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Navigating through the Crisis: Developers and Public Housing Authorities Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International,

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Presentation on theme: "Navigating through the Crisis: Developers and Public Housing Authorities Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International,"— Presentation transcript:

1 Navigating through the Crisis: Developers and Public Housing Authorities Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International, LLC 2008 Real Estate Update: Affordable Housing in Todays Market December 10–12 San Juan, Puerto Rico Sponsored by Reznick Group, Nixon Peabody LLP and IPED, Inc.

2 Current Credit Crisis: Debt and Equity Decreased access to construction and long term debt Decreased supply of equity Increased cost of equity Increased cost of construction debt Increased requirements for debt and equity

3 Current Credit Crisis: Rental Markets Increased number of renters Increased average rental costs Decreased vacancy rate Decreased cost of land and construction costs in some markets

4 Tax Credit Market Ernst & Young estimates that tax credit equity has decreased by at least 40% Fannie Mae, the largest tax credit equity provider, noted equity investments decreased by 50% between 2006 and 2007 Government takeover has reduced this even further.

5 Pre-2007 Tax Credit Pricing At peak (2006), prices for pay-in ranged from.94 – 1.04 Price depended on: Pay-in Period Financial strength of developer Negotiation 10-12 Equity providers would call once an application was submitted

6 Current Tax Credit Estimates from.78-.82 Developers receiving fewer offers Pay-in periods longer Stronger developer track record required 10-12 calls must be made by the developer to the equity providers AFTER an allocation and only 1-2 might show serious interest

7 Debt Status Construction lending increased from 175 bp over LIBOR to 250bp over LIBOR Permanent financing increased from 200 bp over the 10 year Treasury to 400bp Saving grace is that rates are still relatively low even with the increase (7- 8%) Lenders are much more stringent

8 Rental Market Status National vacancy rate is decreasing: –10.2% 2003 – 9.6% 2007 (Q4) –Estimate of 9 – 10% in 2008 Median asking rate for rentals jumped 14%, from $591 a month during the fourth quarter of 2003 to $673 a month at the end of 2007 The number of renters in professionally managed apartments leapt by the largest amount since 2000.

9 Rental Demographics In the 10 years preceding the credit crisis nearly 2.2 million (or 6 percent) of all rental units were demolished or otherwise permanently removed from the inventory Number of renters increased by approximately one million in 2007. National median gross rent rose 2.7 percent in real terms from 2001 to 2006 while the median renter income fell by 8.4 percent.

10 Reasons for Increase in Renters Foreclosures Economic situation makes it difficult to buy Underwriting criteria is more strict People waiting for home prices to drop Lost home due to foreclosure

11 Different Investor Profile Sought Fannie, Freddie, many banks not investing or investing less Equity funds looking to pension funds, insurance companies, communications firms Increased rate of return demands (from current 4-5% to 6.5-8%) will keep equity prices low

12 Challenges for Developers Equity more difficult to obtain and more expensive Debt requirements more stringent and debt costs higher Less money for trust funds because of real estate situation More competition for trust fund and other governmental monies Funds diverted for the foreclosure crisis

13 Advantages to Developer/Public Housing Authority Partnerships PHAs often located in or near qualified census tracts Non-profit affiliates of PHAs are competitive in tax credit applications Population served by PHAs makes them competitive in seeking HOME, Trust Fund, AHP and other types of financing Able to Leverage Capital and Operating Fund Programs

14 Factors Aiding PHAs in Developer Partnerships Strong financial position needed to receive tax credit equity Equity needed to secure debt, whether in relation to tax credits or conventional Financial resources place developer in a more competitive position Less experienced developers, including PHAS, more difficulty raising equity

15 Preservation Emphasis 46 states prioritize preservation in their LIHTC allocation. 25 states have competitive tax credit set asides for preservation. A majority of states dedicate a portion of their four percent tax credits and private activity bonds to preservation. An increasing number of states have developed housing trust fund programs that finance preservation and rehabilitation. Most states have made a commitment to the preservation of affordable rural housing through their tax credit programs.

16 State Low Income and Preservation Emphasis Massachusetts: 35% tax credit set aside for preservation Georgia: 14 points added for very low income properties in rural areas 15 Points Conversion/Rehab for low income renters

17 Additional Resources Exist but Under Pressure Municipal Bonds and 4% Credits –Bond market is difficult at current time State and Local Housing Trust Funds –Contributions Shrinking due to Financial Situation HOME –Competition with Community Preservation and Foreclosure Prevention

18 Capital Fund Financing Program PHA pledges a portion (up to 33%) of its current and future year capital fund allocations to a lender or investor, for up to 20 years If the PHA Forms an Affiliate Organization, Can be Used with Tax Credits PHA can Partner with a Private Developer

19 CFFP: Criteria Up to 33% of Capital Funds May Be Pledged Financing Cannot Have Detrimental Impact on Balance of Portfolio Analysis Based on Physical Needs Assessment (PNA) Plan Should Include Sensitivity if Units and/or Capital Allocations Will be Reduced

20 CFFP: Key Conditions Lender Or Investor Must Understand Pledged Funds Are Subject To Federal Appropriations The Transaction Must Stand On Its Own Terms, As There Is No Full Faith And Credit Guarantee Of The U.S. Government Section 30 Permits A PHA To Borrow Against Its Assets While Protecting The Housing For Public Housing Residents

21 Tax Credits and CFFP PHA Affiliate Organization Application Processes: –HUD –State HFA Timing: –CFFP: 24 Months To Obligation; 48 To Expenditure –LIHTC: Must Be Placed In Service By End Of Year Two Years After The Award

22 What Can Slow Down the Process 1.Physical Needs Assessment not complete, not submitted to the field office as part of the PHA Plan, not completed in accordance with regulations, such as life cycle considerations. 2.PHA Plan not complete, not completed in accordance with HUD requirements, or not approved. 3.Evidence of effective DOTs in first position, lacking or insufficient. 4.Adjustments to CFP to reflect activities that would reduce grant. Source: U.S. Department of Housing and Urban Development

23 Capital Fund Appropriations History FY2000200120022003200420052006 Total 2,9003,0002,843.42,7302,712.22,6002,463.6 Less Set Asides 150168194.2190.1171.1150.393.3 CFP Available for Formula 2,7502,8322,649.22,539.92,541.12,449.62,370.2 Change in CFP Available for Formula 2.98%-6.45%-4.13%0.05%-3.60%-3.24% Timely Obligator Set Aside 550447 CFP Available for Untimely Obligators 2,7502,8322,09922,09292,541.42,449.52,370.2 *Numbers recorded in millions Source: U.S. Department of Housing and Urban Development

24 Operating Fund Financing Program (OFFP) Can pledge the following: (subject to the written approval of the Assistant Secretary of PIH or the DAS of OPHI) Cash flow Funding Needs at 84% Operating reserves in excess of 3 months of operating expenses Source: U.S. Department of Housing and Urban Development

25 LIHTC and CFFP CAPITAL Lease used to acquire the real property Ground lease used to control - Isolate the land cost HUD Declaration of Trust in first position No First Mortgage debt (impact on DSCR) Construction loan in second position Break Even Cash Flow budgeting All cash flow from HUD runs through PHA All HUD Public Housing Rules apply during the tax credit compliance period Final HUD approvals (CFFP and Mixed Finance) Source: James Hamilton, Stevens Point (WI) Housing Authority Tom Landgraf, Tom Landgraf Consulting, LLC

26 OFFP Considerations Mixed Finance Can use cash flow to pay debt service When received by a PHA, such funds must be treated as operating subsidy All projects must be under project based accounting Project being financed must submit an audited financial statement PNA must demonstrate that the improvements cannot be addressed through CFFP and Capital Fund must be used first

27 PHA Project Based Vouchers PHA – Owner HAP contracts up to 10 years Except for units for elderly, disabled, or receiving supportive services, building must have less than 25% receiving project-based voucher assistance. PHA may extend HAP contract to achieve long- term affordability or to expand housing opportunities Contracts and extensions subject to availability of appropriated funds Source: U.S. Department of Housing and Urban Development

28 Conclusion Debt, Equity Markets Create Challenges PHA-Developer Partnerships Have Advantages for Both Tax Credit Competition and Difficult to Develop Areas CFFP and OFFP Financing Project Based Rental Assistance Still Challenges Ahead

29 Thank You For More Information: IraPeppercorn@Earthlink.Net IraPeppercornInternational@Yahoo.Com

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