Preservation Pitfalls and Windfalls DEAL FEASIBILITY AND LESSONS LEARNED PHFA HOUSING FORUM MAY 2015 Agenda Intro Feasibility Factors 9% vs. 4% Lessons learned Two Projects (or Three) Robert Saligman Apartments 180 unit 202 built in 1978 HUD 202 loan, HAP renewing annually Converted Holiday Inn Addition built in late 1990s—not part of project Shared common spaces, sitework, elevators via condo Ground floor office space leased to sponsor Renovations will upgrade common areas, address deferred maintenance, position property for continued success Ephraim Goldstein Apartments 154 unit 202 built 1980 HUD 231 loan, HAP renewing annually Shared common spaces, sitework, elevators via cross-easement Ground floor office space leased to adult day provider Renovations will upgrade common areas, address deferred maintenance, position property for continued success SHALOM HOUSE Ephraim Goldstein Apartments 114 unit 202 built 1985 Original HUD loan prepaid in 2003, HAP renewing annually Built as addition/companion to Shalom House— also part of project Shared common spaces, sitework, elevators via cross-easement Ground floor office space leased to adult day provider Renovations will upgrade common areas, address deferred maintenance, position property for continued success ARBOR HOUSE Sponsor—Federation Housing, Inc. •Founded 1970 •Own/manage 10 affordable independent living sites for seniors in Northeast Philadelphia and Eastern Montgomery County •Serve 1500+ seniors with housing and services •Experienced and very capable staff •Active and highly experienced board Approach Renew HAP—as long as possible, rents as high as possible Partnership acquire property--high price Keep tenants in place Control rehab costs but address all deferred maintenance Earn developer fee and sale proceeds for developer Costs •Construction—control costs but scope should address as much as possible •Soft costs—bonds will add to costs, higher legal fees •Acquisition—as high as (reasonably) possible Sources •Equity—from rehab and acquisition credits •How much permanent debt? •HAP rents •Operating expenses (big projects easier) •Real estate taxes (PILOT/Exemption) •Gap—how to fill? Gap Financing The Windfall Generate acquisition credits>> equity via sale of property to partnership Seller: •Pays of existing debt •Loans a portion of net proceeds to project to fill gap •Still nets $2 million Deal Feasibility Factors Current building value (high) Existing debt (low) Potential HAP rents (high) HUD regulatory restrictions (manageable and understood) Rehab costs (low—but do everything!) In place rehab possible?>>boosts equity raise 4% vs. 9% •Bonds add a layer of complexity •Must cover at least 50% of costs—seller loan as bond? •Must be outstanding for at least 18 months •Can only pay for “good” costs •Less reliance on scarce subsidy 4% vs. 9% •More structuring issues to deal with •Seller loans •Relationships between seller and buyer •Establishing a need for the bonds 4% vs. 9% •4% does not always work (see Deal Feasibility Factors above) •Deal should be “cooked” when you submit to PHFA •No “application risk” •While you wait for PHFA approvals: HUD approvals, issuer approvals, design process, investor/lender due diligence Lessons Learned You don’t have to be a HUD expert, but you need one • To help assess feasibility up-front • To obtain HUD approvals: • HAP extension/increase • Prepayment of mortgage • Disposition of residual receipts and replacement reserves • To help with quirks, issues, signatures Lessons Learned The bonds are not mysterious •Mostly like a conventional loan •Direct placement—simplest, most common •Bond attorneys and issuers care about things you have never heard of Lessons Learned Strong property management is key •Highest equity raise = in-place rehab, and relocation is difficult for elders •Daytime relocation for the duration of unit rehab—3-5 days •448 co-occurring home renovation projects •Legal notices, clear communication about work schedules •Complaints about dust, noise •Compliance issues still have to be addressed Lessons Learned Experienced general contractor is key •In-place rehab: tenants vacate their apartments during the work day 7 to 3 (hospitality suite or day program) •3 to 5 days in each unit •Specialized work teams •Common area and systems work ongoing throughout •GC/property manager coordination Lessons Learned You need a lot of hands on deck •Federation: staff bore the brunt—adds to normal workload •4 or 5 board members who devoted 5 – 40 hours per week over 6 months •Consultant: approximately 1.5 FTEs avg over 6 months including construction oversight Lessons Learned Good stewards are rewarded •Higher as-is appraised value (more equity) •Lower rehab costs •Higher replacement reserves •Higher residual receipts Lessons Learned Today’s smaller projects will be harder to rehab in 20 years •Cause: resource constraints • Less project-based rent subsidy • Less development subsidy •Effect: smaller projects, higher per unit operating expenses, less debt supported •Will this approach work in 20 years?
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