A Best Practice Guide: Strategies for Successful Transition of Maturing LIHTC Projects

Transcription

1 A Best Practice Guide: Strategies for Successful Transition of Maturing LIHTC Projects

2 Projected vs. Actual Rent & Expense Escalators Year Year

3 Projected vs. Actual Rent & Expense Escalators Year Year

4 The Death Spiral Reserves drawn for basic operating expenses Make-readies deferred Reserves depleted Vacancy increases Recovery is more expensive and difficult with each stage in the spiral Without intervention and assistance, foreclosure is inevitable once the spiral has begun Real estate taxes not paid Bank debt service not paid Despite this, early stages are often disregarded with an unfounded optimism that the future will get better Foreclosure action filed Transparency about project challenges in early stages is crucial to recruit assistance

5 Preventing the Spiral Reserves drawn for basic operating expenses Reserves depleted Engage project stakeholders about challenges LP Investor, OHFA, the bank, and local political structure Raise resources Grants Loan writedowns LP investment Sponsor investment Strategies Fund and preserve reserves Reserve surplus of early years for eventual rise in cost Personnel Training to create culture of asset management Bring in a different management team Implement best practices in operations Maximize revenue Control expenses Invest in maintenance & makereadies

6 Best Practices in Asset Management Operations Strategy Maximize revenues Annual rent increases Utility allowances & Restrictive Covenant Amendment Housing Choice Vouchers Aggressively collect rents Turn units quickly Control expenses Insurance (lowest cost options) Real estate taxes (Woda Ivy Glen & Board of Revisions Complaints) Utilities (monitoring & intervention) Maintain property Invest in make-readies, even when expensive Invest adequately in maintenance

7 Components of the Sales Price Remaining debt Sum of all mortgage release prices as established by each mortgagee Mortgage release price to banks inflated by sales projections Exit taxes May apply when Limited Partner s capital account is below zero To minimize, allocate losses to general partner once limited partner s capital account reaches zero Transaction costs Closing costs Tax proration Water bills in some cases Discretionary transaction costs Sales fee Repairs needed Seller credit Sum of debt Exit taxes Trans. costs Min. sale price of lease purchase home

8 The Equivalency Principle Monthly housing costs after taking title Debt service All utilities Taxes Insurance All maintenance Monthly housing costs before taking title Rent Tenant-paid utilities Minor maintenance cost A tenant who can afford a $500 monthly rent might only be able to afford a $250 monthly debt service.

9 Before Crisis After Crisis Impact of the Financial Crisis Bankability and Alternative Mortgage Sources Risk-tolerant bank underwriting criteria Bank financing an available option for most leasepurchase families CRA-motivated bank loans were the staple Conservative bank underwriting criteria Bank financing not viable for more than 85% of leasepurchasers Seller financing or CDFI-like loan product is the main alternative to bank financing

10 Administrative Preparation Confirm Expiration Date Review Loan Terms Review Restrictive Covenants Review Partnership Agreement Review each property s Form 8609, especially the first year s tax return (Form 8609-A) To determine disposition in Y16 and projected outstanding loan balances Include any made with OHFA, HDAP, local HOME, FHLB, or others Determine what Limited Partner expects in Y16 Examine Reserves Prepare projections of Y16 reserve balances Investigate Property Issues Platting issues? Title issues? Flooding or environmental issues?

11 Spreadsheet of sale scenarios Key inputs All remaining debt, on a per-unit basis Projected mortgage release prices Transaction costs and exit taxes (if any) The application of project reserves Capital improvements if necessary (most times unnecessary in lease-purchase)

12 Buyer s perspective Identify What public sector debt that can be assumed by a buyer and the related terms Calculate Buyer closing costs and associated costs such as insurance Define How much cash the buyer must bring to the closing table (the buyer s first mortgage) Base this on sales price and above factors Determine Best non-bank mortgage loan type (i.e. amortization schedule, interest rate, etc.) Use maximum monthly debt service from equivalency principle as a guide Most buyers will not be bankable

13 Buyer s perspective Example Output Purchase Price $25, City 2 nd Mortgage $7, State 3 rd Mortgage $2, Amount Financed $15, Bank Financing Amount Financed $15, Term 180 months Fixed Interest Rate 4.50% Principal & Interest $ Special Financing Amount Financed $15, Term 60 months Fixed Interest Rate 6.50% Principal & Interest $303.28

14 Preparing the Homeowner The Rule of Thirds Motivation Readiness Don't want to take title Poor foundational Want to take habits title today Understand Homeownership Want to take title, but are unfocused on purchase Good foundation for teaching A family may be highly motivated but unready, or vice versa.

15 Preparing the Homeowner Tools for Preparation Training opportunities need to be ongoing and multi-channeled, with emphasized outreach in Years Examples One-on-one interaction with property managers Resident newsletter articles that feature successful leasepurchase homeowners Basic homeownership classes Credit enhancement classes Home maintenance classes IDA Savings programs Readiness Poor foundational Poor Poor Poor Poor Poor habits foundational foundational foundational foundational Good habits Understand Understand habits habits habits habits foundation for Homeownership Homeownership Understand Good teaching Homeownership Understand foundation for Homeownership Understand teaching Good Homeownership foundation Good for Understand teaching Homeownership foundation Good for Good teaching foundation foundation for for teaching teaching

16 Implementation in Year 15 Bank debt Public sector debt Restrictive covenants Limited Partner Exit Finalize the per-property mortgage release price Finalize 2-3 year loan extension if loan is scheduled to balloon in Y16 Finalize terms for lease purchase residents to assume portion of debt Explore partial debt forgiveness Finalize restrictive covenant release with OHFA and transition HOME deed restriction into 2 nd mortgage (HOME compliance mortgage) for buyers. Limited Partners often want to exit the investment ASAP after yield is verified and potential for exit taxes has been determined Finalize transfer of the Limited Partner interest to an entity of the project sponsor

17 Implementation in Year 15 Purchase Options Bank financing Available for less than 10-15% of families Cash purchase Difficult for families to save cash Alternative Mortgages Seller Financing (CHN) 3-year term with 0% interest rate Capitalized total of $1.67 million Funded by $330,000 OHFA Housing Investment Fund Grant Underwriting focuses on rent payment history Average loan of $9,000 Y16 Loan Fund (NHS) 5-year term with 6.5% interest rate Capitalized with $2.5 million loan from NeighborWorks Backed by $250,000 loan loss reserve fund Underwriting focuses on rent payment history and other factors With Reliance alternative on mortgage bank financing sources, in CHN the is current able to financial average 85% climate title transfer will prevent for lease 90% purchase of sales. residents.

18 Create a Specialized Sales Team Don't Don't want want take to to to take take title title title Want to take title, but are unfocused on purchase Want to take title, but are unfocused on purchase Want to take title, but are unfocused on purchase Motivation Success Don't want to take title Want to take title today Want to take Take Want title to today take title today Motivation Motivate Want to families take to purchase their home title today Convert Maybe to Yes Through the loan application process Engage residents prior to Year 16 Emphasize timely rent payment Want to take title, but are unfocused on purchase Educate & coach residents Through IDA programs Examine credit Convert No to Maybe Through the closing process Complete sale and paperwork

19 Case Study: Cleveland Citywide Y16 Initiative Objective: To stabilize 25 CDC-sponsored projects (882 units) scheduled to reach Year 16 between 2010 and 2015, while creating viable pathways to home ownership for the 18 lease purchase projects (718 homes). Partners: Cleveland Neighborhood Progress (CNP) City of Cleveland Cleveland Housing Network (CHN) Enterprise Community Partners LISC s National Equity Fund (NEF) NHS of Greater Cleveland Ohio Housing Finance Agency (OHFA) Financial Contributors: - City of Cleveland - Enterprise Community Partners (ECP) - LISC s National Equity Fund (NEF) - Ohio Housing Finance Agency (OHFA)

20 Case Study: Cleveland Citywide Y16 Initiative Lessons Learned: A Best Practice Guide: Strategies for Successful Transition of Maturing LIHTC Projects Cleveland LIHTC Project Stabilization and Preservation Initiative

21 Signs of Distress Approaching Y16 Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 Stage 7 Reserves draw for basic operations Reserves emptied; Increase in AP Larger number of expensive make-readies deferred Vacancy losses increase; > number of vacant units Real estate taxes go unpaid Bank debt services doesn t get paid Foreclosure action is filed

22 Transparency: FIRST AND BEST RESPONSE

23 Partnerships solve problems individual outreach efforts cannot OHFA Limited Partner Partnership Table Bank Local Gov t

24 Framework for Debt Restructuring Timing Negotiation Process Underlying Principals Lessons Learned Imperative to monitor balloon date and begin conversations early re: ability to repay debt from projected sales Critical to monitor and understand market fluctuations affecting banks Banks: case-by-case; varying internal processes/protocol Negotiation is an iterative process; restructure isn t guaranteed Solicit support from other stakeholders (financial, political) as leverage A project s debt is directly linked to The Equivalency Principle If a project is overleveraged, the need to restructure debt, either through a loan modification or a discounted note sale to a friendly purchaser (e.g., nonprofit mission-based organization) is critical. Each negotiation is different; spanned varying levels of efficiency Lenders that understood market dynamics and conceded that options are limited were able to create a better outcome for LP families

25 Strategies for Vacant Vandalized Homes In most cases, maturing LIHTC deals that are reaching the end of the compliance period have little to no reserves available for make-readies or worse, significant repairs from vandalism. 5 Success Strategies are highlighted for dealing with vandalized and vacant homes

26 The Cuyahoga County Land Reutilization Corporation (CCLRC) Strategies for Vacant Vandalized Homes: Case Study #1 CCLRC agreed to take title to and demolish a small number of homes that are not financially viable to repair. To date, they have taken title to nine (9) homes for demolition.

27 Strategies for Vacant Vandalized Homes: Case Study #2 Deed-in-Escrow Program: The Cuyahoga County Land Reutilization Under this program, the purchaser agrees to renovate the home as required by previously established Housing Quality Standards within the time period specified in the Sales Agreement. Corporation (County Land Bank) Upon completion, title transfers to the purchaser. To date, the sale price for each vacant house under this program has been $4,000 plus all closing costs. To date, six (6) homes have been repaired through the Deed-in-Escrow program.

28 Cleveland Y16 Initiative Preservation Project the Strategies for Vacant Vandalized Homes: Case Study #3 Cleveland Housing Network (CHN) CHN submitted a 2014 Y16 Initiative LIHTC Preservation Project to the State in hopes to secure an award that would support the preservation of 41 units of scattered-site lease-purchase properties throughout the east side of Cleveland, Ohio. All 41 homes were constructed over 16 years ago and have since become vacant and blighted. Although an award was not secured in the last round, it was viable effort to preserve affordable housing investment, reduce blight, and create high quality homes for leasepurchase families in the targeted neighborhoods.

29 Strategies for Vacant Vandalized Homes: Case Study #4 In the Toledo market, a targeted triage approach has been used to maximize resources. Toledo Triage Model The worst homes on the most problematic blocks were demolished. For the newer homes that could be salvaged, the Limited Partners invested significant resources to repair vacant vandalized homes. For the older projects, OHFA has committed repair resources through the Housing Investment Fund (HIF).

30 Habitat for Strategies for Vacant Vandalized Homes: Case Study #5 Humanity Model - Greater Cleveland Habitat for Humanity (GCHFH) Piloted an initiative to acquire, rehabilitate, and sell former LIHTC LP homes using the Habitat model. The project included 6 houses on Cleveland s eastside. The rehabilitation is a full renovation and follows Enterprise Green Communities Criteria and the City of Cleveland s Green Building guidelines. GCHFH is also collaborating with the local CDC to locate families in need of affordable housing and have an interest in home ownership. Financing is provided by GCHFH at 0% interest to eligible families.

31 What if a partnership is too far gone to salvage? Create a viable work-out strategy to the greatest extent possible, with the caveat that priority will be given to working with current families to take title to their homes.