Innovation in Capital Markets. A New Generation of Community Development Funds from Enterprise. Enterprise 1

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1 Innovation in Capital Markets A New Generation of Community Development Funds from Enterprise Enterprise 1

2 Contents 3 Introduction 4 overview: Enterprise Leverages Capital 5 Loan Pool Model 6 D.C. Preservation Pool Profile 7 Free-Standing Fund Model 8 New York City Acquisition Fund Profile 10 New Generation Fund Profile 12 results 14 evaluation 2 Innovation in Capital Markets

3 Introduction The current credit crisis offers a stark reminder that access to capital is vital to the health of our economy and to the existence of key industries. For decades, the affordable housing and community development industry has struggled to obtain sources of capital for its building and revitalization efforts, which often require multiple layers of financing. Since leading the development and passage of the Low-Income Housing Tax Credit in the early 80s, Enterprise has continued seeking new solutions that offer partners critical capital. We have met that financing challenge through both philanthropic and Program- Related Investment grants as well as a myriad of innovative financial products. The latter include LIHTC equity, New Markets Tax Credits, permanent mortgages, and short-term loans for acquisition, predevelopment and construction. In recent years, Enterprise has launched a series of innovative community development funds that support and enhance local government efforts by attracting large amounts of private capital, generally from banks. While created to increase access to more favorable capital, these funds may be the only viable source of financing for some affordable housing developers during the current credit crunch. The following summary illustrates how these funds can successfully leverage capital, turning limited government and foundation funds into resources that can impact more and more communities across the nation. To read the full-length report by My B. Trinh, Bart Harvey Enterprise Fellow, please visit Enterprise 3

4 Overview: Enterprise Leverages Capital Since 2005, Enterprise has created six leveraged funds to provide acquisition and predevelopment capital, often the most difficult financing to obtain. On the following pages, we highlight three of those funds the D.C. Preservation Pool, the New York City Acquisition Fund and the New Generation Fund in Los Angeles and briefly evaluate their performance. D.C. Preservation Pool Local Funding: $8 million Senior Lender Support: $20 million Total Fund Size: $28 million Lending: $45 million from inception to year-end 2008 Homes preserved: 1,130 New York City Acquisition Fund Local Funding: $8 million Foundation Support: $32.65 million Senior Lender Support: $192.5 million Total Fund Size: $ million Lending: $101 million from inception to year-end 2008 Homes preserved: 2,531 New Generation Fund (Los Angeles) Local Funding: $10 million Foundation Support: $3.75 million Senior Lender Support: $103 million Total Fund Size: $ million Lending: $15 million from inception to Jan. 31, 2009 Homes preserved: Innovation in Capital Markets

5 Loan Pool Model $20 million Senior Lenders $8 million District of Columbia Department of Housing and Community Development Blending $20 million of bank capital with District of Columbia Department of Housing and Community Development (DHCD) funds, Enterprise s D.C. Preservation Pool provides low-interest acquisition loans to borrowers in the Washington, D.C., metropolitan area. Up to half of each loan can include DHCD funds, which must be used in the District of Columbia. Private capital in the pool can be used across D.C. s metro area. The preservation pool is operated entirely by and within Enterprise Community Loan Fund, a certified Community Development Financial Institution (CDFI), and Enterprise is the sole loan originator. Loan Pool Characteristics Situated within Enterprise Single loan originator Attracts private capital Minimal start-up time and cost Standard CDFI loan sizes and loan-to-value ratios Reduced recourse to borrowers Enterprise Community Loan Fund D.C. Preservation Pool Enterprise 5

6 Loan Pool Model D.C. Preservation Pool The D.C. Preservation Pool is a $28 million loan pool created to provide acquisition capital for purchasing affordable multifamily housing developments threatened with conversion to for-sale housing or higher rents. Targeted specifically for Washington, D.C., it operates as a pool of funds within Enterprise Community Loan Fund, which has a $163 million portfolio that provides predevelopment, acquisition, working capital and other financing structures. The Preservation Pool s maximum loan commitment is $4 million, providing that Enterprise and the District of Columbia each have a 50 percent participation. In addition: The loan-to-value ratio cannot exceed 100 percent. Loans can be used to acquire multifamily properties for residents whose incomes are at or below 80 percent of the District s area median income. Eligibility is limited to nonprofit developers, or for-profit developers working with nonprofit groups that have at least a 50 percent ownership interest in the property. Recourse to borrowers is 100 percent. Persistence and Preservation in the Nation s Capital In early 2005, the St. Dennis Apartments in Washington, D.C. s Mount Pleasant neighborhood was slated to be sold and turned into market-rate condominiums. The landlord paid the tenants to leave, but Eve Martinez and her two adult daughters refused to move, despite the building s deteriorating condition. The family formed a tenants association and facilitated a settlement with the owner. But as the deadline for finding a new buyer who would keep the building 100 percent affordable approached, the situation looked grim. A story in the Washington Post brought needed attention to their plight. The Martinez women selected the National Housing Trust-Enterprise Preservation Corporation and local LSDBE District Development Group to purchase the St. Dennis on their behalf with a $3.7 million loan from the D.C. Preservation Pool, plus support from City First Bank of DC. 6 Innovation in Capital Markets

7 Free-Standing Fund Model Examples: New York City Acquisition Fund, New Generation Fund City $/PRI Guarantee Pool New York City Acquisition Fund Other Originating Lenders Senior Lender $ Enterprise The Free-Standing Fund Model includes a guarantee pool of city and foundation contributions that enhance borrower credit, but are not lent to borrowers. By having a risk structure that places senior lenders in a good position to collect debt when defaults occur, the guarantee pool enables the fund to provide bank capital at lower interest rates, less recourse, and higher loan-to-value ratios. The fund operates outside of Enterprise, and works with multiple loan originators. Each originator is an existing CDFI that already has high loan volumes and strong relationships with affordable housing developers to provide the fund with a healthy pipeline of loan applications. Fund Characteristics: Free-standing funds Multiple originators Large fund size High loan capacity Long start-up time and cost Low risk of loss to senior lenders and loan originators High loan-to-value ratios and larger loan sizes to borrowers Highly reduced recourse to borrowers Enterprise 7

8 Free-Standing Fund Model New York City Acquisition Fund The success of the D.C. Preservation Pool spurred Enterprise to continue developing fund structures to bring capital to the affordable housing community. In 2006, we created the New York City Acquisition Fund, a $233 million free-standing fund to allow affordable housing developers to compete against market-rate developers who routinely outbid them on affordable housing developments site acquisitions. An innovative loan fund that combined the complexity of Wall Street fund structuring with Enterprise s mission-driven socialinvestment goals, the New York City Acquisition Fund appealed to investors with varying interests. The result: a loan fund that was larger than the vast majority of Community Development Financial Institutions (CDFIs), which had been the primary source of acquisition and predevelopment financing. At a time when the supply of discounted city-owned properties suitable for redevelopment had nearly dried up, the fund provided financing at a greater scale than was previously available. The Fund s maximum loan commitment is $7.5 million for the acquisition of vacant properties, and up to $15 million for the acquisition of occupied residential buildings. In addition: Nonprofit borrowers may borrow up to 120 percent of the lesser of the as-is appraised value or the sales price. An additional 10 percent may be made available in a capitalized interest reserve, up to 130 percent of the loan-to-value ratio. For-profit borrowers may borrow up to 95 percent of the lesser of the as-is appraised value or the sales price. Loans can be used to acquire land and properties and pay for soft-construction, predevelopment and environmental costs (including remediation), capitalized interest, architectural plans and feasibility consultants. Recourse to borrowers is 25 percent. 8 Innovation in Capital Markets

9 Free-Standing fund Model How Enterprise Leverages Capital New York City Acquisition Fund $8 million Public money seeds the fund $32.65 million Foundation money grows the guarantee pool $192.5 million Senior lenders provide lending capital When Enterprise sought support to create an acquisition fund, the Starr Foundation made the first investment a $12.5 million challenge grant. Enterprise met and exceeded the challenge by creating a structure that placed city funds and program-related investments (PRIs) into a guarantee pool. The pool, which reduces senior lenders risk, attracted $192.5 million of private capital to create a $233 million fund. Keeping the Bronx Affordable Six privately owned and fully occupied Bronx apartment buildings will remain affordable, with a $23 million loan that Enterprise made to longtime community development partner Fordham Bedford Housing Corporation in The buildings were acquired from a respected family-owned development corporation that had opted to sell the buildings. Financing available through the New York City Acquisition Fund ensured that FBHC could preserve their long-term affordability. That means peace of mind for Wendy Gonzalez, a hotel housekeeper, and her husband Fausto, a doorman, who are raising five children in a neat, compact apartment in one of the Bronx buildings. Even as the cost of diapers and electricity continues to rise, the family knows their rent will remain stable. It would be hard to find another place we could afford, says Wendy. Enterprise 9

10 Free-Standing fund Model New Generation Fund The city of Los Angeles took notice of the New York City Acquisition Fund s success. In 2006, Mayor Antonio Villaraigosa engaged Enterprise about creating a fund to provide acquisition capital in Los Angeles s overheated real estate market. Modeled after the New York City Acquisition Fund, the free-standing New Generation Fund arrived in a tighter credit market. Nonetheless, it raised more than $116 million. While the market has experienced a downturn, the credit crunch has reduced sources of financing, making the New Generation Fund a critical resource in Los Angeles. The New Generation Fund closed in May It provides loans up to $10 million. In addition: Nonprofit borrowers may borrow up to 120 percent of the lesser of the as-is appraised value or the sales price. An additional 10 percent may be made available in a capital interest reserve, up to 130 percent of the loan-to-value ratio. For-profit borrowers may borrow up to 95 percent of the lesser of the as-is appraised value or the sales price. Eligible uses of loan proceeds include acquisition of vacant land, property improvements (including purchase of buildings) and predevelopment expenses. Recourse to non-profit borrowers is 25 percent; 100 percent to for-profit borrowers. 10 Innovation in Capital Markets

11 FrEE-STANDiNG FuND MoDEL How Enterprise Leverages Capital new GEnEratIon FunD $10 million Public money seeds the fund $3.75 million Foundation money grows the guarantee pool $103 million Senior lenders provide lending capital a $10 million commitment from the Los angeles Housing Department seeded Enterprise s new Generation Fund. using the new York City acquisition Fund as a model, Enterprise raised $3.75 million of program-related investment capital (PrI) to form a guarantee pool for the new fund. the pool helped to attract $103 million of private capital from senior lenders to create a $116 million fund. Seeds of Hope on Skid row sro Housing corporation will transform a vacant lot in the skid row region of Los angeles into affordable homes for formerly homeless adults. The proposed gateway apartments will serve residents earning 30 percent to 60 percent of area median income, and provide access to on-site case management. The nonprofit community-based organization acquired the site with a $5.85 million loan made possible by the new generation Fund and enterprise community Loan Fund, which served as the underwriting lender. project financing for gateway apartments is expected to include a combination of funding sources, including the Los angeles Housing department s permanent supportive Housing program, the Federal Home Loan Bank affordable Housing program, city of Industry Funds Housing authority of the county of Los angeles, Low-Income Housing tax credits, and a construction loan. Enterprise 11

12 Results Enterprise s leveraged funds have successfully provided large sums of capital to meet an enormous need. To date, the funds have collectively helped create or preserve more than 3,900 affordable homes 1,130 in the nation s capital; 2,531 in New York City and 298 in the city of Los Angeles. The targeted approach of the D.C. Preservation Pool attracted unprecedented investments. By the end of 2008, the Enterprise Community Loan Fund had closed loans totaling more than $45 million for affordable housing preservation. The New York City Acquisition Fund provides acquisition financing for affordable housing developers. As the credit market tightened in 2007 and 2008, the fund became one of the only sources of acquisition financing. As of this writing, the fund has closed funds totaling more than $100 million. The market s further deterioration in 2009 has spurred Enterprise to explore new ways of using the fund to support the affordable housing industry. L.A. s New Generation Fund was created in 2008 amid already tight credit markets. Attracting investment in the fund proved tremendously challenging. Nevertheless, Enterprise established a $116 million fund that continues making critical loans. Enterprise is also exploring how to use the New Generation Fund to provide other types of resources for the affordable housing industry. By the end of January 2009, the New Generation Fund had produced $15 million in loans. D.C. Preservation Pool Affordable homes by AMI Of the 1,130 apartments preserved by the D.C. Preservation Pool, 68% serve households with incomes below 50% of area median income (AMI). All of the units are occupied by households with incomes below 80% of AMI. 32% 51% - 80% of AMI 15% 0% - 30% of AMI 53% 31% - 50% of AMI 12 Innovation in Capital Markets

13 New York City Acquisition Fund Affordable homes by type New York City Acquisition Fund Affordable homes by AMI 26% Preservation 52% Low-Income Rental 9% 61% - 80% of AMI 16% 80% of AMI or greater 20% < 50% of AMI 20% Supportive Housing 2% Mixed-Income Homeownership The majority of units preserved or created by the New York City Acquisition Fund have been lowincome rental units. Preservation and supportive housing make up much of the remaining units. 55% 51% - 60% of AMI Seventy-five percent of N.Y. City Acquisition Fund units have served households with AMIs of 60% or below. However, the Fund has also been used to build market-rate units in mixed-income properties. New Generation Fund Affordable homes by type New Generation Fund Affordable homes by AMI 40% Supportive Housing 58% 60% 51% - 60% Low-Income of AMI Rental 42% < 50% of AMI Thus far, the New Generation Fund has exclusively produced low-income rental units and supportive housing. All of the New Generation Fund s loans have funded properties serving populations with household incomes at or below 60% of AMI. Enterprise 13

14 Evaluation The leveraging power of the Free-Standing Fund Model suggests that it offers a far more attractive framework than the Loan Pool Model. However, closer examination shows that the Loan Pool Model is more appropriate in some circumstances. For example, the D.C. Preservation Pool required minimal start-up time and costs in contrast to the free-standing New York City Acquisition and New Generation Funds. The New York City Acquisition Fund and L.A. s New Generation Fund yield important lessons for the financial feasibility of leveraged funds. Both funds involved coordinating multiple parties with varying interests, and each fund took more than 18 months and $1 million for Enterprise to establish. Modeling the New Generation Fund after the New York City Acquisition Fund did not yield any significant cost savings. Still, the New York City Acquisition Fund has committed more than $100 million in loans since 2006, while successfully sustaining its operations. Its loan production and financial returns have demonstrated significant increases over time, providing investors both economic and social returns. The New York City and Los Angeles funds require significant start-up costs as well as government and foundation subsidies in the form of low-interest investments. At the same time, they clearly can generate net income, even amid unfavorable economic conditions. While these funds present attractive options, many factors must be in place for them to be successful. Any organization interested in starting a fund should carefully assess the following factors: Support from city government Takeout financing Foundation support Bank investment Ability to generate high loan volume Established CDFI partners Housing development capacity In-depth profiles and a detailed analysis of the D.C. Preservation Pool, the New York City Acquisition Fund and the New Generation Fund are available in the report, Innovation in Capital Markets, available at 14 Innovation in Capital Markets

15 Enterprise is a leading provider of the development capital and expertise it takes to create decent, affordable homes and rebuild communities. For more than 25 years, Enterprise has introduced neigh borhood solutions through public-private partnerships with financial institutions, governments, com munity organizations and others that share our vision. Enterprise has raised and invested more than $10 billion in equity, grants and loans to help build or preserve more than a quarter million affordable rental and for-sale homes to create vital communities. Enterprise is currently investing in communi ties at a rate of $1 billion a year. Visit www. enterprisecommunity.org and to learn more about Enterprise s efforts to build communities and opportunity. Copyright 2009, Enterprise Community Partners, Inc. All rights reserved. Please send questions about the information in this brochure to mail@enterprisecommunity.org or Enterprise Community Partners, Inc., Knowledge, Impact and Strategy Department, American City Building, Wincopin Circle, Columbia, MD 21044, Made possible with the generous support of Enterprise 15

16 Fund Partners Enterprise is pleased to acknowledge the following partners for investing in our leveraged funds. Their support and participation are vital to our mission to create opportunity for low- and moderate-income people through fit, affordable housing and diverse, thriving communities. D.C. Preservation Pool Senior Lenders City First Bank of DC Capital One F.S.B The Prudential Insurance Company of America D.C. Department of Housing and Community Development Living Cities (includes AXA Equitable Life Insurance Company, Bank of America Community Development Corporation, Deutsche Bank, John D. and Catherine T. MacArthur Foundation, JP Morgan Chase, Metropolitan Life Insurance Company, and The Prudential Insurance Company of America) District of Columbia D.C. Housing Department Enterprise plays a continuing role in the D.C. Preservation Pool, the New York City Acquisition Fund and the New Generation Fund in Los Angeles. We are a loan originator for all three funds; and an investor in both the New York City Acquisition Fund and the New Generation Fund. We also would like to acknowledge Forsyth Street Advisors as the the fund manager for the New York City Acquisition Fund and the New Generation Fund. New York City Acquisition Fund Senior Lenders Bank of America Bank of Tokyo Mitsubishi Commerce Bank Deutsche Bank Fannie Mae HSBC JP Morgan Chase M & T Bank Merrill Lynch Mizuho Corporate Bank Capital One Signature Bank Wachovia Washington Mutual Foundations F.B. Heron Foundation Ford Foundation Gimbel Foundation John T. and Catherine D. MacArthur Foundation New York Community Trust Open Society Institute Robin Hood Foundation Rockefeller Foundation Starr Foundation City of New York New York City Department of Housing Preservation and Development Originators Corporation for Supportive Housing Local Initiatives Support Corporation Low Income Investment Fund New York City Housing Development Corporation New Generation Fund Senior Lenders Citi Community Capital Deutsche Bank HSBC Merrill Lynch Metropolitan Life Insurance Co. Wachovia Foundations Ahmanson Foundation California Community Foundation Rockefeller Foundation Weingart Foundation Wachovia Foundation City of Los Angeles Los Angeles Housing Department Community Redevelopment Agency of Los Angeles Originators Century Housing Corporation for Supportive Housing Local Initiatives Support Corporation Low Income Investment Fund 16 Innovation in Capital Markets