Presentation done for Kephart Webinar 4/09

1. April 15, 2009
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2. History & Overview
HUD/FHA
Low Income Housing Tax
Credits
Private Activity Bonds
Opportunities
2

3. HUD/FHA
History & Programs
3

4.  FederalHousing Administration –
creation by Congress under National
Housing Act of 1934
 Two mortgage insurance programs
created to stimulate economy
- Section 203 – Home Ownership
- Section 207 - Apartments
4

5. Current Active Programs
Sec. 221(d)(3) – Apartments
for Non Profit Sponsors – New
Construction & Substantial
Rehabilitation
5

6. Current Active Programs
Sec. 221(d)(4) – Apartments
for Profit-motivated Sponsors
– New Construction &
Substantial Rehabilitation
6

7. Current Active Programs
Sec. 223(f) - Purchase and
Refinance of Apartments
Profit Motivated Sponsors
Existing Properties Only
Moderate Rehabilitation
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8. Current Active Programs
Sec. 231 – Apartments for senior
citizens
Non Profit and Profit Motivated
Sponsors
New Construction & Substantial
Rehabilitation
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9. Current Active Programs
Sec. 232 - Assisted Living
Facilities and Nursing Homes
Non Profit and Profit
Motivated Sponsors
New Construction and
Substantial Rehabilitation
9

10. Current Active Programs
Sec. 242 – Critical Access
Hospitals
Non Profit and Profit Motivated
Sponsors
New Construction & Substantial
Rehabilitation
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11. Why HUD/FHA?
Why Now?
11

12. Why HUD/FHA?
Little to No Bank Lending
Traditional Outlets Closed
National availability
Protection from competition
Attractive Features
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13. + FEATURES:
Construction and Permanent
Financing
Long Term (35-40 years)
High Loan to Value/Cost (85%-
90% Potential)
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14. + FEATURES:
Fixed Rate
No Income Restrictions
Assumable
Non-Recourse!
14

15. -FEATURES:
Davis-Bacon Wage Rates
Prepayment Lockout
Bureaucratic
Inflexibility/Processes
Processing Time*
15

16. - FEATURES:
Processing Time*
Two Stage Process:
First Stage – PreApplication is Free
Can take 90 days
(See Paul Campbell article)
16

17. - FEATURES:
Processing Time*
Two Stage Process:
Second Stage – Firm App costs
30bp
Can take 240 days for prep, review
and closing
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18. -FEATURES:
No Developer’s Fee
Project size - at least 75-100
units
Need Equity $
Cash-out only twice a year
18

19. Why Now?
Flat to negative home sales
Tightening credit for home
buyers
19

20. Why Now?
Increasing demand for
affordable rental units
Changing demographics
20

21. Changing Demographics
Almost Four of Ten Senior Citizens
Plan on Working Until They Die
Bankrate retirement poll finds savings rate low,
expectations high
Source: Bankrate.com
April 23, 2007
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22. Changing Demographics
Increasing numbers of households
that make too much for affordable
rental, too little to purchase.
“Good credit? Home loans no
longer a sure thing.”
USAToday Headline 10/31/2008
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23. Changing Demographics
There are more people
at lower income levels
than there are at higher
incomes.
People/$
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24. Changing Demographics
Supply/ Price
The more income,
the broader range
of choices from the
supply of housing.
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25. Changing Demographics
Supply/ Price
People/$
25

26. Sec. 221(d)(4) Underwriting
1.11 Debt Service Coverage Ratio
Combination Construction and
Permanent Loan
Construction Period + 40 Years
Term
26

27. Sec. 221(d)(4) Underwriting
Market interest rate
(10 year Treasury +/- 350 bp)
Formulaic Replacement Reserve
Deposit
27

28. Sec. 221(d)(4) Underwriting
Maximum Loan is the Least of:
HUD Statutory Limits
90% of Replacement Cost
Amount Supportable by Net Income
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29. Case Study
Denver, Colorado
225 Units
New Construction
Urban Infill Site
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30. Case Study
35 0 BR Units – 540 SF
50 1 BR Units – 640 SF
40 1 BR Units – 740 SF
40 1 BR Units – 880 SF
30 2 BR Units – 1,020 SF
30 2 BR Units – 1,140 SF
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31. Case Study
24,000 SF Commercial
25% Other non-residential
Gross SF = 249,625
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32. Case Study
Land: $5,900,000
Construction: $37,575,039
Financing: $4,134,145
Legal, Org., Audit: $180,000
BSPRA: $4,188,918
Total Costs: $51,978,103
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33. Case Study
0 BR Units – 540 SF - $1,100
1 BR Units – 640 SF – $1,250
1 BR Units – 740 SF - $1,350
1 BR Units – 880 SF - $1,550
2 BR Units – 1,020 SF - $1,850
2 BR Units – 1,140 SF - $2,000
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34. Case Study
 Gross Income: $4,501,180
 Vacancy Rate: 7%
 Operating Exp: $881,400
 Net Oper. Inc.: $3,267,517
 Avail. For D.S.: $3,303,653
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35. Case Study
 Int.Rate: 6.30%
 Mortgage Ins. Prem. .45%
 GNMA Fee: .25%
 40 yr. Amort. Factor: .518%
 Debt Serv. Constant: 7.518%
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36. Case Study
 Loan = $3,303,653/7.518%
 Loan = $39,114,000
36

37. Case Study
Cost: $51,978,103
Insured Loan: $39,114,000
Equity: $10,147,089
37

38. HUD Value-added for Equity
Independent market study
Third-party review of plans
Financial Underwriting of all
parties
38

39. HUD Value-added for Equity
Construction monitoring
Independent audit of costs
Potential for conversion –
contingent liability elimination
39

40. Sec. 223(f) Underwriting
1.17 Debt Service Coverage Ratio
Permanent Loan
Term: Up to 35 Years
Moderate rehab can be included
40

41. Sec. 223(f) Underwriting
Loan is LEAST of 85% of Value
Or
Amount supportable by Net Income
Or
85% of Costs
41

42. Sec. 223(f) Underwriting
Case Study:
Value = $7,000,000
Loan supportable by NOI = $7,151,400
85% of Transaction Costs= $5,950,000
Purchase Price = $7,000,000
Equity = $1,092,475
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43. LOW INCOME HOUSING
TAX CREDITS
A Brief Introduction
43

44. Created in 1986 – Ullman Act
Section 42 of the of the Internal
Revenue Code provides low-
income housing tax credits
New construction
Acquisition/rehabilitation of low-
income housing.
44

45. The “LIHTC Credit” is a dollar-
for-dollar reduction of federal tax
liability.
Owners also receive deductions
for ordinary tax losses - real
estate taxes, depreciation and
interest.
45

46. Available for 10 years beginning
with the first year of occupancy.
The Credit is designed to be equal
to 70 percent of the costs of
constructing new low-income
housing -- the “9% credit” or…
46

47. Or...30 percent of the costs of
acquiring existing housing or
developing housing with some
other federal subsidies (tax-
exempt financing, HOME and
CDBG funds)
47

48. The “9% credit” is obtained
through competition; demand
greatly exceeds supply.
 The “4% credit” is obtained
through the use of private
activity bond financing.
Both are reserved/approved by
state agencies
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49. Who gets the Credits?
Sponsors get the credits & form
entities in which they are the
General/Managing Partner.
Sponsors can be public or private
corporations, LLLP’s, LLLC’s, LP’s,
housing authorities, etc.
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50. Who gets the Credits?
Sponsors find an Investor to buy
the credits, and…
Negotiate a partnership agreement
that stipulates pay-in schedule and
roles/responsibilities
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51. Who gets the Credits?
The Investor becomes a limited
partner/member and takes a 99.99%
interest in the partnership.
Losses and Credits flow through to
the Investor in that proportion;
income at a 10%/90% ratio.
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52. The Income Restrictions:
quot;20/50 testquot; or quot;40/60 test.quot;
20% of the Units have tenants whose
income is 50% of the area median
or
40% of the Units have tenants whose
income is 60% of the area median.
52

53. How Are Credits Calculated?
 On the basis of affordability and
eligible costs.
Land, permanent loan costs and
certain other fees cannot be
included in eligible basis.
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54. How Are Credits Calculated?
Credits are a function of % of
affordable units
 If a project proposed 100% Low
income occupancy and the Eligible
Basis was $1,000,000, then the
Qualified Basis would be
$1,000,000.
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55. How Are Credits Calculated?
Annual credit % is set at 9.0%
under the HERA of 2008
Annual credit for $1MM is
$90,000.
(1.00 X $1,000,000 X .090 = $90,000.)
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56. How Are Credits Calculated?
Annual amount is available for 10
years
Project must remain compliant
with affordability
Total value of the credits is
$900,000 (10 X $90,000)
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57. Investors pay a discounted price
(less than 100%).
Location, type of project, type of
credits, amount of losses and
other variables determines price
Today - range of $.65 to .$70 –
from among a very limited
universe of buyers.
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58. So for our example, if the price
were $.70, the credits could raise
$630,000.
$.70 X $900,000 = $630,000
With a $1,000,000 cost, the loan
would need to be $370,000.
58

59. And for our example, that loan
would have to be a conventional,
taxable bank loan.
(difficult to obtain today…)
59

60. + Features
 “Free” equity
 Low Loan to value
 Meets a societal need
 Can be a vehicle for grant funds
 Can ease zoning/plan/permit
approval
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61. -Features
 Competitive (demand is 6/1)
 Limited supply (state volume cap)
 Complex program
 Has significant contingent liabilities
- including major penalties for non-
compliance
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62. -Features
 Usually a long-term hold
required – little potential for gain
on sale or conversion
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63. Summary
LIHTC is 4% Credit or a 9% Credit.
9% Credit - used for new construction
with no “federal subsidies.” Loans must
be taxable
The Credit is taken over 10 years.
63

64. Summary
Not all costs are eligible for credits
Limited universe of buyers
Eligible projects must be “rent
restricted” and “income restricted” for at
least 15 years.
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65. Summary
Sponsors form limited partnerships
and investor limited partners
contribute capital at a discount (+/-
$.70 / $1 today)
Sponsor/GP can own project after 15
years – LP buyout/assume debt
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66. PRIVATE ACTIVITY BONDS
A Brief Introduction
66

67.  Lower Interest Rates – promotes
feasibility
 Cheapest access to capital for non-
profit and governmental programs
 Aggressive underwriting for
affordable projects
 Ability to combine with soft funds –
HOME, CDBG, etc
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68.  Governmental Bonds
◦ Libraries, City Bldgs, Housing Auths.
 Qualified 501(c)(3) Bonds
◦ Non Profit – Multi-Family
◦ Bank qualified bonds
 Qualified Private Activity Bonds
◦ Single Family & Multi - Family
68

69. • Single Family Mortgage Revenue
Bonds and Mortgage Credit
Certificates
• Residential rental projects for new
construction or acquisition/rehab of
housing for persons with low to
moderate incomes (60% AMI)
69

70. • “Qualified Residential Rental Project”
– Ullman Bill – Tax Reform Act of
1986 Section - 42(d) of Tax Code
• Low-income set asides: 20% @
50% or 40% @ 60%
• Qualified project period
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71. • Allocation of Private Activity Bond
issuance authority to states
• New construction or acquisition and
rehabilitation but not refinance
• For-profit and Non-profit borrowers
• 30 – 40 year permanent loans BMIR
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72. • State, County and Local Gov’t units,
Housing Authorities, may be a conduit
issuer, depending on state law.
• Eligible to receive 4% Section 42 tax
credits (not subject to state credit
cap and not automatic)
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73. •Bond financing must pay for 50%
of the project costs.
•Construction may be financed with
bond proceeds at times
•Bond proceeds must be used for
project purposes before the end of
the 1st year of the 10-year credit
period.
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74. •HUD/FHA Mortgage Insurance may
be used to provide a “Credit
Enhancement” for bonds to bring
down the interest rate – bonds would
carry a AAA rating.
•Sale of tax credits may help raise
equity $.
74

75. +Features
• Below market interest rate
• Ability to do mixed income project
• Enhanced marketability
• Less competition than for Tax
Credits
75

76. -Features
• See tax credit negatives
• High fixed transaction costs
• Limited market for tax credits
• Can be complex
• Usually 10 year lockout on refinance
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77. Access to Financing for
New Construction and Acq/Rehab
Long Term Ownership
Fee Income from Management
Potential for Gain on Sale
Potential for Conversion
Response to Social Need
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78. HUD
www.hud.gov/offices/hsg/mfh/map/
maphome.cfm
TAX CREDITS
www.novoco.com
PRIVATE ACTIVITY BONDS
www.ncsha.org
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79. HANDOUTS
Case Studies
HUD Program Descriptions
HUD MAP Lender Directory
Paul Campbell Article
79

80. RODGER HARA
Principal
Community Builders Realty Services
1129 Cherokee St.
Denver, CO 80204
720.323.0253
rodger.hara@comcast.net
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