the contractor with
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the lowest responsible bid, which may not necessarily be the absolute lowest bid. A contractor’s experience, capacity, staff, and time, as discussed in the next section, are considered in evaluating bids. If the bid documents are carefully prepared and coordinated and the pool of potential bidders is large enough, the bids received should accurately reflect the lowest available cost for completing the work. Errors, omissions, and discrepancies in the plans and specs, or unusual conditions or modifications to the construction contract, will raise questions with the bidders and potentially increase the cost of the work, as noted earlier in this chapter. The owner typically reserves the right to reject all bids, but the bidding process should not be used by the owner as a method for reviewing the work plan or the cost estimates that had been developed through negotiations between the owner and another contractor. This approach not only would alienate participating contractors but also may severely hamper the owner ’s ability to get contractors to respond to a future request for bids when a true competitive bid is being sought by the owner. In some parts of the country, contractors experienced in building market-rate and luxury housing are now competing for affordable housing projects. Because of the decline in the market for these other housing types, the competition for all work has increased in the industry. Unfortunately, this increased competition has not resulted in a significant reduction in the cost of construction. Other factors, such as the rise in the cost of materials, have contributed to the relatively high cost of housing production. This increased competition, however, often provides the owner with a greater choice of qualified bidders, thereby mitigating any concerns regarding the contractor’s ability to complete the project. (ii) Who Should Be Invited to Bid? For publicly financed housing projects, the competitive bidding process is normally required. Invitations to submit bids are usually published in one or more newspapers and anyone who wishes to can submit a bid. For projects that do not require a published invitation to bid, the owner must develop, with the assistance of the architect, a list of contractors who likely are qualified to bid for the project. Various techniques, such as a substantial deposit for the bid documents or a preliminary request for qualifications (RFQ), can be used to prequalify bidders and minimize the number of unqualified bidders. RFQs usually require interested contractors to provide the owner, at a minimum, with a detailed description of the company’s experience in developing projects similar to the owner’s proposed development, and to include name, address, size and construction cost, proof of the company’s
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financial strength, and résumés of the individuals who would be working on the project if selected. Three general guidelines can be used for most projects, to determine whether a contractor is “qualified” to bid: 1. Experience. The owner should seek out only those contractors who have direct experience with other projects of the same type of construction, size, complexity, and location. An owner who is considering completing a rehabilitation of a property with the tenants remaining in the property should strongly consider selecting contractors with experience working under these kinds of conditions and restraints. 2. Financial responsibility. Only contractors with a track record of completing projects on or under budget and with sufficient financial resources to carry the project should be considered. 3. Staff and time. Some contractors are “jobbers” who hire all of the personnel necessary for a job only after being awarded a contract. For obvious reasons, this situation should be unacceptable to the owner. There are already too many unknowns on a construction project without adding to the concerns. On the other hand, some contractors will have aggressively bid a number of projects to keep their staff busy and may not have the time to properly address the owner’s needs on the project. Knowing who on the Contractor’s staff is responsible for the project and the extent of the staff members’ other commitments can be critical to the selection process. (iii) Developing a Complete Set of Bid Documents. Once the contractors are
prequalified for the bidding process, they normally will be given a complete set of bid documents, including bidding instructions. The general format and contents of the bid documents have been established by the AIA and are widely accepted and understood in the industry. AIA document A501, “Recommended Guide for Competitive Bidding Procedures and Contract Awards for Building Construction,” suggests a “project manual” that will include all pertinent bidding documents. The bidding documents consist of: The agreement and the conditions and their associated documents make up the contract for construction. The agreement is usually one of the standard AIA contracts, such as those shown in Exhibits 17A.2 and 17A.3. The agreement spells out the scope of work, dates of commencement and completion, contract or stipulated sum, and payment provisions. It also incorporates other contract elements—the drawings, specs, and General and Supplementary Conditions—into one contract for construction.
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General Conditions refers to AIA Document A201 (shown in Exhibit 17A.4), which describes the rights and responsibilities of each of the parties to the contract. (See Section 17.3(a), (c) for a fuller discussion of the individual rights and duties of the parties, and Section 17.5.) Where necessary, Supplementary Conditions are added to account for “variations in the nature of individual projects, requirements of individual Owners . . . and variations in specific legal requirements from locality to locality” (AIA Document A511, p.3). AIA documents A101 and A201 (Exhibits 17A.2 and 17A.4) are the most widely used and accepted documents in the industry. 4 See 17.5. When contractors who are bidding for a project see that these documents are being used, they know from experience what to expect. They then can spend more time evaluating the cost of the project and less time deciphering an unfamiliar document. This, unfortunately, does not mean necessarily that the contractors can or will produce lower bids for the project. On the contrary, the contractors’ familiarity with the documents may work to the detriment of the owner because the contractors know exactly which clauses can be modified to save the money or to increase fees. These issues have been addressed in 17.3(c). Insurance and bonds are necessary because every construction project, by its nature, has the potential for accidents and damage. A prudent owner will carefully assess the insurance needs for a particular project and include them in the construction contract. The cost to the contractor for the insurance required for the job must be included in the contractor’s proposed bid. The General Conditions (AIA Document A201, Article 11), spell out the basic insurance needs for a construction project. An owner who requires additional insurance must include this coverage in the bid documents prior to the submission of bids. In addition, the owner and/or the owner’s construction lender may require the contractor to obtain bonds for payment and performance of the work (P & P bonds). The owner and the lender have similar if not identical interests, and these bonds are intended to alleviate the owner’s and lender’s concern that the contractor will not be able to complete the proposed project. The AIA also has a form for this purpose—AIA Document A312a, “Performance Bond and Payment Bond.” The document combines the two bond types into one form and states: The Performance Bond is an assurance by the Contractor and the Contractor’s Surety that the work will be performed and completed in accordance with the terms of the Construction Contract. The Payment 4
AIA Document A111 also is used frequently in the industry. This document is discussed later in this chapter in relation to negotiated bids when contract documents have not been completed or an expedited construction process is anticipated by the owner. See Appendix 17A for a sample.
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Bond is an assurance by the Contractor and the Contractor’s Surety that labor and materials bills incurred in connection with the Construction Contract will be paid. This assurance is limited by the amount of each bond. [AIA Doc. A312a, 1984 Instructions]
In most cases, the general contractor, not the owner, must have the financial strength to secure the bonds specified in the contract. The owner, after consulting with an attorney or bond specialist, must determine the amount of each bond (often 100 percent of the cost of construction), fill in the blanks in the AIA form, and propose any modifications to the terms set out in the form. The owner should set the bond limits, with the understanding that the owner ultimately has to pay for the bonds through the contract price for the construction. The contractor will see clearly the requirements for the job when reviewing the contract documents and preparing its bid. The owner should be sure that the contract allows the owner to approve the contractor’s surety. Payment and performance (P & P) bond requirements are significantly more problematic when an owner with an in-house construction capacity also intends to be the contractor. Under these circumstances, the owner’s and the lender’s interests in securing P & P bonds could not be more different. The lender still wants the bonds to ensure completion of the work and payment of all subcontractors; however, the owner wants partial or no bonding requirements, for two reasons: 1. The owner simply may not have the financial strength to obtain this type of coverage from a surety. Most sureties will provide P & P bonds only to contractors with significant net worth because the sureties want to make sure that the contractor can withstand financial adversity and/or has resources sufficient to go after if a claim is made on a P & P bond. Most nonprofit sponsors could not withstand that kind of scrutiny or qualify for that type of coverage. 2. The owner does not want to pay the high cost for these bonds in order to ensure completion of its own work, given the likelihood that the project’s budget already is limited. In these cases, the owner and a flexible lender can try to design a mutually agreeable solution that involves one or more of the following mechanisms: •
Reduction of the P & P bonds below 100 percent of construction cost—As discussed above, most lenders and owners want the contractor to provide P & P bonds for 100 percent of the construction costs. Nonprofit owners may be able to convince a lender to require less than 100 percent coverage where the owner also is the contractor and if
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the owner has a strong track record of completing construction jobs within budget and on time. Some nonprofits have been able to obtain reductions down to 50 percent or even 25 percent of the estimated construction cost. •
Provision of a letter of credit—Nonprofit owners may be able to provide a letter of credit (LOC) to a lender in place of a P & P bond, in whole or part. An LOC would allow the lender, under circumstances set out in the letter of credit agreement between the parties, to access funds in order to ensure completion of the work and payment of all subcontractors. Negotiating the terms whereby the lender can gain access to the LOC often is a time-consuming and contentious experience because the owner will want to exhaust all of its options before the LOC can be drawn down, and the lender will want to protect itself at the earliest possible time. Regardless of these potential problems, owners often prefer this method because they already have letter of credit relationships with lending institutions, and the cost of securing the LOC for this transaction may be nominal compared to the cost of P & P bonds. Moreover, some lenders prefer letters of credit because accessing the money often is easier than securing payment on a P & P bond. As with P & P bonds, owners and lenders can negotiate an LOC in an amount equal to or less than the construction cost.
•
Provision of deed of trust on other property, or other guarantee—An owner may be able to provide other types of security to a lender in place of P & P bonds, in whole or part. As security for completion and payment of the construction work, the owner may provide a lender with a first, second, or third position in other real estate owned by the owner. Similarly, the owner may be able to have a third party guarantee its work through the pledging of assets of a party other than the owner, or to establish with the lender a bank account that contains a balance sufficient to meet the lender’s required amount of protection (often referred to as a compensating balance). The forms of guarantee that require the sale of real property in order to secure the funds necessary to complete a construction project are less liquid and, therefore, less comforting to the lender. These options, however, may be the least expensive alternative for the owner.
Drawings and specifications (often referred to as “plans” and “specs”) should be prepared by the architect in a manner that defines the project to the fullest extent possible. The drawings illustrate the size, location, and configuration of the building’s elements; the specifications define the
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quality of the work and the materials to be provided. The two documents are closely interrelated and must be carefully coordinated to avoid errors, omissions, and discrepancies. The contractors use the drawings to determine the quantity of materials and labor necessary for the job and to establish the construction sequence best suited for the site and time allowed. The specifications are used by the contractor to determine which materials are to be used and the manner in which they are to be installed. As noted in 17.3(b), the owner is responsible for the architect’s work on the project. Therefore, the owner should ensure that the architect is given sufficient time to coordinate the drawings and specifications and to incorporate into the specifications last-minute changes made to the drawings, prior to initiating the bidding process. Failure to do so could result in significant cost overruns through change orders. Experienced contractors know that the architect’s job requires an enormous number of changes and modifications to the drawings in order to arrive at the final design. They also know that, in many cases, the bulk of the architect’s time is spent in preparing the drawings (not the specifications), and the specifications are compiled from a previous job and are “cut and pasted” together at the last minute. The combination of these factors may result in final specifications that do not reflect all of the lastminute changes made to the drawings or the actual specs needed for the current project. These omissions often give a contractor an opportunity to increase its fees through costly change orders. The proposed construction contract (with General and Supplemental Conditions), the plans and specs, and the insurance requirements often are referred to collectively as the “contract documents.” Bidding instructions should be provided to a pool of qualified contractors together with a complete and coordinated set of contract documents in order to produce competitive prices for the project. The owner will be overwhelmed with bids that are not comparable and cannot be judged, if bidding instructions have not been provided to the bidders prior to the submission date. The terms, format, and content of submissions must be specified. To assist owners in the process, the AIA has created Document A701, “Instructions to Bidders” (1997). This form defines the terms used, outlines the bidder’s procedures and responsibilities, and establishes a baseline of understanding for all concerned. Although not part of the contract documents, Document A701, together with the advertisement or invitation to bid, any job-specific requirements, and sample bid forms, should be included in the project manual provided to the contractor. By using this form and following the procedures outlined, the owner will improve the uniformity of submissions.
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The following three terms used in the Instructions to Bidders must be clearly understood by the owner: 1. Alternates. Under AIA Form A701: An Alternate Bid (or “Alternate”) is an amount stated in the Bid to be added or deducted from the amount of the Base Bid if the corresponding change in the Work, as proposed in the Bidding Documents, is accepted.
Alternates are utilized by an owner if it wants to evaluate the financial impact of various construction alternatives (e.g., providing hot water heaters in each unit versus a central hot water system for the property). In that case, the owner must state in the bidding documents the alternatives that are being considered. The Instructions to Bidders should require each contractor to submit a bid for all alternates proposed by the owner, and to guarantee the price of alternate work until the award date or contract signing. These requirements will prevent any last-minute increases in cost because the contractor’s supplier or sub-contractor is balking at the bid price. 2. Award date (acceptance of bid). The standard AIA Form A701 states: “It is the intent of the Owner to award a Contract to the lowest responsible Bidder provided the Bid has been submitted in accordance with the requirements of the Bidding Documents. . . .” If the bidding documents reflect a proposed date when a bid will be accepted and a contract awarded by the owner, then the owner has a responsibility to act within these time constraints or face possible cost increases. If the owner allows the specified award date and the corresponding “order to proceed” (the date when work will begin by the contractor) to slip off schedule, the delay can be hazardous to the project and the budget. The contractor may request additional funds to compensate for lost contracts or to provide temporary heating facilities that would not have been necessary if the project had been started when proposed in the bidding documents. Time is of the essence for the owner, architect, and contractor. 3. Unit prices. Form A701 also states: “A Unit Price is an amount stated in the Bid as a price per unit of measurement for materials, equipment or service or a portion of Work as described in the Bidding Documents.” Unit pricing is a convenient tool to establish the cost of work proposed and to increase or decrease the
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cost for changes in the future. For example, if the unit price to paint a 10' × 12' room is $X, the cost to paint ten similarly sized rooms should be approximately $10X. The problem with unit prices arises when the owner and contractor have not agreed on the component costs included in the unit price. For example, in the painting example above, the owner should establish that the unit price includes or does not include such component costs as floor protection, ceilings, wall preparation, patching, taping, sanding, primer, undercoats, finish coats, trim work, hardware protection, clean-up, equipment, materials, labor, ventilation, electricity, overhead, and profit. The components of a unit price can be as atomized as necessary to describe the work and satisfy the owner and contractor. For many tasks, the project’s specifications will help to describe the manner, quality, and performance standards of the job. The key point is that both parties must agree to the components and prices, to avoid surprise extras in future billings. If unit prices are to be included in the bid documents as acceptable costs for the work described, the owner must consider two things: 1. Items utilizing unit prices should be presented in a unit price schedule that lists the acceptable component costs. 2. Unit prices that are satisfactory to the owner at bidding should be satisfactory later when a change order occurs. Compiling and/or reviewing a unit price cost schedule can be a real education for an inexperienced owner. The owner can increase his or her understanding of the contractor’s job by examining the myriad of costs and considerations required for even the smallest task. (b)
Negotiated Contract with Gross Maximum Price
(i) Generally. Competitive bidding, as discussed in 17.5(a) above, employs
market forces to reduce the cost of construction. Where the owner’s primary concern is cost, the bidding process is an excellent choice. However, in cases where an owner needs to finalize a construction budget—in order to secure loan commitments, for example—but all the elements of a “project manual,” such as drawings and specifications, have not been completed, a negotiated contract with a gross maximum price may be the owner’s best and only alternative. A negotiated bid also may be used when the owner has had
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positive experiences working with one or more general contractors.5 This approach has certain advantages, including the following: 1. The project can be partially completed and operational earlier than would otherwise be possible, because the initial contract documents need not be as complete or precise prior to starting construction. 2. The cost of construction is capped at a specified amount—the gross or guaranteed maximum price (GMP). 3. The contract allows for an open-book monitoring of all construction costs, including subcontracts; unlike stipulated-sum contracts, no costs or contracts are hidden from the Owner. 4. The owner knows and has confidence in the contractor selected to build the project. The disadvantages to this option stem from the realistic notion that, no matter how firm the maximum price, problems can occur to increase that value. The disadvantages are: 1. Changes to the contract documents, as they are further developed, may cause significant increases in project costs, including prolonged negotiations during construction to resolve project issues, which could result in delays that destroy the major benefit of this option. 2. Amounts budgeted at the outset by the owner and the contractor for project contingencies may inflate the cost of construction beyond true market prices. The advantages of this option must exceed the disadvantages because it is becoming increasingly popular among developers of large, phased, and complex projects. Bringing a project online early generates revenues and reduces market risks and financing costs. Refining the plans and specifications for later phases of the project while early construction gets under way saves time and money. By capping total project costs, some financial risk shifts from the owner to the contractor. A gross or guaranteed maximum price contract is typically negotiated using AIA Document 111 (see Exhibit 17A.3) where the basis of payment is the cost of work plus a fee with a guaranteed maximum price or AIA Document 114 (2001) without
(ii) Developing the Construction Contract.
5
This approach can be used with competitive bidding as well, but is less commonly done. Many of the advantages are equally true when that form of contractor selection is followed by the owner.
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a guaranteed maximum price. A glossary of the terms used in this document and a T-shirt emblazoned with “I am a professional, do not try this at home” should come with this contract. The glossary is supplied below; the T-shirt should serve as a warning that the contract format can be deceptively simple and reassuring. The pitfalls, however, can be extremely hazardous for the owner. Terms used in the guaranteed maximum price (GMP) contract must be clearly understood by owners choosing this option. They include: C OST OF THE WORK P LUS A F EE
The owner pays only for the direct costs of labor and materials used on the project plus a fee to cover the contractor’s overhead and profit. The reimbursable and nonreimbursable costs incurred by the contractor are specified in AIA Document A111 (Exhibit 17A.3). The “cost plus” contract without a guaranteed maximum cost provides the contractor with little or no incentive to economize for the owner during construction and should be avoided if possible. C OSTS
As mentioned earlier, the cost of construction, in this option, is determined prior to completing a full and comprehensive set of contract documents. The contractor prices out the work that is known and makes conservative estimates to cover the work that is not yet completely defined. The total of these two values plus the contractor’s fee for overhead and profit is the contract sum. Because these values are somewhat fluid, the limit or maximum contract sum is the GMP. Any cost overruns in excess of the GMP are the contractor’s responsibility. AIA Document A111, Articles 7 and 8 (Exhibit 17A.3), states clearly the costs that a contractor can and cannot charge to the project. These generally include only labor and material costs used on or required for the successful completion of the project. Allowable miscellaneous costs include such items as insurance and bond premiums, taxes, and fees. Finally, costs associated with preventing accidents or repairing damages not caused by contractor negligence are included. Costs that cannot be reimbursed are, generally, anything not mentioned in Article 7 and any cost that would exceed the GMP. Unfortunately, the prudent owner can take little comfort in the specificity of Articles 7 and 8. Reimbursable costs are the subject of arguments between owner and contractor on most projects. Here are some specific areas of conflict: •
What percentage of the contractor’s loosely defined General Conditions costs are reimbursable?
•
How are salvaged items and leftover materials dealt with?
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•
Can cost overruns on one line item be mitigated by shifting excesses in another?
•
Should there be a hard-cost contingency and how and when can it be accessed?
•
Are costs caused by the contractor’s failure to satisfy contractual requirements reimbursable?
The owner should ensure that these issues and others raised by the owner or other members of the development team are set out in writing in the contract. F IDUCIARY R ELATIONSHIP
The “cost plus” contract with a guaranteed maximum price (GMP) often is used on projects where time is a significant factor. Some of the project’s design decisions are postponed until after the contracts are signed and construction is under way. In this case, the contractor and owner must rely on each other to carry out their respective obligations in good faith. Article 3 of AIA Document A111 (Exhibit 17A.3) establishes this relationship. The contractor will have made certain assumptions in pricing and sequencing the project, based on the incomplete contract documents. Contingency values for the unresolved issues should be built into the GMP, and construction should continue while those issues are resolved. The contractor is therefore relying on the owner to proceed with the project, as outlined, without significant and costly alterations to the scope of work. The owner contractually agrees with the contractor’s best estimate for the maximum cost of construction when the contract is signed. The owner knows that contingencies are built into the pricing and is relying on the contractor to control costs and to act in the owner’s best interest. Without the obligation of a fiduciary relationship, the contractor would have no incentive to generate any savings and could easily spend up to the GMP. G UARANTEED M AXIMUM P RICE (GMP)
To address the shortfalls of the “cost plus” contract cited above (see “Cost of the Work Plus a Fee”), a cap can be placed on the total project costs allowable by establishing a GMP. The contractor and owner agree on this price, and all cost overruns are the contractor’s responsibility, except where specified. For the owner and contractor to agree on the GMP, both parties must trust that the other will perform the appropriate duties responsibly and in a timely fashion.
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R EQUISITIONS/P ROGRESS P AYMENTS
Requisitions, progress payments, or draw requests are discussed in detail in Section 17.6. However, certain aspects of making requisitions under the method called Cost Plus a Fee with Guaranteed Maximum Price should be discussed here. Under AIA Document A111 (Exhibit 17A.3), all applications for payment are based on an instrument known as the “Schedule of Values.” The Schedule of Values allocates the entire GMP among the various categories of the work to be performed in the project—General Conditions, plumbing, heating, and so on. The contractor’s fee is shown as a single separate item. AIA Document A111 provides two methods for calculating progress payments based on this Schedule of Values and obligates the owner to pay out the lesser of the sums determined by these two methods: 1. The contractor may request payment for the actual cost of work completed under each category, plus a percentage of the total fee that reflects the percentage of construction completed (20 percent of the fee if construction is 20 percent complete). 2. The contractor may request, as payment, a percentage of the total project budget and an equal percentage of its fee, based on the total percentage of construction completed. The most significant problem in analyzing the contractor’s applications for payment is determining what percentage of the construction actually has been completed. As discussed below, if the owner and the architect carefully negotiate the contract and monitor all requisitions from the beginning, problems concerning progress payments or draws can be avoided. VALUE E NGINEERING AND S AVINGS
Value engineering is a term used to describe the contractor’s participation in the design development phase of the project. A contractor’s experience with market conditions, materials purchases, construction sequencing, and labor relations can provide valuable input to the owner during the design development phase. Often, technical advice of this sort can result in real savings for the owner’s budget. Another source of this type of advice is a construction manager, and use of this professional is a common practice with this contract (see Section 17.3). The owner may consider sharing with the contractor any savings generated on the project, in order to provide the contractor with an incentive to save the project money. The prudent owner, however, should be wary of having to share “artificial savings.” As described earlier, contingencies are often used in these projects, to cover the cost of
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those portions of the work that are not fully developed at the start of construction. These contingencies are usually conservatively priced to cover any situations that may arise. If the contractor simply does not spend the entire fat contingency, these are “artificial savings.” If, on the other hand, the contractor controls costs, purchases materials wisely, and keeps the project on schedule, real savings may result. (c)
Design/Build Contract
The third construction contract relationship available to an owner is a design/build contract. This option shifts the relationship and responsibilities of the three major parties in a construction project, the owner, the architect, and the contractor. The owner now contracts directly with the design/build firm to provide the services of both the architect and the contractor on the project. Except for the owner, the responsibilities of the parties remain essentially the same. The owner is no longer ultimately responsible for the performance and warranty of the architect. The real difference is in the hierarchy and communication links between the parties. The architect and contractor are now responsible to and directly linked with the design/build firm. The design/build firm is responsible to the owner for the performance and obligations of both the architect and the contractor. The owner is now responsible only to the design/build firm and has no obligation or contractual ties to the individuals or firms representing the architect and contractor. This contract option is therefore the ultimate tool for owners who are willing or who prefer to delegate authority. Experienced owners often choose this option for projects involving scattered sites or complex designs, in order to reduce administrative overhead or fast-track a project. Less experienced owners sometimes choose this option as a learning process and essentially buy the design and construction management skills of the design/build firm. This is done in the hope that the novice owners can replicate the experience on future projects. Whatever the agenda, most owners choose this option for one or more of the following advantages:
(i) Generally.
•
All negotiations or contracts are with a single firm or entity.
The architect’s responsibilities and warranty are shifted from the owner to the design/build firm. • It allows for maximum value engineering into the design process. • The owner’s tangible responsibilities are reduced essentially to providing design criteria, a complete property description, a budget, and support services (which must include an authorized representative for the project). •
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The owner, of course, maintains the responsibilities and obligations for funding the work. The owner’s primary responsibilities during the construction phase include analyzing and evaluating the payment requisitions, maintaining cost controls, and making progress payments. These areas likely will cause the biggest problems from an owner ’s point of view. Reduced cost is not listed as an advantage of this option for two reasons: 1. Value engineering can create an efficient design and generate a streamlined and market-sensitive construction schedule, but there is little or nothing an owner can do to force the design/build firm to share any savings. All of the tricks and pitfalls used by contractors in the previous options can apply here. The prudent owner must ensure that the owner’s agent or representative is a skilled and experienced professional who can avoid these problems. Construction managers, not architects, are often hired to act as owners’ agents for these contracts. They speak the same language and should be aware of the techniques used by contractors to increase profits. 2. Relinquishing responsibility for large portions of the project means giving up control, and this can be expensive. It can cost a lot of money to have someone else suffer your headaches. Unlike the bidding process, there are no market pressures to reduce costs. Unlike the GMP contract, there is no spending limit. In the AIA contract for this option, a cap on construction costs is actually prohibited unless agreed to by the design/build firm (AIA Document A191, Article 3). In 2004, the AIA introduced new designbuild model documents to replace the current set, which were introduced in 1986 and last revised in 1996. The new documents abandon the twopart format of the 1996 documents, which required owner and designbuilder to enter into an agreement for the preliminary design and then to develop a separate agreement for final design and construction. Instead, the 2004 documents provide one agreement covering both design and construction and offers the parties three different methods of payment: stipulated sum, cost plus a fee with a guaranteed maximum price, and cost plus a fee without a guaranteed maximum price. The documents do not prescribe the nature of the design/build entity and recognize that the design/builder could be an architect, a construction contractor, a developer, a singlepurpose entity or any other business entity legally permitted to do business as a design/builder in the jurisdiction where the project is located.
(ii) The Construction Contract.
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The newly created design/build agreement between owner and consultant provides a contracting vehicle for the upfront services an owner may require when considering design/build delivery. The consultant, who may or may not be an architect, may perform a wide range of services for the owner. The parties select which services the consultant will provide from a checklist included as an exhibit to the agreement. The new documents also depart significantly from the 1996 documents by not relying on AIA Document A201, General Conditions of the Contract for Construction. The agreement between owner and designbuilder (the design/build contract) contains its own terms and conditions as Exhibit A to the agreement, as does the agreement between design-builder and contractor (the construction contract). The two agreements do not share a general conditions document because the designbuilder and the contractor do not share common obligations. Under the design-build contract, the design/builder is obligated to design and construct the project in accordance with the design/build documents, which include the owner’s project criteria and any modifications to them, but do not include the contract documents the design/builder ’s architect prepares. Under the construction contract, the contractor, which could be one general contractor or multiple primes, is obligated to construct the project in accordance with the contract documents. The key document is A141 (2004), which replaces A191 (1996) and consists of the agreement between the owner and design-builder and three exhibits—Exhibit A, Terms and Conditions; Exhibit B, Determination of the Cost of the Work; and Exhibit C, Insurance and Bonds. Exhibit B is not applicable if the parties select to use a stipulated sum. A141 obligates the design-builder to execute fully the work required by the design/build documents, which include A141 with its attached exhibits, the project criteria and the design/builder ’s proposal, including any revision to those documents accepted by the owner, supplementary and other conditions, addenda and modifications. The agreement requires the parties to select the payment type from three choices: stipulated sum, cost of the work plus design/builder ’s fee, and cost of the work plus design/builder ’s fee with a guaranteed maximum price. A141 and its attached exhibits form the nucleus of the design/build contract.6 For the experienced owner, a design/build contract can be the ideal format for implementing the proposed project. Design/build can work well if an owner knows what it wants, knows how much the project can cost, has the ability or staff to control costs, has the experience to avoid the pitfalls, and trusts the design/build firm selected to utilize their combined skills to implement the owner’s goals. However, unless cost is not 6
Information provided by the American Institute of Architects, http://www.aia.org/ docs_newtitles
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a factor, which is unlikely in the affordable housing market, design/build contracts are not really an option for the inexperienced owner. 17.6
ELEMENTS OF THE CONSTRUCTION CONTRACT
As shown in the previous sections, the American Institute of Architects (AIA) publishes documents that can be used by the parties, with modification, to set the terms of the construction contract and the relationships between the various parties involved in the construction process. This section explores the basic elements of the most commonly used contract, AIA Document A101, “Standard Form of Agreement Between Owner and Contractor” (the “Agreement”; Exhibit 17A.2) and AIA Document A201, the General Conditions (Exhibit 17A.3). Some elements of AIA Document A201 concerning the responsibilities of the owner and the contractor to each other have been addressed in Section 17.3. (a)
AIA Document A101
As described in Section 17.5, this agreement is used for projects with a complete set of construction documents (plans and specifications) and a contract price that has been firmly established, usually by competitive bid. Nine articles make up the agreement. (i) Article 1—The Contract Documents. This article spells out the various documents that make up the contract documents, as described in Section 17.4, and incorporates them into the agreement. This is necessary because the agreement alone is not a complete contract and requires the other documents to be binding and inclusive. Article 1 names the documents by their generic titles; Article 9, Enumeration of Contract Documents, lists separately all of the items that are being incorporated into the agreement pursuant to Article 1. Included in Article 1 are the agreement, the Conditions (General, Supplementary, and other), the drawings and specifications, any addenda issued prior to the formal agreement, and any other documents necessary to the particular project. The document list in Article 9 makes up the entire contract and supersedes any other agreements or negotiations that may have occurred. The owner must be sure that any issues discussed and resolved during negotiations are reduced to writing and included in one of the documents on this list, in order to have any legal effect. The owner also must be careful not to list conflicting or redundant documents, as discussed in Article 9 below.
This article defines the scope of work to be completed under the contract and any exceptions where
(ii) Article 2—The Work of the Contract.
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necessary. Owners should be thorough and inclusive when defining the scope of work. The descriptions used must incorporate all work covered by the plans and specifications, plus any additional work, conditions, or responsibilities required to complete the job. The owner should state in this article its plans to complete certain aspects of the project itself or with a separate contractor. (iii) Article 3—Date of Commencement and Substantial Completion. Despite
its title, this article does not necessarily establish when construction begins or when it ends. The Date of Commencement is the start of the construction period but not always the start of construction. Although time is of the essence on most construction projects, the owner should be cautious in defining a specific start date at contract signing. Many things can happen to delay project construction, particularly on rehabilitation projects. Tenants may have to be relocated, authorization permits must be obtained, and financing must be put in place. These factors are not always under the direct control of the owner. As noted in Section 17.3, if a contractor is delayed in starting the project after an official start date is established, additional compensation may be required. Therefore, some form of flexibility is necessary to allow the owner to address last-minute changes and issues. A useful tool for the owner to include in the agreement is a requirement of a Notice to Proceed letter. This document is issued to the contractor, after signing the contract, as notification that the conditions are correct to begin construction. This letter allows the owner to reduce its risk and to increase its flexibility as to timing of the work. The owner locks in the contractor to a stipulated sum as defined in the agreement, and thereby reduces the risk of a price change. In addition, the owner maintains the flexibility of starting the project only when all necessary conditions are met. Contractors, for obvious reasons, dislike Notice to Proceed letters. These letters are perceived as risky by contractors because they give owners an open-end date to begin construction. Owners who want to utilize the Notice to Proceed mechanism must explicitly state in Article 3 that the start of construction will be determined by a Notice to Proceed letter. This gives the contractor fair warning of this condition. Article 3 also defines the date and condition under which a contractor will have achieved “Substantial Completion.” This is a point in the construction process, defined and certified by the architect or construction manager, when the project is essentially suitable for occupancy in whole or in part. In addition to the conditions necessary for occupancy, the contractor must have secured government authority to occupy the property (a Certificate of Occupancy and similar documents) by the date of substantial completion.
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If occupancy of the project by a certain date is critical to an owner, provisions should be made in this article for penalties or incentives to induce the contractor to proceed diligently and to compensate the owner for possible damages that may be caused by delay. One form of inducement is the use of a liquidated damages clause. Liquidated damages are intended less as a penalty and more as a means of keeping the owner whole during each day that the contractor delays completion. Liquidated damages amounts, often calculated and reflected in this article as a predetermined per-diem charge that is assessed against the contractor for every day that the project is delayed, should represent the owner’s estimate of potential damages (e.g., lost rental income, additional interest carry, and so on). Despite the owner ’s attempt to base this per-diem charge on reasonable damages estimates, the establishment of a liquidated damages clause may be the most difficult issue that the owner and the contractor will have to negotiate. In addition to a liquidated damages clause, the owner should consider including an incentive clause in the agreement. An incentive clause commonly allows the contractor to share with the owner, in an agreed-on percentage, any cost savings resulting from completing the job ahead of schedule. When the project is completed and the owner is free to occupy all or some portion of the project, the responsibility for warranties, insurance, security, utilities, and damage may be shifted from the contractor to the owner. The manner and timing for this transition of responsibility should be carefully planned by the owner, the attorney, and the insurance representatives. This article stipulates the basic terms of compensation for completing the scope of work. The owner should define the lump-sum amount to be paid and any alternates that may be acceptable. If unit prices are to be used, they should be fully defined in the space provided. In addition, the owner should specify the time period during which all alternate and unit prices will be guaranteed by the contractor. Alternates and unit prices were discussed more fully earlier in the chapter.
(iv) Article 4—The Contract Sum.
This article establishes the procedures to be followed in making the periodic payments (often referred to as “progress payments” or “draws”) to the contractor for work completed. This is a prime responsibility of the owner, and careful coordination with the construction lender or lenders is required.
(v) Article 5—Progress Payments and Retainage.
•
Timing of periodic payments—Contracts commonly call for the contractor to submit an Application for Payment on the 25th of the
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month. In many cases, the contractor will project its costs through the end of the month and include them in the application. This projection requires the owner, architect, and lender to guess whether the contractor’s estimate is accurate or not. To eliminate the projection problem, owners should consider stating that the payment period is one calendar month, beginning and ending on the 25th of each month. •
7
Reviewing periodic payment requests—The construction lender’s standard procedures for reviewing the Applications for Payment and then issuing checks will affect the schedule of payment or the date when the contractor can expect to get paid after submitting a progress payment request. Lenders will require specific supporting documentation such as “lien waivers” and affidavits, as discussed below, before processing any payment requests. Where applicable, a list of the documentation that will be required from the contractor with each payment request should be provided to the contractor so all parties understand and agree to the procedures and schedule of payment. Lien waivers were listed above as an example of the type of supporting documentation required by construction lenders. A lien waiver is a document that the contractor receives from a subcontractor in order to certify that no liens have been or will be placed on the building or property because of nonpayment.7 Lenders require these waivers to ensure themselves that the payments made to the contractor are being distributed to the subcontractors. Lien laws vary between localities, however, and contractors often submit lien waivers from subcontractors one payment period in arrears. In order for a contractor to submit current lien waivers for each period, the contractor would have to pay the subcontractor out-of-pocket or have the subcontractor forgo the lien rights prior to payment. Owners must determine the best procedure for dealing with lien waivers based on local laws and the contractor’s financial strength. This issue must be carefully addressed in the agreement, to avoid delays in the project schedule due to litigation.
Lien waivers are necessary because laws in most jurisdictions give contractors and subcontractors who provide construction services or materials to a property owner the right to file a lien against the property for the amount of any unpaid bills due the contractor. These liens are often called “mechanic’s liens” for services provided but unpaid and “materialmen liens” for materials provided but unpaid.
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•
Determining the amount of periodic payment requests—A large portion of Article 5 is devoted to the formula for calculating periodic payments. There are essentially three factors in the calculation: 1.
The original contract sum plus or minus any adjustments due to change orders.
2.
The total payment earned for all work completed and stored to date minus any retainage (see below).
3.
The total of all previous payments to the contractor.
The payment request should be the difference between the total payments earned to date (item 2 above) and the total of all previous payments (item 3 above). These payments should obviously not exceed the adjusted contract sum (item 1 above). Progress payments for hard costs (bricks and mortar) as well as soft costs (interest and fees) are usually made on AIA Documents G702 and G703 or some facsimile thereof. •
Retainage—Retainage is a percentage of each payment that is held or “retained” by the construction lender, in an account, to further induce the contractor to complete the work diligently and to establish a source of funds to complete the work if the contractor fails to do so. The amount retained and the timing for its release can be critical to the success of a project. The amount retained will vary, depending on the complexity of the project, the extent of the unknown or unforeseen conditions, and the contractor’s track record with a particular owner or lender. New construction work can be as low as 5 percent retainage; early phases of a rehabilitation project may reach 10 percent of each payment request. This money is owed for work completed and should not be considered as a contingency fund except where the contractor or the subcontractor substantially fails to complete the work as noted above. The timing of repayment of retained funds is often a source of trouble for contractors and owners. Some lenders hold the retained funds for the entire construction period. This practice can create serious financial problems for trades that have performed work on a project in the early stages of the construction. These trades may be asked to delay up to 10 percent of their compensation until the project is completed, even though they have little or no control over the situation or the schedule. Various techniques can be used to resolve these problems, including an early release of retained funds or a reduction in the amount retained from future draws after certain preestablished construction milestones have been met. The owner should be sensitive to these issues and work out a method with the lender early in the construction process.
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This article defines the conditions and government approvals that a contractor must achieve in order to receive final payment for the project. For the owner, the Final Payment can be a nightmare! The project has taken a long time to plan, design, and build, and everyone is ready to finish the job. The problem is defining what is a finished job. The contractor has to move equipment and crew to a new job and does not have time to clean the building and property or complete the incidental items required by the owner. The owner has successfully marketed the project and wants to move the tenants in, but the building is dirty and the details haven’t been addressed. The Final Payment is the lever to move the contractor to complete the project to the owner’s satisfaction. An experienced contractor with a good working relationship with the owner will send in the “punch list” crew to touch up, clean up, and tighten up everything the owner’s needs. Other contractors have drawn down all of their compensation in previous payments and will not be sufficiently induced to stay on the job. The owner cannot wait until the Final Payment to define how and when the job is complete. Article 6 provides an opportunity to establish a standard of completion. However, only by careful construction management over the entire construction period will that standard be realized. The owner should coordinate a final inspection schedule and determine the conditions necessary for final payment with the construction lender. Reliance on a Certificate of Occupancy or other municipal authorizations is problematic in that the authorities’ concern is only for the health, safety, and welfare of the occupants, not the appearance, cleanliness, workability, or warranty of the project. (vi) Article 6—Final Payment.
The article provides an opportunity to incorporate specific conditions into the contract site or the project.
(vii) Article 7—Miscellaneous Provisions.
(viii) Article 8—Termination and Suspension. This article establishes, through cross-reference to the General Conditions, the terms and method for termination of the contract. (ix) Article 9—Enumeration of Contract Documents. As noted earlier, this article lists all documents that are part of the contract, including any addenda or modifications issued prior to executing the contract. The owner should use caution when adding documents to this list, especially if the documents are other AIA contract forms. The AIA contracts are complex and interrelated documents. Therefore, every time an AIA document is added to the list, the owner faces the risk that terms included in these forms may be redundant or in conflict with terms and conditions already stated elsewhere in a document listed in this article.
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(b)
AIA Document A201
The General Conditions, AIA Document 201 (see Exhibit 17A.4), provides the basis for the working relationships among the owner, the contractor and subcontractors, and the architect. This detailed document is a standard in the industry and is generally incorporated into each of the other standard AIA contracts. The General Conditions cover the responsibilities of the parties, administration of the contract, change orders, scheduling, payments and completion, insurance and requirements, and conflict resolution. Owners should be familiar with the provisions of this document in order to understand the complexity of the issues. Where site or project conditions dictate modifications or additions to the General Conditions, a separate document—The Supplementary Conditions, Form A201/SC— can be used. Key issues related to General Conditions, not previously addressed in Section 17.3, are discussed below. (i) Dispute Resolution. As stated throughout this chapter, the owner must be prepared for problems on the site of any construction project. The best time to address the manner in which conflicts and disputes are resolved is before they happen. This is especially true when the contractors are still competing for the job and have less leverage over the negotiations. Disputes are traditionally best resolved in a phased process, as defined in the General Conditions, AIA Document A201, Article 4. The phased resolution process requires all parties to be notified about the issues in dispute and to try to resolve the problems internally. If the dispute cannot be resolved internally, then the parties are free to use arbitration. This method provides all parties with an opportunity to address minor issues quickly and inexpensively without resorting to a third party, arbitration, or litigation. If a conflict cannot be resolved through negotiation, serious project delays and costs can result. Preventing the unnecessary escalation of problems should be the owner’s prime concern in devising a dispute resolution procedure. Three points should be established:
1. The contract documents contain a dispute resolution clause that defines a procedure to be followed by all parties. 2. An arbitration or litigation provision is invoked in the event disputes cannot be resolved through the established procedure. 3. Notice requirements clearly state the manner and timing for notification of all parties of a pending dispute.
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Without these three provisions, the smallest conflict can escalate out of hand. The issue of arbitration versus litigation often is a problem. Many contractors and architects do not want the owner to have the right to litigate conflicts, but owners often want the right to do so. Although no formal statistics on this issue exist, many experienced construction attorneys believe that owners prevail more often in litigation than in arbitration. Owners should consider inserting a provision that allows either party to litigate unless both parties agree to arbitrate. Subcontractors are specialized members of the development team. They can be hired for the project by the contractor, to supplement the trade experience of the crew; they can be hired by the owner, to work for the contractor; or they can be hired by the owner, to work for the owner directly. Elevator installation, electrical and plumbing work, and kitchen installations are just a few examples of the types of building trades hired under subcontracts. Subcontractors are addressed in Article 5 of AIA Document A201. Unless the owner hires the subcontractors, there is no contractual relationship between the contractor’s subcontractors and the owner. This has advantages and disadvantages to the owner. Without a direct contract, the subcontractors must act through the contractor to resolve disputes on the job. As long as the contractor continues to obtain lien waivers from the subcontractors, the owner can be satisfied that no legal action against the property by a subcontractor will interfere with the construction progress. If, however, a subcontractor’s performance on the job is not to the owner’s standard or satisfaction, it can be difficult to have the subcontractor replaced without the direct contractual relationship. The owner must act through the contractor to address complaints in this situation. When the owner hires the subcontractor, it is usually done to decrease costs, especially on publicly bid projects, or to impose an element of control over the project. As noted in Section 17.3, there is a disadvantage to this approach for the owner. Responsibility for the subcontractor’s work becomes blurred. Normally, the contractor is liable for the work of all subcontractors. If the owner hires the subcontractor and the subcontractor does not perform or causes delays, the contractor can claim damages. Attempts to modify the Construction Agreement to shift liability for this subcontractor’s work with disclaimers are common in the industry and are done in this article. The owner should weigh carefully the use of independent subcontractors on the job. The advantages of decreased cost and an increased
(ii) Subcontractors.
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performance standard must be balanced against the potential disruption, difficulty in coordination, and increased cost if something goes wrong. As mentioned numerous times earlier in this chapter, change orders are the means for altering the scope of work and cost for a construction contract. A change order can be prompted by the owner or the contractor in response to errors and discrepancies in the contract documents; a change in the market, site conditions, or codes; and changes in the development team. Change orders are addressed in Article 7 of AIA Document A201. As noted in Section 17.3, errors and discrepancies in the contract documents are a common source of change orders. These are usually the result of a lack of coordination between the drawings and specifications on the part of the architect. Changes in the market conditions also can cause the development team to reexamine the materials and products specified for the project. For example, if skylights or bathrooms equipped for the disabled will command a greater market share, these changes may be required. Site conditions, particularly subsurface conditions, are also common sources of change orders. Rocks, water, or physical improvements like subway tunnels or buried tanks can cause tremendous delays in the project schedule. The building or housing codes governing a project’s construction rarely change mid-construction; however, they can and sometimes do, and change orders would be required to reflect these changes. Similarly, a jurisdiction’s interpretation of its own codes can change during the construction process. For example, political pressure from neighbors of a proposed affordable housing project, such as a homeless shelter, could cause the local inspectors to impose a stricter interpretation of the relevant codes than they have required in the past. Finally, changes in the development team, either for preference or non-performance, will often create change orders. For example, the architect may not have been as skilled as the owner had expected in managing the construction. Therefore, the owner may have substituted an experienced construction manager to complete the construction management element of the job. The change orders in this case would be targeted to reduce the Contract Sum and create savings for the owner. On the other hand, a small subcontractor selected for the job may go out of business midproject. Substitution of a new subcontractor, usually at a higher price, may result in an increase to the Contract Sum via a change order. Change orders are often the only means of increasing the cost of construction on a signed contract. Therefore, some contractors view them as a potential source of profits. This is especially true if the project was
(iii) Change Orders.
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underbid by the contractor to get the job. Owners must carefully monitor the entire change order process to avoid unnecessary increases in the cost of construction. The owner should be sure to negotiate which costs can be included by the contractor in a change order. For example, unless limited by terms of the agreement between the owner and the contractor, the contractor can include the following types of costs in a change order: direct costs of the work involved; indirect or soft costs associated with the change, including overhead, change order preparation time, negotiation time, project delays, and disruptions of the schedule; and consequential costs or damages, including canceled contracts and lost projects. Inclusion (by the contractor) of all of these costs in a change order is more likely to occur on one-time projects or low-bid public jobs and less likely to occur on projects where a “good” working relationship is necessary for future work. The owner may be exposed to such action unless the agreement states otherwise. Where possible, the owner should negotiate a change order provision in the agreement that allows the contractor to charge only the actual direct cost of the work required to be performed by the change order. (iv) Bonding and Insurance Requirements. The important aspects of bonding and insurance requirements are discussed in Section 17.5.
17.7
REHABILITATING AN OCCUPIED PROPERTY
A nonprofit housing developer that is anticipating the rehabilitation of an occupied, multifamily property must consider the impact of the rehabilitation on the residents and plan accordingly. The developer should consider the following issues: 1. In-place rehabilitation. In some cases, the rehabilitation may be possible to complete with the tenants remaining in the property or “in place.” This alternative may be attractive to the nonprofit and the residents for many reasons: (1) the residents could more easily continue their organizing efforts if necessary to complete a resident homeownership development; (2) the upheaval to residents’ families and lives would be minimized if they do not have to secure temporary, alternative housing, off-site; and (3) the nonprofit sponsor, as the owner, could continue to collect a rent stream from the property. However, there are down sides to in-place rehabilitation: (1) This method of rehabilitation actually could be more costly to the developer.
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Contractors often can work faster and therefore, more cheaply if a property is vacant, and (2) the disruption and inconvenience caused by rehabilitation being completed in and around your unit cannot be underestimated. Living through the work and, for example, temporarily sharing bathroom and kitchen facilities, may not only alienate the supporters of the rehabilitation but also expose the sponsor to claims for rent reductions or rent rebates from residents not in support of the rehabilitation effort and inconvenienced by the in-place work. 2. Relocation Costs. The sponsor must budget for and consider the feasibility of relocating residents during the rehabilitation, either within the housing development or to other properties. Whether an in-place rehabilitation is contemplated or otherwise, the sponsor likely will have to move some of the residents on a temporary basis while work is being completed in their units. These costs could include actual, reasonable and necessary moving costs as well as the monthly difference between what the resident was paying for rent and utilities while in their original unit and the amount that must be paid in the temporary housing. 17.8
COMPLETION OF CONSTRUCTION
Just as the project’s start-up requires careful planning, so does the completion of the work. The anticipation of the finished project alone can accelerate the most experienced owner’s heart rate. Schedules are tight; things slip through the cracks; responsibilities are forgotten. Completing the construction process should begin several months in advance of the proposed completion date. The parties responsible for each item should be notified and reminded of their obligations and deadlines. Written responses to these notifications should be required by the owner to ensure that everyone is on notice and has been provided with an opportunity to resolve any conflicts. The following list summarizes the submissions that are due to the owner prior to completion of the project: •
As-built plans and specifications.
•
Guarantees from the contractor and subcontractors for work, materials, and equipment installed.
•
Transfer documents for all certifications, releases, lien waivers, equipment manuals, and warranties.
•
Final inspection reports and sign-offs.
•
Transfer procedures for utilities, insurance, and letters of credit.
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Upon completion of the work, the following must occur: Certificate of Occupancy received by the owner. • Certificate of Substantial Completion provided to the contractor by the architect. •
•
Final punch list developed by the contractor and completion of punch list items scheduled.
•
Clean-up guidelines established, approved, and agreed on by the owner and contractor.
•
Termination of temporary utilities, security, and insurance at the site.
•
Lender’s final inspection completed.
•
Final payment reviewed and processed.
•
Contractor or installer service contracts in place and equipment tune-up completed.
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A P P E N D I X
1 7 A
Construction Process Checklist and Sample Contractor Agreements E XHIBIT 17A.1 Owner Checklist to Facilitate the Construction Process
An outline of issues discussed in this chapter is compiled here as a checklist, with references to the sections where the issue was discussed, to assist sponsors in managing the construction process: 1.
Selecting the Type of Contract (lump sum, cost plus, design build) (17.5);
2.
Proposing a Start Date with a Notice to Proceed Letter (17.6(a));
3.
Establishing a Completion Date and Conditions for Substantial Completion and Final Payment (17.6(a));
4.
Establishing a Construction Schedule, Milestones and Preliminary Targets (17.3(d));
5.
Establishing Provisions for Liquidated Damages or Incentive Clauses (17.6(a));
6.
Establishing Termination and Suspension clauses (17.6(b));
7.
Obtaining Permits (17.3(c));
8.
Obtaining Necessary Approvals (City, State, and Federal authorities) (17.3(a));
9.
Establishing Progress Payment Procedures and Payment Schedule (Coordinated with Lender) (17.6(a));
10.
Establishing Change Order Procedures (17.6(b));
11.
Establishing Dispute Resolution Procedures (17.6(b));
12.
Establishing Guidelines for Using the Site (17.3(b));
13.
Clean up guidelines established, approved and agreed upon by Owner and Contractor (17.3(d));
14.
Providing Temporary Utilities (electric, water, waste removal) (17.3(b));
15.
Requiring Review of Contract Documents (duty to inquire) (17.3(d));
16.
Managing Subcontractors (17.3(d));
17.
Managing Allowances (17.3(d));
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E XHIBIT 17A.1 Owner Checklist to Facilitate the Construction Process (continued) 18.
Developing Contract Documents a.
Drawings and Specifications (Coordinated and approved) (17.5(a));
b.
Project Manual/Bidding Documents (17.5(a));
c.
Proposed Budget (Alternates, Unit Prices) (17.5(a));
d.
Insurance and Bonds (17.6(b));
19.
Designating Owner’s Construction management representative (17.3(d)); and
20.
Establishing Architect’s inspection schedule (17.3(c)).
21.
Planning for Rehabilitating an Occupied Property (17.7)
22.
Completing the Construction: Deliverables to the Owner (17.8) a.
As-built plans and specifications;
b.
Guarantees from Contractor and subcontractors for work, materials and equipment installed;
c.
Transfer documents for all certifications, releases, lien waivers, equipment manuals and warranties;
d.
Final inspection reports and sign-offs; and
e.
Transfer procedures for utilities, insurance, letters of credit; contractor or installer service contracts in place and equipment tune-up completed;
f.
Certificate of Occupancy;
g.
Final Punch List Developed by Contractor and Completion of Punch List Items Scheduled;
23.
Completing Lender’s Final Inspection; and
24.
Reviewing and Processing Final Payment
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C H A P T E R
E I G H T E E N 18
Selective Rehabilitation PETER WERWATH*
Designing the Project: Work Write-Ups and Cost Estimates 679
18.8
Computerized SpecificationWriting and Estimating Systems 681
18.9
Defining Methods and Materials: Performance Specifications 681
Overview
18.2
Introduction to Selective Rehabilitation 666
18.3
Managing Selective Rehabilitation: Formal Versus Informal Approaches 673 Implementing a Formal Approach to Selective Rehabilitation: The Rehabilitation Specialist 675
18.10 Selective Rehabilitation and Construction Management 682
18.4
18.5
18.6
*
666
18.7
18.1
18.11 Selective Rehabilitation and The Contractor Pool 683
Choosing A Property for Selective Rehabilitation: Building Inspection Techniques of Rehab Specialists 676 Conceptualizing the Project: Rehabilitation Standards 678
18.12 The Role of Government Agency/Public-Purpose Organizations in Selective Rehabilitation 684 18.13 Avoiding Gut Rehabilitation: Tips of the Trade 685
The bulk of this chapter was written by Peter Werwath is a Vice President at The Enterprise Foundation and former director of its Rehabilitation Work Group, which has assisted in the renovation and construction of more than 10,000 affordable homes and apartments across the United States. A former renovation contractor and codes official in Maine, he is author or co-author of several books on affordable housing, including A Consumer’s Guide to Home Improvement, Renovation and Repair, and the Housing Production Manuals.
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Housing Codes to Selective Rehabilitation 691
18.14 Improving Energy Efficiency in Selective Rehabilitation 686 18.15 Dealing With Lead-Based Paint Hazards in Selective Rehabilitation 687
18.18 Standards Issues with Funders and Selective Rehabilitation 692
18.16 Dealing With Other Recurring Health and Safety Issues in Selective Rehabilitation 689
18.19 Information Sources and Tools for Selective Rehabilitation 693 Appendix 18A Sample Documents Regarding Rehabilitation 695
18.17 Applying Construction Codes and Existing
18.1
OVERVIEW
Chapter 17 describes the more traditional approaches to completing new construction and substantial renovation projects. Under these approaches, owners utilize professionals such as architects, construction managers, and general contractors to plan, design, and competitively bid the work. While these may be the most common approaches, some experienced affordable housing developers use a less traditional approach, termed selective rehabilitation, that enables them to do more with less and more quickly. The primary author of this chapter, Peter Werwath, pioneered this approach at The Enterprise Foundation in the late 1980s and early 1990s, as a way to breath life back into housing by selectively making improvements only to systems that needed work. Mr. Werwath provides excellent guidance to this approach in the following pages, including the caveat that funders often will need to be educated on the desirability and efficacy of selective rehabilitation. Many funders, public and private, and even developers, often are skeptical of this approach for a number of reasons. They do not want to underwrite the development today in order to determine the right amount of investment to improve or fix some, but not all, core systems and then have to reunderwrite it again in a few years to do more work on the remaining systems. Relatedly, they know that substantially the same amount of political and financial capital has to be used up to secure financing for all or part of an affordable housing development so they might as well seek the funds needed to substantially renovate the project. Appendix 18A provides checklists and sample documentation. 18.2
INTRODUCTION TO SELECTIVE REHABILITATION
The words “affordable housing development” conjure up stereotypes of new homes or apartments being erected in suburban areas or, in cities, 䡲
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neglected buildings being gutted and rebuilt. But increasingly, these images of new or totally renewed housing are only part of the affordable housing picture—and the smaller part at that. For every affordable home or apartment that is newly built or substantially rehabilitated, three or four are renovated with a more frugal approach called selective rehabilitation. With this method, deteriorated housing (even abandoned housing) is artfully rehabilitated and made livable again. Walls and ceilings are rarely gutted out. Instead, parts of existing walls, ceilings, floors, doors, windows, and mechanical components are painstakingly repaired and replaced. The underlying philosophy—“If it ain’t broke, don’t fix it”—is decidedly unglamorous but supremely cost-effective. When this cost-conscious system is used in the affordable housing industry, there are a number of benefits: •
The total development costs are substantially less than the cost of new construction or substantial rehabilitation—typically 30 to 60 percent less.
•
The requirements for hard-to-obtain subsidy financing are correspondingly lower.
•
Special skills are involved in design and supervision, but these can be learned by unlicensed (and much less expensive) specialists.
•
The impact on the neighborhood economy is apt to be more positive, because payments for construction work are less likely to be exported to the well-capitalized contractors from the suburbs. Smaller-scale, neighborhood-based contractors (roofers, electricians, painters, handy-persons, etc.) can be employed, as most lowincome neighborhoods have a network of specialized tradespeople who perform basic, no-frills maintenance work for landlords.
•
There is less overinvestment in the housing—that is, spending more than it is worth on the market. This is a significant benefit in very low-income inner city micromarkets where new or substantially rehabilitated homes or apartments typically cost half again their appraised values. Given this common problem, lenders and public funders should look more favorably at investing in modestly priced improvements.
This relatively new discipline has come to be called selective rehabilitation. It is sometimes called partial rehabilitation, but that term is less accurate because it implies that the work is somehow not complete. The term moderate rehabilitation has been used in several federal housing programs. It is not inaccurate, but is less descriptive of what actually occurs— namely, highly selective improvements. 䡲
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(a)
Selective Rehabilitation Defined
Selective rehabilitation is best defined as the systematic repair and replacement of worn-out components of a residential structure, usually combined with limited modernization. Repairs and replacements are intentionally as limited as possible. The theme is to restore the structure with leastcost, high-value-added methods and materials. Although selective rehabilitation is often employed in multimillion-dollar projects, it is more high-level maintenance than construction. There is nothing exotic about repairs and replacements. These include new roofing, puttying of window panes, plaster and wallboard repairs, painting, replacement of faulty wires, pipes or equipment, and containment of hazards such as asbestos and lead paint. The science is in determining what and how much to do to a particular building system, what work should be put off for the future, and what should be done now. These decisions require experience and creativity. Modernization is usually aimed at improved safety, building performance, or appearance—for example, adding new electrical circuits and outlets, a central heating system, new closets, new kitchen cabinets, and more secure doors, or removing an old tub on legs and replacing it with a built-in tub/shower. Among the highest-priority modernization items are improvements in energy efficiency. Where homebuyers or renters can afford only minimal housing payments and subsidies are scarce, repairs and replacements will be emphasized. Where incomes are higher, subsidies are abundant, or a “new image” is wanted for the neighborhood, more modernization will be called for. Selective rehabilitation should never be confused with “cosmetic” rehabilitation, in which the only intent is to improve the superficial appearance of a property—usually one that is about to be offered for sale or rent. In contrast, the focus of selective rehabilitation is curing all serious deferred maintenance. In fact, if funds are in short supply on a specific project, a professional experienced in selective rehabilitation will tend to abandon any purely cosmetic repairs in favor of repairing the most serious problems with the structure, envelope, and mechanicals. (b)
The Role of Selective Rehabilitation in the Affordable Housing Industry
Selective rehabilitation has two origins: (1) the informal practices of the residential maintenance and repair industry, and (2) the more formal practices which have evolved since the early 1960s from federally funded housing programs. Each year, more than 100,000 homes and apartments receive some kind of selective rehabilitation treatment funded through federal programs, primarily Community Development Block Grants (CDBG), the HOME program, and the housing preservation program of 䡲
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the Rural Housing and Community Development Service (formerly Farmer’s Home Administration). This compares with approximately 100,000 housing units a year that are newly built or substantially rehabilitated using federal programs. Within the affordable housing industry, there are two distinct types of activities in which selective rehabilitation is employed: (1) grant and loan programs that fund repairs for existing building owners, and (2) development projects that involve both acquisition and rehabilitation. The grant and loan programs typically have such words as “home repair,” “rental rehabilitation,” or “housing preservation” in their formal titles. The majority of these programs are run by local government or nonprofit agencies, who help the property owners—either owner-occupants or investor-owners—by producing bid specifications, doing cost estimates, bidding out the work, and monitoring it. Development projects involving selective rehabilitation come in many forms: A nonprofit or government agency buying derelict homes, rehabilitating them, and selling them with special financing to lowerincome buyers. • A nonprofit housing developer buying and modestly repairing an apartment complex in which federal subsidies are expiring, with the goal of preserving this existing affordable housing. • A nonprofit group buying deteriorated “low-end” rental units (either occupied or vacant) in the open market and the goal of repairing them and continuing to rent them as low-cost housing. • A newly formed tenants’ group deciding to buy the apartment building the tenants occupy, renovate it, and convert it to cooperative ownership. •
(c)
Selective Rehabilitation As a New Discipline
The individual practices of selective rehabilitation are straightforward and readily understood by most homeowners and rental property owners. When the work is broken down into separate tasks, it is no more than a collection of maintenance jobs along with limited systems replacements (such as new windows, if called for) and limited improvements (such as additional wiring). But the discipline of selective rehabilitation, as applied to housing development, is not widely understood. Performing $1 million in catch-up maintenance on a 100-unit apartment complex is in a different league from finding a contractor to repair a roof. So, for that matter, is a project involving $30,000 in repairs and modernization for an older home. As maintenance jobs become larger and multiple building systems are being worked on, appropriate design and construction management 䡲
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systems become more and more complex. The ethic of selective rehabilitation—replacing only what is needed—makes this management work more complex than substantial rehabilitation, because the essence is customizing the work to the exact needs of the building. Windows may be replaced on the south side, where the sun has beaten down and deteriorated the wooden parts, but only repaired and painted in shady locations. One door may be repaired and all others left alone. In fact, the customizing demanded by selective rehabilitation can become so complex that it is seen as unmanageable: too hard to specify, too hard to keep track of as a contractor, too hard to pass instructions on to subcontractors. As a result, many architects and contractors who encounter buildings appropriate for selective rehabilitation tend to standardize rather than customize. For example, assume that in an apartment building scheduled for renovation, 20 percent of the rooms had some of the walls damaged and most of the water supply pipes ripped out by “copper thieves.” Many architects and general contractors might see this devastation and call for complete gutting out and standardized replacements; for example, all new drywall, plumbing fixtures, doors, floor coverings, and the like. If this recommendation is followed, the design work may be laborious, but will follow a predictable path. In contrast, a selective rehabilitation approach will require painstaking inspections and seemingly endless decisions on what to save and what to replace, but with the benefit of saving thousands or even tens of thousands of dollars per apartment. The tendency to standardize is understandable—at least, it was understandable—until new management systems and sophisticated software came into play during the 1980s. The nature of this new discipline is described shortly, but first it is important to understand when selective rehabilitation is appropriate and when it is not. (d)
Comparisons with Substantial Rehabilitation
Most selective rehabilitation jobs, unless done simply to resolve an emergency, are complete and permanent repairs. All needed maintenance and capital replacements are performed. After this catch-up work, the building is ready for steady-state maintenance if the funds are there to pay for it. Despite these realities, the conventional wisdom among some in the housing and building industries is that selective rehabilitation is ill-advised. Because not all systems have been renewed, the building will soon need more maintenance, according to this view. In fact, selectively rehabilitated housing will need maintenance sooner than new housing, but this is not the problem it is made out to be. For example, a penny-pinching selective rehabber will probably leave a roof in 䡲
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place even if it has only 8 or 10 more useful years, at least for a property that will have adequate maintenance budgets and replacement reserves. This example gets at the essence of selective rehabilitation’s cost-saving benefits: namely, that when one refuses to throw away building components with some useful life remaining, one will save money. The costsaving principle is similar to just-in-time methods that factories use to keep inventories lean and reduce the need for capital investment and interest payments. In substantially rehabilitated housing, there is no doubt that maintenance costs will be lower in the first five or ten years, perhaps saving as much as $5,000 in maintenance bills per dwelling unit. But compare this with the fact that substantial rehabilitation costs an additional $20,000 or $40,000 or more per home than a selective approach. Where selective rehabilitation is an option, it typically results in enormous savings in any life-cycle cost analysis. Many in the housing industry maintain that wholesale replacements are the only way to go, because they supposedly “extend the useful life” of the building. This is an expensive myth. Sound trim, cabinets, doors, and even windows can last for hundreds of years if routinely repaired and not abused. Electrical wires hardly ever wear out unless damaged. The useful lives of plumbing lines vary enormously—from 10 to 200 years—depending upon the original materials used, the chemistry of the water supply, and the amount of use. The reality is that most selective rehabs focus on long-lasting repairs, whereas most dollars spent in a gut rehabilitation are for the appearance of newness, not endurance. So, what gave rise to the conventional wisdom? A number of factors: •
Homebuilders and remodelers make more money doing substantial rehabilitation, and few of them are interested in doing maintenance or maintenance-like rehabilitation.
•
Some in the industry claim that unless a building is gutted, hidden defects will not be found. This erroneous view betrays an ignorance of the selective rehabilitation discipline, which includes many methods of inspecting and testing the hidden parts of structural and mechanical systems.
•
Unfortunately, in many parts of the United States (unlike Europe), many property owners take a “use it up and then rebuild it” approach, particularly with lower-value housing.
•
Our system of subsidizing housing rehabilitation rather than housing maintenance provides strong incentives for premature 䡲
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replacements. Often, the more one spends, the more grant money, soft loans, or tax credits one gets. In Baltimore, City Homes Inc. is a good example among many programs that have proved these dicta wrong. In 1987, this nonprofit corporation set out to prove that most of the city’s 50,000 substandard, low-value rowhouses could be selectively rehabilitated much more cheaply than they could be substantially rehabilitated. At that time, most nonprofitand city-sponsored rehabilitation programs were doing gut renovations on these rowhouses, at an average development cost of about $75,000 per home. City Homes rehabilitated some of the same stock for $20,000 to $30,000 per home (total development cost) by being selective not only in its rehabilitation but its choice of properties to buy. Turning the tables on conventional wisdom, it can be said that gut rehabilitation, not selective rehabilitation, is an unnatural act—the result of abandonment, a fire, or maintenance too long deferred. Most commonly, someone failed to repair the roof or the plumbing when leaks developed. Water damaged too much wood and plaster. Typically, only in these situations of neglect or disaster is gut rehabilitation truly necessary. (e)
When Not to Choose Selective Rehabilitation
With some buildings, it is obvious that selective rehabilitation is the right choice. However, there are also some situations in which selective rehabilitation should be rejected out of hand: The building is so deteriorated that only the shell and some of the frame can be salvaged. Much of the plaster and finish carpentry has been ruined by fire or water damage. Most doors and windows are broken or missing. The plumbing, electrical, and heating systems are vandalized and inoperable. In short, this is a gut rehabilitation job. • The building was poorly constructed to begin with or has suffered structural damage. For example, floors are springy, walls are out of plumb, or masonry walls are failing. The building should be torn down. If the site is developed at all, new construction is called for. • The building targeted for rehabilitation is nonresidential. In this case, both practical considerations and code requirements typically indicate a need for substantial rehabilitation. •
Sometimes, though, the choice between selective and gut rehabilitation is not so clear. For example, a nonprofit housing group may be considering the purchase of a very deteriorated but structurally sound building for which only selective rehabilitation can be afforded. Here 䡲
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decision making is more difficult. The following factors, alone or in combination, may suggest a need for gut rehabilitation: •
A need to remove most of the plaster or wallboard. On a room-byroom basis, this is usually indicated by 25 percent or more of the plaster needing replacement.
•
Serious damage to interior finishes and mechanicals; for example, due to fire, water damage, or vandalism.
•
A need to reconfigure rooms; for example, to eliminate walk-through bedrooms or make the layout more appropriate for a group home.
•
Particularly in multifamily housing, a need to cure serious fire safety problems. These problems typically arise when slumlords have done illegal work—subdividing apartments without providing proper fire egress, putting in jackleg wiring, or replacing major portions of walls and ceilings with non-fire-rated materials.
•
The original layout and materials in a building are so antiquated that modern safety and livability standards cannot be attained without gut rehabilitation.
•
Fairly or unfairly, local code standards for rehabilitation are so strict that gut rehabilitation is effectively mandated. For example, a few communities still have in force the so-called “50 percent rule,” which requires residences to be brought up to new construction standards if the rehabilitation cost will exceed half the appraised value of the structure.
In most cases, no single factor is enough to tip the balance against selective rehabilitation. It may be necessary to produce two cost estimates, one for selective rehabilitation and one for substantial rehabilitation, so a rational decision can be made. Even if a specific building needs gut rehabilitation, the cost-conscious affordable housing developer often has another alternative: looking for a building that can be selectively rehabilitated at much lower cost. Many novice housing developers are tempted to buy the worst building on the block, either because they have public-spirited reasons for removing an eyesore, or because of the already described philosophy that “gut rehabilitation is best anyway.” Such fatal attractions should be avoided. Some eyesores are best taken care of by demolition crews. 18.3
MANAGING SELECTIVE REHABILITATION: FORMAL VERSUS INFORMAL APPROACHES
Depending upon the nature and amount of the rehabilitation work being done, there are more and less appropriate ways to design and manage a 䡲
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selective rehabilitation project. Formalized systems and professional construction management help are appropriate in projects with higher costs and complexity. Yet many homes and apartments are continually maintained and improved without the need for outside design and construction management services. (a)
Informal Approaches
Informal approaches to selective rehabilitation are appropriate for the routine maintenance and minor improvements frequently needed by homeowners and rental property managers. A problem is encountered, such as a leaky roof; preventive maintenance may be needed, such as a furnace tune-up; or more modern bathroom fixtures may be wanted. Typically, the owner either performs the work personally or calls in a single, specialized contractor, such as a plumber, electrician, handyman, or roofer. Cost estimates from more than one contractor may be sought, sometimes simply over the phone, or may not be needed on smaller projects. Typically, over time, the owner develops a relationship of trust with a few specialized tradespeople who are used repeatedly. This continual process of repairs and improvement is the ideal alternative to periodic major rehabilitation projects. For the most part, no special design skills are needed, because the contractors specify their proposed work in an estimate (whether verbal or written). Management of discrete projects is relatively simple. Financing is easier, too, as repairs and maintenance are typically paid out of the owner’s cash flow or small loans that are easy to obtain. These informal approaches are so widespread that they account for the vast majority of the nation’s $100-billionplus annual residential maintenance industry. (b)
Formal Approaches
Informal practices are generally so workable that the most critical question for a property owner or developer is: When are they not appropriate? When is expert outside help needed with design and construction management? When are more formalized systems needed for specifying the work, bidding, qualifying contractors, and monitoring the work? There is no simple formula for telling when this line is crossed. All of the following factors contribute to the need for a more formalized approach: •
Working on multiple building systems, which nearly always triggers the need for multiple specialized contractors who must then be coordinated. 䡲
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•
A large number of discrete tasks; for example, multiple repairs or improvements in most rooms.
•
A dollar volume of work in the tens of thousands of dollars or more, so that the risk of expensive mistakes is higher.
•
Complex design issues such as the need to reconfigure walls or relocate plumbing fixtures.
•
Repairing structural problems or making structural changes, which in most states requires blueprints stamped by a licensed architect or engineer.
•
Limited ability on the part of the owner to select and manage contractors effectively.
•
Lenders’ or funders’ requirements for independent, expert oversight of the rehabilitation project.
When a specific project is evaluated in light of these factors, a judgment can be made regarding the need for more formalized design and management systems. 18.4
IMPLEMENTING A FORMAL APPROACH TO SELECTIVE REHABILITATION: THE REHABILITATION SPECIALIST
There are three distinct approaches to managing a major rehabilitation project: 1. Using the architect/general contractor system. 2. Using a design/build remodeler who specifies all the work and acts as the general contractor. 3. Using a rehabilitation specialist who stands in the place of an architect and sometimes of the general contractor as well. A model agreement setting out the common roles of a rehabilitation specialist is shown in Exhibit 18A.1. The first two systems are described in Chapter 17. The third approach, the subject of this section, is appropriate for most selective rehabilitation jobs, for several reasons. First, the skills of an architect are generally not needed when only functional repairs and improvements are being specified. This is not the highest and best use of an architect, and typical architects’ fees are not warranted. Second, most design/build remodelling contractors are generally not equipped to carry out cost-conscious rehabilitation. Their highestprofit opportunities are expensive makeovers of kitchens and bathrooms or room additions that feature upscale windows, doors, plumbing equipment, 䡲
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cabinets, and other finishes. Unlike maintenance-oriented firms, they depend on extensive marketing and sales efforts that necessitate profits margins of 30 percent or more. Third, when cost saving is a major goal and the budget is tight, it is difficult to get contractors to perform quality work cheaply without the involvement of a highly skilled and toughminded rehabilitation specialist who is thoroughly versed in least-cost rehabilitation methods. Because of the limitations and shortcomings of more traditional approaches when applied to selective rehabilitation, the new system of design and construction management has taken shape over the past several decades. These are the core elements of the system: •
Planning and construction management tasks are carried out by unlicensed but skilled professionals, most often called rehabilitation specialists but sometimes called construction managers.
•
Plans and specifications consist of room-by-room work lists called work write-ups.
•
Construction work is by contractors who bid on the prepackaged work write-ups, with few options for changing the specifications.
•
Qualifying (and occasionally debarring) firms to maintain a pool of reliable contractors who will bid competitively on low-profit but (hopefully) high-volume work that requires little or no marketing and sales effort.
These design and construction management systems, or something very similar, can be found throughout the private real estate market wherever selective rehabilitation is occurring. For example, rental property owners define major maintenance jobs with work write-ups (calling them work orders), while their maintenance supervisors serve as construction managers. Insurance adjusters have their own versions of work write-ups. In many communities, real estate companies buy older homes and fix them up for resale using similar techniques. 18.5
CHOOSING A PROPERTY FOR SELECTIVE REHABILITATION: BUILDING INSPECTION TECHNIQUES OF REHAB SPECIALISTS
Perhaps the highest skill of a rehabilitation specialist is his or her ability to inspect a property that is a candidate for selective rehabilitation. Typically, the entire work specifications and cost estimate are generated from one inspection of the building, taking only an hour or two per dwelling unit. 䡲
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The first step is evaluating the basic structure for major structural problems with the foundation, frame, termite damage, and so on. Often the clues are slanting walls, large cracks in walls, or sagging ridge lines. Any of these signs and symptoms will trigger a careful structural inspection, often in hard-to-reach spaces under the house or in attic areas (making the rehabilitation specialist’s job sometimes physically demanding and grungy). Standard inspection tools are a flashlight, a sharp knife or awl for probing timbers, hand tools for opening and closing hatches, sometimes a ladder, a tape measure, paper, pen, and handheld calculator. Typically, an inspector starts with the building grounds and outbuildings, moves to the exterior, checks the basement and attic, and then moves room by room—all the while measuring, counting, and entering the data on needed repairs onto a pad of paper or computer data entry form (handheld computers have yet to replace these paper tools). See Exhibit 18A.2 for a sample inspection checklist. To properly inspect a building, utilities should be turned on so all mechanical systems can be tested. Active systems are easier to check for furnace problems, water leaks, low water pressure that indicates encrustation of pipes, and the like. However, for a preliminary estimate, inactive mechanical equipment can be checked visually so long as a big contingency is built into the cost estimate for possible undetected problems. Checking for insulation and weather-tightness is another important step. The most sophisticated inspections involve an infrared scanner and a blower installed in an exterior door to measure outside air infiltration. However, these useful tests can often be skipped by very experienced inspectors, who have learned to spot infiltration problems by sight and will remove electrical outlet covers to check for wall insulation. In the inspection process, the inspector ’s biggest asset is his or her experience in a particular community in inspecting a number of buildings. After a while, the inspector can guess the age of a building within a few years by discerning the original construction materials. Patterns are learned: for example, in City A, most homes built in the 1940s either have failing underground sewer lines or have already had them replaced. A look at where the sewer line enters the house will tell you which is the case. Or, in a certain subdivision in City B, dangerous aluminum wiring was used in the 1970s and should be replaced. Of such a stock of arcane and hard-won knowledge are excellent inspectors made. In this business, experienced inspectors are as valuable as gold. On one hand, they can prevent needless system replacements that might cost thousands of dollars extra for each home or apartment being rehabilitated. On the other hand, they can detect almost every so-called hidden defect (hidden only to the uneducated) that might make the project infeasible. 䡲
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18.6
CONCEPTUALIZING THE PROJECT: REHABILITATION STANDARDS
As mentioned earlier, selective rehabilitation is cost-conscious by definition. Yet radical cost-cutting is limited by a number of other factors, primarily marketing considerations and codes. It is certainly possible for a program to provide low-interest financing for home repairs while funding only the most basic functional work, such as repairing the roof and making the electrical system safer. For example, a small minority of repair programs do not provide for painting interior rooms, even after walls have been patched and repaired. But the reality is that most low-income homeowners want a more finished job. Most government- and nonprofit-sponsored programs do not merely fund cosmetic items such as painting, they require them. From another point of view, it would be theoretically possible for a program to fund no more than one new electrical outlet in a room being used as a bedroom (an old storage room, perhaps) that for some reason never had any electrical service. Most housing codes, however, require a minimum of two outlets per room, so the extreme minimalist approach would be incompatible with codes. With selective rehabilitation, there are five kinds of codes and standards that can dictate the design parameters of a selective rehabilitation project: 1. Zoning ordinances. Because selective rehabilitation by its nature involves restoring an existing residential structure (with few alternatives), zoning approvals are rarely needed. This is not the case with a so-called “change in use” (for example, converting a warehouse or school to apartments). Zoning approvals might be needed if a building addition, new porch, or exterior stairway encroaches on areas where setbacks are required, or if additional dwelling units are created that might trigger parking or open space requirements. 2. Construction codes, including building and mechanical codes, and also local requirements for driveways, catch basins, parking spaces, retaining walls, lighting, screening, and other improvements outside the building. 3. “Existing housing,” “existing structures,” and “life safety” codes that govern the safety, liveability, and soundness of existing residences, whether or not they are being rehabilitated. These are the bedrock standards of any selective rehabilitation project. 4. Environmental hazard regulations, which govern the removal of hazards such as lead paint, lead dust, radon, and asbestos. 5. Financing standards (for lack of a better term), which are requirements of lenders, local government housing offices, and federal 䡲
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18.7 DESIGNING THE PROJECT: WORK WRITE-UPS AND COST ESTIMATES
funding agencies. In some cases, these can be much more strict and conservative than code standards. The application of new construction codes and existing housing codes is discussed in § 18.17. Environmental hazards and financing standards are described more fully in §§ 18.15–18.18. Other relevant codes and standards include historic preservation ordinances and federal, state, or local requirements regarding access for the disabled. Historic preservation concerns are usually moot or restricted to selection of replacement materials (such as wood panel doors versus metal doors). In fact, most preservationists much prefer selective rehabilitation over gut rehabilitation, because it tends to preserve more original components. Federal requirements for physical accessibility to the disabled, in most cases, do not apply to maintenance-level rehabilitation of existing housing unless federal funding is involved. However, where federal requirements prevail or increased accessibility is desired for moral or practical reasons, selective rehabbers usually retrofit a small percentage of homes or apartments in which the costs of retrofit are the lowest. This means picking units at grade level or otherwise requiring the fewest reconfigurations to be accessible. A set of rehabilitation standards—a formal document developed by a public agency or public-purpose lender and imposed on a nonprofit borrower (see Exhibit 18A.3 for an example)—will often settle these questions of quality, appearance, safety, minimum performance, and code compliance. In short, they provide a set of ground rules to guide the rehabilitation specialist in specifying the work. This is a small sample section from a set of rehabilitation standards: Smoke Detectors—Each dwelling unit shall have the number and type of smoke detectors required by law.
18.7
DESIGNING THE PROJECT: WORK WRITE-UPS AND COST ESTIMATES
In selective rehabilitation, conventional working drawings (blueprints) are never used unless the property owner is also undertaking structural work or substantial rehabilitation work in a portion of the project. Instead, the rehabilitation specialist makes lists of all the needed repairs and improvements. After an inspection, and usually back at the office, field notes are used to create a work write-up, which organizes the tasks by physical areas of the property (grounds, roof, exterior areas, room 1, room 2, etc.) in almost the same order as the inspection. See Exhibit 18A.4. for an example. 䡲
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About 90 to 95 percent of the text in a work write-up is based on standard bid specifications adopted by the funding agency. These may be modified with short addenda, adding more specific locations or directions, such as “behind kitchen range” or “remove old baseboard.” When unusual conditions are encountered, the specifications must be tailor-made. In selective rehabilitation, bid specifications are brief; for example: Second Floor Hall Quan.Description 1 Smoke Detector—Install a UL-approved, ceiling-mounted smoke and heat detector permanently wired into a receptacle box near sleeping rooms.
Note that the specification is fairly general. It does not specify: (1) a brand or product number for the detector, (2) an exact location for mounting the detector, (3) the type of wiring to be used or how it is to be installed, or (4) instructions for repairing possible damage from installing new wires. However, in most programs that carefully prequalify contractors, such simple specifications are sufficient and are welcomed by contractors because of the flexibility allowed. In this example, ABC Renovators, Inc., is not required to hunt around town for a specific brand or model of smoke detector, which may be temporarily out of stock; any hard-wired detector will do. As the work write-up is prepared, the rehabilitation specialist also prepares a cost estimate for each task specified. This requires careful quantifying of the number of items or extent of work involved. For example, “repair plaster on all walls” does not lend itself to accurate estimating or bidding by a contractor. A professional would instead specify something like: “Repair 20 square feet of plaster.” If one knows that plaster repairs typically cost $3 per square foot, one can accurately estimate the cost of this single task at $60. For single-family rehabilitation, a complete cost estimate is often presented in the form of a room-by-room work write-up with costs appended to each item and totaled at the bottom. In multifamily projects, cost estimates are summaries of all the individual specifications; for example: Electrical Quan.
Item
Unit Cost
Total
117 49
Duplex receptacles, replace Duplex receptacles, new
3.25 22.00
380.25 1078.00
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18.9 DEFINING METHODS AND MATERIALS: PERFORMANCE SPECIFICATIONS
Sometimes not-to-scale floor plans are drawn and attached as an extra reference for locations and to help the rehabilitation specialist more accurately estimate numbers of windows, square footage, and so on. 18.8
COMPUTERIZED SPECIFICATION-WRITING AND ESTIMATING SYSTEMS
Rehabilitation specification and estimating software have come into wide use over the past two decades. Numerous companies provide products that can serve the needs of organizations doing selective rehabilitation. The advantages of using software for these activities are: (1) streamlining note-taking in the field, (2) automating the printing of write-ups and estimates, (3) automating the math involved in estimating, (4) allowing “what-if” scenarios to be estimated more easily, and (5) giving much wider latitude in the kinds of reports that can be generated. Most automated systems use a standard paper checklist which the rehabilitation specialist fills out with quantities and addenda. Back at the office, an entry clerk typically types in the specification number, quantity, and any addenda for each task. When entry is completed, various reports can be generated. Typical ones are: •
The work write-up by location (meaning room by room), with blank lines for contractors to fill in their bids for the various tasks.
•
A work write-up with prices, which is the agency’s cost estimate.
•
A work write-up by trade, meaning that the work and/or cost estimates are broken out into separate trades such as electrical, carpentry, painting, and so on. This allows a general contractor to more easily break the specifications into smaller packages for bidding by various subcontractors.
18.9
DEFINING METHODS AND MATERIALS: PERFORMANCE SPECIFICATIONS
Because bid specifications are generally brief and to the point, some housing agencies develop detailed performance specifications that give more precise instructions about methods and materials to be used. These are usually published in a standard manual made available to all contractors. In programs dealing with single-family rehabilitation, such specifications are a mixed blessing. They make possible more quality control, but from a contractor’s view increase “red tape.” For example, specifying an exact product may create supply problems if that product is out of stock or not carried by one of the contractor’s suppliers. This can contribute to higher bids. 䡲
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However, in multifamily work, where, for example, 200 identical smoke detectors might be specified, performance specifications are more appropriate. This example shows how a performance standard differs from the briefer bid specification shown earlier: Smoke Detectors—Each smoke detector shall be a Black and Decker model number 12530, installed in a new, recessed outlet box and hardwired to an existing or new electrical circuit capable of sustaining the load in accordance with the National Electrical Code, 209___ edition. The outlet shall be wired with Number 14 or larger grounded cable— either concealed in the wall and/or ceilings or under surface-mounted Wiremold or similar product. The outlet shall be located as described in the bid specifications.
Performance specifications are helpful in defining tasks for which quality and durability can be most questionable, such as specifying preparation work for exterior painting and the quality of paint to be used. A performance specification manual allows the agency to keep the bid specifications brief so lengthy instructions need not be provided every time a task is listed. In any case, an active selective rehabilitation program will use several hundred bid specifications frequently, and have as many as 1,500 available for use. If performance specifications are also used, they are typically not as numerous; they will perhaps be limited to 20, 50, or 100 tasks or materials specifications that need extra quality control. 18.10 SELECTIVE REHABILITATION AND CONSTRUCTION MANAGEMENT Construction management in a selective rehabilitation setting differs from gut rehabilitation or new construction in two ways: (1) the design system just described, and (2) the type of contractors who can most effectively do this kind of work. In other respects, construction management is conventional. In the typical selective rehabilitation program, the rehabilitation specialist (or in larger programs, various specialized personnel) are responsible for these tasks: •
Prequalifying contractors—In programs that have jobs continually going out to bid, a system is typically in place for prequalifying contractors. Contractors fill out a detailed application form, references are checked, insurance policies are verified, and so on.
•
Bidding and contract award—The rehabilitation specialist or construction manager typically: (1) creates a bid package, which includes the work write-up and instructions for bidding; (2) invites and receives the bids; (3) analyzes the bids on behalf of the owner; and 䡲
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18.11 SELECTIVE REHABILITATION AND THE CONTRACTOR POOL
(4) helps the owner select the most appropriate bid. Then the owner and contractor enter into a binding contract. Or there may be no general contractor, with the owner entering into multiple contracts with specialty contractors. In this case, the rehabilitation specialist serves as a full-charge construction manager, coordinating the various trades. •
Construction monitoring—After a notice to proceed is issued, the rehabilitation specialist periodically inspects the work in progress, notes any deficiencies, and requires corrections. Toward the end of the project, a punch list of final work items is created. When this is completed, any warranties are handed over to the owner and the job is done.
•
Managing the money—In the best-managed projects, all funds are escrowed and construction draws are controlled by the rehabilitation specialist or construction manager, who keeps all the financial accounts. In selective rehabilitation, a contingency account of 5 percent or even 10 percent is not uncommon—and, as with any construction job, is used to fund change orders. The exact amount of the contingency account is not revealed to the contractor(s).
18.11 SELECTIVE REHABILITATION AND THE CONTRACTOR POOL In any selective rehabilitation program, the collective experience and qualifications of the contractors are all-important. Selective rehabilitation is a specialty unto itself. Homebuilders are rarely good at this work, even though they may be attracted to bid when other work is slack. Unlike new home construction, rehabilitation often involves fussy repairs and working with floors and walls that are not level and plumb. Often, the employees of a homebuilder and its subcontractors are simply not experienced with the artful techniques required to work around these existing conditions. For reasons already described, the typical remodeling contractor is usually not the best choice for this work. Very specialized kinds of subcontractors and tradespeople must be recruited, either by the sponsoring organization or by the general contractors that work with it. An electrician that works primarily with new construction will not be as speedy as one that continually rewires old houses. Old-style plasterers may be hard to find for repair work, but can save a great deal of money when compared to the alternative of drywalling over damaged walls and ceilings. Because of the work involved in developing a reliable and specialized contractor pool, it is difficult to carry out a selective rehabilitation project on a one-time-only basis, even for an organization experienced in other types of construction. If an organization does not have a pipeline of 䡲
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selective rehabilitation projects and an established contractor pool, it is well advised to team up with an organization or independent construction manager that does. 18.12 THE ROLE OF GOVERNMENT AGENCY/PUBLIC-PURPOSE ORGANIZATIONS IN SELECTIVE REHABILITATION Although selective rehabilitation practices are widely used, the most formalized and effective systems are found in experienced public-sector and nonprofit agencies that are involved in large volumes of housing renovations. For example, a number of cities provide low-cost financing to rehabilitation projects with 500, 1,000, or even more dwelling units each year. There are several reasons that the most elaborate systems for selective rehabilitation have evolved in the community development sector: •
Public-sector programs are motivated to contain costs, because the needs of low-income families far outstrip available resources of affordable financing. When money can be saved, more clients can be served with the same annual budget of loan or grant funds.
•
The sheer volume of the work and common funding sources make uniform systems and procedures possible and cost-effective.
•
The use of public funds requires high accountability and protections against fraud, waste, and abuse. This in turn requires standardized and well-documented project management (which, if carried to extremes, however, can lead to too much red tape and loss of costeffectiveness).
•
HUD and several major industry organizations, such as Neighborhood Reinvestment Corporation and The Enterprise Foundation, have developed and supported more standardized systems.
In the housing agencies that are involved with selective rehabilitation, construction management systems are only parts of larger systems that involve such diverse tasks as program marketing, intake, prequalifying, homebuyer training, financial packaging, loan or grant closings, fund escrows, project accounting, and even the provision of social services. Broadly speaking, two kinds of agencies are involved in selective rehabilitation: •
The “intermediary,” which raises capital and gives out low-cost financing to homeowners, nonprofits, or investor-owners.
•
The “developer,” which buys, rehabilitates, and then sells or rents homes and apartments.
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18.13 AVOIDING GUT REHABILITATION: TIPS OF THE TRADE
Local government community development offices and quasi-public state housing finance agencies predominate in the first category. Nonprofits are more prevalent in the second. In most public and nonprofit agencies involved with high volumes of selective rehabilitation, the rehabilitation specialist is a full-time staff person. To justify the cost of this position, he or she must be responsible for a minimum of about $500,000 in single-family rehabilitation contracts each year, or perhaps twice that volume for multifamily rehabilitation (which is not as labor-intensive in terms of design and monitoring). For agencies dealing with smaller volumes of selective rehabilitation, design and construction management services are typically contracted out to another agency, a skilled individual, or a construction management firm. In this scenario, a formal contract for services is advisable, just as if an architect were being hired. See Exhibit 18A.1 for a sample “Agreement between Owner and Rehabilitation Specialist.” Our focus here is on the construction systems. It is important to note, though, that in the affordable housing industry, even the best construction management systems are ineffective unless connected to larger systems designed to solve the housing problems of low-income homebuyers and renters. To be implemented effectively, these programs require highly specialized organizations that are capable of financial packaging, rental property management, credit counseling (for homeowners and prospective homebuyers), and a number of other related tasks.
18.13 AVOIDING GUT REHABILITATION: TIPS OF THE TRADE As described already, the condition of some homes and apartments puts them in a gray area where the rehabilitation specialist must decide between selective and gut rehabilitation. In many cases, the watershed is whether or not to tear out a substantial amount of plaster or wallboard. To do so always has major ripple effects. Once the walls are open, most prudent rehabilitation specialists and building inspectors will want most, if not all, the electrical and plumbing lines to be brought up to new construction code standards. And if wiring and plumbing lines are new, who would want to reattach old tubs, sinks, toilets, electrical fixtures, and the like? Once the walls are stripped to the studs, it is tempting to remove and rebuild partitions to achieve better room layouts. And if drywall and flooring will all be new, who would dream of leaving or reinstalling old trim, cabinets, windows, and doors? Thus, seemingly logical decisions can snowball into a total gut rehabilitation.
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Here are some tips for avoiding these cascading effects: •
Avoid demolition of wallboard and plaster wherever possible.
•
Do not attempt to replace all wiring and plumbing; instead, selectively repair and add to existing systems.
•
Fish new electrical wires through walls instead of opening up raceways or entire walls.
•
If new plumbing supply or waste lines are needed, put in exposed pipes or cover new ones with chases rather than tearing into walls.
•
In some cases, stay with space heaters (safe, code-approved, and vented if need be) and room air conditioners rather than installing central heating. It is a myth that central heating and air conditioning are more efficient; they actually waste energy in rooms that are not being used.
•
Do not assume that because something is old, it can no longer work. For example, old plaster and older plumbing fixtures can be handsomely refurbished. Even very old “knob-and-tube” wiring can be safe and durable when it is still sound; there is considerable separation between the wires and almost negligible danger of short circuits.
•
Wiring and plumbing simply cannot be brought up to new construction code standards in a selective rehabilitation. To do so would very probably trigger the need to gut out all plaster or wallboard.
18.14 IMPROVING ENERGY EFFICIENCY IN SELECTIVE REHABILITATION In affordable housing programs, the energy efficiency of homes and apartments is important for an obvious reason—more efficiency means more affordability. Energy conservation goes hand-in-glove with the repair focus of selective rehabilitation, particularly as 40 percent of the average heat loss in a house is due to air infiltration. Fixing infiltration is, for the most part, low-tech work involving caulking, repairing windows, installing weatherstripping, and the like. Adding overhead insulation and storm windows (if needed) are other easy upgrades. Even without replacing heating systems and insulating walls, selective rehabilitation can reach 80 to 95 percent of the energy efficiency that can be achieved with substantial rehabilitation or new construction. A weather-stripped older wood-frame window with a good storm window can have the same or better energy performance as a new double-glazed window. Even old furnaces can usually be retrofitted much more costeffectively than installing new high-efficiency models. 䡲
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18.15 DEALING WITH LEAD-BASED PAINT HAZARDS
Generally speaking, the most common and cost-effective measures for reducing heating and air conditioning costs in selective rehabilitation are: •
Infiltration control measures such as caulking and weather striping.
•
“Cap” insulation blown in or laid in over the uppermost ceilings.
•
Adding storm windows (but not storm doors, which do little to stop infiltration). Replacement windows are usually overrated as energy improvement measures.
•
Installing new, insulated, and tightly weatherstripped entrance doors, where controlling infiltration is otherwise very difficult.
•
Blowing in wall insulation, along with measures to prevent related moisture build-up in walls.
•
Retrofit of old furnaces or boilers. For example, in oil-heated homes, more efficient flame-retention burners should replace archaic models.
•
For hot water systems, the add-on of modulating aquastats, which raise and lower boiler water temperatures based on outside temperatures.
•
Planting of trees that shade the home from heat or block winter winds.
18.15 DEALING WITH LEAD-BASED PAINT HAZARDS IN SELECTIVE REHABILITATION In many communities with extensive stocks of pre-1950 homes, perhaps the thorniest issue with selective rehabilitation is lead hazard abatement. At one time, it was thought that lead poisoning in children was due to eating flaking paint chips and chewing on painted surfaces such as window and door trim. Today, the work of researchers at Johns Hopkins University and others have made it clear that most poisoning is due to high levels of lead dust on floors and other surfaces, which is ingested by children during hand-to-mouth activity or simply breathed into the lungs, where it is then absorbed into the bloodstream. The gravest health danger is to children under the age of seven, after which behaviors and neurological susceptibility change for the better. Because of this recent research, it has also become clear that earlier methods of lead paint abatement made the poisoning problem worse, not better. Methods such as scraping, burning, or crudely using chemical solvents can add greatly to the lead dust levels in a house. Tragically, children’s brains have been irreparably damaged by lead dust exposure following these removal treatments. 䡲
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The area of lead hazard abatement is one area in which gut rehabilitation has some advantages over selective rehabilitation. In gut rehabilitation, the dwelling is, by necessity, empty and poses no hazards to residents during demolition and reconstruction. Generally, all painted interior components are removed. Although remaining lead dust may be rampant during construction, it is usually cleaned out or covered over completely. Nonetheless, there are workable (albeit expensive) methods that can be used in selective rehabilitation: •
Test for presence of lead in all pre-1978 housing occupied by children under seven, either by lead “dust wipe” tests, x-ray fluorescence analysis, or other methods.
•
If hazardous levels of lead dust are found, remove the residents and all belongings from the home before any rehabilitation occurs that would disturb painted surfaces.
•
Seal off all nonabatement surface areas with plastic sheeting.
•
Protect workers by using respirators and protective clothing.
•
Remove all lead-painted materials from the site, rather than attempting to remove paint on site, and minimize or avoid paint scraping (which produces lead dust).
•
If lead-painted surfaces are to be left in the home, they should be sealed so that no lead dust can escape from the surfaces. Industry experts disagree on adequate sealing methods. Minimalists believe that adequate cleaning and painting may be enough. Others, including HUD, have promoted “permanent” sealing such as new drywall or certain epoxy sealers.
•
For clean-up, it is advisable to use proven routines that involve highphosphate washes on all surfaces followed by vacuuming using a high-efficiency particle accumulator (HEPA) vacuum (often repeated until lead dust tests show acceptable levels).
This advice is not intended as a comprehensive set of specifications for removing lead hazards, but merely as an illustration of current industry practices. The Lead-Safe Housing Institute, based in Columbia, Maryland, is engaged in research and offers publications and training that seek to strike a reasonable balance between cost and safety. See a greater discussion of lead-based paint regulations in Chapter 4, Section 3 (c) (iii). The economic implications of the lead hazard problem are enormous. At least 57 million older homes are thought to contain some lead-based paint. Because low-income families tend to live in older, low-value housing, the risks to their children are higher than for the average family. 䡲
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Substantial rehabilitation would be prohibitively expensive if it were applied to all housing needing abatement. A number of less costly techniques are being used and tested in selective rehabilitation projects, with per-dwelling costs ranging from a few thousand dollars to about $20,000. The variables that determine cost are primarily: •
The amount of lead paint in the home.
•
The locations of the hazards (lead paint in the interior is obviously a worse hazard than on the exterior).
•
Whether all lead paint is to be removed or simply encapsulated.
•
Whether the encapsulation is thorough-going (as with heavy epoxy coatings) or minimal (as with repainting).
•
The rigorousness in removing lead dust by careful cleaning followed by dust wipe tests.
In time, continuing research should reveal the most cost-effective approaches that are compatible with selective rehabilitation. Meanwhile, caution is the watchword, especially with demolition and scraping of interior surfaces. 18.16 DEALING WITH OTHER RECURRING HEALTH AND SAFETY ISSUES IN SELECTIVE REHABILITATION Abating lead hazards is only one example of the moral and technical challenges involved in designing selective rehabilitation projects. These are some other recurring health and safety issues: •
Asbestos—Many older homes have asbestos-insulated pipes and boilers that present the worst hazards when coverings deteriorate and the particles become airborne. Asbestos shingles, asbestos siding, and vinyl asbestos tile (VAT) flooring deteriorate much more slowly and generally present lesser hazards (some would say negligible). As with lead hazard abatement, volumes could be written on abatement techniques. Generally speaking, though, proper encapsulation or removal of the worst hazards typically costs no more than a few thousand dollars per dwelling.
•
Radon—Most radon problems are related to gases emitted from soil or rocks; for example, the soil under floors or around foundations. Water from drilled wells can emit radon gas. On rare occasions, concrete blocks and other masonry products have been identified as the source of the problem. Abatement techniques are reasonably well proven and compatible with selective rehabilitation. 䡲
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•
Fire egress—Some older dwellings have poor means of egress in the event of fire. In single-family housing, the worst problems occur in larger homes that were chopped up into smaller apartments. Often, these units were created without zoning approval or building permits and violate the basic rule of proper egress—that each dwelling unit should have at least two separate and remote means of egress. Fire escapes are considered less safe and reliable exits than regular stairways, so rectifying these problems can be quite expensive. Fire egress in multifamily buildings is a highly complex area where rehabbers should seek expert advice.
•
Fire ratings of materials—In most local jurisdictions, the governing code for fire ratings in existing housing (as opposed to new housing) is the Life Safety Code (LSC). Many well-built older homes meet the fairly lenient requirements of LSC. These ratings are expressed as 20-minute, one-hour, two-hour, and so on, referring to the time it takes windows, doors, and the like to burn through after a fire has started. The primary reason for these ratings is to give occupants adequate time to get out of the dwelling and firefighters more time to get there. Sloppy renovation techniques, such as tearing out fire separations or installing nonrated panelling, can seriously diminish these margins of safety. In many older dwellings, poorly executed renovations from prior years must be remedied.
•
Rises and runs of stairways—The requirements of the Life Safety Code for existing stairways can be quite onerous—so much so that these rules are often ignored in selective rehabilitation. The underlying reason for the rule is to lessen the chances of falling, particularly during a panic situation such as a fire, by requiring that stairs be less steep. Experts in the field may disagree, but many consider this a much less serious safety issue than, for example, fire ratings or abating lead paint hazards.
•
Guard rails—Poor guard rails on porches, stairs, and fire escapes in older housing are a serious safety problem, particularly for children. Deteriorated railings can give way when pushed against. Poorly designed railing assemblies can allow small children to push through the openings and fall. Unguarded windows in mid-rises and high rises can be lethal to children. In this area, the Life Safety Code offers the best guidance; for example, it prescribes exactly how far apart to space banisters in a stair rail assembly.
Many of these health and safety issues are not peculiar to selective rehabilitation. Nearly every year the national code associations put forth new ideas or requirements for improving the safety of new and existing residential dwellings. Some, for example, argue that all new homes 䡲
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should have fire suppression sprinklers. Proponents of affordable housing sometimes question or oppose expensive new requirements. There is no absolute right and wrong in these debates. In is clear, however, that the issues and decisions are tougher in selective rehabilitation than in substantial rehabilitation or new construction. There is always a tension between controlling costs and increasing safety. Code requirements can be unclear or even contradictory. Nonetheless, it is essential for rehabilitation specialists to understand the relevant codes and to be able to negotiate gray areas with code officials. Codes can make selective rehabilitation feasible or prohibitively expensive. In the work specifications for each project—and indeed in the codes administration of each city and county—a rational balance must be struck between safety standards and costs. 18.17 APPLYING CONSTRUCTION CODES AND EXISTING HOUSING CODES TO SELECTIVE REHABILITATION The major code issue for developers employing selective rehabilitation is this: To what extent will new construction requirements be imposed? Harsh treatment in this regard will thwart selective rehabilitation plans and push the project toward much more expensive gut rehabilitation, because most older structures are far from meeting the constantly updated new construction requirements. These are some typical rehabilitation issues arising out of codes that were designed to govern new construction: •
Electrical systems—Older residences typically have many fewer outlets and fixtures than required by new codes. Also, many have ungrounded two-wire systems as opposed to more modern threewire systems.
•
Plumbing systems—The location and sizing of pipes and vents in older homes and apartments often do not meet plumbing code requirements.
•
Fire safety issues—Fire codes have progressively required materials with higher fire ratings, more elaborate fire egress (such as separate stair towers), more sprinklers, and more elaborate alarm systems, particularly in multifamily housing.
Obviously, there is a considerable disparity between the conditions in older homes, on the one hand, and the minimum standards of codes that were designed primarily to govern new construction. Therefore, most local jurisdictions have adopted what are called existing housing codes. By setting basic health and safety standards, these codes recognize 䡲
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the economic and practical difficulty in bringing old structures up to new construction standards. However, a lesser standard for existing housing does not mean that anything goes. Enforcing housing code standards in some buildings requires remediation, such as removal and replacement of non-fire-rated materials, installation of smoke detectors and fire escapes, repair of heating systems, and so on. When applied to a rehabilitation or maintenance scenario, most building and mechanical codes limit their applicability to new materials installed, rather than the entire structure. For example, even in a selective rehabilitation, new electrical wiring must meet new code standards, whereas existing wiring need not. In fact, it is quite common for selective rehabbers to add new electrical circuits, outlets, switches, and ground fault interrupters that conform perfectly to new construction standards. However, when the work is done, the number of outlets in a room will likely be fewer than required in new construction codes. In a typical room, the National Electrical Code requires four or five wall outlets, but existing housing codes typically require only two. Major problems are encountered when codes—or code administrators—are unfriendly to selective rehabilitation. The relatively rare problem of the onerous “50 percent rule” has already been mentioned. More widespread problems arise from the discretionary powers of individual inspectors or their supervisors with regard to dictating “proper” renovations. Most building codes and some housing codes give inspectors the powers to require rehabbers to “remove other health and safety hazards,” or language to that effect. This can open the door to a number of unwritten requirements, which are often unevenly enforced. In virtually every community, code administrators have the legal powers under such clauses to issue verbal or written administrative rules that could, for example, require every home or apartment being rehabilitated to have four, five, or more outlets per unit, in accordance with new construction requirements. This has occurred in some cities, but only rarely, because most communities and their code officials do not wish to set up expensive disincentives for maintenance and rehabilitation.
18.18 STANDARDS ISSUES WITH FUNDERS AND SELECTIVE REHABILITATION Although this is little recognized, the most aggressive standards setters in the affordable housing industry are funders, not code officials. Private lenders are rarely the problem; many of them are used to financing prudent, maintenance-level repairs by homeowners or investor-owners. More serious problems arise with some federal agencies, state housing finance 䡲
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18.19 INFORMATION SOURCES AND TOOLS FOR SELECTIVE REHABILITATION
agencies, and community development offices of local government that provide subsidy funding for housing renovations. Over the past 15 years or so, the trend in the policies and practices of these agencies as a whole has been favorable to selective rehabilitation. Prior to that, though, rehabilitation standards were generally more strict. In HUD’s now-extinct “deep subsidy” programs such as Section 236, Section 221(d)(3), and Section 8 New Construction, new construction was the rule. Rehabilitation of housing was rare under these programs, and when it occurred, nothing short of substantial rehabilitation was considered for funding. With the subsequent 80 to 90 percent decline of federal funding for affordable housing production programs, many public funders gradually began to embrace more cost-effective approaches such as selective rehabilitation, with its lower subsidy demands. HUD’s notorious Minimum Property Standards—its bible of construction standards which were unfriendly to rehabilitation of all kinds—was abandoned in the early 1980s in favor of local code requirements. Nonetheless, many conflicts remain between prudent selective rehabilitation practices and the requirements of some public funding agencies that suffer from hangovers of the old “make it new” philosophy. However, if a rational discussion of these standards issues can take place, even the most ardent upholders of new-construction-like standards may compromise. 18.19 INFORMATION SOURCES AND TOOLS FOR SELECTIVE REHABILITATION These books are available in many larger bookstores: •
Robert M. Santucci, Brooke C. Stoddard, & Peter Werwath. A Consumer’s Guide to Home Improvement, Renovation and Repair, 2nd ed. (Hoboken, NJ: John Wiley & Sons, 1995).
•
2005 National Repair and Remodeling Estimator (Carlsbad, CA: Craftsman Book Co., 2005).
The following technical publications are available from The Enterprise Foundation, Communications Department, 10227 Wincopin Circle, Suite 500, Columbia, MD 21044; phone: (410) 964-1230: •
The Enterprise Foundation. Single-Family Selective Rehabilitation— Housing Production Manual No. 1 (New York: Van Nostrand Reinhold, 1991). 264 pp., including extensive addenda of model documents. This text is most applicable to nonprofit and public agencies performing specification writing, bidding, and construction monitoring on 䡲
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behalf of a large volume of homeowners needing very basic rehabilitation work on their homes. •
The Enterprise Foundation. Multifamily Selective Rehabilitation— Housing Production Manual No. 2 (New York: Van Nostrand Reinhold, 1991).
•
Master Rehabilitation Specifications, 2nd ed. (1995). A compilation of about 1,400 concise bid specifications for selective rehabilitation, with typical unit costs. Also includes: (1) sample inspection checklist; (2) a guide to efficient inspections, specification writing, and cost estimating; (3) how to assemble a work write-up, with samples; and (4) numerous specifications dealing with lead hazard abatement. All is in hardcopy, with bid specifications on a DOS/ ASCII disk. These brief specifications do not include precise material specifications or detailed instructions on installation; however, they are field-tested.
T h e E n te r pr i s e F o u n da ti o n o ff e r s H o u si n g D eve l o p er P ro (www.enterprisefoundation.org) specification-writing and estimating software, specifically designed for selective rehabilitation. The National Center for Healthy Housing publishes a number of technical bulletins on lead hazard abatement; for example, “Creating a Lead-Based Paint Hazard Control Policy.” Contact The National Center for Healthy Housing, 10227 Wincopin Circle, Suite 200, Columbia, MD 21044, (410) 992-0712 The BOCA Property Maintenance Code (various editions) is a widely adopted housing code that can be used as a minimum performance standard for selective rehabilitation. However, it offers few solutions for complex issues involving mechanical systems and fire safety. The NFPA Life Safety Code (various editions) is the authoritative and nearly universally adopted code relating to egress, fire ratings of materials, and other fire safety issues in existing housing, whether or not the housing is undergoing repairs or renovations. However, enforcement is spotty to nonexistent in many jurisdictions.
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A P P E N D I X
1 8 A
Sample Documents Regarding Rehabilitation E XHIBIT 18A.1 Agreement between Owner and Rehabilitation Specialist
AGREEMENT made on _____ (month) _____ (day), _____ (year) BETWEEN the owner: and the rehabilitation specialist: For the Project located at: Which has this general scope of work: The owner and the rehabilitation specialist agree as follows: SECTION 1—DEFINITIONS 1.1.
The term “owner” shall mean the first party to this agreement, regardless of that party’s relationship to the project property.
1.2.
The term “financing source” shall mean any source of capital financing; source of interest, rental or capital subsidiaries; or any guarantor of the above.
1.3.
The term “contractor” shall mean the contractor or contractors who are solicited to provide, or under contract to provide, materials, labor, or other services to complete the work required in the bid or contract documents.
SECTION 2—RESPONSIBILITIES OF REHABILITATION SPECIALIST 2.1.
Project Review Phase. The rehabilitation specialist shall review with the owner the goals of the project, the design standards appropriate to the Project, alternative methods of construction, alternative methods of contracting the work, and the requirements of proposed financing sources.
2.2.
Specifications and Estimate Phase. Based on the above review, the rehabilitation specialist shall perform an inspection of the project property and prepare detailed specifications for rehabilitation work and a detailed cost estimate.
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E XHIBIT 18A.1 Agreement between Owner and Rehabilitation Specialist (continued) This inspection shall consist of a thorough visual evaluation of each area of the Project property normally accessible to occupants or maintenance personnel and a determination of individual work items required to repair the property to the standards agreed upon with the owner in the Project Review Phase. However, if conditions discovered during this inspection (or at any subsequent time until project completion) reveal the need for services by licensed design consultants, such as architects or engineers, such services shall not be the responsibility of the rehabilitation specialist unless provided in Section 9. 2.3.
Bid Documents Phase. Based on the specifications and cost estimate, as approved by the owner or adjusted at the request of the owner with regard to the scope and quality of work, the rehabilitation specialist shall prepare bidding documents. These documents shall conform to the owner’s preferred method of contracting the work and the requirements of proposed financing sources.
2.4.
Project Approvals Phase. The rehabilitation specialist shall assist the owner with regard to the owner’s filing of documents required for approval of the proposed activity by governmental authorities or the proposed sources of financing.
2.5.
Construction Contracts Phase. The rehabilitation specialist shall assist the owner with regard to the owner’s solicitation of bids and/or negotiated proposals, selection of a contractor, and the preparation of contracts for construction.
2.6.
Construction Phase. The rehabilitation specialist shall be a representative of the owner during the Construction Phase and shall have authority to act on behalf of the owner to the extent set forth in the contract documents. All instructions to the contractor shall be forwarded through the rehabilitation specialist. This phase shall commence with the award of a construction contract or contracts. This phase, together with the rehabilitation specialist’s obligation to provide basic services under this contract, will end when a final Certificate for Payment is issued.
2.7.
Project Monitoring. The rehabilitation specialist shall visit the project site or sites at appropriate intervals to determine if the rehabilitation work is being performed in accordance with contract documents and to endeavor to protect the owner against defects. The rehabilitation specialist shall inform the owner of work progress, determine the amounts owing to the contractor, and issue Certificates for Payment in accordance with contract documents. However, the rehabilitation specialist shall not be required to make exhaustive on-site inspections. The rehabilitation specialist shall have access to the work at all times when it is being performed.
2.8.
Limit to Responsibilities. The rehabilitation specialist shall not be responsible for the execution of construction tasks, or for safety precautions, or for acts and omissions of the contractor, subcontractors, or other persons providing materials or performing the work, or for the failure of any of these to carry out the work in accordance with the contract documents or for any failure of any of them to pay for any materials or labor used in the project. The rehabilitation specialist shall not be responsible for any additional design, specification, estimating, or construction work necessitated by the discovery after the Specifications and Estimate Phase (as described in paragraph 2.2) of conditions that were not observed previously. In addition, the rehabilitation specialist will use due diligence in preparing cost estimates, but does not represent that bid prices will not exceed the estimates due to market conditions.
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E XHIBIT 18A.1 Agreement between Owner and Rehabilitation Specialist (continued) 2.9.
Certificates for Payment. The issuance of a Certificate for Payment shall constitute a representation by the rehabilitation specialist to the owner, based on the rehabilitation specialist’s observation of the work, that the work has progressed to the point indicated; that, to the best of the rehabilitation specialist’s knowledge, information, and belief, the quality of the work is in accordance with the contract documents (subject to an evaluation of the work for conformance with the contract documents upon substantial completion); and that the contractor is entitled to payment in the amount certified.
2.10.
Rejection of Work. The rehabilitation specialist shall have the authority to reject any work that fails to conform to the contract documents and require testing, removal, or special inspection of work that is nonconforming.
2.11.
Change Orders. The rehabilitation specialist shall prepare change orders for the owner’s approval in accordance with contract documents.
SECTION 3—OPTIONAL SERVICES OF THE REHABILITATION SPECIALIST 3.1.
Optional Services in General. Certain services are optional and are not included in basic services unless so identified in Section 9 below. Otherwise, they shall be provided at additional cost to the owner if authorized in writing by the owner. Optional services are as follows:
3.2.
Providing financial feasibility studies.
3.3.
Providing surveys of the needs and preferences of future occupants.
3.4.
Providing measured drawings, surveys of property lines, detailed inspections or testing of building components or underground utilities, energy use surveys, evaluations of a building’s structural integrity, or other evaluations of existing conditions (except as provided in paragraph 2.2).
3.5.
Providing bid documents in excess of those described herein, as a result of a decision by the owner to rebid or a change in requirements of governmental authorities or financing sources subsequent to the first bidding.
3.6.
Acting as a construction manager in coordinating work performed by contractors in various trades, in the absence of a general contractor.
3.7.
Coordinating work performed by volunteers, future occupants, or the owner.
3.8.
Providing cost estimates in more detail than a gross estimate of cost for each line item in the specifications.
3.9.
Providing any floor plans or other construction drawings.
3.10.
Providing for the services of consultants, including architects, structural engineers, mechanical engineers, appraisers, attorneys, and code consultants.
3.11.
Conducting a preliminary inspection of the project property to determine a generalized scope of work and a preliminary estimate, subject to refinement and modification in the Specifications and Estimates Phase.
3.12.
Providing drawings or specifications in connection with change orders.
3.13.
Providing services in connection with fire or other damage occurring after the specifications and estimate phase, or resulting from defects in the contractor’s work.
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E XHIBIT 18A.1 Agreement between Owner and Rehabilitation Specialist (continued) 3.14.
Providing services in connection with the operation of any new equipment installed during the rehabilitation.
3.15.
Serving or preparing to serve as an expert witness for the owner in any legal procedure.
3.16.
Providing services (except as described in paragraph 2.4) to the owner in connection with obtaining approvals of the project by governmental authorities or financing sources, or obtaining waivers of normal requirements.
3.17.
Providing any other services not otherwise included in this agreement.
SECTION 4—RESPONSIBILITIES OF THE OWNER 4.1.
Project Information. It is the owner’s responsibility to provide in a timely manner information on goals of the project, rehabilitation standards, proposed sources of financing, preferred contracting systems, and other factors not under the control of the rehabilitation specialist which are critical to performance of the services described in Sections 3 and 9.
4.2.
Owner’s Representative. The owner shall designate, at the request of the rehabilitation specialist, a representative to review construction documents, make decisions, and provide information required in this Section in a timely manner.
4.3.
Legal Description and Survey. The owner shall, at the request of the rehabilitation specialist and at the owner’s expense (unless otherwise provided in Section 9), provide the following services to the project: a.
A legal description and certified land survey of the site
b.
A soil survey by a soil engineer and/or other consultants
c.
Other tests or inspections of the Project property as required by the law
d.
Any legal appraisal accounting or other services required to carry out the Project.
SECTION 5—ARBITRATION 5.1.
All claims, disputes, and other matters in question between the parties to this agreement, arising out of or relating to this agreement or the breach thereof, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then obtaining unless the parties mutually agree otherwise. No arbitration arising out of or relating to this agreement shall include, by consolidation, joinder, or in any manner, any additional person not a party to this agreement except by written consent containing a specific reference to this agreement and signed by the rehabilitation specialist, the owner, and any other person sought to be joined. Any consent to arbitration involving an additional person or persons shall not constitute consent to arbitration of any dispute not described therein or with any person not named or described therein. This agreement to arbitrate and any agreement to arbitrate with an additional person or persons duly consented to by the parties to this agreement shall be specifically enforceable under the prevailing arbitration law.
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E XHIBIT 18A.1 Agreement between Owner and Rehabilitation Specialist (continued) 5.2.
Notice of the demand for arbitration shall be filed in writing with the other party to this agreement and with the American Arbitration Association. The demand shall be made within a reasonable time after the claim, dispute, or other matter in question has arisen. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim dispute or other matter in question would be barred by the applicable statute of limitations.
5.3.
The award rendered by the arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.
SECTION 6—TERMINATION OF AGREEMENT 6.1.
This agreement may be terminated by either party upon seven day’s written notice should the other party fail substantially to perform in accordance with its terms through no fault of the party initiating the termination.
6.2.
This agreement may be terminated by the owner upon at least seven days’ written notice to the rehabilitation specialist in the event that the Project is permanently abandoned.
6.3.
In the event of termination not the fault of the rehabilitation specialist, the rehabilitation specialist shall be compensated for all services performed to the termination date.
SECTION 7—OTHER PROVISIONS 7.1.
Unless otherwise specified, this agreement shall be governed by the law or the principal place of business of the rehabilitation specialist.
7.2.
The owner and the rehabilitation specialist waive all rights against each other and against the contractors, consultants, agents, and employees of the other for damages covered by any property insurance during construction. The owner and the rehabilitation specialist shall require appropriate similar waivers from their contractors, consultants, and agents.
7.3.
Other Agreements. This agreement represents the entire and integrated agreement between the owner and the rehabilitation specialist and supersedes all prior negotiations, representations, or agreements, either written or oral. This agreement may be amended only by written instrument signed by both owner and rehabilitation specialist.
7.4.
Assignment of Agreements. The owner and the rehabilitation specialist respectively bind themselves, their partners, successors, assigns, and legal representatives to the other party to this agreement and to the partners, successors, assigns, and legal representatives of such other party with respect to all covenants of this agreement. Neither the owner nor the architect shall assign, sublet, or transfer any interest in this agreement without the written consent of the other.
7.5.
Rehabilitation Specialist’s Records. Records of expenses pertaining to optional services shall be kept on the basis of generally accepted accounting principles and shall be available to the owner or the owner’s authorized representative at mutually convenient times.
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E XHIBIT 18A.1 Agreement between Owner and Rehabilitation Specialist (continued)
SECTION 8—PAYMENT TO REHABILITATION SPECIALIST The owner shall compensate the rehabilitation specialist as follows: 8.1.
Fee for Basic Services. For basic services described in Section 2 and optional services included in Section 9 as basic services, basic compensation shall be computed as follows:
8.2.
Payments. Unless otherwise stipulated in this paragraph, payments shall be made monthly and in proportion to the services performed within each phase of work, on the basis set forth in paragraph 8.3.
8.3.
Percentages Payable. Where compensation is based on a fixed amount or percentage of construction cost, payments shall be made for each phase of work in accordance with the following percentages of the total basic compensation: Project Review Phase Scope of Work Phase (optional) Specifications and Estimate Phase Bid Documents Phase Project Approval Phase Construction Phase
8.4.
Fee for Optional Services. For optional services of the rehabilitation specialist’s personnel as described in paragraph 9.2, and not included in basic services, compensation shall be computed at the following multiples of direct personnel expense: Direct personnel expense shall mean actual salary, hourly, or fee expenses paid to personnel, exclusive of benefits.
8.5.
Fee for Optional Consultant Services. For optional services performed by consultants in accordance with paragraph 9.2, payments shall be made at cost.
8.6.
Fee Adjustment. The owner and the rehabilitation specialist agree that if the scope of the project is changed materially, the amounts of compensation will be adjusted accordingly.
SECTION 9—OPTIONAL SERVICES 9.1.
Services for Basic Fee. Following are optional services which will be performed by the Rehabilitation Specialist as part of basic services:
9.2.
Services at Additional Cost. Following are services to be performed at additional cost to the owner, over and above the fee for basic service, to be paid in accordance with paragraphs 8.4 and 8.5:
SECTION 10—OTHER CONDITIONS This Agreement entered into as of the day and year first written above. OWNER
REHABILITATION SPECIALIST
______________________
___________________________ 䡲
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E XHIBIT 18A.2 Sample Inspection Checklist
[Extracts from a longer document, reprinted with permission of The Enterprise Foundation.] INTERIOR ROOM DIMENSIONS: __________ by __________ LR: _____ DR: _____ HALL: _____ BR: _____ OTHER: _____ ELECTRICAL 23-7006 _____ EA 23-7004 _____ EA 23-7010 _____ EA 23-7072 _____ EA 23-7094 _____ EA 23-7076 _____ EA 23-7080 _____ EA 23-7092 _____ EA 23-7090 _____ EA 23-7074 _____ EA 23-7008 _____ EA 23-7126 _____ EA 23-7066 _____ EA
Electrical cover plate Replace wall receptacle New receptacle—15 amp Replace switch Replace light fixture Add switch, existing light fixture Add switch, existing wall outlet Add light fixture and switch Replace light fixture globe Add 3-way switch (pair) Add 3-way switch (pair) and fixture Add smoke detector, hard-wired Electrical repair, custom: ________________
HVAC 21-6173 _____ EA 21-6172 _____ EA 21-6102 _____ EA 21-6138 _____ EA 21-6175 _____ EA
Replace register, wall Replace register, floor Add heating duct and register Replace thermostat with mechanical setback HVAC item, custom: ________________
WINDOWS 8-3502 _____ EA 8-3506 _____ EA 8-3504 _____ EA 8-3514 _____ EA 8-3574 _____ EA 8-3532 _____ EA 8-3534 _____ EA 8-3536 _____ EA
Replace sash lock Replace sash chains Replace sash lift Repair window: ________________ Replace window pane Replace complete double hung window Replace sash Weatherstrip window
DOORS 8-3410 _____ EA 8-3415 _____ EA 8-3407 _____ EA 8-3401 _____ EA 8-3411 _____ EA 8-3470 _____ EA 8-3416 _____ EA
Interior door—rework Replace passage set Replace hinges Replace striker Replace interior Add door stop Door repair, custom: ________________ 䡲
701
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SAMPLE DOCUMENTS REGARDING REHABILITATION
E XHIBIT 18A.3 Model Rehabilitation Standards for Single-Family Housing
Developed by The Enterprise Foundation Rehabilitation Work Group and reprinted with permission. Revised 1995 as model rehabilitation standards that local public or nonprofit housing agencies could adapt to their own needs for single-family housing rehabilitation programs. These are not intended to apply to multifamily housing, where the building systems and safety issues may be substantially different from single-family housing. PURPOSE These are minimum standards for all single-family housing which is rehabilitated by _______________ [organization name]. The general goals are that each residential structure which is rehabilitated shall be: 1.
Reasonably free from the dangers of fire, toxic substances and other hazards.
2.
Comfortable, healthy and well ventilated.
3.
Decent appearing inside and out.
4.
Inexpensive to heat and maintain.
5.
Solid structurally and weathertight.
6.
Reasonably equipped for current handicapped occupants.
At the same time, it is recognized that financial resources for rehabilitation are increasingly hard to obtain, especially for the neediest families who will require grants or deferred payment loans to finance their rehabilitation projects. Therefore, it is intended that use of these standards will limit rehabilitation costs and conserve funds. For example, the standards do not require converting safe space heat to central heat, installing air conditioning, “modernizing” functional kitchens and bathrooms, or doing purely cosmetic treatments to exteriors, floors, windows, etc. COMPLIANCE WITH CODES AND OTHER STANDARDS This standard equals or exceeds the Housing Quality Standards of the U.S. Department of Housing and Urban Development. This standard meets the requirements of the local building, plumbing and electrical codes as they pertain to existing housing, but not as they pertain to new construction. When a single room has its interior finish (plaster or wallboard) removed, the rehabilitation in that single room will meet new construction standards for plumbing, electricity, heating and fire ratings. When such removal occurs in over 50 percent of the rooms in a freestanding building, this rule will apply to the whole building. Otherwise, the code for existing housing will prevail. Local and federal regulations pertaining to zoning, traffic, drainage, floodplains and fire limits will be observed. 䡲
702
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SELECTIVE REHABILITATION
E XHIBIT 18A.3 Model Rehabilitation Standards for Single-Family Housing (continued)
Properties will be rejected for rehabilitation if the rehabilitation is not economically feasible—that is, the existing debt on the property plus the new loan exceed _____ percent of after-rehabilitation market value or $ _____ (whichever is greater). PRACTICAL EFFECT This organization will make rehabilitation grants and/or loans to qualified families for improvements in conformance with this standard. Unless another standard or policy statement of this organization permits it, no work items may be undertaken during a rehabilitation project that exceed these general standards for quality and performance. If proposed improvements meet only a lesser standard (e.g. emergency repairs, weatherization or “staged” improvements), they will conform to separate standards for that program or standards negotiated on a case-by-case basis by this agency and local code authorities. EXTERIOR AND STRUCTURAL STANDARDS Dilapidated Outbuildings, Fences and Other Structures. Unsafe structures and nuisances will be demolished and removed. Visually blighting structures will be demolished and removed unless their use is essential to the lifestyle of occupants. Debris, Junk, and Unwanted Trees. growth will be removed.
Debris, junk and dead or dangerous tree
Repair of Outbuildings. Unsafe, unsound or unsightly outbuildings and other structures (fences, walks, etc.) will be repaired one time up to a total estimated cost per dwelling unit of $1,500. Walks and Driveways. Badly deteriorated essential paving will be repaired or replaced to result in at least a five-year useful life after rehabilitation. Nonessential deteriorated paving will be removed. Exterior Requirements. Every dwelling unit will have a mailbox or mail slot and 3” high address numbers. Steps, Stairways and Porch Decks. These will be reasonably level, even surfaces and have an expected useful life of five years or more after rehabilitation. Porches. Unsound, unsafe or unsightly porches that are unwanted or infeasible to repair will be removed. Porch repairs will be made up to a total estimated cost of $1,500 per dwelling unit to result in an expected useful life of 10 years. Handrails and Guardrails. These are required on one side of steps or stairs with more than two risers, and around porches or platforms over 30” high. Portions of stairs or platforms over 42” above grade or above another floor will have guardrails or balustrades.
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SAMPLE DOCUMENTS REGARDING REHABILITATION
E XHIBIT 18A.3 Model Rehabilitation Standards for Single-Family Housing (continued)
Siding and Trim. These will be intact and weatherproof. No component will have an expected useful life less than 10 years. All components will have a continuous coat of paint or bonded finish with an expected life of at least five years. Siding requiring over 40 percent replacement will be re-sided entirely with vinyl or aluminum. Foundations. These will be sound, reasonably level and reasonably free from movement for an expected period of 15 years. Structural Members. Structural framing and masonry should appear to be free from deterioration, rot or serious termite damage, be adequately sized for current loads and have a 15-year expected useful life after rehabilitation. Prior to any rehabilitation, all sagging floor joists or rafters will be visually inspected. Significant structural damage and its cause will be corrected. Insulation. Attic areas and floors over cold crawl spaces will be insulated to R-21 or to cavity capacity if less than 3 inches of insulation is currently in place. Walls will be insulated only if the plaster or wallboard is removed. Plastic ground covers will be placed in crawl spaces under insulated floors. Recessed ceiling light fixtures will be covered, leaving an air space, before insulation is placed over them. Attic and Crawl Space Ventilation. Attics and crawl spaces will be ventilated to remove excess moisture at a minimum ratio of one square foot of vent for each 300 square feet of enclosed space. Exterior Doors. Doors and hardware must have at least a five-year useful life after rehabilitation. All hollow-core exterior doors will be replaced. Locks will tightly secure doors. If desired by occupants, and required to meet ventilation standards, screen doors will be installed on one or two doors per dwelling unit. Roofs. Roof covering will be replaced if blistered and the mineral covering is substantially deteriorated. Missing or leaking shingles and flashing on functional roofs will be repaired. Broken antennas will be removed. Roofing material shall have at least a five-year expected useful life after rehabilitation (assuming normal maintenance) or shall be replaced with new roofing. Chimneys. Unsound chimney tops will be repaired or removed. When chimneys are being used for venting, they will be restored, if necessary, to safe and operable condition, with an expected useful life of at least 15 years. HEATING SYSTEM STANDARDS Heating systems. Inoperative, hazardous or inefficient (under 60 percent efficiency per test) heating systems will be repaired to perform at 78 percent or better efficiency or replaced. Replacement space heating systems are acceptable where they are preferred by the occupants and have a lower rehabilitation cost and the same or lower operating cost as compared to central heat. All heating equipment will have a minimum expected useful life of 10 years, if pre-existing,
䡲
704
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SELECTIVE REHABILITATION
E XHIBIT 18A.3 Model Rehabilitation Standards for Single-Family Housing (continued)
or 20 years, if new. Ductwork may be exposed. Fuel tanks will be located in fire-resistant areas. Habitable rooms must be provided with 68-degree heat when the outside temperature is at the average yearly minimum for the locale. Wood and Coal Stoves. Wood and coal stove installations will have safe clearances from combustible surfaces. Protective floor and wall coverings will be provided as necessary. Flues will be safe, properly sized and clean. ELECTRICAL SYSTEM STANDARDS Electrical Outlets. Every room will have at least one duplex receptacle and one light fixture or two duplex receptacles. Large rooms or those with heavy current electrical loads may require three or more outlets, as determined by the program inspector. Kitchens will have at least two outlets on separate circuits, one of which must have 20 amperes capacity, and one of which may be 15 amperes. Bathrooms will have at least one grounded outlet. Electrical Wiring. “Knob-and tube” and other older-type wiring will be left in place if safe and serviceable. Where areas are being insulated, knob-and-tube will be removed and all junction boxes covered. Recessed ceiling light fixtures will be covered before insulation is placed over them. Ground Fault Interrupters. Electrical outlets within four feet of a bathtub must be removed, or replaced with a GFI protected outlet. Any newly wired outlet in a bathroom or within five feet of a kitchen sink area must be GFI protected. Light Fixtures. Every habitable room must be provided with a light fixture or one outlet controlled by a wall switch. Existing wall or ceiling lights with their own internal switches are acceptable. Common or internal stairways from one floor used as a living area to another must have at least one light controlled by a three-way switch, or in the case of public hallways, a three-way switch on a automatic switching device. Exterior stairs with five risers or more will have a light fixture. Appliance Outlets. Safe electrical outlets must be provided for all existing appliances or those proposed to be installed during the rehabilitation. Appliances requiring 120 volts may be on a circuit with other outlets so long as there is no obvious evidence the circuit is overloaded. Only essential motors requiring 240 volts must have a separate, dedicated circuit and outlet. Electrical Service Entrance. The service entrance (whether new or preexisting) shall be in good condition and sized to safely service all outlets, fixtures and appliances proposed to remain or be newly installed during the rehabilitation. In no case will it be less that 60 amperes. Any service entrance replacement will have a minimum capacity of 100 amperes. Smoke Detectors. tains a bedroom.
A smoke detector shall be required on each floor that con-
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705
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SAMPLE DOCUMENTS REGARDING REHABILITATION
E XHIBIT 18A.3 Model Rehabilitation Standards for Single-Family Housing (continued)
PLUMBING SYSTEM STANDARDS Kitchen Plumbing. Every dwelling unit will have at least a single bowl kitchen sink with hot and cold water located in the kitchen. Bathroom Plumbing. Every dwelling unit will have an attached bathroom containing a lavatory (basin) where space permits, a toilet, and a shower or tub. Plumbing Fixtures. The essential fixtures named above will be in good repair with an expected useful life of 10 years after rehabilitation. They will be replaced only when repair costs exceed 50 percent of new fixture costs. Faucets will be free from leaking for an estimated five years after rehabilitation. Water Shutoffs. Malfunctioning existing shutoffs will be repaired or removed. There will be at least one accessible main shutoff interior to the structure for each dwelling unit after rehabilitation. Water Supply Lines. All hot and cold water lines will be expected to have a 15-year useful life after rehabilitation, without major leaks and maintain a three gallon per minute flow. Pressure regulators will be installed where street pressures may exceed 100 p.s.i. Exposed piping is allowed. Water Waste Lines. Existing drain lines must safely and adequately carry away waste water, and must be vented well enough to prevent significant breaks of the water seal in fixture traps. Existing S-traps or drum traps may remain. Existing traps that are broken may be replaced with similar devices unless the entire waste water system is being replaced in that room in which case the requirements for new construction will govern. Exposed piping, PVC and ABS are allowed. Minimum expected life of waste systems is 15 years after rehabilitation. Wells. Every house not connected to a public water system will have its own system offering safe water at least 20 pounds pressure at each faucet. Hot Water Heaters. Each dwelling unit shall have a minimum of one 30-gallon hot water heater (or a shared water heater with similar capacity) in good working condition with an expected life of five years. Durable insulating jackets will be provided if this does not require relocating the water heater and results in a safe condition. Water heaters should produce at least 120 degrees F water at all taps. Relief valves and overflow pipes will be properly installed. New Plumbing System. Where plumbing lines and fixtures are being torn out in a room or entire dwelling unit, new construction codes will be observed to the extent practicable for that room or dwelling unit. Showers. This standard does not require the installation of a shower where a workable tub with no shower exists. Shower Areas. Showers in operation must have a watertight wall with an expected useful life of at least five years, or an enclosing circular shower curtain/ rod apparatus. 䡲
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SELECTIVE REHABILITATION
E XHIBIT 18A.3 Model Rehabilitation Standards for Single-Family Housing (continued)
OTHER INTERIOR STANDARDS Floors. Bathroom and kitchen floors will have a water-resistant, easily cleanable surface. Damaged wood floors will be repaired and painted. Seriously damaged tile or vinyl flooring will be replaced. Basement floors shall be a minimum of 3” poured concrete. Insect Screens. Every habitable room having windows and/or doors will have at least one window or door screen. Bathroom Ventilation.
Natural or mechanical ventilation is required.
Kitchen Ventilation. A window which can be opened or vent fan must be present in working order. Kitchen Cabinets. One- and two-bedroom dwelling units must have one base and one wall cabinet at least 42 inches long. Three-bedroom units must have 72” base and 48” wall cabinets. Storage Areas. A built-in storage device at least two feet wide with a shelf and clothes rod are required in or near each bedroom. Walls. Walls and woodwork should be free from peeling paint and loose or cracked plaster. Rooms with deteriorated or stained paint or wallpaper will be repainted. Solid plaster or wall board that has uneven but sound surfaces will be left alone. Interior Doors. Any doors that are damaged and beyond repair will be replaced. Slide bolts are allowed. All bedrooms and the bathrooms will have operable doors with a latch. Windows. Each habitable room, excluding the kitchen area or bathroom, will have at least one operable window or skylight with at least one operable sash with a working device to hold it open. All windows accessible from the ground or porches will have locking hardware. Storm Windows. Where practicable, every single-glazed window will have an outside storm window in good condition. Weatherstripping. This will be installed in a prudent manner, recognizing the oxygen requirements and pollution production of heating devices that may be in place. Homes that are heated exclusively with electricity or well-vented furnaces or stoves will be tightly weather-stripped. Room Sizes, Layouts, Fire Ratings and Fire Exits. The dwelling unit, after rehabilitation, will conform to the requirements in these areas of the BOCA Existing Structures Code/1987, unless unusual conditions merit consideration of a waiver. Hazardous Materials. Asbestos, radon and lead paint, when positively identified, shall be addressed in conformance with applicable local, state and federal law. 䡲
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SAMPLE DOCUMENTS REGARDING REHABILITATION
E XHIBIT 18A.4 Sample Work Write-Up and Cost Estimate
[Extracts from a longer document, reprinted with permission of The Enterprise Foundation.] Date: Project: Note:
June 28, 1995 20 Center St., Pleasantville (Smith) Do not show cost estimates to contractors. A write-up without costs will be provided for bidding.
ITEM NO.
ITEM
QUAN
UNIT
COST
220
SF
$396
1
EA
$115
1
EA
$66
2
EA
$ 84
2
EA
$ 10
2
EA
$ 10
STAIRWELL TO 2ND FLOOR 18-5404
Laminate with 3/8” drywall; paint Remove loose plaster and top piece of 3piece baseboard assembly. Cover wall with 3/ 8” drywall, screwed to studs at 12” intervals. Tape all joints (3 coats compound), sanding after each coat. Install new 1/2” ogee molding over baseboard. Prime and paint (1 topcoat) wall, ceiling, and trim (product and color specifications P1 and P2). 23-7084 3-Way Switch (Pair) Install two 3-way, ivory switches at opposite sides of room at strike side of door controlling an existing fixture. Fish wire or use surfacemounted raceway as directed by owner. 23-7126 Smoke Detector Install a UL-approved, ceiling-mounted smoke and heat detector permanently wired into a receptacle box near sleeping rooms. FRONT BEDROOM 8-3410 Door—Rework Interior Rehang and plane door; adjust door and lockset to operate properly. BEDROOM AND CLOSET DOORS 8-3470 Door Stop Install baseboard-mounted solid metal door stop. 8-3502 Sash Lock Install brass-plated sash lock on double-hung window. 䡲
708
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SELECTIVE REHABILITATION
E XHIBIT 18A.4 Sample Work Write-Up and Cost Estimate (continued)
8-3506 Sash Chains Install sash chains between sash and counterweights. Adjust window to operate smoothly. 8-3534 Window Sash Install single-glazed wood sash on existing frame. Replace parting bead and stop where necessary to allow lower sash to operate. Fix top sash shut. Provide chains or clips if lower sash. RIGHT LOWER WINDOW
䡲
709
䡲
2
PR
$ 34
1
EA
$ 65
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p06.fm Page 711 Monday, March 13, 2006 4:26 PM
P A R T
S I X 2
Completing and Managing the Property
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C H A P T E R
N I N E T E E N 19
The Project Completion Phase: Completing the Development and Maintaining an Ownership or Rental Community 19.1
Introduction
19.2
Settling on the Permanent Loan 714
19.3
Maintaining a Rental Property 717
19.4
Developing Additional Resident Services As Part of a Comprehensive Property Management Plan 733
19.5
19.6
19.1
713
Key Points on Setting Performance Standards for Comprehensive Property Management 734 Key Points on Deciding Whether to Contract for Management or Manage Directly 734
19.7
Key Points on Selecting a Good Management Company 735
19.8
Key Points on Evaluating Property Management Performance 740
19.9
Financial Management of Rental and Multifamily Homeownership 745
19.10 Converting the Property to Homeownership for Residents 754 19.11 Managing and Budgeting for Rental or Multifamily Ownership 757 Appendix 19A Sample Documents and Disclosure Statements 762
INTRODUCTION
An affordable housing project is considered successful by all objective criteria if the project remains a viable economic entity long after completion of the construction or rehabilitation. In large part, the nonprofit sponsor ensures longterm viability in the project completion phase of the housing development by properly structuring the project’s permanent
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THE PROJECT COMPLETION PHASE
financing and the future operations and management of the property, whether it is being used for ownership or rental purposes. 19.2
SETTLING ON THE PERMANENT LOAN
As discussed in Chapter 6, the project’s “permanent” loan is the loan that is expected to remain with the property until the loan is fully amortized or paid off. Generally, the sponsor will settle on the permanent loan and use the proceeds to pay off all of the short-term debt incurred by the sponsor to purchase and construct or rehabilitate the property. As discussed in this section, however, permanent loan closing for a sponsor of rental or cooperative housing will be quite different from the permanent loan closing experienced by a nonprofit developer of condominium or single-family homeownership housing. Moreover, as discussed throughout the book, most nonprofit housing projects are financed from multiple sources, often referred to as layered or tiered financing. Given these multiple financing sources, the project may have received some of its long-term or “permanent” financing at the time of acquisition and secured the rest of the permanent financing after completion of the construction. The following scenario, in which long-term financing is provided to a project at different times, is most common in the case of rental or cooperative housing development.1 Assume that the sponsor has developed a rental housing project with TDCs of $1 million ($400,000 for acquisition and $600,000 for construction and other development costs). The sponsor provides $50,000 of its own equity and secures from the local government unit the remaining $350,000 that it needs to acquire the property. The government has committed to keep its financing in the project for 30 years 1
Generally, a party can provide long-term financing at the outset of the development and keep the financing in place for the long term only in rental and cooperative housing development because the property that secures the loan and the borrower of the funds remain the same throughout the development process. The same is not true for condominium or single-family homeownership housing development. With these types of housing, usually the original property that secured the loan at acquisition has to be subdivided in order to create the individual homeownership opportunities, and the property necessarily has to change hands at the time when the individual units are transferred to the homeowners. Cooperative housing is discussed more fully later in this chapter. Similar financing arrangements may be used for certain single-family and condominium developments. In these situations, the original lender, usually a government entity, provides the nonprofit sponsor, possibly a tenant association that is seeking to create homeownership opportunities for the existing tenants, with a $350,000, shortterm acquisition loan secured by the property. After construction or rehabilitation is completed, the government entity then “rolls” the $350,000 acquisition loan into individual permanent loans for the homeowners purchasing single-family or condominium loans. These loans often are “soft second” permanent loans, as discussed more fully in Chapter 6.
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19.2 SETTLING ON THE PERMANENT LOAN
and to subordinate its claim against the property to later claims of privatesector lenders.2 The remaining $600,000 is provided for 18 months by a private construction lender in order for the sponsor to complete the construction and to fully rent the units. At the end of this 18-month period, the sponsor closes on what is considered to be its “permanent” loan—a $600,000 loan from a different private-sector lender, which is used to pay off the construction lender. The project’s permanent financing is composed of a $600,000 first trust obtained upon settlement on the permanent loan and a $350,000 second trust obtained at the initial acquisition of the property. Where possible, the sponsor will seek to borrow up to $650,000 from the “permanent” lender in order to get back the equity that it originally invested in the project for use in future affordable housing developments.3 (a)
Rental and Cooperative Housing
Permanent loan settlement for a rental housing or cooperative housing development commonly involves the sponsor’s borrowing funds from one, and sometimes more, lending sources for a 10- to 30-year period.4 The loans are secured by the property, and funds received from these loans are used to pay off the lenders who had lent the sponsor money, on a short-term basis, to acquire and construct or rehabilitate the property.5 In some rental and cooperative housing developments, as noted above, additional long-term financing may have been secured previously. The sponsor’s role at settlement on the permanent loan(s) is no different than 2 3
4
5
See the discussion of subordination of claims in Chapter 6. The sponsor likely will be able to secure the return of its original equity from loan proceeds at permanent settlement when the appraised value of the property, after construction and rental of all units, significantly exceeds the amount of the loan needed by the sponsor to pay off all short-term loans and the return of the sponsor’s original equity investment. As discussed throughout this book, while cooperative housing is technically homeownership housing, it is financed primarily as rental housing because the actual ownership of the property is in one corporate entity, not in the homeowners individually. The financing of market-rate cooperative housing developments, as defined in Section 19.4, may include the use of share loans or individual loans to homeowners purchasing their cooperative shares. These loans are secured by the shareholder’s share in the cooperative, not by the property owned by the cooperative corporation. When share loans are used, the sponsor will receive funds sufficient to pay off all short-term loans from proceeds of the permanent loan(s) provided to the sponsor and secured by the property and from proceeds of share loans provided to homeowners, secured by the shareholder’s share in the cooperative, and paid to the sponsor when the share is transferred to the shareholder. Under this scenario, the sponsor’s permanent loan closing will have some characteristics of a traditional rental housing permanent loan closing, as discussed in this section, and some characteristics of a traditional permanent closing of a developer of condominium or single-family homes, as discussed below. Most limited-equity or low-yield cooperatives, as defined in Section 19.4, are not financed with share loans.
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THE PROJECT COMPLETION PHASE
at settlement on the acquisition and construction loan closings completed earlier in the process. The sponsor executes the necessary loan and settlement documents and reviews the settlement sheet to ensure that it was credited with the right amount of money and that the money was applied to the appropriate places. No further long-term financing should be required if the sponsor manages the property well and has arranged a fully amortizing permanent loan or non- or partially amortizing “permanent financing,” for example, ten-year balloon loan, until the balloon note is due. In certain circumstances, permanent settlement also may trigger the provision of rental subsidies or other government incentives that reduce operating costs, such as property tax exemption or utility cost reductions. The sponsor should be sure that it knows at what stage of the development these types of incentives should take effect and that the appropriate government action is taken to initiate the provision of the incentive to the property. (b)
Condominium and Single-Family Homeownership Housing
“Permanent loan closing” for a sponsor of condominium or single-family fee simple homeownership projects will be quite different. In these forms of homeownership housing, unlike rental or cooperative housing, the sponsor receives the funds to pay off its short-term lenders from the proceeds of the sales of the homeownership units, not from the proceeds of new long-term debt that the sponsor is obligated to pay back. The homeownership units generally will be financed by long-term “permanent loans” obtained by the homeowners, carried by the homeowners (not the sponsor), and secured by the homeownership unit. The sponsor’s financial relationship to the property usually ends at the time when the acquisition and construction lenders are paid off and any warranty periods related to construction have expired. Unlike rental or cooperative housing, unless all or substantially all of the units are sold by the sponsor at the same time, the sponsor will not receive all of the funds necessary to repay the acquisition and construction lenders at any one “permanent” closing. Generally, the sponsor will have to wait for closings to occur on the sale of most or all of the units before it can obtain sufficient proceeds to pay off all short-term lenders.6 For this reason, acquisition and construction lenders often require the sponsor to convince them that a firm market exists for these units or to “presell” the units prior to acquisition or construction closing. (See the discussion of sales issues in Chapter 14.) 6
In fact, in order to sell the units over a period of time and to receive proceeds from these sales, the sponsor’s lender(s) must agree to a partial release of the deed of trust that is securing the entire development. The sponsor’s lenders would be releasing their interest in the units being sold to the public so the purchaser could secure traditional condominium or single-family home financing.
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19.3 MAINTAINING A RENTAL PROPERTY
19.3
MAINTAINING A RENTAL PROPERTY
Many nonprofit housing providers believe that their hardest work begins after all the financing and subsidies are in place. Most owners of successful low-income rental housing communities do much more than simply collect rent. Many communities provide residents with opportunities to participate in the management of the property and offer essential services, such as job training, day care, and employment counseling, that allow adult residents to be gainfully employed. Some nonprofits, including tenant associations and resident councils, develop the rental housing for the specific purpose of converting the housing to homeownership at a future point in time.7 Thousands of rental and homeownership units in multifamily housing developments no longer provide housing opportunities for low-income persons. In many cases, these properties failed because the developers, often well-intentioned nonprofit and for-profit organizations, were very interested in developing housing, but not in the mundane issues related to managing these assets. In the past ten years, many nonprofit organizations have realized that they need to dedicate as much or more of their resources to managing their properties as they do to developing new ones. Many nonprofits have adopted Comprehensive Property Management approaches. A comprehensive property management plan combines both Basic Management Services and Enhanced Management Services. The routine practices of property management, such as marketing, tenant selection, rent collection, maintenance, finance, rule enforcement, strategic planning, and so on, are referred to as Basic Management Services. Enhanced Management Services include extra dimensions of basic property management that respond directly to resident needs. For example, basic management services include notifying residents annually of the rent due and date payable, and the sending of late notices and eviction notices when deadlines are not met. Enhanced management services might include monthly billings with return envelopes, as well as budget counselling for families who have difficulty meeting their obligations in a timely fashion. Good property management should include both basic and enhanced services. In addition, some nonprofits even take on a third area of fully comprehensive property management—the provision or coordination of resident services. These services have an indirect but vital relationship to successful residential communities. An example of these additional services might be providing day care services for single mothers, to enable them to pursue educational or vocational options that would eventually 7
For more detailed guidance on property management, see Bennett L. Hecht, James Stockard, and Local Initiatives Support Corporations, Managing Affordable Housing: A Practical Guide to Building Stable Communities (New York: John Wiley & Sons, 1996).
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THE PROJECT COMPLETION PHASE
help them become more independent, more contributing members of the community, and, not unimportantly, more dependable rent payers. Good property managers who are concerned about their residents and their communities, as well as their buildings, view these three tiers much like a pyramid, with the basic services forming the foundation, and the enhanced and additional resident services as the smaller, but still important, next tiers. Without the additional resident services, the community is truncated and incomplete. The enhanced services level provides an important link between the more indirect additional services and the practical necessities of basic property management. But management professionals are unequivocal: If the basic services are not performed well, the next two levels of services are largely irrelevant. It is important to put the discussion of comprehensive property management into a cost framework. Although it may seem tempting to view these added components as “extras” to be considered only if operating funds allow, the enhancements are indispensable. When used effectively, comprehensive property management techniques can decrease the costs of operating and maintaining the property over the long term. Keeping the buildings in good physical condition is simply a continuation of the original premise of community physical development. The buildings stand as tangible proof that the community is healthy enough to maintain the physical gains it has effected. Much of this chapter highlights key points of basic and enhanced services as discussed in Managing Affordable Housing, cited in footnote 7. An important theme that will reappear throughout the following pages is technology. Today technology, primarily the Internet, can and should be used to improve basic and enhanced property management. With data networks built into housing developments, as described in Chapter 17,8 and high-speed Internet access available in every unit for free or very low cost, property managers can improve rule enforcement and communications, maintenance, security, and the delivery of enhanced social services directly to residents. Each of these applications of technology in affordable housing is described below. My nonprofit organization, One Economy Corporation, described earlier in this book, works with affordable housing developers to help them to maximize the use of technology to improve the delivery of basic and enhanced property management services. For the past five years, we have helped developers to build data networks into their new construction and high-speed Internet access for each unit into their operating costs. More importantly, we have helped them to customize our core selfhelp website, the Beehive (www.thebeehive.org), so they can provide residents with a website that they can use to refer to house rules, submit 8
Section 17.4
718
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19.3 MAINTAINING A RENTAL PROPERTY
work orders and watch how long they take to complete, participate in insuring the safety and security of the property and connect to local resources that help them to get a better job, find affordable child care, or get health insurance for their children. In addition to providing space on the website for property managers to post house rules, community calendars, work order requests, and so on, the Beehive serves as a “self-sufficiency program in a box,” giving residents much needed information and answers about money, jobs, school, family, and health (see Exhibit 19.1). (a)
Managing the Property’s Finances
The most important thing that a nonprofit owner of affordable rental housing can do for its residents is to manage the property’s finances well. If the finances are not managed well, the property will not be financially viable. If the property is not financially viable, the well-meaning owner who developed the property in the hope of providing residents with decent housing, ownership, employment, and management opportunities will never get the opportunity to do so. All of the owner’s time and E XHIBIT 19.1 The Beehive Home Page
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money will be spent trying to work its way out of financial difficulty or avoiding foreclosure. As discussed in Chapters 3 and 14, the property should be managed by a professional management company that has experience in managing the type of property just developed by the nonprofit sponsor. The management company must aggressively collect all funds due the owner, whether the debtors are residents or a government agency that provides rental assistance to the property or its residents. Management also must aggressively manage expenses by utilizing the most cost-effective means of maintaining the property and by ensuring the preventive maintenance takes place on a regularly scheduled basis. Most importantly, the owner must be an aggressive owner. The owner must stay informed about the management company by carefully reviewing the property’s monthly income and expense reports, as discussed in Section 19.5. Moreover, the owner must work closely with the management company to develop annual budgets for the property that reflect reasonable project costs and that account for necessary reserves for operations, vacancies, and replacement. (See the full discussion of the owner’s role in managing and budgeting in Section 19.5.) (b)
Tenant Selection
Basic • • • •
• •
•
The tenant selection process must be well understood in the community and perceived to be fair. Marketing is critical, even when rents will be subsidized. Outreach must begin at least six months prior to unit availability. Make it easy for people to apply, and to provide all the information needed to consider them fully and fairly for admission. A modest amount of time invested in screening for eligibility and acceptability may save great amounts of management time dealing with a difficult resident. Keep careful records of reasons for rejections. After the required tenant selection priorities are imposed, the owner’s board of directors should use additional priorities to meet the organization’s goals for the housing. The key to compliance with Fair Housing laws is a well-planned and executed outreach plan.
Enhanced •
Outreach can include preparing candidates for the application process.
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•
More staff makes for better applications.
•
Automatic rescreening encourages growth.
•
Special tenant selection criteria allow owners to serve residents for whom they have a particular concern.
(c)
Rule Enforcement
Basic •
The most important factor in lease enforcement is consistency. Don’t make rules that can’t or won’t be enforced.
•
It is usually important to develop rules for each property that make the lease terms more specific. Make the rules and consequences available 24/7 on the property’s customized Beehive website.
•
Violations of rules have clear and automatic consequences.
•
Good property managers focus sharply on rent collection.
•
Most good owners offer, but narrowly limit, repayment agreements for unpaid rent. Collect or assign e-mail accounts to all residents and send them monthly e-mails reminding them about rent collection and other property-specific issues.
•
Sending monthly rent statements helps significantly in collecting rent accurately and on time.
•
Fair and objective appeals panels are important in the life of a residential community.
•
The key to prevailing in any eviction case is documentation.
Enhanced •
Rent counseling, done well, can help both the development and the resident.
•
Service coordinators can give full attention to matching residents with any services they may want or need. Effective property managers train their service coordinators on how to use the Beehive website to refer residents to needed services and offer training sessions so that residents can use it on their own as well.
•
A rich and diverse program of activities can enhance the quality of life at a development and increase the residents’ commitment to maintaining that condition.
•
Strong resident organizations are often the best advocates and reinforcers of the rules of a development.
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(d)
Management of Maintenance
Basic •
• •
•
•
• •
•
•
•
A good maintenance program begins with the practice of inspecting every unit in the development at least once a year. Other systems are also inspected regularly. The inspecting staff person should not be the person who will be responsible for actually completing the work. The key to a successful maintenance program is preventive maintenance. Preventive maintenance cannot succeed without a good inspection program. 100 percent of all maintenance work is recorded on work orders. Effective property managers are migrating their work order requests and records online so that management and residents can have a record of each request, and all parties can see how long the orders take to be completed. This system can be integrated into the property’s customized Beehive website. A typical priority list for maintenance tasks: Emergencies. Vacancies. Preventive maintenance. Programmed maintenance. Resident calls (nonemergencies). The owner must have a system for responding to emergencies 24 hours a day. Good vacancy reoccupancy requires three departments to work together closely—site management, maintenance, and tenant selection and placement. Scheduling is vital in coordinating the work of these three departments. The main reason that preventive maintenance tasks are not completed is they are forgotten. Good managers create systems to prompt the memory. Maintenance staff can be centralized or decentralized, depending on many factors. In either system, however, communication is critical to success. Staff turnover is costly. Money and time spent on recruiting, training, and retraining maintenance staff is well invested.
Enhanced •
Inspection visits can be opportunities for getting to know families and spotting potential problems before they grow.
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•
Residents, with the proper training and supervision, can often be the best maintenance employees, because their job is their home.
•
Joint maintenance planning with residents helps people understand the realities of the budget, and the reasons why priorities are important.
The three last points are worth focusing on more closely. Many nonprofits consciously use the annual physical inspection as an opportunity to find out how things are with the family occupying the unit. The manager makes the inspection (ideally with a maintenance supervisor) and looks not only for maintenance items needing attention, but also any signs of problems in the apartment, such as extremely negligent housekeeping, the presence of dangerous or illegal items, or permanent residents who are not on the lease. The manager then takes the time to sit and talk with the family about any of these observations and whatever other matters seem important. Inspections are scheduled at a time when family members can be present, and enough time is allowed to have a relaxed conversation. Topics may include any concerns about life at the development or among particular residents, issues the family is facing, requests for services, or any other matter that seems relevant. This is seen as an opportunity to get to know residents better, provide additional services, and head off problems before they become management headaches. (i) Inspections As Family Interaction Opportunities.
Progressive nonprofits and exceptional management companies that manage in the affordable housing field are particularly interested in hiring residents of the developments they oversee. In some cases, residents have all the skills necessary, and the choice is an easy one. In other cases, the organizations make a conscious decision to hire residents and make the extra commitment to training so that, over time, those skills can be developed. While choosing this option may involve some sacrifice of efficiency in the short run, resident employees often bring an extra sense of commitment to the work because the development is not only their job but also their home. Other goals can be met as well. Some nonprofits hire teenagers to perform vacancy cleanouts or simple grounds maintenance. The youth earn some money, gain pride in accomplishments, establish a work history, become invested in the development, and have less time available to get involved in vandalism and dangerous activities. In addition, while it is a tricky subject, and employers try to make policies that will avoid staff’s being taken advantage of, it is clear that when a maintenance employee lives on the site, the property enjoys some extra benefits. Live-in staff make informal repairs, teach people how to do some of their own work, find out about problems from direct experience (ii) Employing Residents.
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rather than secondhand, and generally assume additional responsibility for the development. When this is combined with the economic development and individual growth advantages that nonprofits seek for their neighborhoods, it is clear why this policy is popular. (iii) Contracting with Residents. In a similar vein, some organizations con-
tract with residents for maintenance work and supplies. In some cases, the contracting is with individuals or the organizations they run. A resident or a resident-owned company might be given a contract to paint vacant apartments, for example. Or the management might purchase electrical supplies from a hardware stored owned by a resident. But an increasingly significant movement in the maintenance area is contracting with the organized residents of the development to supply certain services. For example, the management might contract with the tenant council to clean the grounds or perform landscaping services or clean and paint vacant apartments or any of a number of other tasks. This policy has several advantages: •
It puts money in the hands of some residents.
•
It builds up the strength of the resident organization.
•
It gets important work done by people who live at the development and care about how it looks.
•
It gives a number of residents a reason to make sure that improvements they have made stay in good shape.
•
It helps residents learn about the procedures involved in managing the equivalent of a small business, perhaps preparing them to embark on such a venture of their own in the future.
(iv) Maintenance Training for Residents. Many nonprofits run maintenance
training programs for residents. These usually begin at the orientation sessions when residents first move into the development. They are taught about the equipment and materials in their apartment and how to use them. They may also be taught how to make simple repairs on those items. In some cases, residents continue to receive maintenance training throughout the year. Simple carpentry and plumbing tasks are frequently taught, as well as tile replacement, wallpapering, painting, and even some masonry. Electrical work is usually not included. The basic policy behind such an approach is to encourage residents to make some of their own repairs. But there is also the feeling among many nonprofits that an additional benefit is the increase in self-confidence that accompanies these new skills.
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This strategy features annual or more regular planning sessions with residents where data from the maintenance operation is shared and policies and procedures are reviewed. New priorities are discussed, and there is often particular attention to the budget for the coming year and to capital improvement plans. The greatest advantage cited by organizations that use this practice is that residents understand much more clearly the realities of the budget. They can then help create clearer policies and procedures and explain those to other residents. In addition to these basic and enhanced maintenance services, many nonprofits also use additional services in the education and vocational areas to help improve the management of maintenance at their developments. These activities are described later in this chapter.
(v) Shared Maintenance Planning with Residents.
The benefits of using technology to manage work orders will not be fully realized if the residents do not know how to use the system and have faith in its effectiveness. Therefore, property managers must establish formal and informal methods for teaching residents to use the system. These likely will include orientation at least signing, hands-on help during the annual unit inspection and general property meetings addressing an array of issues and uses of the Beehive. (vi) Training Residents on the Online Work Order System.
(e)
Security
Basic •
Even the most conventional of management programs recognizes the importance of involving residents in the security effort.
•
Technology can be a great tool for improving safety at the property in two ways. First, the same data network that helps to bring high-speed Internet to each unit can be used to carry both voice and pictures from the front door to each unit, enabling residents to see and hear who is waiting at the front door to be let in. Second, residents can use their in-unit e-mail and high-speed Internet connection to communicate with law enforcement officials, anonymously if desired, about criminal concerns that they might have at the property.
•
Safety is directly correlated with the level of involvement of the local police. This involvement begins with communications and is sustained by appreciation and support.
•
Thoughtful architectural and landscape design can create a development that is easy to keep safe.
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•
Fair and thorough tenant selection can be an important element in the security program by screening out applicants who are very likely to cause problems.
•
Evict residents who violate rules seriously or repeatedly.
•
In cases where only some members of the household are causing security problems, the entire household is evicted unless some agreeable solution can be found which removes the risks from the development.
Enhanced •
Many nonprofits believe it is more effective and less costly to provide orientation, counseling, and other service programs in an effort to prevent security problems, rather than spending all their time correcting them.
Unfortunately, security has become a very pressing matter at many multifamily properties. Many nonprofits have found that the following actions can go a long way toward providing increased security to a property. (i) Involve Residents. Residents see and hear things that can be helpful in keeping the development and its residents safe. They are sometimes in a position to put a stop to harmful behavior. And if the dangers are too great, residents who are involved in the security activities of their community are more likely to call in outside help quickly and effectively. As the number of residents who develop a passionate commitment to the safety of their community grows, the security of their homes increases. Owners use a number of methods for creating this involvement. Many use some version of the Blockwatch program, which features a broad network of neighbors keeping their eyes on the street, communicating with the police, providing safe haven for each other, and generally increasing the level of alertness in the neighborhood. Online communications between residents, property management and law enforcement can augment a Blockwatch’s effectiveness significantly. They key to any successful Blockwatch is the willingness of neighbors to report suspicious activity to law enforcement. Blockwatch’s can reach a new level of effectiveness if local law enforcement is committed to responding on a timely basis to e-mails from residents and property management personnel concerning pressing security issues on the site and residents are trained to use such communications effectively.
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Hallway, entryway, or block captains are also a popular strategy. These people monitor the security system (e.g., checking that doors are shut, lights are on, and alarms are functioning), alert residents to dangerous security breaches, and actually patrol their territory at certain times. Some developments have resident patrols that keep watch over the common spaces during certain hours of the day. Typically, these residents have some symbol of authority (hat, badge, jacket), and have received training from the police in observation techniques and in communicating with the emergency agencies in the community. Often, a small stipend is provided for these people. While their role is only one of observation and notification, these patrols often help their neighbors feel safer, act as a deterrent to casual criminals, and occasionally are instrumental in apprehending a wrongdoer. Fear is real, and any steps to make people feel safer are important. Resident councils are also included in security planning in some cases. They meet with police officials and management to plan routes for patrols, lighting, and various security activities. The concept behind all of the resident involvement strategies is that the more residents know about security in general and about the specific security program at their development, the safer the entire community will be. Building managers agree that the overall security of their property is directly correlated with the level of attention they receive from the community police force. Private security organizations are very expensive and have a mixed record of effectiveness. As with most cooperative efforts, getting the police involved begins with good communication. Experienced owners ask local police officials to review their construction or rehabilitation plans for safety issues while they are still in the design stage. Officers are often able to point out likely hiding places, escape routes, sites where residents will be vulnerable to crime, and other situations that can be corrected by good design. They may also be able to provide good advice regarding security hardware that has been successful in their experience. Once construction is complete, police officials are invited to tour the property. They are supplied with maps, locations of alarms, phone numbers of key people connected with the development, and keys to facilitate access when necessary. Officers are also invited to early meetings of new residents so they begin to know the people as well as the property, and tenants begin to be acquainted with the officers. At these meetings, police officials may be asked to make a short presentation on personal and home safety. Every effort is made to assure that the police will include the property on their regular rounds. Stopping into the building is even more desirable. (ii) Involve the Police.
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Whenever a security issue arises at the property, police are notified immediately and supplied with as much information as possible. Management cooperates in whatever ways necessary and encourages residents to do the same. On occasions when the police are conducting an investigation related to the property, the same cooperation is forthcoming. In extreme cases, management supplies apartments for surveillance, and access to various parts of the building for similar purposes. Finally, police officers, like everyone, feel good when they are thanked for their efforts. Good management organizations make it a point to send letters of commendation and thanks for special efforts to make the development and the neighborhood safer. (iii) Design a Safe Property. It has been 20 years since Oscar Newman first wrote about how to design housing with security in mind (Defensible Space: Crime Prevention through Urban Design, New York: Macmillan, 1972). By now, many of the insights included in that important work are commonplace design elements for any new and, where possible, renovated property. Among the most important principles of the defensible space concept are the following: •
Outdoor spaces are as defined as possible, using fencing, shrubbery, level changes, changes in surface treatment, and any other mechanisms available. Further, as much space as possible is assigned to individual families, so it is clear who is responsible for what space, and so it is clear that when a person enters it, he or she is entering someone else’s territory. Semipublic and public space is much harder to secure, and invites loitering, which often makes people feel insecure. It is also much more common for crimes to happen in public and semipublic spaces.
•
Light spaces well, especially public and semipublic areas. Lighting is placed in such a way as to make it difficult to destroy, and fixtures are secure ones.
•
Use fencing to direct people’s walking and activity patterns, and to demarcate private areas. Choose a style of fencing that does not create hiding spaces and leave walkers vulnerable. This means lower fencing and fencing people can see through.
•
Generally plan to avoid situations where people can hide and spring out on pedestrians. This means creating long vistas so walkers can see what is on the path in front of them, creating straight lines of travel whenever possible, avoiding sharp turns in the path around the corners of buildings, and lighting tricky spaces particularly well.
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•
Avoid planning superblocks where cars do not have access. This keeps police patrol cars from viewing all elements of a development, and keeps other sets of eyes far away from the interior of the site. It also means longer walks from cars to homes for more people. Generally, planners are attempting to knit new developments into the fabric of the surrounding street pattern, or reintroduce that pattern if it was destroyed at an earlier stage of development.
•
Control the entries to buildings. A building has as few points of access as possible. By monitoring those few locations carefully with security devices and/or people, management and the residents have a better chance of keeping people outside the buildings who do not have a legitimate reason for being there. The entries are well lit. When possible, entries are designed so that they can be observed from the street. Access is gained only by buzzer. Buzzers are augmented by either telephone or television monitoring. When possible, entries to particularly high-risk buildings are staffed with security personnel.
•
In general, properties are designed to minimize public spaces, especially those that cannot be monitored easily by many people. Hiding places are avoided, and light and visibility are favored. Glass and mirrors are used to enhance visibility. Other building elements are also designed with this in mind.
•
Standard security hardware, checked frequently to ensure its good operating condition, is used throughout the building. This includes deadbolt locks, peepholes on apartment doors, alarmed exterior doors, camera monitors, emergency pull chains (especially for the elderly), and the full range of safety fixtures, as well—smoke and heat detectors, fire alarm pull boxes, sprinklers, and fire extinguishers. All these items are cheaper and easier to install during construction or major renovation.
In most cases, the people who create security problems for a property come from outside that property. However, there are some situations where the threat is from within. This means that thoughtful property managers think of certain parts of the tenant selection process as elements of the security program. Applicants are asked if they have a criminal record. If so, they are asked to produce the documentation of that record. In the case of criminal activity unrelated to residency (e.g., speeding, gambling, “white collar crime”), the history is typically ignored. When the activity is related to residency, but the evidence of complete rehabilitation is strong, the applicant may be admitted. But if the manager has sound reasons for believing the behavior might be repeated, the applicant is rejected. (iv) Undertake Careful Tenant Selection.
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Many people will not be forthcoming about their criminal records. This is why it is important to make lying on an application for residency a ground for rejection. Managers are increasingly being granted access to criminal records through the CORI statutes. When available, these records are checked for all applicants.
Important “Defensible Space” Concepts Unsafe Space
PUBLIC SPACE
PUBLIC SPACE
SEMI-PRIVATE SPACE
Safer Space
PRIVATE SPACE
Building
Building PUBLIC SPACE
PUBLIC SPACE
References are also checked carefully, from previous landlords. Questions typically asked include the following: •
Describe the applicant’s role in resident organizations or other activities at your development.
•
Describe the applicant’s rent payment history.
•
If there were any difficulties, were there extenuating circumstances?
•
If there were any difficulties, how did the applicant communicate with the manager about the situation?
•
How did the applicant treat the premises?
•
How did the applicant treat the staff?
•
How did the applicant get along with his or her neighbors?
•
Were there ever any occasions when the applicant needed to be disciplined or warned about violating rules of your development? If so, please describe the situation.
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(f)
Personnel
Basic •
It is likely the best candidate for an important job opening is not reading want ads. He or she is a valued employee at some other location. Active recruiting is vital.
•
All new employees are provided with a substantial orientation.
•
In many organizations, there is a target number of days of training for each employee each year.
•
When managers oversee maintenance workers, site coordination is easy, but supervision may be short on technical skills. When maintenance workers are overseen by centralized technicians, coordination may suffer.
•
The team approach to management makes up in creativity and commitment what it may lose in decision-making efficiency.
•
The “coaching” method of evaluation is based on mutual goal setting between the employee and the supervisor and continuous feedback throughout the year. It produces much better results than the dreaded annual performance review.
•
Rewards and sanctions are not common in the nonprofit world, but groups increasingly believe these measures should be adopted.
Enhanced •
Management organizations must be allowed to hire and fire their own employees if they are to be held accountable for performance.
•
Nonprofits go to great lengths, including the establishment of training programs, to locate and hire qualified residents for their management operations.
•
When involving residents in the evaluation of management performance, owners design systems that minimize the danger of bias against particular employees.
•
Employee assistance programs can provide critical support to staff and benefit the management effort as well.
No one issue may be more important to the success of a comprehensive property management plan than the people who are selected to implement it. Selecting, training, and managing the property’s managers are critically important.
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(g)
Management Information Services
Basic •
The more removed someone is from the day-to-day management of a property, the less total information they need in order to play their role appropriately. They also need less specific data.
•
The role of the board of the nonprofit is to make policy. In this role, members rarely need information more detailed than quarterly summaries.
•
Executive directors of nonprofits, because of their oversight role, typically need monthly reports of a wider range of data than the board needs.
•
No report should be generated unless a specific person needs to read it, and could take some action based on the information it contains. Time spent on reports that do not fit this definition is wasted.
•
Senior staff of the management operation need still more information, though much of it can still be on a monthly summary basis.
•
The site manager prepares many of the reports required by others. But his or her job is made easier by timely receipt of certain summaries (some daily) from other departments.
•
Providers of loans, equity, and subsidies will all have a need for information from the development. Many will have their own formats for the information. Good managers use these forms for their own reports whenever possible.
•
All the popular property management software programs today are web-based. This means that almost any interested party with a password, from an on-site manager to a funder, could produce meaningful, real-time reports about property operations on an hourly, daily, or monthly basis without waiting for someone else to compile the report. This new and expanded access to information should be used appropriately and enable the right people to get the right information at the right time so they can make the right decision.
Enhanced •
Investors have very particular information needs. Typically, they need documents generated for other purposes, but they need them in a very timely fashion.
•
Good property managers spend time reviewing certain regularly generated reports with resident organizations. This creates a
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19.4 DEVELOPING ADDITIONAL RESIDENT SERVICES
wider understanding of conditions at the development, and adds to the self-confidence of residents. 19.4
DEVELOPING ADDITIONAL RESIDENT SERVICES AS PART OF A COMPREHENSIVE PROPERTY MANAGEMENT PLAN
•
Resident services provide the capstone to comprehensive property management’s first two elements—basic and enhanced management services. But nonprofits agree unanimously that the basics must come first.
•
Enhanced management services not only benefit residents, but are directly related to desired improvements in the management of the development.
•
Additional resident services are directed toward the growth and development of residents. But managers agree that more active and self-confident people often become greater contributors to the community and more responsible tenants.
•
Most owners and managers plan and facilitate the delivery of additional resident services by others rather than provide the program or activity themselves.
•
Use of an online, self-help website, like the Beehive described in Section 19.3(a), can be used effectively by those providing resident services on-site to refer residents to nearby programs and services such as child care, health care, and job training. For many properties that do not have the resources to bring resident services to the site, the Beehive may be the only affordable mechanism for connecting residents to needed information, products, and services.
•
Both the second and the third dimensions of comprehensive property management require cash and staff time commitments that are not usually covered in operating budgets. Financing must be found elsewhere.
•
Service coordinators are the engine that drives a successful integration of management and resident services.
•
When service coordinators work directly for the site manager, coordination is ensured. When they have a separate chain of command, independence is increased.
•
In the comprehensive property management approach, each property management activity is looked at as a potential element in the supportive services effort, and each service program is viewed as an extension of the management effort at the development.
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19.5 • •
•
•
•
KEY POINTS ON SETTING PERFORMANCE STANDARDS FOR COMPREHENSIVE PROPERTY MANAGEMENT Standards provide a target against which the nonprofit can assess its own management efforts or evaluate its outside manager. In some cases, performance standards are dictated or strongly suggested by an oversight agency—lender, subsidy provider, or equity partner. When standards seem very difficult to meet, a useful approach is often to negotiate for additional assistance in order to meet the goals. A performance standard is not an absolute measure of success or failure. It provides a starting point for discussion and analysis of performance. Some typical performance standards:
•
Rent collection—95 percent. Occupancy rate—95 percent. Turnover time—10 days. Expenses-Income—±5 percent. Operating reserves—20 to 50 percent of annual budget. Capital reserves—5 to 20 percent of replacement. Inspections—100 percent of units annually. Resident maintenance calls—less than 15 percent staff time. Energy expenditures—less than 3 percent increase in use. Work on work orders—100 percent.
Nonprofit owners are beginning to explore the concept of performance standards for resident service programs—particularly ones that deal with the outcomes for participants.
19.6
KEY POINTS ON DECIDING WHETHER TO CONTRACT FOR MANAGEMENT OR MANAGE DIRECTLY
There are good reasons for nonprofits to manage directly and there are good reasons to contract for management. There is no single correct choice for those interested in comprehensive property management. • Important factors in deciding whether to manage directly or contract for management: •
Goals of the organization. Number of units owned.
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Budgets of properties owned.
Experience as a property manager.
Availability of good staff.
Availability of good private management companies.
Ease of managing the particular property.
•
Nonprofits whose major goals are development or advocacy may find it incompatible to manage. Those who want to demonstrate new management possibilities may need to staff the effort directly.
•
Nonprofits with fewer than several hundred units find it difficult to afford to manage directly.
•
When budgets for particular properties are too thin to allow comprehensive property management approaches, nonprofits often turn to private companies whose larger portfolios provide flexibility.
•
Wise nonprofits begin slowly in the property management arena, seeking training and experience before taking on major assignments for themselves.
•
When there are no good property management companies in the area that share the values and approach of the nonprofit, it may have no choice but to manage directly.
•
Experienced nonprofits weigh the difficulty of managing a property before deciding to take it on. When resources match the level of complexity, it is easier to say yes to direct management.
•
Neighborhood qualities may have as much to do with the ease or difficulty of managing a property as the property itself.
•
Mature nonprofits review their goals and the relevant factors periodically, and then develop a reasoned strategy about property management that can be followed for a substantial period of time.
19.7
KEY POINTS ON SELECTING A GOOD MANAGEMENT COMPANY
•
It is particularly critical to select the management company early in the development process. This allows for their input on design and material selection matters.
•
Always begin the process of seeking a property management company by defining the intended role clearly.
•
It is best not to begin advertising for management organizations until one or two excellent candidates have agreed to offer proposals.
•
Good requests for proposals (RFP)s are direct, honest, and complete. They describe exactly what the nonprofit is seeking, rather
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•
• •
•
• • • • • •
than asking management companies to guess what to propose. When nonprofits are uncertain, clear questions are posed to which companies can react. Property management companies that are not clear enough about procedures to write then down are often not clear enough about how to implement them. A management plan is not a straitjacket. Rather, it specifies the general approach management will take to common situations. Experienced nonprofit owners take all the time they need to read management plans thoroughly and discuss their details with the prospective managers. The most important clue to how a management company will perform is not how they say they will perform, but how other owners say they have actually performed in the past. References are typically asked if they would select the organization again. Every story has at least two sides. Wise owners attempt to discover them all during the reference-checking process. Interviews are generous in time (one to two hours) and scheduled so the committee meets no more than two companies per session. Formal site visits are announced and structured so personnel from the management company are available to lead tours. Wise owners start over rather than select a management company that is the lesser of several poor choices. The contract always calls for the agent to perform the basic management services and for the owner to cooperate in all necessary ways. Other services are added as agreed.
Additional guidance on some of these key points is necessary. (a)
Contents of a Good Management Request for Proposal
When a nonprofit seeks an outside property management company, it must spend some time figuring out for itself what it wants this company to do. These decisions must then be reflected in a request for proposal that is sent out to companies that the nonprofit hopes will bid for the job. The RFP should have the following contents: 1. The definition of the manager’s job at this property. 2. A description of the property (number of units, type of construction, location, expected [or existing] mix of residents, financing method, current conditions).
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3. A detailed statement of the projected or most recent operating budget. 4. A description of the owner and its approach to property ownership and management. 5. A statement of the proposed management fee. 6. A description of the required contents of proposals. 7. Draft suggestions for various performance standards. 8. The date and time of any prebid conference that will be held to further familiarize the management organization with the property and the owner’s plans for management. 9. The date and time the proposal is due (management organizations are usually given about six weeks to prepare a proposal). 10. A description of the timetable and process for selecting a contractor. (b)
Contents of a Good Management Proposal
The proposals that a nonprofit gets back from prospective management companies should have the following contents: • • • •
• • • •
A management plan for the specific property. A corporate resume. The name and resume of the staff who will serve as site and regional managers. Proposed methods for dealing with issues particular to this development (e.g., how to use a generous amount of community space, how to market some undersized units, how to deal with a drug problem in the neighborhood, how to attract previously uncooperative social service agencies). Proposed strategies for involving residents in the governance of the development. Copies of report formats that will be used to supply data to the owner’s staff and board. A list of properties currently under management and contacts for those properties. Other references.
In addition, a thorough management plan should include: (c)
Contents of a Complete Management Plan; Reviewing the Plan
The critical element of a management proposal is the suggested management plan for the property. Each management plan will differ in its details,
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but certain topics are always covered in such a plan. The following matters appear in a complete and thorough document (see Exhibit 19.2): •
A marketing strategy (special attention to HUD’s federal preferences, or any other special criteria where they apply).
•
An application-taking procedure (including methods for maintaining and periodically purging the waiting list).
•
A screening procedure for applicants.
•
A selection and assignment process (including orientation for new residents).
•
A standard lease used by the management organization, with unusual clauses annotated.
•
A rent collection procedure (including proposed policies regarding late payments and damage charges).
•
A procedure for enforcing the rules of the lease and any additional standards of conduct for the development (including a grievance procedure and steps in the eviction process).
•
A recertification procedure.
•
An inspection program (units, buildings, systems, grounds).
•
Procedures for managing the maintenance of the property.
•
A purchasing and inventory procedure.
•
A vacancy turnaround procedure.
•
A security program.
•
A plan for working with individual residents and resident organizations.
•
Procedures for handling the finances of the development (including budgeting; receipt, recording, and deposit of revenues; bookkeeping and accounting; accounts payable and receivable; investment strategy; and monitoring and reporting).
•
Personnel procedures (including recruiting; affirmative action and equal opportunity outreach; resident hiring, selecting, training, evaluating, and disciplining).
•
A procedure for collecting information and supplying it to the parties who need it (including the owner, oversight agencies, the public, management organization staff, and residents).
•
A procedure for facilitating resident services for the development.
•
An organization chart for the management and maintenance staff, with job descriptions.
•
A capital improvement program.
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E XHIBIT 19.2 Building Blocks of a Good Management Plan
Capital Improvement Organization Chart
Resident Services
Inventory
Rule Enforcement
Marketing
Vacancy Turnaround
Recertification
Application Taking
MIS
Personnel
Finances
Security
Inspection
Screening
Resident Organizations
Managing Maintenance
Selection Assignment
Purchasing
Lease
Rent Collection
There are several general questions that owners consider when reviewing a management plan: •
Does this plan square with our philosophy of management?
•
Are the staffing plans realistic, given the budget and the needs of the property?
•
Are the procedures proposed realistic, given the budget and the needs of the property and its residents?
•
Has the organization agreed to the standards identified by the owner in the RFP? If not, are the responses reasoned and thoughtful?
•
Does the plan deal specifically with this development, or is it a boiler-plate plan that could be used for any proposal? Owners note that some aspects of the proposal are expected to be standard because they reflect accepted professional practice. However, there should be some parts of the plan that are clearly responsive to this particular property, owner, and resident mix.
•
Do the reporting forms used by the company seem easily understandable and include the information the owner wants to see?
•
Has the management organization taken the time to understand the important issues in the RFP and has it responded directly to them?
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•
Is the staff proposal well qualified and appropriate?
•
Is the proposal well written?
19.8
KEY POINTS ON EVALUATING PROPERTY MANAGEMENT PERFORMANCE
•
Regardless of how many other management reviews are performed, the evaluation by the owner is the most critical for two reasons— value and proximity.
•
The executive director or other senior staff person receives monthly reports regarding the critical performance measures. It is important to respond to these reports.
•
There is a strong effort to create a partnership between the staff of the property management organization and the senior staff of the owner.
•
Nonprofit owners and their managers select several performance indicators that are most important to them and focus on measuring progress in those areas.
•
Lack of accurate and timely data is the single largest obstacle to good evaluations.
•
Many nonprofits are committed to meeting with their management organization after each report, even if all the news is good.
•
Annual reviews are occasions for praising work well done, as well as for setting new targets and standards.
The setting of goals and standards for measuring the performance of the property management company is of primary importance. Any reasonable evaluation process begins with both parties agreeing on goals and standards. The senior officials of the management organization and the board of the nonprofit must negotiate overall goals and standards of performance for the management effort. A number of potential management performance standards which owners and management organizations choose were mentioned earlier in this chapter. However, one very important element of good evaluation is scope. It is not possible to review and deal with every issue in the management arena. Nonprofit owners and their managers select several indicators (usually not more than five to seven) that are most important to them and focus on measuring progress in those areas. Sometimes these areas are chosen because there is a perceived problem. In other cases, they are simply matters of particular importance to the owner. While it is not possible to create a list of the absolutely most important performance standards to monitor, the
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following are items that are mentioned most frequently by nonprofits and good property management professionals: •
Occupancy of 95 percent or greater.
•
Rent collection of 95 percent or more of the current month’s maximum potential rent roll.
•
Expenses within 5 percent of budget (+ or –).
•
Operating reserves between 20 and 50 percent of current operating budget.
•
Resident profile within financing guidelines and owner’s target population.
•
100 percent of units inspected annually.
•
100 percent of preventive maintenance tasks completed.
•
One or more indicators of resident growth and independence (e.g., increasing high school graduation rate, increasing percentage of residents working, reduction in teenage pregnancies).
Even this list, or an equivalent set of performance standards, requires a significant monitoring effort. Some owners and managers begin with several items from such a list and target the documentation and review of others for a specific point in the future. Within three years of the opening or acquisition of each new property, a monitoring profile such as the one shown here is in place and under review on a regular basis. (a)
Collect Data
Collect the date needed to measure results. Lack of accurate and timely data is the single largest obstacle to good evaluation. Therefore, it is vital to know from the beginning of any property management relationship what performance standards are important to the owner. Then information systems that produce the data necessary to assess that performance can be designed. Much of this process can be computerized so that reports are generated automatically. The primary sources of data are the following documents: •
The general ledger that records receipts and disbursements of funds.
•
Tenant selection and placement records.
•
Rent payment statements.
•
Work orders.
•
Inspection reports.
•
Utility bills.
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•
Incident reports.
•
Rent recertification worksheets.
•
Reports from resident service program.
Most experienced management organizations have standard systems for recording data from these sources and putting it into understandable report formats to meet the needs of the owner. If not, the development of such systems is a high priority early in the course of the management contract. Without this data, the entire evaluation process will be subjective. Owners who seek a comprehensive version of property management appreciate the need for such subjective judgments as a part of the process, but increasingly value the objective measurement of selected management functions. (b)
Produce Reports on Time
Produce agreed-upon reports in timely fashion. Management allocates the staff time necessary to produce these documents. They are distributed to the appropriate parties so that conversations can be held to review the results. The management information systems discussed earlier describe some of the reports that are used by owners and managers to review important data. The most important are as follows: •
Annual audits.
•
Quarterly and monthly financial statements (including balance sheets and income and expense statements).
•
Annual, quarterly, and monthly vacancy reports.
•
Annual, quarterly, and monthly rent delinquency reports.
•
Monthly work order summaries.
•
Monthly reports of inspections.
•
Monthly reports on occupancy (including move-outs, move-ins, and status of actions against residents).
•
Monthly resident service program reports.
Some management companies’ report formats are substantially clearer than others. Owners and managers often work diligently in the early period of a management relationship to design or adjust reporting formats to meet the needs of the owner. (c)
Monitor Progress
Hold frequent informal monitoring sessions. Some of these meetings or telephone conversations are entirely ad hoc and based on incidents or questions
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that arise and need to be addressed. Others are for the purpose of reviewing one of the regular monthly or quarterly reports. Many owners believe it is important to meet after each of these reports, even if the information is all positive. Such sessions reinforce the fact that someone is reading the reports and that their production is important. Also, it provides an opportunity to commend the manager for work well done. When these sessions are omitted because everything is on target, then the primary interactions are around problems, and often include criticism of some aspect of the manager’s work. This tends to warp the owner’s view of the management effort and be destructive to the relationship between the site manager and the executive director. Hence the practice of regular review meetings, regardless of the information in the reports. (d)
Review Property Status
Hold major review sessions annually. Once a year, typically at the beginning of the budgeting process, the owner and the management organization hold a meeting to review the status of the property. Each of the major performance standards is reviewed, adjustments are made as necessary, new goals are set out for the coming year, and performance standards are set. If a contract anniversary is approaching, a decision is made about renewing the agreement. These annual reviews are opportunities to offer congratulations and thanks for work well done, and to set new directions when necessary. The management organization typically presents a summary of the important information about the development as contained in the reports, offers observations, and makes recommendations about new initiatives. The owner reacts to the reports and the recommendations and often comes up with plans and ideas of its own. In the context of comprehensive management, these plans and ideas often involve ways of providing additional services that will support residents in their growth and development. These are the conversations that are most meaningful for nonprofits and their management organizations, and are the fruit of the hard work necessary to accomplish the highest level of property management. (e)
Providing a Transition to Homeownership or Resident Management
Owners of rental housing can work with the residents to develop a plan for converting the property to homeownership or resident control of management. Some nonprofit sponsors have developed multifamily housing initially as rental housing with the long-term plan of working with the residents to determine the feasibility of converting the property to affordable homeownership, or in assigning management responsibility to a trained resident management corporation. Tenant associations or
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resident councils, in particular, who acquire their properties for later conversion to homeownership, usually must operate the property as rental housing until the rehabilitation is completed, units are sold, and all legal conversion requirements have been met. Resident management can be viewed as a interim step toward homeownership or as an end in itself. (i) Resident Management. As noted above, a nonprofit owner can assist the residents in assuming management control of the property as an interim step toward homeownership or as an end in itself. To assist residents in attaining this goal, an owner can do the following: •
Select new residents for occupancy who are interested in and committed to working toward resident management or ownership.
•
Begin implementing plans to increase tenant participation in management as soon as possible.
•
Identify and nurture resident leaders and an active resident council through the use of the tenant participation programs.
•
Provide training to residents on issues relevant to property management, such as office administration, accounting, budgeting, selecting tenants according to fair housing laws, and property maintenance.
•
Hire residents for pay, for rent credits, or as volunteers to work sideby-side as apprentices with property management staff at all levels.
•
If resident interest in management is significant and apprenticeships have been successful, establish a period of joint management by the nonprofit and the residents.
•
If the joint management is successful, transfer management to the residents through execution of a memorandum of understanding between the residents and the nonprofit owner.
A nonprofit owner of rental housing can assist the residents in working toward homeownership, in a number of ways:
(ii) Homeownership.
•
Select new residents for occupancy who are interested in and committed to working toward homeownership.
•
Identify and nurture resident leaders.
•
Assist in creating an active resident council or tenant association with operating articles of incorporation, bylaws, and committees such as fundraising and communications. The development of resident leaders and an active resident organization will be easier to
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accomplish if the owner already has residents participating in management of the property. •
Provide to residents ongoing training on issues relevant to homeownership, such as rights and responsibilities of homeownership, homeownership options, how to establish credit and save money, and how to maintain one’s home.
•
If resident interest in homeownership is significant, assist the resident organization in completing a feasibility study on resident ownership.
•
Develop a memorandum of understanding between the residents and the owner, setting out a series of milestones and timetables that the residents must meet in order to be provided the opportunity to purchase the property from the nonprofit (see Exhibit 19A.2 for an example of this type of memorandum). One of these milestones may include interim resident management.
•
Assist the resident organization in developing a marketing strategy for converting the property to homeownership.
Section 19.10 provides additional detail about these last three issues and other important considerations for developing homeownership opportunities for residents. 19.9
FINANCIAL MANAGEMENT OF RENTAL AND MULTIFAMILY HOMEOWNERSHIP
Developing multifamily homeownership is very different from developing single family homes. A nonprofit sponsor of multifamily homeownership must determine what type of homeownership housing to create— condominium or cooperative—and the technical requirements that must be fulfilled when developing or converting these entities under state or local laws and regulations from rental to homeownership. (a)
Condominium and Cooperative Housing
The two most common forms of multifamily homeownership are condominium and cooperative housing. The nonprofit sponsor must understand the differences between them and the advantages and disadvantages of each form, in order to select the one most appropriate for the property and the surrounding neighborhood. As discussed in Chapter 14, this selection must be made only after the nonprofit has fully evaluated the marketability of condominium or cooperative units in the neighborhood where the property is located.
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(i) Similarities.
The two forms of ownership are similar in the following
ways: •
Group decision making—Both ownership forms require many decisions to be made by a group of owners, not simply one owner. Cooperatives, as described below, require significantly greater group decision making than condominiums. However, issues affecting condominium “common spaces” or “common expenses,” as discussed below, usually require a group decision.
•
Restrictions on use—Both ownership forms may restrict what can or cannot be done at the property. Generally, cooperatives can be more restrictive because owners do not own a real property interest but only a share in the cooperative corporation, as described below. Certain restrictions on condominiums, such as limitations on subleasing, however, have been upheld by courts.
•
Governance by a board of directors—Both ownership forms provide for governance by a board of directors. The board of the cooperative controls the entire property. The board of the condominium controls only common spaces and common expenses.
(ii) Distinctions.
The distinguishing characteristics of condominiums are:
•
Fee simple ownership—Owners of condominiums own their individual units in fee simple together with a percentage interest in the common areas. The common areas are the areas not in individual units, such as hallways, laundry rooms, parking lots, and so on, that are controlled jointly by all the owners. Condominium owners are provided the same protections under the law as any other owner of real property, including single-family homes. Thus, condominium fee simple ownership means that the owner has sole control over the use, transfer, and disposition of the unit. Condominium ownership is more widely accepted in most communities than cooperative ownership because the legal protections and the degree of control provided condominium owners more closely resemble single-family homeownership. In fact, condominium owners can search the land records in the jurisdiction where the condominium is located and find their names as the owners of record of a specifically identified plot of land, just like single-family homeowners.
•
Individual financing required—Purchasers of condominium units must individually be capable of qualifying for mortgage financing. This means that the individual purchaser must be able to meet the traditional underwriting criteria required by mortgage lenders. For
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example, the mortgage applicant cannot be proposing to spend more than 28 percent to 30 percent of gross income on housing costs, or more than 32 percent to 35 percent of gross income on all debts, including housing. The loan cannot be more than 80 percent to 90 percent of the value of the property, the applicant must have a good credit history, and the applicant must have cash sufficient to pay all loan-closing and down-payment costs (ranging from 5 percent to 10 percent of the purchase price of the condominium). Unless the sponsor or purchaser can identify lenders with relaxed credit criteria, as discussed in Chapter 11, these strict standards will likely keep many low-income families from qualifying for traditional condominium mortgages. In addition to an individual mortgage payment each month, condominium owners will be responsible for paying a monthly charge to cover the owner’s proportionate share of common expenses incurred by the condominium association. The condominium association, comprised of all the condominium owners, assesses a fee to each owner for a share of the property’s expenses that are not directly related to an individual unit. These would include management fees, lighting for hallways, heat or gas for a common boiler, and similar necessities.
9
•
Fewer restrictions on use and transfer—Condominium owners face fewer restrictions on how they can use or dispose of their units than owners of cooperative units because condominiums are afforded the same legal protections as any other form of fee simple real property ownership. The U.S. Constitution prohibits unreasonable restrictions on an individual’s use and alienation of real property. Therefore, courts will strike down unreasonable restrictions, and few condominiums seek to impose them. Some condominiums, however, do limit leasing of units in order to meet occupancy requirements imposed by the secondary markets, such as Fannie Mae, and to keep the most favorable condominium loans available to potential purchasers of units at the property.9
•
Easier to finance, transfer, and sell—Condominiums are easier to finance, transfer, and sell than cooperative units in most communities because they have most of the attributes of single-family homeownership. Because condominium owners are provided the For example, Fannie Mae will purchase condominium loans at properties with 90 percent or more of the condominium units occupied by owners. The fact that lenders will be able to sell their loans to Fannie Mae likely will result in lower interest rates and other costs to potential purchasers and more interest in the units and competition among purchasers.
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same legal rights as other fee simple owners and are not subject to considerable restrictions on resale and usage, many families who cannot afford a single-family home look to condominiums. These attributes have made lending institutions more willing to lend money to assist in the purchase of these units. Broad acceptance of condominiums in the lending community has given developers more reason to develop condominiums. Moreover, competition among lenders for condominium financing allows purchasers to reduce their monthly housing costs by shopping for the best mortgage terms. •
More onerous disclosure requirements when first created and resold—Condominiums often are heavily regulated by state and local governments. These regulations, primarily consumer protection provisions, tend to be more onerous than cooperative regulation, for the simple reason that more consumers are affected by condominium sales. Condominiums are more widely used as a form of multifamily ownership.
The distinguishing characteristics of cooperatives are: •
Fee simple ownership by corporation, not individual—Fee simple ownership of the property is held by the cooperative corporation, not the individual members of the cooperative.
•
Individual owns personal property, not real property—A homeowner in a cooperative owns a share in the cooperative corporation that owns the property in fee simple. This share, considered personal property in most states, provides the shareholder with certain rights related to the corporation and the property. However, unlike condominiums, if a cooperative shareholder searches the land records in the jurisdiction where the cooperative is located, the shareholder’s name will not appear as an owner of record of a specifically identified plot of land.
•
Shareholder’s rights and responsibilities—A cooperative shareholder is provided certain rights as a result of owning a share in the cooperative corporation. These rights, reflected in the cooperative’s legal documents, usually provide the shareholder with the right to vote for the corporation’s officers and/or board of directors, who are responsible for operating the corporation; the right to live in a specified unit in the property; and the right to use, transfer, and dispose of the property within certain guidelines. Legally, the shareholder is a tenant in the property and the cooperative corporation is a landlord.
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These documents also state a shareholder’s responsibilities. The shareholder’s obligation to pay that portion of the property’s operating costs and debt service that can be reasonably allocated to the shareholder’s unit is the most important shareholder responsibility. Annually, the cooperative board of directors establishes a budget for the operation of the property and the payment of blanket debt. Each shareholder then is assessed a fair share of these expenses. Failure of one or more shareholders to pay their allocable share on a monthly basis may mean that these costs will have to be borne by the remaining shareholders through increased fees until the nonpaying shareholders can be evicted and new members selected in their place. •
10
Individual financing not always required—Cooperatives generally are financed like rental housing, through the use of “blanket” loans secured by the whole property, not individual homeowner loans. The lenders finance the property based on its marketability, value, and rent stream, not on the qualifications of individual residents. This financing structure may make it possible to develop a cooperative without individual shareholders’ having to meet the stringent qualifications required by most mortgage lenders. In essence, cooperative shareholders assume responsibility for a portion of the blanket debt in place of securing their own individual financing. For families with low incomes, credit problems, or little cash for closing and down-payment expenses, this financing may be the only way to qualify for homeownership. Limited-equity or low-yield cooperatives, discussed below, often are financed in this manner. This method of financing cooperatives often is not workable for market-rate cooperatives. In a market-rate cooperative, as described below, shareholders purchase their shares with the expectation that they will be able to enjoy an appreciation of the share’s value upon resale. Like a condominium or single-family home, however, this appreciation generally can only be realized if a purchaser can secure a mortgage for 80 percent to 90 percent of the purchase price.10 In cooperatives, these loans are “share loans” or loans secured by the shares. Potential purchasers of shares in cooperatives that have blanket debt in excess of 35 percent to 70 If a mortgage loan at this level is not available, the interested purchaser either would have to pay all cash for the share or the seller would have to provide “owner takeback” financing so the purchaser could pay the purchase price over an extended period of time. The first option is unrealistic, especially for low- and moderate-income families. The second option likely will frustrate the seller’s purpose for selling the share, which was to take the equity appreciation and invest it in a new home upon the sale of the cooperative share.
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percent11 of the property’s value will have a difficult and probably impossible time obtaining a share loan. These properties are viewed as higher risks to share lenders because of the lack of equity in the project. Without share loans, the seller will have to lower the sales price to a level where the purchaser can afford to pay cash for the share, provide take-back financing, or use a combination of both in order to induce a sale. • More restrictions on transfers and use—Unlike condominiums, where an owner has the right to transfer the property to whomever it desires, cooperative shares can only be transferred to persons found acceptable by the cooperative corporation. As noted above, transfers can be restricted because the share is personal, not real, property. New shareholder approval is crucial to the long-term health of the corporation because of the direct impact each shareholder can have on the fiscal integrity of the cooperative as a whole. The process weeds out potential purchasers who don’t understand the nature of a cooperative’s “shared responsibilities” and those who pose a high risk of not meeting their monthly financial burdens to the corporation. Cooperatives usually have more use restrictions than condominiums. For example, many cooperatives have severe restrictions on subleases, allowing them only for short periods of time or when hardship can be shown by the shareholder. As with transfer rights, these restrictions are legally enforceable because of the personal property nature of the shares themselves. These restrictions can be used to the benefit of shareholders by keeping drug dealers and other undesirable elements out of the property. As noted above, these same types of restrictions are difficult to impose on condominiums. • More difficult to finance, transfer, or resell—Cooperative shares tend to be more difficult to transfer and resell than condominiums. This problem is true for market-rate cooperatives, in large part, because share loans are difficult to obtain except in strong cooperative markets like New York City. Conventional mortgage lenders tend to avoid share loans because the loan is not secured by real property, the traditional source of mortgage loan security, and because the lender simply does not have experience making loans to cooperatives. Having fewer lenders means facing less competition among 11
Fannie Mae will not buy share loans from originating lenders if the blanket debt on a cooperative exceeds a certain percentage of the property’s value. This percentage has ranged over the years from 35 to 70 percent. The National Cooperative Savings Bank, which is the largest share loan lender that will keep these loans in its own portfolio (e.g., not only provide share loans that it knows it can sell to Fannie Mae), also will not make loans to cooperative shareholders where cooperative debt approaches the full value of the property. Like Fannie Mae, these percentages of debt to value change over time.
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lenders. Less competition means fewer loan products and higher interest rates.12 Only closing costs for cooperatives are less than those for condominiums, because individual title insurance is not required for cooperative shares. All of these issues tend to have the effect of depressing the market for and the resale value of the share. Shares in limited-equity cooperatives ordinarily can be transferred without outside share loan financing because of the shares’ appreciation limitation. These shares will be relatively easy to transfer as long as the property is in good condition, is located in a desirable neighborhood, and has an existing market for ownership in multifamily properties. • Limited-equity v. market-rate cooperatives—There are two types of cooperatives, limited-equity and market-rate. Limited-equity cooperatives, also called low-yield cooperatives, limit the amount that a shareholder can receive from the resale of the share. Most limitedequity cooperatives permit a shareholder to receive only the amount of initial equity paid in, adjusted by an annual cost-of-living factor, plus the shareholder’s portion of loan principal (not interest), paid over the years, plus the cost of any improvements made to the unit occupied by the shareholder. This definition, applicable to limited-equity cooperatives financed with tax-exempt mortgage revenue bonds,13 and many other cooperatives financed with government subsidy, is favored by governments because it creates homeownership opportunities that will remain affordable permanently for low-income persons. Market-rate cooperatives do not limit share appreciation or equity appreciation at all. These cooperative shares can be sold at whatever price the market can bear. Resale value, however, as discussed above, is affected greatly by the availability of share loans for purchasers. Critics of limited-equity cooperatives believe that this form of ownership too closely resembles rental housing and that a greater level of appreciation is needed to maintain resident interest in the property. Supporters of limited-equity cooperatives argue that benefits from resident control over resident selection, on-site management selection, and costs far outweigh the loss from future 12
13
For example, on any given day in almost any city throughout the country, a consumer can get more than 40 quotes from more than a dozen different mortgage lenders concerning mortgage loan rates and terms; among them are: 1-, 3-, 5-, and 7-year adjustable mortgages; 15- and 30-year fixed rate mortgages; assumable and convertible loans; and loans tied to the Treasury bill, the LIBOR rate, or the prime rate of interest. I.R.C. § 133(k)(8)(D). A discussion of mortgage revenue bonds can be found in Chapter 7. Other limited-equity definitions are utilized by cooperatives around the world, for example, no equity cooperatives and appreciation limited as a percentage of the original equity contributed plus blanket debt assumed at the time of purchase.
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appreciation. Moreover, many limited-equity supporters oppose the conversion of existing multifamily properties to market-rate cooperatives, especially those that house low-income families, because these units have the potential of being lost permanently from the affordable housing stock. (b)
Complying with State and Local Conversion Laws/Condominium and Cooperative Legal Documents
Many jurisdictions at the state and/or local government level regulate the conversion of multifamily rental housing to homeownership housing. These regulations tend to be “consumer protection” provisions that require sponsors to fully disclose everything that a consumer would want to know in order to make an informed decision about purchasing a condominium unit or a cooperative share. These disclosure statements generally will include information such as the identity of the sponsor and the development team, warranties provided for work performed during construction and rehabilitation, if any, projected costs to purchase a unit or share, and projected monthly assessments by the condominium association or cooperative corporation. A significant part of these disclosure statements is the collection of legal documents that govern the operation of the condominium or cooperative. A discussion of some of the provisions that commonly are found in condominium and cooperative disclosure statements and in the legal documents follows. Sample documents referenced in the text are found in Appendix 19A. (i) Condominiums •
Public offering statement—Most states that regulate condominiums refer to the required disclosure document as the Public Offering Statement (POS).
•
Plats and plans to record in land records—The POS must include specific, to-scale drawings that tell each owner exactly what size an individual unit is and what common areas are owned jointly by all unit owners. These drawings, called plats and plans, must be filed in the jurisdiction’s land records in order to subdivide the land.
•
Warranties for building condition—The POS must include information about the existence or nonexistence of warranties that the sponsor is providing to purchasers concerning the building’s condition, the units’ condition, or the condition of building systems.
•
Bond for warranties—Where warranties are required by law, the regulating jurisdiction usually will require the sponsor to post a bond to cover any legitimate warranty claims not honored by the sponsor.
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•
The condominium declaration—The POS often will contain the corporate charter for the condominium unit owners’ association, known as the Condominium Declaration.
•
Bylaws of condominium unit owners’ association—This document sets out the most important issues for the unit owner for example, how condominium fees will be assessed, use restrictions, authority of the association’s board of directors, number of board members, and the unit owners’ right to elect some or all of the members of the board.
•
Deed of trust for each unit—The POS will include a sample of the deed of trust that will be provided to purchasers (a discussion of deeds of trust can be found in Chapter 16).
•
House rules—The POS will include the proposed rules that will govern the conduct of persons residing in the property (see Exhibit 19A.1).
•
Projected annual budget for condominium association, monthly condominium fees, and percent of allocation to unit—The sponsor usually will be required to include a projection for the condominium association’s first year’s operating budget, a breakdown of the percentage share of this budget that will be allocated to each unit owner, and the projected monthly assessment resulting from this allocation.
(ii) Cooperatives •
Articles of Incorporation for the cooperative corporation—The POS will contain the corporate charter for the cooperative corporation (the charter establishes the legal existence of the corporation).
•
Bylaws of cooperative corporation—If the articles of incorporation create the organization, the bylaws allow the corporation to operate. The bylaws are the rules that must be followed in order to conduct corporate business. They establish the relationship, authority, and powers of the cooperative board of directors and the shareholders; the election process necessary to fill board of directors’ seats; any restrictions on share transfers and equity appreciation; and the process for assessing annual and monthly cooperative charges to shareholders. The bylaws will be required in any cooperative POS.
•
Occupancy agreement for tenant shareholders—The occupancy agreement governs the relationship between the cooperative as landlord and the shareholder as tenant. An occupancy agreement, which is basically a lease, is required because the cooperative owns the unit and the shareholder only owns the right to live in that unit as a result of its ownership of a share in the cooperative. Therefore, the
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cooperative and the shareholder actually have a landlord-tenant relationship. The occupancy agreement sets out the terms under which the shareholder possesses the unit, monthly charges for occupying the unit, the rights of the shareholder as tenant, the rights of the corporation as landlord, responsibilities for maintenance and repair, sublet provisions, and transfer restrictions, which may be addressed in the bylaws as well. •
Stock certificates—The POS will include a copy of the stock certificate that will be provided to shareholders who purchase a share in the cooperative corporation. The stock certificate is evidence that the shareholder has an ownership interest in the corporation.
•
House rules—As with condominiums, a cooperative POS often will include the proposed rules that will govern the conduct of persons residing in the property. See Exhibit 19A.1.
19.10 CONVERTING THE PROPERTY TO HOMEOWNERSHIP FOR RESIDENTS Converting multifamily rental housing to homeownership is also very different from developing multifamily homeownership through new construction. Nonprofits and resident groups acting as owners of rental housing or as sponsors of the development (“sponsors”) who are seeking to create homeownership opportunities for existing residents of multifamily properties, under federal programs such as HOME,14 Youthbuild,15 or others must do more than simply determine the appropriate ownership form and comply with applicable disclosure laws. To be successful, these projects require resident participation and ownership of the development process itself, not just the finished cooperative or condominium units. Georgetown University Law Center’s National Center for Tenant Ownership, under a cooperative agreement with HUD, developed many of the tools that nonprofit developers and resident councils can use to build resident support for and participation in a resident ownership effort during the feasibility phase and beyond. These tools are provided in Exhibit 19A.2 through 19A.8. (a)
Participation in Securing Resident Information
The sponsor needs to secure the most current and accurate information available about the existing residents. The best way to get this information 14 15
See Chapter 8. See Chapter 8.
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19.10 CONVERTING THE PROPERTY TO HOMEOWNERSHIP FOR RESIDENTS
and to generate interest in the project is to have the residents collect it from themselves. To the extent possible, the sponsor should work to establish a committee of residents responsible for developing both a Household Survey Form and a plan for disseminating and collecting the form. A model Household Survey Form can be found in Exhibit 19A.4. This form should be designed to get as much financial and demographic information as possible from each household and to collect the residents’ insights into property management issues and economic development opportunities. This information provides the basis for the affordability analysis to be completed by the sponsor during the feasibility phase. Moreover, it can help the sponsor develop plans for job training, employment opportunities, and economic development activity at the property. The responses to this form can be compiled and presented to the resident leadership as part of a Resident Profile Report, which would allow the residents to understand better the demographic makeup of their community. A model Resident Profile Report can be found in Exhibit 19A.5. (b)
Participation in Evaluating the Building’s Condition
The sponsor also needs to secure the most current and accurate information available about the condition of the property. The completion of a preliminary building evaluation by an architect or engineer is required, as described in Chapter 4; however, resident information about the property’s condition may be equally as important. By getting residents to develop an Apartment Rehabilitation Survey Form and a plan to disseminate and collect this information, resident participation will be maximized, the sponsor will uncover problems that exist in individual units and recurring physical problems, and the types of improvements that residents would like to see made at the property to make it marketable to them and new owners will be revealed. (c)
Participation in Developing the Scope of Work
The sponsor should make the findings from the residents’ Apartment Rehabilitation Survey Forms available to the professional who will be completing the preliminary building evaluation. After the preliminary building evaluation report is completed, it should be shared with the property’s residents. By reviewing the professional’s analysis of the major building systems, the residents are introduced to the major cost items involved in any rehabilitation plan. This approach helps residents to begin to think about the long-range planning required for the effective maintenance of their property. A model Apartment Survey Form is presented as Exhibit 19A.6.
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The preliminary building evaluation report should be presented, together with a compilation of the responses to the Apartment Rehabilitation Survey Forms, to show the residents how they as a group prioritized the physical problems in the property. More often than not, the major concerns of the residents parallel the findings of the building professionals as to which building systems are in the poorest condition. This is an excellent training exercise; it gives residents the confidence that their practical knowledge of the property is valuable in tackling even the toughest rehabilitation issues. To the extent that resident concerns differ from the issues raised by the professionals, these differences should be discussed. The sponsor, the residents, and the development team professionals should seek to work together to develop a rehabilitation scope of work that meets the needs of the residents, the sponsor, and lenders. A model Preliminary Building Evaluation Report outline is in Exhibit 19A.7. (d)
Participation in Determining the Form of Ownership
The sponsor should work with the residents in developing a training program that explains, among other issues, the differences between cooperatives and condominiums, the benefits and burdens of homeownership, and the legal structure and operation of the multifamily homeownership forms. Based on this training, the established scope of work, and the residents’ ability to pay, the sponsor and the residents should determine the appropriate form of ownership. This determination should be part of the overall feasibility analysis completed by the sponsor and reduced to writing in a Feasibility Analysis Report. A model Feasibility Analysis Report can be found in Exhibit 19A.8. (e)
Participation in Securing Financing
Once the sponsor has identified potential funding sources, the sponsor should work closely with the residents to secure the necessary financing, especially from public sector sources. Sponsors should not underestimate the ability of tax-paying residents to pressure local, county, and state political leaders to commit public resources to their project. (f)
Establishing a Formal Relationship with Residents
Where the sponsor is not the resident council, the sponsor should consider establishing a formal relationship with the residents, ideally through a resident council, early in the development process. This relationship should be reduced to writing and should clearly state the responsibilities and expectations of the sponsor to the resident council and the resident council to the sponsor. This document could be used to
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19.11 MANAGING AND BUDGETING FOR RENTAL OR MULTIFAMILY OWNERSHIP
dispel rumors that inevitably arise about the sponsor’s intentions as the project advances. 19.11 MANAGING AND BUDGETING FOR RENTAL OR MULTIFAMILY OWNERSHIP The most overlooked issue in affordable rental and homeownership housing development is quite possibly the most important: What steps are going to be taken to ensure that the property remains financially viable in the long term, and who is going to take those steps? For rental housing, the nonprofit owner and sponsor must address these issues; for homeownership entities such as condominiums and cooperatives, the board of directors must be held responsible. Both types of housing should ensure that the following actions are taken. (a)
Managing Current Operations of the Property
The nonprofit owner of rental housing and the condominium/cooperative board must review monthly management reports including income and expense statements from the property with management every month, without exception. A sample monthly management report is provided in Exhibit 14A.1. The review and analysis must address the following issues:
(b)
•
How much did we make last month and how much did we spend last month (actual income and expenses)?
•
How much did we earn in income last month and how much did we expect to spend last month (budgeted or projected income and expenses)? A discussion of budgeted amounts can be found in the next section.
•
When actual income and expenses are compared to budgeted income and expenses, on a line-item by line-item basis, what are the reasons for variance, if any?
•
Is action necessary to remedy variances, for example, should we increase advertising to fill vacancies, analyze potential leaking pipes if water expenses are excessive?
•
What were the sources of this income (who paid and who did not)?
•
Is management, board, or legal action necessary to secure timely payment of current or past due debts to landlord? Managing Future Operations of the Cooperative
The nonprofit owner of rental housing and the condominium/cooperative board must develop an annual budget for the property, maintain operating
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and replacement reserves, and regularly prepare financial information about the property for internal and external use. Each entity must complete the following tasks: (i) Develop an Annual Budget •
•
•
What is a budget? A budget serves these purposes:
It forces the owner to set the organization’s fiscal parameters and goals for the coming year by determining how much money should be spent overall and on specific cost categories such as maintenance, management fee, and so on.
It provides the owner with a benchmark with which it can compare the organization’s actual spending with the budgeted amounts, on a monthly and annual basis, to determine how well the organization is working within these parameters and meeting these fiscal goals. The use of a budget as a benchmark was discussed in the previous section.
How do you develop the annual budget? The process that an owner or board must go through in order to establish an annual budget is very similar to the process that the sponsor had to go through in order to establish income and expense projections for the project during the feasibility phase (see Chapter 5). The owner or board must review the prior year’s income and expense summary and make adjustments to the summary as needed due to:
Inflation.
Changes in policy or goals.
Changes in services provided.
Utility and property tax rate changes.
Changes in vacancy and collection losses.
Changes in deposits to reserves.
When do you develop the budget? Thirty to 60 days prior to the end of the fiscal year.
(ii) Maintain Operating Reserves. Operating reserves, as discussed in detail
in Section 5.4, allow an owner to avoid having to seek a rent increase from its tenants or save a board of directors from having to go back to the owners or shareholders to raise assessments during the fiscal year simply because of nominal cost overruns or lower-than-expected revenues. Operating reserves are used to cover unexpected fluctuations from budgeted income and expenses. An operating reserve account is generally set
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19.11 MANAGING AND BUDGETING FOR RENTAL OR MULTIFAMILY OWNERSHIP
aside by the owner or board as part of the annual budget process and is funded each month, as a percentage (often 3 percent) of projected collections. The budgeting and funding of an operating reserve account are crucial for the fiscal health of affordable housing developments because the owner or board may not have the ability to pass through cost increases to residents or resident-owners during the year, on a timely basis, due to regulatory agreements with lenders, rental assistance agreements with government agencies, or simply the residents’ inability to pay. (iii) Maintain Replacement Reserves. Replacement reserves, as discussed in detail in Section 5.4, are used to cover all or part of the costs of replacing assets (e.g., roof, plumbing, boiler, and so on) as they are used up. Replacement reserves allow the owner or the board to make these needed capital expenditures without increasing rents or assessments or to limit the new charges to only the amount needed when sufficient reserve funds are not available. A replacement reserve generally is budgeted as part of the annual budget process and is funded each month with a percentage (often 2 percent) of the projected collections. As discussed in Section 5.4, the owner or board must complete an evaluation of the remaining useful lives of the building’s systems and the amount of funds in the replacement reserve prior to depleting the reserve account. The owner or board may not want to spend all remaining funds in the reserve at one time or take other actions simultaneously, if significant additional capital expenditures are expected in the near future. In that case, the reserve funds may be used as equity to obtain outside financing for the improvements, rents or regular assessments may be increased, or a onetime special assessment to homeowners may be required to rescue the reserve account.
A viable and responsible business prepares financial statements on a regular basis for use by persons inside the organization (owners, board members, management) as well as by interested persons outside of the organization (lenders, government, potential purchasers). An owner of affordable rental housing and the boards of cooperatives and condominiums should do no less. The key concerns are: (iv) Prepare Financial Statements Regularly.
•
What information should be recorded in financial statements?
What the ownership entity or association owns, how much money it owes, and how much investors and owners have invested in the ownership entity (“balance sheet”).
The income and expenses experience of the corporation last year and this year (“income statement”).
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•
The level of income and expense incurred this month, how it compares to what was budgeted for this month, and how close the actual income and expenses for the year are to the budgeted amounts in this year to date (“monthly income statement”).
The funds currently in the operating and replacement reserve accounts (should be included in the monthly management report and balance sheet).
The levels of nonpayment from members (should be included in the monthly management report).
What reports should be produced?
Monthly income and expense reports, as discussed above.
Annual income and expense reports, as discussed above.
Annual balance sheet, as discussed above.
Annual audit, review, or compilation. Most owners and boards focus on an audit, which is an analysis of the organization’s financial statements and underlying accounting system by an independent certified public accountant (CPA). The CPA analyzes this information in order to determine whether the organization’s financial statements were prepared in conformance with generally accepted accounting principles (GAAP). The CPA’s audit does not affirmatively look for fraud or improprieties. In most situations, however, an audit is an unnecessary expense for the organization. An audit is expensive because of the level of testing that must be done by the CPA in order to give an opinion about the statements. Moreover, by providing an opinion, the CPA is exposed to the risk that persons will detrimentally rely on the opinion and it was wrong. Therefore, the CPA must pass this risk on in higher costs for audits than other accounting services. Unless an annual audit is required by lenders or government agencies, the organization may decide to incur these costs only once every other year or every third year. An organization may be able to complete a review or a compilation to achieve the necessary results. A review simply requires a CPA to look at an organization’s financial statements and see whether anything appears unusual. A compilation calls for the CPA to help the owner, board, or management company to put together the necessary financial statements but not to provide any review or audit steps.
Annual reports to members. The annual report should provide the financial statements discussed above, plus any other information that would be of interest to the membership.
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(c)
Providing Homeownership and Board of Directors Training
The cooperative or condominium association should provide ongoing training for both homeowners and the association’s board of directors. New homeowners, for example, should be required to complete a homeowner orientation that explains the legal and organizational documents of the homeownership organization, rights and responsibilities of homeowners, and use and occupancy restrictions, if any. An annual or biannual homeowner “retreat” should be scheduled by the board to discuss association business, develop a long-term strategic plan for the management and operation of the property, and give homeowners a structured way to interact for business and social purposes. The board of directors should be required to complete board training each year as well. At a minimum, the existing board should schedule a board training session in conjunction with the development of the organization’s annual operating budget. The board would meet with its accountant, management company, and counsel to propose the next year’s budget and to set organizational priorities and goals. In addition, new board members should be required to attend a board orientation session. The orientation would explain the legal and fiduciary responsibilities of board members, the budget process, the legal and organizational documents of the homeownership organization, rights and responsibilities of homeowners, and use and occupancy restrictions, if any. (d)
Receiving Ongoing Technical Support and Legal Counseling
The nonprofit owner of rental housing or the board of directors of a cooperative or condominium must ensure that they continue to receive technical support and legal counseling throughout the life of the housing development. Professional management and independent accounting services must be utilized to maintain the fiscal integrity of the project. The owner or board must employ professionals in these areas who are experienced in working with similar entities and who aggressively force their clients to face the tough issues such as raising monthly housing costs, maintaining operating and replacement reserves, and evicting nonpaying homeowners. The owner or board also must retain legal counsel experienced in multifamily properties. Counsel will be needed on real estate matters such as evictions, fair housing laws, and mortgage encumbrance issues. However, counsel also should be able to advise the organization on much broader issues such as corporate matters, employment issues, and vendor and contractor disputes.
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
A P P E N D I X
1 9 A
Sample Documents and Disclosure Statements E XHIBIT 19A.1 Sample House Rules
INTRODUCTION 1.
_____ (the “Corporation”), acting through its Board of Directors (the “Board”), has adopted the following (“House Rules”). These House Rules may be amended from time to time as provided in the Bylaws of the Corporation.
2.
Whenever in these House Rules reference is made to “Occupant,” such term shall apply to the occupant of any Dwelling Unit in the community known as _____ _____ (the “Property”), under any occupancy Agreement or other lease or sublease or other occupancy agreement of a Dwelling Unit, to his or her family, subtenants, whether or not in residence, servants, employees, agents, visitors and to any guest, assignee, invitees or licensees of such Occupant, his or her family or subtenant of such Occupant. Wherever in these House Rules reference is made to the Corporation, such reference shall include the Corporation, the Board, and the Managing Agent when the Managing Agent is acting on behalf of the Corporation.
3.
The Occupants shall comply with all the House Rules hereinafter set forth governing, if applicable, the buildings, balconies and patios, drives, recreational areas, grounds, parking areas and common areas of the Project.
4.
The Corporation reserves the right to alter, amend, modify, repeal or revoke these House Rules and any consent or approval given hereunder at any time by resolution of the Corporation or the Board of Directors.
5.
These House Rules are supplementary to and not in lieu of provisions governing the Property which are set forth in the Bylaws of the Corporation. To the extent of any inconsistency between any of the foregoing, the following shall prevail in the order noted: the Bylaws, and these House Rules.
ENFORCEMENT 6.
In addition to exercising the rights and remedies set forth in the Bylaws and the Occupancy Agreements, the Board of Directors shall have the right to assess each Occupant, as a Special Charge, an amount up to $50.00 for each violation of these House Rules committed by such Occupant. In the event of a violation that is in the nature of a continuing violation, the Board of Directors shall have the right to assess such Occupant up to $50.00 per day, as a Special Charge, for each day the violation continues.
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E XHIBIT 19A.1 Sample House Rules (continued)
GENERAL RESTRICTIONS ON USE 7.
No part of the Property shall be used for any purpose except housing and the common purposes for which the Corporation was created. Each Dwelling Unit shall be used as a residence for a single family, its servants and quests, unless otherwise permitted in accordance with the Bylaws.
8.
No industry, business, trade, occupation or profession of any kind, commercial, religious, educational or otherwise, designed for profit, altruism, exploitation or otherwise, shall be conducted, maintained or permitted on any part of the community, except as expressly permitted in the Bylaws, nor shall any “For Sale,” “For Rent,” or “For Lease” signs or other window displays or advertising be maintained or permitted on any part of the Property or in any Dwelling Unit, nor shall any Dwelling Unit be used or rented for transient, hotel or motel purposes. Any postings inside the Property must be posted on the Bulletin Board established by the Board and approved by the Board, prior to posting.
9.
There shall be no obstruction of the common areas of the Community. Nothing shall be stored in the common areas without the prior consent of the Board of Directors except as herein or in the Bylaws expressly provided. No public hall of any building shall be decorated or furnished by any Occupant in any manner.
10.
The sidewalks, entrances, halls, stairways, and fire exits must not be obstructed, encumbered in any way, or used for any purpose other than for egress and ingress.
11.
No overshoes, boots, umbrellas or other articles shall be placed in the halls, stairways, nor shall anything be hung from the outside windows or over balcony or terrace railings. Neither shall any linens, clothing, curtains, rugs, mops, planters, or other objects be shaken or allowed to protrude from the windows, patios, balconies or doors.
12.
No Occupant shall cause or permit anything to be hung, displayed or exposed on the exterior of a Dwelling Unit or areas appurtenant thereto, whether through or upon windows, doors or masonry of such Dwelling Unit. The prohibition herein includes, without limitation, laundry, clothing, rugs, signs, awnings, canopies, shutters, radio or television antennas or any other item. Under no circumstances shall any radio or television antennas or other items be installed by the Occupant beyond the boundaries of his Dwelling Unit. An Occupant, however, may use a central radio or television antenna provided as a part of his Dwelling Unit. No clothes line, clothes rack or other device may be used to hang any items on any balcony or window, nor may any such devices be used anywhere on the common areas except in such areas as may be designated specifically for such use by the Board of Directors. Balconies and terraces shall not be used as storage areas. No terrace or balcony shall be enclosed or covered by any awning or otherwise without the prior written consent of the Board of Directors. All window treatments must be venetian blinds or draperies which appear white when viewed from the outside of the building.
13.
No awnings, antennas, air-conditioners, bar or grill work apparatus or other projections shall be attached to the outside walls of the building or used in connection with any common area window, individual window unit or any door of any Apartment of any building without the prior written consent of the Board of Directors.
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E XHIBIT 19A.1 Sample House Rules (continued) 14.
No sign, notice, advertisement or other lettering or ornamental hardware shall be exhibited, inscribed, painted or fixed by an Occupant on any part of the common areas, or on the inside of Occupant’s Dwelling Unit if visible from the common areas without the prior written consent of the Board of Directors.
15.
No additional plantings or fence constructions shall be added to the present landscaping by any Occupant without prior written approval of the Board of Directors.
16.
No Occupant shall purposely allow anything, including water, to fall from the windows, doors or balconies of the premises, nor shall Occupants sweep or throw from the premises any dirt or other substance into the halls, ventilators or elsewhere in the building or on the grounds.
17.
Nothing shall be done or kept in any Dwelling Unit or in the common areas which will increase the rate of insurance for any of the buildings or contents thereof applicable for residential use without the prior written consent of the Board of Directors. No Occupant shall permit anything to be done or kept in his Dwelling Unit or in the common areas which will result in the cancellation of insurance on any of the buildings or contents thereof or which would be in violation of any public law, ordinance or regulations. No gasoline or other explosive or inflammable material may be kept in any Dwelling Unit or storage area. No waste shall be committed in the common areas.
18.
All garbage and trash must be placed in plastic trash bags and deposited in the “dumpster” containers provided outside the buildings. No garbage or trash shall be placed on the floor or elsewhere on any common area. No garbage cans, containers or bags of any kind shall be placed in common areas.
19.
Except in the recreational or storage areas designated as such by the Board of Directors, no playing or lounging shall be permitted, or shall baby carriages, velocipedes, bicycles, playpens, wagons, toys, benches, chairs or other articles of personal property be left unattended in common areas of the buildings or passageways, parking areas, courts, sidewalks or lawns or elsewhere on the common areas.
20.
The toilets and other water and sewer apparatus shall be used only for the purposes for which designed, and no sweepings, matches, rags, ashes or other improper articles shall be thrown therein. The cost of repairing any damage resulting from misuse of any such apparatus shall be borne by the Occupant causing such damage.
21.
No Occupant shall install or cause to be installed in any Dwelling Unit a clothes washing or drying machine.
22.
Each Occupant shall keep his or her Dwelling Unit in a good state of preservation, repair and cleanliness and shall not sweep or throw or permit to be swept or thrown therefrom, or from the doors, windows, terraces or balconies thereof, any direct or other substance.
23.
Nothing shall be done in any Dwelling Unit or in, on or to the common areas which may structurally change any of the buildings nor shall anything be altered or constructed in or removed from the common areas, except upon the prior written consent of the Board of Directors.
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E XHIBIT 19A.1 Sample House Rules (continued) 24.
No noxious or offensive activity shall be carried on in any Dwelling Unit or in the common areas, nor shall anything be done therein which may be or become an annoyance or nuisance to the other Occupants. No Occupant shall make or permit any disturbing noises in the building by either the Occupant, his family, pets, servants, employees, agents, visitors or licensees that may disturb the comforts or convenience of other Occupants. All Occupants shall keep the volume of any radio, television or musical instrument in their Dwelling Units sufficiently reduced at all times so as not to disturb other Occupants. Despite such reduced volume, no Occupant shall operate or permit to be operated any such sound-producing devices in a Dwelling Unit between the hours of 11 p.m. and the following 8 a.m. if such operation shall disturb or annoy other occupants of the building.
25.
No Dwelling Unit shall be used for any unlawful purpose, and no Occupant shall do or permit any unlawful act in or upon his Dwelling Unit.
DOGS AND PETS 26.
No animals or reptiles of any kind shall be raised, bred or kept in any Dwelling Unit or in the common areas except for any ordinary, non-exotic domestic animal (e.g. cat or dog) which was being kept in any Dwelling Unit at the time of passage of these House Rules. Such animals being kept in a Dwelling Unit at the time of passage of these House Rules may remain in such unit only for as long as the animal lives or the Occupant with the right to possession of that Dwelling Unit remains in lawful possession, whichever is shorter. The Board, however, reserves the right to require the removal of any pets or animals whatsoever if they are deemed a nuisance by the Board.
27.
No markings shall be permitted on the buildings. Any damage to the buildings, recreational facilities or other common areas or equipment caused by an Occupant, family, servants, employees, agents, visitors, licensees, or subtenants shall be repaired at the expense of the Occupant.
PARKING AND STORAGE 28.
All personal property placed in any portion of any building or any place appurtenant thereto, including, without limitation, the storage areas, shall be at the sole risk of the Occupant, and the Corporation shall in no event be liable for the loss, destruction, theft or damage to such property. Any Occupant may use the storage room, if any, in his building without charge for the storage of trunks, suitcases, snow tires and other items permitted by the Board of Directors.
29.
Should an employee of the Corporation at the request of an Occupant move, handle or store any articles in storage rooms or remove any articles therefrom or handle, move, park or drive any automobile placed in the parking areas, then, and in every such case, such employee shall be deemed the agent of the Occupant. The Corporation shall not be liable for any loss, damage or expense that may be suffered or sustained in connection therewith.
30.
Unless otherwise authorized by the Corporation, the parking areas may not be used for any purpose other than parking automobiles. No buses, trucks, trailers, boats, recreational or commercial vehicles shall be parked in the parking areas or
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.1 Sample House Rules (continued) in driveways except in such areas, if any, specifically designated for such parking by the Board of Directors. All vehicles must have current license plates and be in operating condition. No vehicles shall be parked in the Property with conspicuous “For Sale” signs attached. No automobile repairs or oil changes are to be made on any of the parking areas. No items such as tires, cans of oil, etc. shall be kept in parking spaces. 31.
All Occupants shall observe and abide by all parking and traffic regulations as posted by the Board of Directors or by municipal authorities. Vehicles parked in violation of any such regulations may be towed away at the Occupant’s sole risk and expense.
32.
Parking so as to block sidewalks or driveways shall not be permitted. If any vehicle owned or operated by an Occupant, any member of his family, tenants, guests, invitees, licensees, or subtenants shall be illegally parked or abandoned in the Property, the Corporation shall be held harmless by such Occupant for any and all damages or losses that may ensue, and any and all rights in connection therewith that the owner or driver may have under the provisions of state or local laws and ordinances hereby are expressly waived. The Occupant shall indemnify the Corporation as a result of such illegal parking or abandonment and any consequences thereof.
33.
Occupants assume all responsibility for damage by fire or other casualty or theft loss to the property stored in storage rooms and the Board of Directors shall have no liability for same. The following items are prohibited from the storage bin area: Cleaning supplies which are flammable, shredded paper, any type of styrofoam, more than four tires or any hazardous material.
34.
Property in any unassigned space or aisle way, will be removed without notice and disposed of. The Board, its agents and employees shall not be liable for any loss from disposal of such property.
ENTRY INTO UNITS 35.
No Occupant shall alter any lock or install additional locks on any doors of a Dwelling Unit without the prior written consent of the Board of Directors. The Corporation or the Managing Agent shall have the right to make and keep a copy of any key required to gain entry to any Dwelling Unit to be used if entry to such Dwelling Unit is necessary because of fire, flood or other condition which may affect the common areas or other Dwelling Units.
36.
An Occupant shall grant access to his Dwelling Unit to the Board of Directors or the Managing Agent or any other persons authorized by the Board of Directors or Managing Agent for the purpose of correcting any conditions originating in his Dwelling Unit, and threatening another Dwelling Unit or the common areas, or for the purpose of performing installations, alterations or repairs to the common areas in his Dwelling Unit or elsewhere in the Property, or
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.1 Sample House Rules (continued) to correct any condition which violates the provision of any mortgage covering the Property, provided that request for entry is made in advance and that such entry is at a time reasonably convenient to the Occupant. In case of an emergency, such right of entry shall be immediate whether the Occupant is present at the time or not. 37.
Employees and agents of the Corporation are not authorized to accept packages, keys, money (except for charges due the Corporation) or articles of any description from or for the benefit of an Occupant. If packages, keys (whether for a Dwelling Unit or an automobile), money or articles of any description are left with the employees or agents of the Corporation, the Occupant assumes the sole risk therefor, and the Occupant, not the Corporation, shall be liable for injury, loss or damage of any nature whatsoever directly or indirectly resulting therefrom or connected therewith. The Corporation does not assume any responsibility for loss or damage in such cases. Deliveries requiring entrance to an Occupant’s Dwelling Unit will not be accepted without the prior written permission of the Occupant accompanied by a written waiver of all liability in connection with such deliveries.
38.
When a key for a specific Person or repairman, (i.e., telephone company) is needed, the Occupant must deliver to the Managing Agent a copy of his Dwelling Unit key properly identified rather than request the Managing Agent to furnish an extra key.
KEY POLICY 39.
All Occupants must provide keys to the Corporation for all locks to each Dwelling Unit. In addition, the following policy has been established regarding admissions: a.
In addition to an admit slip, a key must be left with the Managing Agent for all authorized admissions.
b.
If an Occupant is locked out of his Dwelling Unit, there will be no charge for opening the door while maintenance personnel are on duty.
c.
If an Occupant is locked out of his Dwelling Unit outside the normal working hours of maintenance personnel, the Occupant will be responsible for obtaining access to his Dwelling Unit at his own expense.
SUBLEASING DWELLING UNITS 40.
All subleases shall be in writing and on a form previously approved by the Board of Directors, and the Occupant of a Dwelling Unit which is being subleased shall provide the Board of Directors a copy of such sublease promptly after its execution. Each sublease shall provide that (a) occupancy of the Dwelling unit is subject provisions of the Bylaws, as all the foregoing may be amended from time to time, (b) any failure of the subtenant to comply with the provisions
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.1 Sample House Rules (continued) of the Bylaws shall be a default under the sublease, and (c) in the event of any inconsistency between the provisions of the foregoing and the Bylaws and the sublease, the provision of the Bylaws and the House Rules shall be incorporated into each sublease and shall govern.
BUILDING ACCESS AND EGRESS 41.
Each Occupant shall assume personal responsibility for the secure closing of all entrance doors and storage doors making sure that these doors close behind you. Report any malfunction to the Managing Agent immediately.
MISCELLANEOUS 42.
Each Occupant should take responsible precaution to prevent strangers or unidentified persons from following him/her through a locked door.
43.
Complaints regarding the management of the Corporation or regarding actions of other Occupants shall be made in writing to the Managing Agent or the Board. No Occupant shall direct, supervise or in any manner attempt to assert control over or request favors of any employee of the Managing Agent or the Corporation.
44.
All radio, television or other electrical equipment of any kind or nature installed or used in each Dwelling Unit shall fully comply with all rules, regulations, requirements or recommendations of the Board of Fire Underwriters and the public authorities having jurisdiction, and the Occupant alone shall be liable for any damage or injury caused by any radio, television or other electrical equipment in such Dwelling Unit.
45.
Occupants are cautioned against excessive use of soaps and other detergents in their appliances or plumbing apparatus which may cause overflow of suds in any Dwelling Unit or in any central waste disposal system. Detergents and soaps shall be used only according to manufacturer’s directions.
46.
The use of charcoal burners is not Permitted on the Property due to danger of fire and smoke disturbance to neighbors, and such burners may not be used on the common areas except (if and to the extent permitted by law) in such areas, if any, designated by the Board of Directors for such use and in compliance with law.
47.
Solicitation is not permitted in any of the buildings. If any Occupant is solicited by any person in the Property, the Managing Agent must be notified immediately.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.2 Outline of Memorandum of Understanding between Resident Council and Nonprofit Owner (Resident Management Leading toward Resident Ownership) I. Recitals II. III.
Assignment of Management Responsibilities for Property Scope of Management Duties
IV. Effective Date and Term of Management Duties V. Schedule for Assumption of Duties VI. Pre-funding of Operating Funds VII. Developing, Revising and Approval of Budget VIII. Selecting Tenants, Collecting Rent, Term of Leases, Evictions IX. Maintenance Procedures (routine, non-routine and extraordinary) X. Requirements for Management a.
grievance procedures
b.
insurance
c.
fidelity bonding
d.
employee wages & benefits
e.
procurement guidelines
f.
reporting requirements
g.
equal opportunity
XI. Conditions for Transfer of Ownership with timetable a.
% of resident interest in ownership as reflected by number of residents committing funds towards effort
b.
amount of funds raised by residents
c.
completion of homeownership feasibility analysis
d.
proven ability to make decisions
e.
resident council democratically elected and representative of residents
f.
establishment of experienced development team
XII. Termination of Agreement XIII. Notices XIV. Conflicts of Interest XV. Severability XVI. Signatures of Parties
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.3 Planning Tools and When to Use Them
Planning Tool 1.
Preliminary Household Financial Form/ Resident Survey
2.
Resident Association Articles of Incorporation & Bylaws
3.
Resident Profile Report
4.
Resident Association Newsletter
Who Prepares/ Completes
Purpose To get financial and demographic information as soon as possible from each household and to collect the residents’ insights into property management issues and economic development opportunities. To provide the Resident Group with a legal structure to organize around and official standing as an organization. Compiles data provided on the Preliminary Household Financial Forms. Presents data to residents so they understand the affordability issues which face the group as a whole. To develop the official nature of the association and formally communicate the association’s business accurately to every resident.
770
When to Use
Each household
At the beginning of the planning process.
Legal counsel
During initial organizing effort. Adopted, filed before election of officers and directors.
Grantee’s staff or development consultant
After Preliminary Household Financial Forms are analyzed.
Communications Committee of the association with board of directors’ approval.
Monthly, after the initial organizing and development of the Resident Council.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.3 Planning Tools and When to Use Them (continued)
Planning Tool 5.
Operating Expense Analysis Report
6.
Apartment Rehabilitation Survey
7.
Preliminary Building Evaluation Report
Who Prepares/ Completes
Purpose To introduce the residents to the financial management issues they must address as owners of the property and to provide a projected operating budget following rehabilitation. To begin developing a scope or work for the rehabilitation. To give residents the opportunity to relate physical problems which other inspectors might not find.
To provide residents and development team a professional assessment of the physical condition of the property, its rehabilitation needs and a cost estimate for the rehabilitation work.
When to Use
Grantee’s staff or development consultant
Report presented to residents after they have received training session on property management and/or budgeting.
Each household
Distributed to residents after the Preliminary Household Financial Forms have been returned. A compilation of the responses should be provided to the building consultant who will conduct the Preliminary Building Evaluation. After residents have completed the Apartment Rehabilitation Surveys. Report can be presented to residents any time after it is prepared.
An architect, building, or general engineer or general contractor
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.3 Planning Tools and When to Use Them (continued)
Planning Tool
Who Prepares/ Completes
Purpose
When to Use
8.
Preliminary Market Survey
To identify the demographic and real estate trends in the area surrounding the property to determine current and future demand for home-ownership units on the site.
Grantee’s staff or development consultant; property residents can do much of the research.
As soon as possible after the Household Financial Forms have been collected and Resident Profile Report has been presented.
9.
Resident Training Plan
To identify the concepts that are most important for residents to address as in a Homeowner Training Program as they consider the ownership option.
Grantee or training consultant
A fundraising plan is often the best tool for organizing residents. Allows them to define their financial commitment to homeownership by setting minimum household contributions toward the conversion effort.
Board of Directors of the Resident Association after a Fundraising Committee is established. Grantee staff members or consultants assist in developing this committee. Committee makes recommendation to the Board of Directors.
Homeownership Training Programs are most effective when each session is coordinated with the development of the Resident Council and the tasks required to determine the project’s financial feasibility. Begin after the Resident Council is organized, leaders are elected and the residents begin to participate in the planning process. Established at any time during the planning process. The context for any fundraising effort should be provided first in meetings with the full resident group and in the training session on “Costs and Benefits of Homeownership.”
10. Fundraising Plan/Refundable Deposit Agreement
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.3 Planning Tools and When to Use Them (continued)
Planning Tool 11. Memorandum of Agreement
12. Feasibility Analysis Report
Who Prepares/ Completes
Purpose To set forth the responsibilities the grantee and Resident Council each can have in carrying out the planning process together. To present the conclusions reached during the planning process about the project’s financial feasibility, resident interest in ownership and likelihood of successfully financing and operating a homeownership project on the site.
Grantee and Legal Council
Grantee or development consultant
773
When to Use Presented to Board of Directors of Resident Council after the Resident Council has been initially organized and leaders have been elected. At end of planning process.
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.4 Sample Model Household Survey Forms
Dear Resident: Attached is a Preliminary Household Financial Information Form and Property Questionnaire. The questionnaire provides you the opportunity to make recommendations about the management of the property and businesses or services you might want to see developed on or near the property. The financial information requested is necessary to help determine your household’s ability to pay the housing costs if a tenant conversion occurs and to determine if your household is eligible for various purchase subsidies. Complete and accurate information is essential for a valid financial evaluation. All information provided will be kept confidential. Completing this form does not obligate you or your family to participate in any purchase effort. Please enclose three pay stubs within the last 90 days, a letter from the employer or a W-2 form as income verification for all employed members of your household. If you have other sources of regular income please enclose copies of such checks or verification letters. We need some form of verification for each source of income reported. Instructions: 1.
Fill out all information requested. Please mark any space “N/A” if the question does not apply to your household.
2.
List all sources of income for each member of the household, including wages, salaries, tips, retirement benefits, AFDC, SSI, child support, alimony, etc.
3.
List income as gross income (before taxes and benefits are withheld) and indicate whether the amount is weekly, monthly or annual.
4.
If any household member has more than one source of income, list each source separately. Use the back of the form if additional space is needed.
5.
For monthly debts, please put the name of the company or organization owed, monthly payment and outstanding balance in the space provided. Use the back of the form if additional space is needed.
6.
When the financial form and questionnaire are completed, please sign them, date them and return to: [Name of Your Organization].
7.
Don’t forget to complete the questionnaire. We need your ideas on employment, business and service opportunities that might be developed on or near the site and how you think the property could be better managed.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.4 Sample Model Household Survey Forms (continued) PLEASE TYPE OR PRINT CLEARLY 1.
Head of Household:
Name ____________________ Age _____ Phone (Home) _____ (Work) _____ Address______________________________ Apt. # _____ How Long? _____ Zip Code _____ No. of Bedrooms _____ Apt. Rent $_____/Month If your household doesn’t pay the full rent, what is the amount your household pays each month? $_____ Employer (company/agency) _________________________ Phone __________ Address ____________________________________________________________________ Supervisor (name) _______________________________________ Phone ______________ Your Position ________________ Salary $_____ per _____ How Long? _____ wk/month/ year How long do you expect to stay with your current employer? _____ yrs. Other Income $_____ per _____ Source: ______________________________ 2.
Other Working Member of Household:
Name _________________________________________________ Age _____ Employer (company/agency) _______________________________________ Phone _____ Address ____________________________________________________________________ Supervisor (name) _______________________________________ Phone ______________ Position _______________ Salary $_______ per _______ How Long? _______ wk/month/yr How long do you expect to stay with this employer? _____ yrs. Other Income $_______ per _______ Source: ____________________________________ wk/month/yr 3.
Additional Household Members: a.
Name __________________ Age _____ Income $_______ per _____ wk/month/yr
b.
Name __________________ Age _____ Income $_______ per _____ wk/month/yr
c.
Name __________________ Age _____ Income $_______ per _____ wk/month/yr
d.
Name __________________ Age _____ Income $_______ per _____ wk/month/yr
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.4 Sample Model Household Survey Forms (continued) 4.
Assets and Household Savings:
Checking Account Balance $__________ Savings Account Balance $_____ Other Assets (List):
1. ___________________________________________________
(cars, homes, etc.)
2. ___________________________________________________ 3. ___________________________________________________
5.
Monthly Household Expenses:
Utilities:
Other Expenses:
Electricity
$ _________________
Transportation $ _________________
Gas
$ _________________
Medical
$ _________________
Telephone
$ _________________
Insurance
$ _________________
Other
$ _________________
Child Care
$ _________________
Other:
$ _________________
Food/Hshld. Goods $ _________________ Do you use food stamps? _____ Yes _____ No
If yes, monthly amount: $____________________ 6.
Credit Information:
Please provide the following information for your credit cards, school loans, car loans, and any other outstanding debts: Creditor
Monthly Payment
Outstanding Balance
__________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 7.
Other Financial Information:
Provide any other information related to your household’s financial status not identified above: __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.4 Sample Model Household Survey Forms (continued) 8.
Monthly Housing Cost You Are Willing to Pay:
Which one of the following is closest to the monthly amount you would be willing to pay for housing costs and utilities to live in your apartment if you owned it and it was renovated? Identify the annual gross income figure in the column on the left which is closest to your household’s annual income. Then, circle the amount in one of the columns to the right which is closest to the monthly housing costs you would be willing to pay if you owned your unit and it was renovated. (PLEASE CIRCLE ONE OF THE FOLLOWING MONTHLY AMOUNTS:) If Your Gross Income Is:
25% of Monthly Income Is:
30% of Monthly
35% of Monthly Income Is:
$ 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000
$167 208 250 292 333 375 417 458 500 542 583
$200 250 300 350 400 450 500 550 600 650 700
$233 292 350 408 466 525 583 642 700 758 817
PLEASE PRINT OR TYPE CLEARLY 1.
Are you or any members of your household interested in being employed as a construction worker on the property if the property is renovated? _____ yes _____ no
If so, who?
____________________________________ ____________________________________
What specific construction skills or experience do these household member(s) have, if any? (Experience is not required) __________________________________________________________________________ __________________________________________________________________________ 2.
Are you or any members of your household interested in being employed on the property management or maintenance staffs if the property is renovated and purchased by the residents? _____ yes _____ no
If so, who?
____________________________________ ____________________________________
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.4 Sample Model Household Survey Forms (continued) What specific property management or maintenance skills do these household member(s) have, if any? (Experience is not required) __________________________________________________________________________ __________________________________________________________________________ 3.
Please check any of the following in which you or a member of your household has particular experience, skills, or interest in:
_____ Office Management
_____ Journalism/Editing
_____ Bookkeeping/Accounting
_____ Receptionist/Typist
_____ Child Care
_____ Retail Sales
_____ Fundraising
_____ Starting a Business
_____ Graphic Design 4.
List any other skills or specific experience you or another member of your household has which may be useful as the residents work towards acquiring and converting the property to resident ownership:
__________________________________________________________________________ __________________________________________________________________________ 5.
Are you or any members of your household interested in obtaining job training as part of any homeownership program? _____ yes _____ no
6.
If so, in which of the following professions/careers would you or another member of your household seek job training?
____ Health Care (specify)
____ Accounting/Bookkeeping
____ Building Trades (specify)
_____ Manufacturing (specify)
____ Computer Technology
_____ Other (specify)
Specify Here Your Particular Job Training Interests: __________________________________________________________________________ __________________________________________________________________________ 7.
Would you or any members of your household be interested in starting a small business to be operated on or near the property? _____ yes _____ no
If so, what type of business: __________________________________________________________________________ __________________________________________________________________________
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.4 Sample Model Household Survey Forms (continued) 8. What retail (e.g. convenience store, drugstore, laundromat) or social services (e.g. child care center, senior center, van service) which are not now available near the property would you like to see located on or near the site? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 9. Are any members of you household physically disabled? ____ yes _____ no 10. If so, do they need any specialized amenities in your apartment such as wide doorways, grab bars in bathroom, countertop range controls, special light switches, etc? Please identify such needed amenities: __________________________________________________________________________ __________________________________________________________________________ 11. What specific problems have you had or observed with security at the property and what recommendations do you have for improving safety and security measures at the property? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 12.
What other suggestions do you have for improving the management or operation of the property?
__________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.5 Sample Resident Profile Report
This “Resident Profile” is a way of analyzing and presenting to Resident Councils in a confidential yet straightforward way the key demographic and financial data needed to determine the affordability of any purchase effort for existing residents. It is prepared using information collected from the households who complete a “Preliminary Household Financial Information Form.” From the analysis of this information, conclusions can be drawn about the ability of the residents to pay increased housing costs, both following rehabilitation and into the future, and their ability to pay the purchase costs associated with homeownership. This analysis can also provide insight into whether condominium or cooperative ownership is more appropriate for the particular property. This report is used with an Operating Expense Analysis Report, a Preliminary Market Survey and a Building Evaluation Report to arrive at a determination of whether or not it is financially feasible for the residents to purchase the property. Whether or not the details of the report are shared with the residents, (we recommend that it be shared with the Resident Council), the following analyses are important to determining the affordability of any conversion to resident ownership. THE FOLLOWING IS A SAMPLE REPORT SHOWING THE TYPES OF ANALYSES USED TO ASSESS FUTURE AFFORDABILITY FOR EXISTING RESIDENTS. I. Validity of Profile
The property now contains 85 residential units, of which 76 are occupied. To date, a total of 65 completed household financial forms have been received. Each form has been verified to ensure accuracy. The receipt of 65 forms out of 76 occupied units represents a good response rate of 86%. So, this report can be considered valid in representing the overall financial and demographic characteristics of the Resident Council. Note: If the response rate is below 75 percent, conclusions drawn may be suspect and should not be relied upon. II. Demographic Data
The ratio of household size to unit size and the ages of the resident population are important characteristics. The population density (people per dwelling unit) and age profile in a multifamily property directly affects monthly operating costs, how quickly building systems will age and the services, amenities and building improvements that should be considered in any purchase effort. In this case, the data shows an average household size of 2.1 persons. Six households are overcrowded (require more bedrooms to be comfortably housed) and should consider either relocating to larger units on the property if possible, or permanently relocating to apartments off the site if the purchase effort goes forward. Among the 65 households responding, there are nine households headed by individuals over age 62 and there are a total of 15 elderly residents. There are
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.5 Sample Resident Profile Report (continued)
27 children under the age of 18 living on the property. There are no physically or mentally disabled residents requiring special amenities in their apartments. The table below presents the overall age distribution of household members reporting. Age Distribution of All Household Members Age Group 0–4 Years 5–12 Years 13–17 Years 18–29 Years 30–39 Years 40–49 Years 50–61 Years 62 + Years Total
Number
Percentage
8 11 8 9 12 44 30 15 137
6 8 6 7 9 31 22 11 100%
This table indicates that one-third of the property’s residents are age 50 or older and that two-thirds of the residents are age 40 or older. The fact that there is a significant group of people over age 50 generally indicates that their potential for income growth will slow over the next several years through retirement and the fact that these workers may have reached the tops of their respective wage scales. The high percentage of older residents suggests that social services for older people on the site should be considered in any purchase of the property. Twenty people responding indicated their desire to see better transportation services at the property for shopping or medical visits. III. Occupational Analysis
Type of occupation and length of employment of working household members are major factors in determining the likelihood of income growth for a household. The following chart shows the occupations and tenures of working household members at the property: Job Category Professional Administrative Skilled Trades Support Staff Services Public Assistance Rec’d Retired Unemployed Total
Respondents
Percent
9 4 9 16 18 2 7 0 65
14 7 14 24 27 4 11 0 100%
781
Avg. Yrs. on Job 10.2 6.8 9.5 7.5 9.1 — — — 8.6
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.5 Sample Resident Profile Report (continued)
This analysis indicates very stable employment patterns among the working residents of the property. The average duration of employment with current employers is 8.6 years, and only eight of the 56 working individuals reported that they expected to leave their current place of employment within the next five years. Six of the 56 households reporting working members have two people working, and 44 report one working household member. With the largest number of working household members in support staff or service roles, the potential income growth of these households and their ability to absorb increased housing costs is probably limited. When comparing occupation, length of employment, and age of working household members, it was clear that those age 50 or older who are working are predominantly in the skilled trades and services occupations. This would indicate the likelihood for stable employment until retirement but limited potential for income growth until and after retirement. IV. Income Analysis
Perhaps the most important factor in determining a resident group’s ability to absorb increased housing costs is the income levels of its households. While different families have different spending patterns, a general rule of affordability which most lenders and government housing agencies follow is that a unit is affordable if a household is paying no more than 30% of its gross monthly income (before income taxes and other deductions) for housing costs. Currently, the residents’ monthly housing costs consist of rent plus any utilities paid. After any purchase by the residents, monthly housing costs would include payment of a mortgage or a portion of the property’s blanket mortgage, any utilities paid by the homeowner and a monthly condominium fee or co-op carrying charge to cover a share of the costs of property management services, common area maintenance and utilities, insurance, taxes, other operating costs and funding any operating or replacement reserves. The average household income of the residents of the property is $18,400 per year. This income would support an average monthly housing cost, including utilities, of $460 if every household paid 30% of its gross monthly income for housing costs. The following is an income profile of the households reporting: Income Category
Number of Households
Percentage
$ 0–$8,000 8,001–13,000 13,001–18,000 18,001–23,000 23,001–28,000 28,001–33,000 33,001 and Above Total
3 7 19 28 4 3 1 65
4.5 11.0 29.0 43,0 6.0 4.5 2.0 100.0%
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.5 Sample Resident Profile Report (continued)
The income of 29 households (45%) is below the average of $18,400. This indicates that these households would have to pay more than 30% of their gross monthly income to pay $460 per month for housing costs. Fifty households (77%) responded that they would be willing to pay up to 35% of their monthly incomes to live in their units after rehabilitation. The following table shows “Additional Discretionary Income” of the households reporting. Additional discretionary income is the difference between 36% of gross monthly income and the total of monthly housing costs and any monthly consumer debt payments (i.e., car loans, student loans, credit card payments, etc.) made by the household. This is another standard used by lenders to evaluate the affordability of a housing unit for a particular family. Determining the monthly discretionary income of the residents of the property is crucial to determining how much each household might be able to increase its monthly housing costs following any rehabilitation or purchase of the property by the residents. Additional Monthly Discretionary Income
Number of Households
Percent
15 3 11 25 10 1 0 65
23.0 5.0 17.0 38.0 15.0 2.0 0.0 100.0%
$0 $ 1–20 21–50 51–100 101–200 201–400 Over 400 Total
Twenty-nine households have little or no discretionary income available to pay higher monthly housing costs unless a monthly subsidy is available to them. The remaining 36 households have significant discretionary income available to pay higher monthly housing costs, but most could absorb monthly increases of between $50 and $100. Each household’s available liquid assets (i.e. funds in savings accounts or other readily available investments) are important in determining each household’s and the group’s ability to make cast down payments required for purchasing the property or a unit in the property. The table below summarizes the liquid assets of the households which responded. Liquid Assets
Number of Households
$0 $ 1–500 500–1,000 1,001–2,000 2,001 or more Total
34 24 7 0 0 65
783
Percent 52.0 37.0 11.0 — — 100.0%
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.5 Sample Resident Profile Report (continued)
Thirty-four households (52%) currently have no liquid assets, and all 65 households (100%) have $1,000 or less. Therefore, these households should start saving now to be able to make the down payment that may be required of them if no down payment assistance is available. Down payment assistance programs should start to be identified to see which, if any, of these households will be eligible. V. Conclusions 1.
The response rate of 86% is good. Therefore, the data can be relied upon to draw conclusions about the resident group as a whole. Efforts should continue to be made by the Resident Council to get completed financial forms and questionnaires from the nine households not responding.
2.
Six households should consider relocating to larger units on or off the property to lessen overcrowding.
3.
The predominance of older households indicates limited potential for income growth over time to absorb increased housing costs and the need to consider specialized services on the site such as van service if the purchase goes forward.
4.
The very stable employment pattern of working residents is good, indicating household incomes are likely to grow. However, the predominance of workers in the services and support staff areas indicates income growth is likely to be limited.
5.
Available discretionary income is low for most households, but a significant majority (77%) indicate a willingness to pay more than 30% of gross monthly income for housing costs if the rehabilitation and purchase goes forward.
6.
Twelve households may need ongoing subsidy in order to pay monthly housing costs if they decide to purchase because 35% of their monthly incomes is well below the average monthly housing cost that the group as a whole can afford to pay.
7.
Liquid assets of most households is limited indicating the need to identify significant downpayment assistance if most families are to afford to purchase.
The next steps in using this information will be to identify prevailing monthly housing costs supported in the neighborhood through the Preliminary Market Study and to make preliminary projections of the monthly housing costs which seem appropriate for each household and unit type following rehabilitation based on the Preliminary Market Study and the data in this report.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.6 Sample Apartment Rehabilitation Survey
The purpose of this survey is to help the members of the development team identify all of the problems in your unit and to provide you with the opportunity to make recommendations about the property’s rehabilitation if it is to be purchased by the residents. Soon, a professional engineer or builder will inspect your unit and the others in the property. The information you provide on this survey will help the inspector locate problems in your unit and be used to develop the details of any rehabilitation plan. If you have any questions about how to complete this survey, please call [contact person in your organization] at [your telephone number] or [Rehab Committee Chairperson or other identified member] of the Resident Council in apartment [fill in number or address]. PLEASE TYPE OR PRINT CLEARLY. BE AS SPECIFIC AS POSSIBLE ABOUT THE LOCATION AND TYPE OF PROBLEMS YOU IDENTIFY. USE THE BACK OF THIS FORM IF YOU NEED MORE SPACE FOR EXPLANATION. WRITE “N/A” IN ANY SPACES WHICH DO NOT APPLY TO YOUR UNIT. Address of Your Building: _____________________________________________ Unit #: _______________ Floor #: _______________ FLOORS: 1.
2.
Which of the following floor problems, if any, do you have in your apartment? Rotten, soft, or spongy wood floors
__________ Location: __________
Holes in wood floors
__________ Location: __________
Warped or loose floor boards
__________ Location: __________
Missing or damaged vinyl floor tiles
__________ Location: __________
How many ceramic floor tiles are damaged or missing from your bathroom floor? _________________________
Comments: _________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.6 Sample Apartment Rehabilitation Survey (continued) ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________
WALLS & CEILINGS: 1.
How much loose or missing plaster or wall board is there in your walls or ceilings? (Check One) ______ None______ Some______ A Lot Locations: ______________________________________________________________
2.
Holes or cracks in walls?
Location: ______________________________
3.
Holes or cracks in ceilings?
Location: ______________________________
4.
Do you have peeling paint on walls or ceiling?
_____ Yes
_____ No
5.
Are your walls or ceilings damp or mildewed?
_____ Yes
_____ No
6.
How many ceramic tiles are damaged or missing from your bathroom walls?
___________________
7.
Do you have water leaks through your walls or ceilings when it rains?
_____ Yes
_____ No
8.
Do you have water leaks through your walls or ceilings when the water in the apartment above you is on?
_____ Yes
_____ No
9.
Do you have water leaks through your walls or ceilings when the heating system is being used?
_____ Yes
_____ No
Comments: _________________________________________________________ ___________________________________________________________________ WINDOWS: 1.
Do all of your windows open and shut easily?
_____ Yes
2.
How many window locks or ropes are missing or broken?
___________________
3.
Do windows stay open without being propped up?
_____ Yes
786
_____ No
_____ No
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.6 Sample Apartment Rehabilitation Survey (continued) 4.
How many window panes (glass panels) are broken?
___________________
5.
Does water leak through windows when it rains?
_____ Yes
_____ No
6.
Do you feel air blowing through the windows when they are closed?
_____ Yes
_____ No
7.
How many windows have broken or damaged sills or frames?
___________________
8.
How many insect screens are broken or missing?
___________________
9.
How many storm windows are broken or missing?
___________________
Comments: _________________________________________________________
___________________________________________________________________ DOORS: 1.
Does your front (and back) door close and lock securely?
_____ Yes
_____ No
2.
Does water leak through your front or back door when it rains? If so, which door? ________________
_____ Yes
_____ No
3.
Can you feel wind coming through your door(s) on windy days?
_____ Yes
_____ No
4.
How many room or closet doors are missing?
___________________
5.
How many room or closet doors are broken or don’t close properly?
___________________
6.
How many door knobs are missing or broken?
___________________
Comments: _________________________________________________________
___________________________________________________________________ EQUIPMENT 1.
How many of your closet poles are missing or broken?
___________________
2.
How many of your closet shelves are missing or broken?
___________________
3.
_____ Yes _____ No Is the towel bar, soap dish or toilet paper holder in your bathroom(s) missing or broken? If so, which ones? ________________________________________________
4.
Is your medicine cabinet missing or broken?
_____ Yes
_____ No
5.
Is your bathroom medicine cabinet rusted or the mirror broken?
_____ Yes
_____ No
If yes, which one? _______________________________________________
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.6 Sample Apartment Rehabilitation Survey (continued)
Are your refrigerator and freezer operable?
_____ Yes _____ Yes
_____ No _____ No
8.
Is your garbage disposer/dishwasher operable?
_____ Yes
_____ No
9.
Do your kitchen cabinets and drawers open and close properly?
_____ Yes
_____ No
6.
Are your cooking range and oven operable?
7.
Comments: _________________________________________________________
___________________________________________________________________ PLUMBING: 1.
Are there chips in the enamel of your bathroom sink or tub?
_____ Yes
_____ No
2.
Does your toilet flush properly?
_____ Yes
_____ No
3.
Does your toilet leak around the base?
_____ Yes
_____ No
4.
Do your drains clog frequently?
_____ Yes
_____ No
5.
Is your toilet seat broken?
_____ Yes
_____ No
6.
Do the pipes under the bathroom sink leak?
_____ Yes
_____ No
7.
Does the faucet on your bathroom sink leak, or is it cracked or rusted?
_____ Yes
_____ No
8.
If yes, which? ___________________________________________________ _____ Yes _____ No Does your bathtub faucet leak, or is it cracked or rusted?
9.
If yes, which? ___________________________________________________ _____ Yes _____ No Does your bathtub water diverter (lever that directs water from faucet to shower head) work?
10. Does your kitchen sink faucet leak or have a corroded finish?
_____ Yes
_____ No
11. Do the pipes under your kitchen sink leak?
_____ Yes
_____ No
Comments: _________________________________________________________
___________________________________________________________________ MECHANICAL: 1.
In the winter months, the temperature in your apartment is? _____ Too Hot _____ Too Cold _____ Fine
2.
In the summer months, the temperature in your apartment is? _____ Too Hot _____ Too Cold _____ Fine
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.6 Sample Apartment Rehabilitation Survey (continued) 3.
Do you have enough hot water during the winter months?
_____ Yes
_____ No
4.
Do you have enough hot water during the summer months?
_____ Yes
_____ No
5.
Are any of your radiators damaged or broken?
_____ Yes
_____ No
6.
Are there leaks from any of the pipes attached to your heating unit or radiators?
_____ Yes
_____ No
Comments: _________________________________________________________
___________________________________________________________________ ELECTRICAL: 1.
How many electrical outlets do not work? __________________________________
2.
How many electrical switches do not work? _________________________________
3.
How many light fixtures do not work? ______________________________________
4.
Do you have problems with fuses blowing?
_____ Yes
_____ No
5.
Do you feel you could use more outlets in your kitchen?
_____ Yes
_____ No
Comments: _________________________________________________________
___________________________________________________________________ BALCONIES/DECKS/STAIRS 1.
Is the surface of your concrete balcony or deck cracked, chipped, or have holes?
_____ Yes
_____ No
2.
Does your wood deck have loose, missing, or rotten boards?
_____ Yes
_____ No
3.
Do your stairs have loose or spongy treads?
_____ Yes
_____ No
4.
After it rains, does water remain in puddles on your deck or balcony?
_____ Yes
_____ No
5.
Are the railings on your stairs, balcony, or deck loose?
_____ Yes
_____ No
Please use the space below to make any comments about the physical condition of any other part of your apartment that was not addressed above: ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.6 Sample Apartment Rehabilitation Survey (continued) Please use the remaining space below to comment on any security problems, unsafe conditions you have found or to make recommendations about the condition of any common areas including: Hallways, Elevators, Laundry Room, Storage Areas, Building Entrance Doors, Stairwells, Fire Escapes, Fire Alarm System, Parking Areas, Trash Areas, Play Areas, Walks, Railings, Steps, Gutters or Downspouts, Storm Drains, Erosion of Lawn Areas, etc. ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ __________________________
__________________________
Signed Date ___________________________________________________________________________
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.7 Sample Preliminary Building Evaluation Report
PURPOSE: This report provides the residents and development team members a professional assessment of the physical condition of the property, its rehabilitation needs, and a cost estimate for the required rehabilitation work. WHO PREPARES IT: This report is prepared by an architect, building or general engineer, or general contractor after a thorough physical inspection of the property. WHEN TO USE: The inspection of the property and preparation of this report is done after the residents have completed the Apartment Rehabilitation Surveys, so the engineer or contractor will have the benefit of the survey information before conducting the inspection. The report can be presented to the residents any time after it is prepared. I. Purpose
This report provides preliminary information to the residents and other development team members on the current physical condition of the property, its likely rehabilitation needs and provides a preliminary cost estimate for the recommended rehabilitation. THE COST ESTIMATES CONTAINED IN THIS REPORT ARE BASED ON ASSUMPTIONS WHICH MAY CHANGE AS MORE DETAILED INSPECTIONS OF BUILDING CONDITIONS ARE DONE. THEY HAVE BEEN PREPARED WITHOUT ARCHITECTURAL DRAWINGS OR SPECIFICATIONS FOR THE REHABILITATION WORK. ALTHOUGH THEY REPRESENT CURRENT CONSTRUCTION COSTS FOR THE AREA, THEY ARE ALSO SUBJECT TO CHANGE BASED ON ANY SPECIFICATIONS AND ARCHITECTURAL PLANS PRODUCED. THESE ESTIMATES (HAVE/HAVE NOT) BEEN PREPARED ASSUMING FEDERAL DAVIS-BACON WAGE REQUIREMENTS. This report contains the following sections and analyses: 1.
Project Description
2.
Discussion of Building Code Issues
3.
Remaining Useful Life of Major Building Systems
4.
Recommendations for Rehabilitation Plan
5.
Preliminary Rehabilitation Cost Estimate
II. Project Description
The project is made up of 5 three-story garden apartment structures. Each building contains 16 apartment units. One apartment is used as a rental office. There is no public meeting space for the residents. Laundry rooms are located in the
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.7 Sample Preliminary Building Evaluation Report (continued)
basements of three buildings. Heat and hot water are delivered through a central gas system. The complex appears to have been built between 1945 and 1950. The structures consist of masonry foundation and bearing walls supporting a wood frame. Net rentable area is approximately 59,400 square feet. The unit mix and approximate sizes are as follows: Unit Type
Avg. Size (Sq. Ft.)
Number
700 825 975
50 21 9
1-Bedroom 2-Bedroom 3-Bedroom III. Building Code Issues
Our inspection of the property suggests that modifications will be necessary to bring the property into compliance with current state codes related to fire safety and federal laws related to accessibility for handicapped individuals. Specifically, we recommend the following: 1.
Make all building entrances accessible through the construction of ramps to serve wheelchairs.
2.
Adapt four ground-level apartments (5% of total to meet state requirements) to be handicapped accessible with wider doorways, modified bathrooms, modified kitchens, and modified light switches.
3.
Install fire protection sprinkler systems in all building common areas and apartment units. The adequacy of the existing water supply system must be investigated further by a civil engineer to determine if adequate flow and pressure exists to accommodate a sprinkler system without installing new dedicated water supply lines.
4.
Investigate with local government’s fire officials whether or not existing exterior fire escapes can be retained or if new enclosed fire stairs are required at rear of each building.
IV. Estimated Remaining Useful Life of Building Systems
The following is an example drawn from one property. It is not meant to indicate universal lifespans of specific building systems for all properties. Since maintenance of building systems, quality of original construction and type of occupancy vary from property to property, building systems will age at different rates in different geographic areas and from property to property. This example is presented to show the format by which such evaluations can be presented to resident groups. Item
Age (Years)
Exterior Walls Roof Windows Gas Ranges
40 15–20 40 20
792
Remaining Useful Life Indefinite with maintenance. None. Exceeded. 0–5 years. None. Exceeded.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.7 Sample Preliminary Building Evaluation Report (continued) Item
Age (Years)
Refrigerators Kitchen Cabinets Plumbing Fixtures Boiler
12–15 30 40 10
Heating Piping Hot Water Heaters Water Supply Piping Drain & Sanitary Piping Electrical Switchgear Equipment Electrical Wiring & Apt. Panels
Remaining Useful Life
20 5–8 40 40 25
None. Exceeded. None. Exceeded. None. Exceeded. 15–20 years with regular maintenance. 15–25 years. 2–3 years. 0–5 years. 10 years with maintenance. None. Exceeded.
25
None. Exceeded.
V. Recommended Rehabilitation Items
This section of the report should briefly identify significant findings and recommendations for replacement, repair or further investigation upon review of the Apartment Rehabilitation Surveys completed by the residents and the consultant’s inspection of the property. General quantities of items to be replaced or repaired should be provided. This narrative description of the rehabilitation work required provides the basis for the cost estimates which follow. The narrative should address any or all of the following areas: Sitework: Including landscaping, erosion, paving, drainage issues, walkways, fencing, railings, recreation equipment, etc. Walls & Structural Elements: Including exterior walls, foundations, brick pointing, chimneys, retaining walls, etc. Roof: Including flashing, downspouts, gutters. Windows Heating/Air Conditioning Plumbing Electrical: Including increasing incoming service capacity. Fire Safety & Alarm System: Including smoke detectors Handicapped Accessibility Elevators Security & Intercom Systems Stairs, Landings, Entry Doors Kitchens Bathrooms Flooring Walls, Ceilings, & Trim Insulation
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.7 Sample Preliminary Building Evaluation Report (continued) Balconies & Decks Doors/Closets & Storage Areas Laundry Rooms Common Areas: Including Meeting Space for Resident Council. VI. Preliminary Rehabilitation Cost Estimate
The cost estimate should be presented with costs for each area of rehabilitation work described above. While these categories may not be the ones cost estimators or general contractors use, they are more easily identified by residents than the technical terms used in construction specification manuals. A good example is “HVAC or MECHANICAL,” which is the term used in specification manuals for heating, cooling and ventilation systems. Residents can much more easily identify with “Heating/Air Conditioning” or “Furnaces” or “Boilers” than they can with the term “HVAC.” Ask your consultant to be sensitive to the terminology used when preparing these sections of the report so that the residents are not confused or intimidated by technical language. Also ask your consultant preparing this report to include a cost for each item listed under the “Major Building Systems” section, so the residents can clearly see the cost implications of deferring replacement or repair of any of these items. If your property does not have a space that can be used for meetings of the Resident Council and the full membership, ask the consultant to estimate the cost and design implications of creating such a space. Convenient meeting space is an essential physical element of any successful resident conversion plan. The following is an example of how rehabilitation costs can be broken down and shown in a way which is most easily used by the residents: Preliminary Rehabilitation Cost Estimate Amount A.
SITE COSTS Landscaping
$ 20,000
Parking Lot Repairs
10,000
Playground Equipment
4,000
Repair Walks & Railings B.
15,000
Subtotal
$ 49,000
EXTERIOR WALLS & STRUCTURAL ELEMENTS Brick Repairs
$ 12,000
Foundation Waterproofing
5,000
Balcony Repairs C.
20,000
Subtotal
$ 37,000
ROOF Replace Decking & Roof Surface
$150,000
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.7 Sample Preliminary Building Evaluation Report (continued) Reflash Parapet Walls
20,000 30,000
Replace all Gutters & Downspouts Subtotal D.
E.
F.
G.
H.
$200,000
WINDOWS Replace All with New Double-Paned Aluminum HEATING/AIR CONDITIONING Repair, Clean, Service Boilers Replace All Hot Water Heater Air Conditioning
$ 70,000 $ 15,000 20,000 0
Subtotal
$ 35,000
PLUMBING Replace All Water Supply Lines Snake all Drain and Sanitary Lines Subtotal
$ 50,000 5,000
ELECTRICAL Install New Service, Wiring, Panels Replace Lighting Fixtures as Needed Subtotal
$300,000 20,000
$ 55,000
$320,000
FIRE SAFETY Install Sprinkler System
$160,000
Fire Escapes/Fire Stairs
0 15,000 16,000
Upgrade Fire Alarm System Install Smoke Detectors in All Units Subtotal I.
J.
$191,000
HANDICAPPED ACCESSIBILITY Install Ramps to Each Building Adapt Four Apartments
$100,000
Subtotal
$160,000
60,000
SECURITY SYSTEM & INTERCOM Intercom Access System
$ 25,000 20,000
Security System—Doors, Windows Subtotal K.
$ 45,000
STAIRS, LANDINGS, ENTRY DOORS Replace Entry Doors
$
Replace Stair Treads Where Needed Repair Stair Railings & Repaint As Needed Subtotal
$ 13,000
795
6,000 4,000 3,000
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.7 Sample Preliminary Building Evaluation Report (continued) L.
M.
KITCHENS Replace Floors, Cabinets, Appliances Replace Sinks & Countertops Subtotal
$ 356,000
BATHROOMS
$
49,000
Reglaze Tubs
$
8,000 33,000
$300,000 56,000
Replace Toilets, Medicine Cabinets, & Fixtures Regrout Tile as Needed
8,000
Subtotal
$
49,000
N.
WOOD FLOORING
$
80,000
O.
WALLS, CEILINGS, & TRIM Patch Plaster, Replace Drywall Where Needed Replace Trim as Necessary
$
40,000
P.
5,000 80,000
Repaint Walls, Ceilings, Trim Subtotal
$ 125,000
INSULATION
$
20,000
Q.
BALCONIES/DECKS
R. S.
DOORS/CLOSETS/STORAGE AREAS LAUNDRY ROOMS
$
0 10,000
$
5,000
T.
COMMON AREAS
$
3,000
U.
CREATE MEETING SPACE
$
20,000
V.
ENVIRONMENTAL HAZARDS ABATEMENT Asbestos Abatement
$ $
25,000 30,000
Underground Storage Tank Removal Lead Paint Abatement
$ 400,000
Subtotal
$ 455,000
Total Rehabilitation Costs
$2,298,000
Cost Per Unit:
$ 28,725 The above figures include a general contractor’s overhead, profit and general requirements totalling 25 percent. IF A GENERAL CONTRACTOR’S FEES ARE NOT INCLUDED IN EACH LINE ITEM COST, MAKE SURE THEY ARE SHOWN AS SEPARATE COST ITEMS.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.8 Feasibility Analysis Report
The Feasibility Analysis Report provides a comprehensive assessment of the potential for successfully converting the property to resident ownership. It incorporates the findings of the Resident Profile Report, Preliminary Market Survey, Preliminary Building Evaluation, Operating Expense Analysis Report and any Economic Development and Security Plans. It also presents projected development costs, operating expenses, monthly housing costs after conversion, and assumptions about the sources of funding required to complete the rehabilitation and conversion of the property. The form of ownership either selected by the residents or most appropriate for the property is discussed as well as an evaluation of the residents’ interest in and readiness to assume ownership of the property. Upon presentation of this report and discussion of its findings with the residents, the residents are prepared to vote on whether or not they wish to pursue the ownership option. OUTLINE 1.
A recommendation of the form of homeownership most appropriate for the residents and the site (i.e., condominium, market-rate cooperative, limited-equity cooperative, mutual housing, other).
2.
A discussion of the monthly housing costs which the majority of residents can afford and which are supportable in the market area.
3.
A presentation of the likely operating costs of the property following rehabilitation, conversion to resident ownership and incorporation of any new security measures recommended.
4.
A discussion of prevailing market conditions which would hinder or enhance a conversion to resident ownership.
5.
A discussion of the down-payment requirements for purchasing households.
6.
A presentation of the overall development costs associated with conversion to resident ownership.
7.
A discussion of available and likely financing and subsidy sources for the conversion to resident ownership, including the amount of HOPE VI implementation funds for which the project is eligible.
8.
A discussion of the extent to which recommended economic development activities can enhance the feasibility of resident ownership.
9.
A 20-year operating pro forma, incorporating monthly housing cost, operating cost, vacancy, reserves, equity, financing, and subsidy assumptions.
10.
If necessary, an interim operating budget for any period of grantee or resident ownership prior to the transfer of ownership interests.
11.
A discussion of the residents’ interest in and commitment to the form of multifamily homeownership recommended based on the results of the organizing efforts and training program.
12.
A discussion of property management capacity both among the residents and within private firms in the region to successfully manage the property after conversion to resident ownership.
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.8 Feasibility Analysis Report (continued) 13.
A discussion of any legal requirements or legal proceedings needed to effect resident ownership.
14.
A recommendation based on the factors cited above as to whether or not conversion of the property to resident ownership is feasible. If not feasible, a discussion of other options for improving the property with resident involvement in property management or in the redevelopment of the property as a rental project.
15.
A discussion of the next steps required to either implement the recommended home-ownership program or pursue any recommended alternatives to homeownership.
SAMPLE OPERATING EXPENSE ANALYSIS REPORT The following is a guide for analyzing your property’s operating costs and presenting this technical information in a meaningful way to the residents. In order to prepare this analysis, operating income and expense statements must be obtained from the current owner for at least the past two operating years. Obtaining three full years of operating statements is preferable. Operating data from other similar properties in the market area or region must also be obtained. Since your HOPE 2 property has been either owned, insured, financed, or subsidized by HUD or a state or local government, annual financial audit reports of income and expenses most likely have been required and should be available. Operating income and expense data on comparable properties in the market area can be obtained from other properties you may have developed or know about through other owners, government officials, lenders, etc. If financial statements from other properties are not available, you can use the Institute of Real Estate Management’s (IREM) Income and Expense AnalysisApartments reports or similar regional reports for your region. The Institute for Real Estate Management is located in Chicago, Illinois and its telephone number is (312) 329-6000. Ask for the publications department. Sometimes the data in these reports is outdated or is derived from different types of apartment properties in several market areas. Be careful when using the average expense figures from these reports as they may not be as reliable as data from properties in your immediate market area. THE FOLLOWING IS AN OUTLINE OF AN OPERATING EXPENSE ANALYSIS REPORT SHOWING HOW OPERATING DATA CAN BE PRESENTED AND INTERPRETED. DO NOT EXPECT THE RESIDENTS TO GRASP ALL OF THE FINANCIAL CONCEPTS AND EXPENSES DETAILED IN THIS REPORT THE FIRST TIME IT IS PRESENTED. THE FIGURES TEND TO BE INTIMIDATING. THE PRESENTATION OF THIS INFORMATION SHOULD FOLLOW SHORTLY AFTER DELIVERING THE RESIDENT TRAINING PROGRAM SESSION ON “BUDGETING AND FINANCIAL MANAGEMENT” SO THAT THE RESIDENTS CAN BE INTRODUCED TO THE FINANCIAL CONCEPTS PRESENTED IN THIS REPORT BEFORE HAVING TO FOCUS ON THE SPECIFIC FIGURES, ANALYSES, AND CONCLUSIONS IT CONTAINS.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.8 Feasibility Analysis Report (continued) I.
PURPOSE
List for the residents and any consultants who might review this report why the analysis is being done and how it is to be used. A.
To introduce the residents to the costs associated with owning and operating multifamily housing, the relationship between operating expenses and monthly housing costs and the financial management concepts residents must become familiar with if they are to acquire the property and make the leap from tenants to owners.
B.
To present a fair assessment of the property’s current operating condition by presenting two or three years of recent data on each expense category as well as vacancy and collection loss rates.
C.
To identify any trends from the operating expenses and rent collections over the past three years that may affect any rehabilitation plan or future management practices.
D.
To compare the property’s operating expenses with those of other similar properties in the market area or region to identify any specific expenditures that might be unusually higher or lower than those of comparable properties.
E.
To provide a projection of operating costs during the first full year following any rehabilitation and acquisition by the residents so the members of the development team can develop a complete analysis of the overall affordability and feasibility of any conversion effort.
F.
To provide the basis for any future property management firm to develop an operating budget for the property.
II. HISTORICAL OPERATING EXPENSE ANALYSIS
Identify the source of the data you are using (i.e., independently prepared annual audit reports, annual or quarterly financial statements prepared by the owner or owner’s management agent, monthly operating statements, etc.) and the period these reports cover (i.e., last three years, two years, etc.). Present data for the past two years as follows even if you analyzed three years of data. Too many figures are overwhelming. The following example is based upon a 56-unit garden apartment property where annual statements prepared by the owner’s managing agent were reviewed for 2000, 2001, and 2002. Based on the expense information presented herein and analysis of expenses for 2002, the following issues need to be addressed: — Maintenance and repair expenses rose dramatically over the three years, especially in the plumbing repair category. This suggests that major problems may exist with the plumbing system. While water and sewer costs were reduced from 2001 to 2002, they are still high at $21 per unit per month. It is possible that the plumbing system is leaking badly to warrant such high repair costs and water and sewer charges. Since the other repair costs are listed as “Miscellaneous,” further investigation is warranted to see if other major building systems had higher than normal increases in maintenance costs.
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.8 Feasibility Analysis Report (continued)
— The real estate tax figure of $17 per unit per month seems quite low and may be unreliable. This should be checked with the local authority that maintains records of property tax assessments and billings. — The administrative costs have declined significantly over the past three years, indicating that the owner may be trying to cut costs where possible to cover the increases in maintenance and repair costs. The total per unit per month expenses for 2002 of $213 is quite low for a property in which heating costs for the units are paid by the owner. This suggests that the owner is trying to limit services as much as possible to cover the fixed costs related to utilities and repairs. The fact that total operating costs declined from 2000 to 2002, and went down 10% from 2001 to 2002 is also evidence that service at the property is declining. Normally, operating costs for stabilized properties increase at a rate of 3 to 5 percent per year. Residents should expect operating costs after rehabilitation to be higher in order to deliver an adequate level of maintenance and management services. III. CAPITAL EXPENDITURES
Briefly summarize any uses of funds drawn from Reserves for Replacement or other funds to make capital improvements to the property over the past three years and whether or not such improvements appeared to have reduced or will reduce annual maintenance, repair or utility costs. IV. VACANCY AND COLLECTION LOSS
Identify the annual gross potential income from apartment rents and the annual rent collections. Identify which portion of the difference between potential and actual collections was due to vacancies and which was due to nonpayment of rent. If these are not specifically identified, use the marketing/advertising and legal services figures to identify the portion attributable to vacancies and that attributable to nonpayment. High marketing costs in any year would indicate high vacancy rates, and high legal costs would indicate eviction proceedings were undertaken against tenants for nonpayment of rent or other lease violations. Also talk to the property manager to get his/her analysis of vacancy or collection problems.
Annual Gross Potential Income From Apt. Rents Vacancy Loss Collection Loss/Bad Debts Effective Gross Income
Percent Change
2000
2001
2002
$254,800
$260,000
$260,000
+2%
($ 10,141) ($ 7,644) $237,015
($ 20,800) ($6,982) $232,218
($ 21,361) ($ 7,396) $231,243
+110% –3% –2%
800
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.8 Feasibility Analysis Report (continued)
In this example, there could be several reasons for the dramatic increase in lost income due to vacancies. The annual increase in rent from 2000 to 2001 was modest, (only 2 percent), and losses from nonpayment of rents remained fairly constant in dollars over the three years. If the vacancies are not due to some dramatic loss or cutback in building services or some events in the neighborhood such as a series of violent crimes, it is likely that the rents residents were willing to pay for these units reached their maximum in 2001. Total losses from vacancies and nonpayment of rents in 2000 was $17,785 (7%), which is normally manageable. This rate grew to 11 percent with the rent increases in 2001, and Effective Gross Income started to drop in real dollars from $237,015 to $232,218. The slight increases in rent in 2001 were enough to make a significant number of residents look for other housing options. This analysis is valuable in projecting vacancy rates to expect following any conversion, monthly housing cost levels that can be supported in the market area and whether or not there is a problem with residents paying their monthly housing charges. V. OPERATING EXPENSE COMPARISON WITH OTHER PROPERTIES
Use the most recent annual operating expense figures to compare them with those from other comparable properties in the market area or region. Operating data from properties in the immediate market area of similar size, age and amenities provide the most useful comparisons. If such properties do not exist, or if income and expense statements cannot be obtained for such properties, use the Institute for Real Estate Management’s (IREM) Income and Expense Analysis—Apartments reports for your region as a basis for comparison or other such reports which may be available from regional Councils of Government or Apartment Owners and Managers Associations. Two different measures can be used to compare operating expenses: 1) cost per square foot of rentable area and 2) cost as a percentage of gross potential income. Use one of the two measurements in the report. Presenting both analyses to the residents can be confusing. The following is an example which reflects the experience of one property in a specific geographical area. The figures and percentages, therefore, should not be used as guides in developing an analysis for your property. In this example, operating cost as a percentage of gross potential rental income is used to compare costs of the property to the actual average costs from three similar properties in the market area. The comparison of the property’s 1997 expenses with those of three similar properties in the area leads to the same conclusions as in the historical analysis of the property’s expenses. The following conclusions can be made from the data: — The property’s expenses are lower than the average expenses from other similar properties in the market area, but maintenance and utility expenses are higher than average. — The real estate tax figures reported by the management agent are very low and don’t appear to be reliable.
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SAMPLE DOCUMENTS AND DISCLOSURE STATEMENTS
E XHIBIT 19A.8 Feasibility Analysis Report (continued) — The administrative costs are very low, suggesting that management services and the oversight of maintenance work may be declining to offset high physical maintenance costs. — The higher than average costs for gas, water, and plumbing repairs suggests that there may be major problems with the plumbing and heating systems. — Based on this comparison with other properties, the residents should expect significantly higher operating expenses than current expenses if adequate maintenance, repair, and management services are to be delivered. VI. PROJECTED OPERATING EXPENSES AFTER REHABILITATION
This section of the report provides the first projections of operating expenses after rehabilitation based on available information. THE ASSUMPTIONS USED IN MAKING THIS PROJECTION MUST BE MADE CLEAR BECAUSE SOME OF THEM ARE LIKELY TO BE MODIFIED AS NEW INFORMATION IS GATHERED. MAKE IT CLEAR THAT THIS PROJECTION IS SUBJECT TO REVISION AS THE OTHER ELEMENTS OF THE FEASIBILITY ANALYSIS ARE REFINED. BE SURE YOU PROJECT THE OPERATING BUDGET FOR THE FIRST FULL STABILIZED YEAR AFTER REHABILITATION, AFTER ANY MARKETING PERIOD REQUIRED TO MEET STABILIZED OCCUPANCY. THIS MAY BE TWO TO FOUR YEARS INTO THE FUTURE. AND, BE SURE TO INCLUDE AN OPERATING EXPENSE LINE ITEM FOR ONGOING RESIDENT TRAINING. ASSUMPTIONS: 1.
The property’s rentable area is $41,640 square feet.
2.
The property after rehabilitation will contain 56 apartments with zero efficiency, 35 one-bedroom, 19 two-bedroom and 2 three-bedroom units and the following other uses: [fill in other planned uses such as day care center, tot lot, community room, etc.]
3.
Residents will pay the following utilities themselves: [fill in electric, heat, hot water, etc.]
4.
The homeowners’ association will pay the following utilities: [fill in water, sewer, heat, hot water, etc.]
5.
The property management services anticipated are [more, less] extensive than currently provided, and these services will cost [more, less] than current costs.
6.
The residents successfully acquire the property and establish a [condominium, cooperative, MHA, other] form of ownership.
7.
The scope of the rehabilitation adequately addresses repair and replacement of all building systems currently identified in need of repair or replacement and addresses all site improvements currently identified as needed.
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THE PROJECT COMPLETION PHASE
E XHIBIT 19A.8 Feasibility Analysis Report (continued)
In the following example, it is assumed that the property is converted by the residents to a cooperative, with a private property management firm hired to manage the property. All utilities are assumed to be metered as previously metered. This projection was developed by first establishing a current year budget that would adequately provide for the property’s management, maintenance, and repair needs based on the historical and comparative analyses of operating costs. Then, most expenses were trended forward annually from the current year’s budget at the rate of 5 percent. Real estate taxes and insurance costs were projected based upon an estimate of the property’s value after rehabilitation of the property and then using the local assessment office’s formula for establishing taxes from market value. Utility costs were projected based upon upgrading of the gas heating system to be more efficient and elimination of all leaking problems in the water delivery system. Maintenance payroll costs were projected based on paying a semiskilled maintenance employee for 25 hours per week at the rate of $10.00 per hour. Ongoing Training costs are assumed for board members and committee members to attend specific training programs and conferences throughout the year. VII. CONCLUSIONS
Listed below are recommendations for the scope of rehabilitation and the future management of the property based on the data reviewed: 1.
Based on the analysis of operating costs, the property’s plumbing and heating systems may have serious problems which will need to be addressed through the rehabilitation plan. The operating costs for plumbing repairs and water/sewer charges indicate that an engineering analysis of the heating system and plumbing lines is warranted.
2.
A security access system is recommended at each building entry door, and alarming each ground level window is also recommended with an ongoing monitoring service.
3.
The time and cost of maintenance staff should be increased to allow for proper cleaning and general repairs.
4.
While a fully staffed management office on the site is not warranted, the Resident Council should consider having an office with a phone staffed by members of the association, either paid or unpaid. The projected operating costs following rehabilitation include a small amount of money to pay an association member to staff this office on a part-time basis.
5.
The residents should expect operating costs to be considerably higher than current expenses if the property is rehabilitated and acquired by the residents.
THIS ANALYSIS REFLECTS ONLY THE COSTS ASSOCIATED WITH THE DAILY OPERATION OF THE PROPERTY. SUCH ITEMS AS DEBT SERVICE ON MORTGAGE LOANS AND FUNDING OF OPERATING AND REPLACEMENT RESERVE ACCOUNTS HAVE NOT BEEN CONSIDERED IN PREPARING THIS EXPENSE REPORT.
803
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Index
Accountants: cooperative/condominium financial auditing, 760 expenses, 79 role of, 25–26 Acquisition loans, 88–89 Acquisition phase, of real estate development, 15–16 Adjustable rate mortgages (ARMs), 91 Adjustments, in purchase contracts, 435–436 Advertising expenses, 78 Affordability, determining, 71–73 Affordable housing, 3–11 and federal policies, 9 change in nature and character of, 9 current trends in, 6–10 decline in federal support, 6 fall in rental housing supply, 8 homeownership rate, 3 mixed-income communities, 9 One Economy Corporation, 7 opportunities for nonprofit organizations, 10 homeownership, 10 rental housing, 11 public housing’s role in the development of, 282 role of states, 6 scrutiny of government-sponsored enterprises, 10 shift to suburbs, 7 state of America's working poor, 4–6 Tenant-based rental assistance, 6 Affordable Housing Act of 1990, 3 Affordable housing loan consortia, 160–217 Affordable Housing Program (AHP), 141–142 competitive process, 142–144 homeownership set-aside program, 144, 229 technical and application assistance, 144–145 Affordable rental housing current state in America, 4 decline in growth of, 4 AIDS (acquired immunodeficiency syndrome): grants for providing support services, 359 rent subsidies for, 358
䡲
Allowances and reserves, 80–83 changes in deposits to, 77 operating reserves, 81 prefunded replacement, 59 replacement reserves, 82–83 vacancies and bad debts, 80 American Institute of Architects (AIA) documents: AIA document A101, 593–598 AIA document A201, 599–602 competitive bidding and, 579 design/build contracts, 590–593 negotiated contract with gross maximum price, 585–590 American Land Title Association (ALTA), 538 Americans with Disabilities Act (ADA), 53–54 Amortization, loan, 92–94, 105 Annual Contributions Contract (ACC), 301 Apartment Investment and Management Company (AIMCO), 261 Apartment rehabilitation survey, 785–790 Appeals panels, residential community, 721 Appraisals: cost approach, 39 costs, 57 Federal regulations and, 40–41 income capitalization approach, 39 lenders fee, 95 market comparison approach, 38 methods of, 38–40 modified income capitalization approach, 46–48 per-unit cost analysis, 46–48 subsidized housing and, 42–44 Appraiser, role of, 31 Appropriated funds, 116–117 Architect: building program development, 565 design evaluation for feasibility and cost, 566 fees, 56 owner's representative during construction, 566–568 role of, 25–26, 561–568 during acquisition and construction, 28 during feasibility, 26–28
805 䡲
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INDEX
Asbestos, 52 selective rehabilitation and, 689 “As is” sale, 438–439 Assignment rights, in purchase contracts, 442 Attorneys: free or pro bono services, 23–24 general counsel, 22 legal fees, 57, 79, 95 specialized counsel, 22–23
B Bad debts, 80 Balloon mortgages, 93 Baltimore City Homes Inc., 672 Bargain sales, 348 Board and care facilities, mortgage insurance for, 273, 322 Bond financing: general obligation bonds, 117 in mixed-finance transactions, 290 revenue bonds, 117 state and local government general, 117–118 taxable bonds, 118–128 tax-exempt bonds, 118–128 Bookkeeper, role of, 25–26 Bring IT Home campaign, 7 Brokerage commissions, 441 Brooke Rents, 575 Brownfields Redevelopment Initiative, 132 Budgeting, cooperatives/condominiums, 757–761 Building inspection techniques, 676–677 Building permits, 539
C California Community Reinvestment Corporation, 164–166 Cape Affordable Housing Loan Consortium, 166–172 Capital sources, 88–104 equity, 245–278 equity and sales proceeds, 103–104 grants, 102, 225–244 loans, 88–102, 107–217 public housing funds, 279–313 Capitalization (cap) rate, 46 Central Florida Community Reinvestment Corporation, 168–169 Certificates of occupancy, 539 Certified public accountants, see Accountants, 760 Charitable purpose test, 504–506 Chattels, security agreements for, 97 Chlorofluorocarbons (CFCs), 53 Cincinnati Development Fund, 169–171
䡲
806
City “in rem” property, 349 City or region-wide funding collaboratives, 238–244 Cleveland Housing Network, case study, 368 Closing costs, in purchase contracts, 436 Collection losses, 76 Commercial banks lending, 139–140 Commercial facilities, 74 Community Development Block Grants (CDBG), 6, 71, 108–110, 132, 295–296 Community Development Corporations (CDC), 151–153 Community development entity (CDE), 265 Community Development Financial Institutions (CDFI), 156 Community Financing Consortium, Inc., 171 Community Investment Corporation, 172 Community Investment Corporation of North Carolina, 175 Community Investment Funds (CIF) loan program, 141 Community Investment Program (CIP), 141 Community organizer, role of, 29–31 Community Preservation & Development Corporation (CPDC), 375–380 Community Preservation Corporation, 176 Community Reinvestment Act (CRA), 101, 139, 162, 244 Competitive bidding, 577–585 developing bid documents, 579–585 invitations to bid, 578–579 process of, 577–578 Comprehensive property management approaches. See also Rental property, 717 Condemnation, 440 Condominiums: annual budget, 758 cooperative housing compared, 745–752 financial statements, 759–760 house rules, 753, 762–768 identity and form of ownership for, 474 legal documents, 748 mortgage insurance programs for, 320 operating reserves, 758–759 overview of, 473–474 replacement reserves, 759 settling permanent loan, 716 technical and legal counseling, 761 training issues, 761 Connecticut Housing Investment Fund, Inc., 180 Consortium of Sales Area Lenders, 179 Construction codes, applying in selective rehabilitation, 691–692 Construction contingency, 54
䡲
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INDEX
Dallas Affordable Housing Partnership, 182 Date of acceptance clause, 442 Davis-Bacon wages, 305 Debt coverage ratio, 98 Debt service, in mixed-finance transactions, 290 Deed, 96, 435, 535–536 Defensible space concepts, 728 Delaware Community Investment Corporation, 183 Department of Housing and Urban Development (HUD): attracting pension fund investments, 149 determining affordability and, 71 developing housing for homeless, 233–236 Economic Development Initiative (EDI) grants, 227 Empowerment zones and Enterprise Communities initiative, 130–132 Habitat for Humanity International, 227 supportive housing for elderly, 129 supportive housing for people with disabilities, 129–130 Deposit, in purchase contracts, 432–434 Design/build contract, 590–593 approach of, 590–593 construction contract, 590 Designated blighted area, 122 Detroit Neighborhood Investment Corporation, 186 Development fees, in mixed-finance transactions, 291 Development teams, 19–32 accountant/bookeeper, 25–26 appraiser, 31 architect, 25–26 attorneys, 21–24 community organizer, 29–31 conflicts and, 32 construction manager, 29 financial development specialist, 20–21 general contractor, 29 multiple roles, 32 oversight, 32 property management company, 28 sponsor, 20 track record of, 97 Diaz Opinion, 283–284 Direct Loans, 133 Disabilities/handicaps: grants for housing for, 232 grants for providing support services, 358, 359 rent subsidies for, 357, 358 supportive housing for, 129
Construction contract, 593–602 AIA document A101, 593–598 AIA document A201, 599–602 Construction management, selective rehabilitation and, 682–683 Construction manager, role of, 29, 575 Construction phase, of real estate development, 15–16 Construction process, 553–664 checklist for, 605 completion of construction, 603–604 construction loan, 554 contract negotiation and bidding, 577–593 competitive bidding, 577–585 design/build contract, 590–593 negotiated contract with gross maximum price, 585–590 participants and responsibilities, 555–575 construction manager, 575 general contractor, 568–575 owner, 556–561 participants_ roles, 555 rehabilitating occupied property, 602–603 Construction, architects role in, 28 Continuum of Care funding, 234 Contractor, selective rehabilitation and, 683–684 Controllability, in expenses, 84 Conversion fees, 57 Cooperative housing: annual budget, 758 condominiums compared, 745–752 financial statements, 759–760 house rules, 753, 762–768 identity and form of, 472–473 legal documents, 752 operating reserves, 758 overview of, 471–472 replacement reserves, 759 technical and legal counseling, 761 training issues, 761 Corporations: defined, 467 profit versus nonprofit, 467–468 Cost approach, appraisal, 39 Cost estimates, in selective rehabilitation, 666–681, 708–709 Credit enhancement, 118, 318, 325 government mortgage insurance, 318, 323 personal asset pledges, 325 private for-profit mortgage insurance, 324, 325 private nonprofit mortgage insurance, 325 third-party guarantees, 318 Credit reports, 95
䡲
807
䡲
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INDEX
Fair market rent (FMR), 112 Fannie 3/2, 336 Fannie Mae, 10, 327, 336 American Communities Fund, 260 community land trust mortgage loans, 335, 336 community lending programs, 336 Fannie Mae’s community home buyer’s program, 336 lease-purchase mortgage loans, 326 low-income housing projects and, 251, 259 partnership offices, 327 single-family housing programs, 327 subsidized second mortgages, 337 Farmers Home Administration, 354 Federal Deposit Insurance Corporation (FDIC), 139, 163 Federal deposit insurance corporation disposition properties, 347, 348 Federal government: grants, 225–236 for developing housing for elderly, 232 for developing multifamily owned housing, 230–232 for developing single-family homeownership, 225–229 for downpayment assistance, 229–230 for housing for homeless, 233–236 for low-income purchasers, 229–230 persons with disabilities, 232 Safe Neighborhood Action Grants, 232 loans, 129–138 Brownfields Redevelopment Initiative, 132 empowerment zones and enterprise communities initiative, 130–132 Portfolio Reengineering program, 128–138 rural cooperative loans, 134–135 rural rental housing loans, 135–136 self-help housing loans, 137–138 supportive housing for elderly, 129–130 supportive housing for people with disabilities, 129 USDA Rural Housing Service, 132–134 mortgage insurance programs, 318, 323 Federal Home Loan Bank, 141, 142–144 Federal Home Loan Mortgage Corporation (Freddie Mac). See Freddie Mac, 326 Federal Housing Act of 1934, 3 Federal Housing Finance Board, 140 Federal National Mortgage Association (Fannie Mae). See Fannie Mae, 326 Finances, managing rental property, 719
Economic Development Initiative (EDI) grants, 227 Edgewood Seniors Limited Partnership, 378 Edgewood Seniors Preservation Corporation, 377 Elderly: grants for housing for, 232 grants for providing support services, 358, 359 public housing and, 308–309 rent subsidies for, 357 supportive housing for, 129–130 Electric expenses, 78 Electrical systems, selective rehabilitation and, 691–692 Eminent domain, 440 Empowerment zones, 130 Energy consumption, reducing, 362 Energy efficiency, improving in selective rehabilitation, 686–687 Enterprise Communities, 130 Enterprise Foundation, 149–151, 684 Enterprise Mortgage, Inc., 343, 344 Enterprise Social Investment Corporation, 252, 256–258 Enterprise zones, 361 Environmental conditions, costs to address, 51–53 Equity funding: Fannie Mae's American Communities Fund, 260 historic investment tax credit, 262–264 low-income housing tax credit and, 246–259 real estate investment trusts, 261–262 Equity funds, creation of, 245 Equity, and raising capital, 103–104 Escrow agreements, 433, 551 Exempt-facility bonds, 120–123 Expense projection. See also Total development costs, 69–84 allowances and reserves, 80–83 controllability of expenses, 84 general guidelines, 74 lenders role in, 83–84 past operation expense evaluation, 75–77 annual cost adjustments, 75 annual costs per expense category, 75–77 without operating history, 77–80 Expense tracking, 25–26
F Facts-and-circumstances test, 505–506 Fair Housing Act, 479–480 Fair housing laws, 479–480
䡲
808
䡲
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INDEX
Ginnie Mae, 338, 339 Good title, 99–100 Government agencies, selective rehabilitation and, 684–685 Government National Mortgage Association (Ginnie Mae). See Ginnie Mae, 326 Government regulations, settlement process and, 539–540 Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, 10 Grants. See also Subsidies, 102 federal government, 225–236 for-profit corporations, 244 private nonprofit foundations, 236–244 state and local governments, 236 Greater New Haven Community Loan Fund, 189 Grievance hearings, public housing and, 309 Guaranteed Loans, 132 Guaranteed maximum price (GMP), 587 Guarantees, in mixed-finance transactions, 292 Guard rails, 690 Gut rehabilitation, avoiding, 685–686
Financial development specialist, role of, 20–21 Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 40–41, 140 Financial statement, for cooperatives/ condominiums, 759–760 Financing. See also Capital sources applying for, 465–466 fees, 56, 94–95 requirements, determining ownership entity and, 476 Fire casualty, 322 Fire egress, selective rehabilitation and, 690 Fire safety issues, selective rehabilitation and, 691 Fire-ratings of materials, 690 First Housing Development Corporation of Florida, 187 501(c)(3) bonds, 123–127 501(c)(3) organizations, 467–468 Flexible subsidy, 359 Foreclosed multifamily property disposition properties, 346, 347 Foundation Communities, Inc, 373–375 Freddie Mac, 10, 336, 338 Affordable Gold, 124, 336 Affordable Gold 3/2, 337 Affordable Housing Group, 336, 338 Affordable Seconds, 337, 338 low-income housing projects and, 251, 259 multifamily disposition program, 348 Native American housing, 336 rural homeownership, 338 Fuel expenses, 78
H Habitat for Humanity International, 227 Hawaii Community Reinvestment Corporation, 190 Hispanic homeownership, 3 Historic investment tax credit, 262–264 certified historic structures, 263 claiming, 264 introduction to, 262 overview of, 262 qualified rehabilitation expenditures, 263 recapture provisions, 264 HOME Investment Partnership Program (HOME), 110–116 funds, 354 limitations of, 112–114 matching requirements, 111 mixed-finance transactions, 294–295 special nonprofit set-aside of, 114–116 use of funds, 110–111 Home Ownership Partnership (HOME) funds, 6 Homeless SuperNofa, 233 Homeless: developing housing for, 233–236 grants for providing support services, 358 project feasibility case study, 373–375 rent subsidies for, 356, 357 shelter plus care, 356, 357 surplus non-HUD properties and, 345, 346
G Gas expenses, 78 General contractor, 568–575 allowances and, 571–572 as superintendent for project, 572 clean up and, 574 construction procedure supervision, 570 construction schedule and, 573 document review, 569 indemnifictation and, 574 permits/fees/notices and, 571 project documents and materials and, 573 role of, 29 taxes and, 571 use of site and, 574 warranty and, 570 General obligation bonds, 117 General partner in a limited partnership structure, 510
䡲
809
䡲
bindex.fm Page 810 Wednesday, March 15, 2006 4:47 PM
INDEX
Homeownership: determining ownership entity and, 471–474 grants for single families, 225–229 low- and moderate-income family assistance, 319 multifamily conversion to apartment rehabilitation survey, 785–790 condominium and cooperative housing, 745–752 determining form of ownership, 756 developing scope of work, 755 evaluating building condition, 755 feasibility analysis report, 797–803 household survey forms, 774–779 legal documents and, 745–754 planning tools, 770–773 preliminary building evaluation report, 791–796 relationship with residents, 756 resident profile report, 780–784 securing financing, 756 securing resident information, 754 state and local conversion laws, 752–754 rent subsidies for, 355, 356 set-aside funds, 229 Homes for South Florida, 192 HOPE VI funds, 225–226, 282, 288–289, 311, 312 eligible uses, 291 HOPE VI Program, 282 House rules, sample, 762–768 Household survey forms, 755, 774–779 Housing and Community Development Act of 1968, Section, 561–563 Housing and Community Development Act of 1974, loan guarantee provision (Section 108), 109 Housing and Urban Development (HUD): federal deposit insurance corporation disposition properties, 347, 348 mortgagee in possession properties, 346, 347 public housing capital funds, 288–290 single-family property disposition, 345 state housing finance agency risk-sharing pilot program, 324 Housing Assistance Payments Contract, 149 Housing Assistance Payments program, 353 Housing business licenses, 539 Housing codes applying in selective rehabilitation, 691–692 violation, in purchase contracts, 439
䡲
Housing Development Fund of Lower Fairfield County, Inc., 194 Housing Development Grants (HODAG), 110, 323 Housing Opportunities for Persons with AIDS (HOPWA), 358
I Idaho Community Reinvestment Corporation, 196 Income capitalization approach, appraisal, 39 Income projection. See also Subsidies projection determining affordability, 71–73 from nonresidential use, 74 general guidelines, 70 identifying targeted levels, 70–71 Income: increasing. See also Subsidies projection, 349, 360 tracking, 25–26 Income-based admissions, public housing and, 308 Indemnification, in mixed-finance transactions, 292 Individual Development Accounts (IDAs), 229 Inflation, expense projections and, 75 Inspection checklist, in selective rehabilitation, 701 Inspection clause, in purchase contracts, 440 Inspections, maintenance, 723 Institute for Community Economics (ICE), 154–156, 160 Institute of Real Estate Management (IREM), 45, 80 Insulation from liability test, 506–509 favorable factors, 507–508 unfavorable factors, 508 Insurance, property, 532 Interest payments, prior to completion, 56 Interest rates, loan, 90–92 Intermediate care facilities, mortgage insurance for, 322, 323
J Joint ventures, 503–526 checklist for, 523–526 low income housing tax credit and, 518–522 options for structuring relationship, 510–518 bona fide function, 514 flexibility in operations, 513 for-profit subsidiary, use of, 515–517
810
䡲
bindex.fm Page 811 Wednesday, March 15, 2006 4:47 PM
INDEX
Loan sales on secondary market, 325, 344 Enterprise Mortgage, Inc., 343, 344 Fannie Mae, 327, 336 Freddie Mac, 336, 338 Ginnie Mae, 338, 339 sales of multifamily loans, 341, 344 sales of single family loans, 326, 341 Loans. See also specific lending source, 107–217 application attractiveness, 102 common loan provisions, 89–96 federal government, 128–138 financing fees/lender charges, 94–95 interest rates and, 90–92 lender considerations and, 97–102 maturity and amortization of, 92–94 prepayment provisions, 95–96 private for-profit entities, 138–149 private nonprofit entities, 149–217 public lenders, 107–108 security and, 96–97 settling permanent, 714–716 state and local governments, 108–128 types, 88–89 nonprofit housing development Loan-to-value ratio, 98 Local community foundations, 160 Local community land trusts, 158–160 Local Initiatives Support Corporation (LISC), 151–153, 341 Long Island Housing Partnership, 197 Low-Income Housing Fund (LIHF), 156–158 loan packaging, 163 Revolving Loan Fund, 154, 157, 216 Low-income housing tax credit (LIHTC): 518–522 applying for, 250–251 benefits of, 246–247 exempt-facility bonds and, 120–122 fund availability, 251–252 Enterprise Social Investment Corporation, 256–258 Fannie Mae investments, 251 Freddie Mac investments, 251, 259 National Equity Fund, 252–256 in mixed-finance transactions, 297 in neighborhood-based projects, 152 in nonprofit housing development, 247–248 ownership decisions and, 476 program requirements, 249–250 compliance period, 250 low-income use, 249 rent restrictions and, 249 types of properties, 250 role of, 296–298
general partner in limited partnership, 510 limited liability corporations, 510–517 limited partner in limited partnership, 510 national geographic ruling, 515–517 parent_s assets insulation, 512 parent_s exempt status protection, 512 single-member nonprofit LLCs, 518 sources of capital, 513 subsidiary as participant in partnership, 512–513
K Kentucky Mountain Housing Development Corporation (KMHDC), 380–381
L Land trusts, 158–160, 476 Lead-based paint, 53 hazards in selective rehabilitation, 687–689 laws and regulations, 55–59 Lead-Based Paint Hazard Control grants, 132 Lead-Based Paint Poisoning Prevention Act of 1971 (LPPPA), 53 Lease purchasing housing, project feasibility case study, 368 Leases and rents, assignment of, 97 Lenders: 538 loan charges, 94–95 project considerations, 97–102 Community Reinvestment Act considerations, 101 debt coverage ratio, 98 developmental team record, 97 guarantees and, 101 income and expense projections, 98 lien priority position, 99–100 loan-to-value ratio, 98 secondary market sales and, 100 role in expense projections, 83–84 Letter of value, 44, 60–62 Licenses and permits, 57, 78 Lien priority position, 99–100 Life insurance companies, loans from, 145–147 LIHTC, See also Low-income housing tax credit (LIHTC), 7 Limited liability companies (LLC), 510–517 Limited partner in a limited partnership structure, 510 Limited-equity cooperatives, 119–120 Living Cities National Community Development Initiative, 153
䡲
811
䡲
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INDEX
Low-income housing tax credit (LIHTC) (continued) securing property after compliance period, 251 tax credit rates and costs, 247–248 Low-income housing: project feasibility case study, 368–371 tax credit tax syndicators, 252, 275 Low-income purchasers, grants for, 229–230
M Maintenance: contracts, 78 expenses, 78 management, 722–725 inspections, 723 resident training, 724 sharing planning with residents, 725 Management company selection: experience in multifamily housing, 477 fees, 478 monthly reporting, 478, 483–501 Management information systems, rental property, 732 Manna Inc., case study, 369–371 Manna Mutual Homebuyers Club, 481–482 Market comparison approach, appraisal, 38 Marketing expenses, 58 Massachusetts Housing Investment Corporation, 199 Maximum occupancy plans: demand exceeding supply, 480–481 supply exceeding demand, 481–482 Mixed Finance, 286 Mixed-income communities, 9 Mixing Public Housing Capital, 286–288 Modified income capitalization approach analysis, 46–48 Mortgage insurance: federal programs, 318, 323 private for-profit mortgage insurance, 324, 325 private nonprofit, 325 state and local government programs, 323, 324 Mortgage revenue bonds, 118–120 limited-equity cooperatives, 119–120 single family and condominium units, 119 Mortgages, as security, 96 Multifamily housing development, grants for, 230–232 Multifamily Housing Property Disposition Act of 1994, 111 Multifamily mortgage insurance programs, 320, 323 Multiyear income and expense projections, 366–367
䡲
812
National Affordable Housing Act of 1990, 110 National Association of Community Development Funds (NACDLF), 158 National Commission of Severely Distressed Public Housing, 283 National Community Development Initiative (NCDI), 153–154, 237 National Equity Fund, Inc. (NEF), 252–256 National Housing Services of America (NHSA), 339, 341 NeighborWorks, 339 National Housing Trust/Enterprise Preservation Corporation, 371 National nonprofit foundations, 160 Negotiated contract with gross maximum price, 585–590 approach of, 585–586 construction contract development, 586–590 Nehemiah Housing Opportunity Grants programs, 110, 312, 323 Neighborhood Networks (NN), 359, 360 Neighborhood Reinvestment Corporation, 684 NeighborWorks, 339 NeighborWorks organizations (NWOs), 339 Network for Oregon, 201 Nevada Community Reinvestment Corporation, 203 New Hampshire Community Reinvestment Corporation, 204 Nonamortizing loans, 92, 93, 106 Non-Housing and Urban Development (HUD): surplus properties for assisting homeless, 345, 346 Nonprofit corporations, 467–468 Nonprofit sponsor, determining ownership entity and, 474–475 Nonprofits special treatment by government, 540 Nonresidential income, 74 Notice clause, in purchase contracts, 443 Nursing homes, mortgage insurance for, 322, 323
O Occupancy issues, in public housing funding, 306–309 developments for elderly, 308–309 grievance hearings, 309 income-based admissions, 308 payment of fees, 309 rent, 309 security deposits, 309 waiting lists, 307–308
䡲
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INDEX
Permanent loans, 89 settling on, 714–716 condominium and single-family homes, 716 rental and cooperative housing, 715–716 Permits, estimated costs, 57 Personal property taxes, 79 Personnel hiring, rental property, 731 Per-unit cost analysis, appraisal, 46–48 Piedmont Housing Alliance, 371 Pledges of personal assets, 325 Plumbing systems, selective rehabilitation and, 691 Points, 56 Prefunded replacement reserves, 59 Preliminary building evaluation report, 791–796 Preliminary official statement (POS), 126 Prepayment provisions, loan, 95–96 Prepurchase considerations, 465–501 applying for financing and operating subsidies, 465–466 determining ownership entity corporations, 466–468 factors in, 470–476 partnerships, 468–469 divided ownership and leasehold interests, 476 interview and selection of management company, 477–478 plans for renting and selling units, 478–482 Preventative maintenance, 722 Private for-profit lenders, 138–149 commercial banks, 139–140 grants from, 244 life insurance companies, 145–147 owner take-back financing, 139 pension funds, 147–149 savings and loans, 140–145 Private for-profit mortgage insurance, 324, 325 multifamily, 325 single-family, 324, 325 Private lenders, in mixed-finance transactions, 298 Private management, in public housing, 310–311 Private nonprofit foundations: entity loans, 149–217 affordable housing loan consortia, 160–217 Enterprise Foundation, 149–151 Institute for Community Economics, 154–156
Office expenses, 78 One Economy Corporation, 7 goals of, 7 Operating expenses: reducing, 360, 362 reserves, 81 for cooperatives/condominiums, 758 subsidies, 284, 358, 360 applying for, 465–466 in mixed-finance transactions, 290 in public housing funding, 306 Operating funds, 281, 293 treatment of, in mixed-finance transactions, 297 Operations management, property, 732 Options, 444–447 exercise of, 446 purchase and option agreement differences, 444 unique terms of, 445–447 failure to exercise option, 447 granting of option, 445 option period, 446 purchase price, 445, 447 Owner take-back financing, 139 Owner's role, in construction process, 556–561 responsibilities to architect and contractor, 557–561 selecting architect, 556 selecting general contractor, 557 Owners affidavit, 546 Ownership entity, determining: corporations, 466–468 divided ownership and, 476 financing and subsidy requirements and, 476 general, 466 homeownership housing and, 471–474 leasehold interests, 476 nonprofit sponsor and, 474–475 partnerships, 468–469 rental housing and, 470
P Partnerships. See also Joint ventures, 468–469 low-income housing tax credit and, 518–522 tax-exempt leasing rules and, 521–522 Payroll expenses, 78 Pension funds, loans from, 147–149 Performance and payment bond (P&P bond), 14 Performance specifications, 681 Performance standards, for property management, 734
䡲
813
䡲
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Private nonprofit foundations (continued) local community foundations, 160 local community land trusts, 158–160 Local Initiatives Support Corporation, 151–153 Low Income Housing Fund, 156–158 National Association of Community Development Loan Funds, 158 National Community Capital Association, 158 National Community Development Initiative, 153–154 national nonprofit foundations, 160 grants from, 236–244 Private nonprofit mortgage insurance, 325 Private-activity bond financing, 123 Professional fees, 55 Professional management expenses, 77 Project completion costs. See also Project completion phase, 55–59 appraisal, 57 architectural fees, 56 conversion fees, 57 environmental study, 57 financing fees, 56 lender's legal fees, 57 license and permits, 57 loans, 56 marketing expenses, 58 prefunded replacement reserves, 59 professional fees, 55 property transfer and recordation taxes/ fees, 55 relocation expenses, 58 soft cost contingency, 59 title insurance, 57 Project completion phase. See also Project completion costs, 713–803 contracting or managing directly, 734–735 developing multifamily homeownership, 745–754 evaluating property management performance, 740–745 maintaining rental property, 717–733 managing and budgeting for rental/ multifamily ownership, 754–757 of real estate development, 16 permanent loan settlement, 714–716 property management standards, 734 resident services development, 733 selecting good management company, 735–740 Project feasibility: architects role in, 26–28 defined, 35 determining preliminary feasibility, 36
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814
phase of real estate development, 14–16 report, 797–803 case studies for very low income, 369–371 homeless housing, 373–374 lease purchasing housing, 368 rental housing, 377 description of, 363–381 financial pro formas description of, 364–368 multiyear income and expense projections, 366–367 notes to, 367–368 schedules, 367 Property description, in purchase contracts, 431 Property deterioration clause, in purchase contracts, 439 Property disposition set-aside program, 353, 355 Property inspection fees, 95 Property insurance, 78, 532 Property location survey, 532, 543 Property management company, role of, 28 Property management: rental collecting data, 741–742 complete management plan, 737–740 contracting or managing directly, 734–735 converting to homeownership, 743, 754–757 evaluating performance, 740–745 good management proposals, 737 monitoring progress, 742 requests for proposals, 735, 736 review property status, 743 selecting management company, 735–740 timely reports, 742 transitioning to resident management, 743–745 setting performance standards for, 734 Property tax rate changes, 75 Property taxes, reducing, 360, 361 Property transfer taxes, 55 Property: improving, 48–54 Americans with Disabilities Act, 53–54 construction contingency, 54 environmental conditions, 51–53 new construction, 50–51 rehabilitation, 49–50 purchase of, 37–48 appraisal methods, 38–40
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appraisals and Federal regulations, 40–41 appraisals and subsidized housing, 42–44 gathering of information, 45 information evaluation, 46–48 letter of value, 44 self-determination, 44–45 Public housing authorities (PHAs), 226 advantages of, 286 disadvantages for, 288 Public housing development transactions elements of, 298–313 Public housing funds, 279–313 affordable housing and, 280–285 capital funds, 289–290 development funds, 289 eligible uses, 291 ineligible uses, 291–293 modernization funds, 289 mixed-finance transactions and advantages of bond financing and, 290 Community Development Block Grants and, 295–296 condominium form of ownership, 311, 311–313 Davis-Bacon wages and, 305–306 development by PHA affiliates, 301 disadvantages of, 288 disposition of property to private owners, 302–303 eligible uses, 291 HUD review, 299 ineligible uses, 291–293 introduction to, 288–293 long-term use restriction, 301 low-income housing tax credit and, 297 occupancy issues, 306–309 operating subsidy, 306 private lenders and, 298 private management and, 310–311 procurement, 299–301 prohibition on conveyance, 301 public housing capital funds, 289–290 public housing ownership and, 311–313 relocation and, 303–305 shadow law of, 284–285 state alocation plan, 298 tenant empowerment, 310 treatment of operating funds, 297 Public lenders. See also Federal loans, 108–128
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Public-purpose organizations, selective rehabilitation and, 684–685 Purchase contracts: acceptance clause, 442 acknowledgment clause, 444 adjustments, 435–436 assignment rights, 442 binding effect, 442 brokerage services, 441 choice of law, 441 closing and recording costs, 436 conditions and operation of property, 438–440 as is sale, 438–439 fire/casualty/condemnation/eminent domain, 440 further property deterioration, 439 outstanding housing code violations, 439 deed, 435 description of property, 431 earnest money deposit, 432–433 escrow, 433 financing arrangements, 432 general provisions, 443 identifying parties, 430 inspection by purchaser, 440 notice clause, 443 personal property, 431 purchase price, 431 real property, 431 representations and warranties, 440 risk of loss provision, 438 sample contract, 448 settlement provisions, 436–437 tenancies, 437–438 existing tenants, 437 future tenants, 437 time of essence clause, 441 title, 434–435 Purchase price, in purchase contracts, 431–432
R Radon, 51, 689 Real estate development process: acquisition and construction phase, 15–16 addressing specific needs, 17 feasibility phase, 14–15 nonprofit organizations and, 13–14 project completion phase, 16 Real estate investment trusts (REITs), 261–262 Real Estate Settlement Procedures Act of 1974, 529 Recording costs, in purchase contracts, 436
815
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Revenue bonds, 117 Risk of loss provision, in purchase contracts, 438 Rule enforcement, rental property, 721 Rural cooperative housing loans, 134–135 Rural Housing Service rental assistance program of, 354 Rural rental housing loans, 135–136
Redevelopment bonds, 122–123 Reducing total development cost, 344, 349 bargain sales, 348 city “in rem” properties, 349 federal deposit insurance corporation disposition properties, 347, 348 Freddie Mac multifamily disposition program, 348 HUD mortgagee in possession properties, 346, 347 HUD-owned single-family property disposition, 345 surplus non-HUD properties for assisting homeless, 345 Rehabilitation mortgage insurance, 319 Rehabilitation specialist, 675–676 agreement with owner, 695–700 building inspection techniques of, 676–677 Rehabilitation specification and estimating software, 681 Rehabilitation standards, 678–679 Rehabilitation, property, 49–50, 602–603 Relocation expenses, 58 Rent control, 539 Rent counseling, 721 Rent supplements (Section 101), 354 Rental Assistance Program, of Farmers Home Administration, 354 Rental housing: determining ownership entity and, 470 project feasibility case study, 377 settling permanent loan, 715–716 source of, 4 Rental property: maintaining, 717–733 maintenance management, 722–725 management information services, 732 managing finances, 719 personnel issues, 731 rule enforcement, 721 security, 725–730 tenant selection, 720–721 Repair expenses, 78 Replacement reserves, 82–83 for cooperatives/condominiums, 759 Requests for proposals, property management company, 736–737 Resident organizations, 721 Resident Profile Report, 755, 780–784 Resident services, developing, 733 Residential Lead-Based Paint Hazard Reduction Act of 1992, 53, 66 Resolution Trust Corporation (RTC), 172 Resource and Conservation Recovery Act (RCRA), 52
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S Safe Neighborhood Action Grants, 232 Sales proceeds, and raising capital, 103–104 Savings and Loan Associations (S&Ls), 140 Savings Association Mortgage Company (SAMCO), 208 Schedules, financial, 367–368 Secondary market sales, 100 Section 3 funds (Housing and Community Development Act of 1968), 561–563 important definitions, 562–563 numerical goals and, 563 other activities if goals not met, 564 responsibilities, 565 Section 8 rental assistance, 349, 350 Security: loan, 96–97 assignment of leases and rents, 97 mortgage/deed of trust, 96 security agreements, 97 rental property, 725–730 careful tenant selection and, 730 defensible space concepts, 728 designing safe property, 728–729 involving residents, 726–727 police involvement, 727 public housing and, 309 Selective rehabilitation, 666–709 applying construction codes, 691–692 applying existing housing codes, 691–692 as a new discipline, 669–670 as public policy, 692–693 avoiding gut rehabilitation, 685–686 benefits of, 667 choosing property for, 676–677 comparisons with substantial rehabilitation, 670–672 computerized specification-writing and estimation systems, 681 construction management and, 682–683 contractor pool and, 683–684 defined, 668 defining methods and materials, 681 designing project, 679–681 formal approaches, 674 funding issues, 692 government agencies and, 684–685
816
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Stairways, rises and runs of, 690 Standard bid specifications, work-write ups and, 680 State allocation plan: in mixed-finance transactions, 298 State and local government: 108–128 conversion laws, 752–754 grants from, 236 loans, 128 appropriated funds, 116–117 bond financing, 117–118 Community Development Block Grant Loan Guarantees, 109–110 Community Development Block Grant program, 108–109 general obligation bonds, 116–117 HOME Program, 110–116 tax exempt bond financing, 118–128 taxable bond financing, 128 mortgage insurance programs, 323, 324 Stewart B. McKinney Homeless Assistance Act, 233 Subsidiary, as participant in partnership, 512–513 Subsidies use of, 142 Subsidies: federal subsidies, 359, 360 flexible subsidy, 359 Neighborhood Networks, 359, 360 operating expense subsidies for special needs populations, 358, 359 rent subsidies, 349, 350 expiring, 350, 353 for elderly, 357 for homeownership, 355, 356 for people with AIDS, 358 for people with disabilities, 357, 358 Subsidized housing, appraisals and, 42–44 Subsidy requirements, determining ownership entity and, 476 Superfund and Reauthorization Act of 1986 (SARA), 52 Supportive Housing for Persons with Disabilities, 232 Supportive Housing for the Elderly, 232
health and safety issues, 689–691 improving energy efficiency, 686–687 informal approaches, 674 information sources and tools, 693–694 lead-based paints and, 687–689 managing, 673–675 project conceptualization, 678–679 public purpose organizations and, 684–685 role in affordable housing industry, 668–669 sample inspection checklist, 701 using rehabilitation specialist, 675–676 when wrong choice, 672–673 Self-determination, appraisal, 44–45 Self-help housing loans, 137–138 Self-sufficiency programming, 291 Service coordinators, 733 Set-aside restrictions, 121 Settlement agent, 527–528 Settlement company, selecting, 530–531 Settlement process, 527–552 checklist, 541 deed, 535–536 documents, 536, 547 financing statement, 550 government regulations, 539–540 lender requirements, 538 postsettlement, 537–538, 551 property insurance, 532 property location survey, 532, 543 role of settlement agent, 527–528 selecting settlement agent, 529–531 settlement statement, 533–535, 544 title insurance, 528, 531 utility transfers, 533 Settlement provisions, in purchase contracts, 436–437 Settlement statement, 533–535, 544 Sewer expenses, 78 Single-family homes: 702–707 settling permanent loan, 716 Single-room occupancy projects, 322, 356, 357 Site control, 14, 15, 429–430 options, 444–447 purchase contracts, 430–444 securing in writing, 429–430 Site managers, 732 Software, rehabilitation specification and estimating, 681 Soil surveys, 559 Sources and uses statement, 365–366 Special needs populations, operating expense subsides for, 358, 359
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T Tampa Bay Community Reinvestment Corporation, 210 Targeted income levels, 70–71 Tax syndicators, low-income housing, 252, 275 Taxable bond financing, 128
817
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project feasibility and, 35 purchasing property, 37–48 Traffic studies, 560
Taxes: personal property, 79 property transfer and recordation fees, 55 real estate, 79 reducing, 361 Tax-exempt bond financing, state and local government, 118 501(c)(3) bonds, 123–127 considerations regarding, 127–128 exempt-facility bonds, 120–122 mortgage revenue bonds, 118–120 redevelopment bonds, 122–123 Tax-exempt leasing rules, partnership allocations and, 521–522 Tax-exempt status, joint ventures and charitable purpose test, 504–506 insulation from liability test, 506–509 Tenancy provisions, in purchase contracts, 437–438 Tenant empowerment initiatives, in mixedfinance developments, 310 Tenant Rents, 293 Tenant selection: rental property, 720–721 security and, 730 Third party guarantees. See also Credit enhancement, 318 Thrift Institutions Community Investment Corporation of New Jersey, 211 “Time of essence” clause, 441 Title insurance, 57, 528, 531 company selection, 529 policy issues, 538 sample of, 552 Title, in purchase contracts, 434–435 Total development costs (TDCs): defined, 36–37 improving property, 48–54 in mixed-finance transactions, 292 project completion, 55–59
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U U.S. Department of Housing and Urban Development (HUD), 4, 324 Underground storage tanks, 52, 63–65 Uniform Commercial Code (UCC-1), 97 Uniform Limited Partnership Act, 469 Uniform Partnership Act, 469 Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, 58 Urban Revitalization Demonstration (URD) program, 283, 288 USDA Rural Housing Service, 132–134 rural cooperative housing loans, 134–135 rural rental housing loans, 135–136 self-help housing loans, 137–138 Utility rates, reducing, 362 Utility tax rate changes, 76 Utility transfers, 533
V Vacancies, 76, 80 Veterans Administration loan guarantee programs, 320
W Waiting lists, public housing and, 307–308 Washington Community Reinvestment Association, 214 Water expenses, 78 Wisconsin Partnership for Housing Development, 215 Work write-ups, 676, 679–681, 708–709
Y Youthbuild, 226, 230–232
818
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