1. U.S. Department of Housing & Urban Development IPED Conference HUD Financing Programs Todd Wendorf, HUD OPHI July 10, 2008

2. CFFP Process 2 Modernization Backlog Current backlog estimated at $18 billion Annual accrual approximately $2 billion Current appropriation funding $2.4 billion Introduction

3. CFFP Process 3 Overview of QHWRA of 1998 Section 9(d): Adds Financing as an eligible use of CFP. Section 9(e): Allows PHAs to use OF to pay debt service. Section 30: Mortgages and Security Section 30: U.S. Department of Housing and Urban Development (HUD) approval is required for pledging and other types of security interests in public housing property Introduction

4. CFFP Process Introduction Three Financing programs –Capital Fund Financing Program (CFFP) Pledge and repay with Capital Funds Implementing on a case by case basis since 2000 Draft rule published in 2007 Final rule expected soon –Operating Fund Financing Program (OFFP) Pledge and repay with Operating Funds Draft rule published in 2007 Ability to approve a few transactions prior to finalizing rule –Public Housing Mortgage Program (PHMP) PHAs can pledge real estate and use proceeds for affordable housing purposes Repayment source determined by PHA Notice to be published later this year 4

5. CFFP Process 5 Introduction What is the Capital Fund Financing Program? The Capital Fund Financing Program allows a Public Housing Authority to borrow private funds for capital and management activities relating to modernization and development of public housing. This Financing Program provides PHAs with the ability to address the immediate needs of their aging housing stock.

6. CFFP Process 6 CFFP Successes 107 transactions (and counting) approved Over $3 billion in capital provided Assisted 187 PHAs (and counting) Pools in Alabama, Maryland, California, New Jersey (2), Illinois, Pennsylvania, Massachusetts, Ohio and New York Multiple issuances to Philadelphia, Washington, D.C., Chicago, IL, Allegheny Co., PA, and Seattle, WA Increased interest in mixed-finance modernization and use of tax credits Introduction

7. CFFP Process 7 Potential Benefits of CFFP Potential realized only with effective long term planning Address backlog modernization needs. Economies of scale and scope Focus improvements at a single or limited number of developments. Limiting the number of times contractors must mobilize. Replace a single or limited number of systems across an entire portfolio. Allows PHA to use a single system type, simplifying ongoing maintenance. Leverage additional funds (ie: tax credits) Generally, this works best if PHA focuses use of proceeds at a limited number of developments. Address a broader scope – reducing future modernization needs Reduce amount borrowed – reducing debt service thus freeing up CFP for the payment of debt service. Introduction

8. CFFP Process 8 Fundamentals Pledging of a portion of your current and future years capital fund allocation as collateral for borrowing. Pledge Must Be subject to Congressional appropriations. No Additional Appropriations No guaranty or full faith and credit of HUD or the U.S. Government Section 30 – specifically states, No Liability to the Federal Government Risk to Lenders/Investors and PHAs Appropriations Risk Performance Risk Poor Planning/Implementation Fundamentals

9. CFFP Process 9 Fundamentals, (cont.) Financial Structure/Business Terms Optional – Monies for debt service dont flow through PHAs. Payments made directly to Trustee or Lender. CFF Amendment to the ACC. Buffer – Each FY, 1 st Payment of debt service on April 1. Principal = 1 st Payment - option Generally – up to 20 years and up to 33.3%. RHF Pledge up to 100% provided overall CF does not exceed 50% Negotiate – PHAs must negotiate legal provisions Covenants, defaults, and remedies Fundamentals

10. CFFP Process 10 Fundamentals, (cont.) Proceeds from CFFP transactions considered Capital funds. All statutes, regulations, etc that apply to CFP apply to proceed. –PHA Plan Use of Proceeds – Annual Statement Use of FF/RHF for Debt Service – 5 year Action Plan (Annual Statement if Applicable) –RHF Plan (if using RHF Funds) –Procurement –Environmental –Declaration of Trust on all PH Properties –Depository Agreement –Obligation/Expenditure (mandatory redemption) Fundamentals

11. CFFP Process 11 Fundamentals, (Cont.) The proceeds of the Loan may be expended only for purposes for which public housing Capital Fund Program moneys may be expended. All such uses of proceeds shall be subject to HUD approval (as part of HUDs approval of Authoritys annual plan) The Authority shall report to HUD quarterly with respect to such expenditures in the same manner as it accounts for the expenditure of Capital Fund Program moneys. Fundamentals

12. CFFP Process 12 The Basics Start with three basic questions What do I want/need to do? How much money can I raise? Can I spend the money quickly enough?

13. CFFP Process 13 The Basics What do I want/need to do? –Conduct PNA for entire portfolio for term of proposed financing –Identify priority need projects, size, scope, and cost estimate –Use the new CFFP/OFFP PNA form Based upon a life-cycle analysis of useful life components and related costs Includes all of the major building systems and 504 needs and specific items within them, specifying quantities and costs of repair/replacement Property specific Indicates the number of units inspected by bedroom size

14. CFFP Process 14 The Basics How much money can I raise? –CFP borrowing capacity analysis Prepare a Portfolio Schedule to project future reductions in public housing portfolio Adjust the Capital Fund Conduct a Sensitivity Analysis to address how much of your capital fund is historically being used for administration, management improvement and operations and take that into consideration when determining your borrowing

15. CFFP Process 15 Portfolio Schedule What Is the Purpose of a Portfolio Schedule: Reflects future adjustments in the Capital Fund (CF) grant and Replacement Housing Factor (RHF) grant Demolition/Disposition Mandatory, Required, Voluntary Conversion Merging of Units (e.g. 2 studios into 1 one bedroom unit) Casualty, condemnation Homeownership Asset management PIC data issues Voluntary Compliance Agreements or other administrative or judicial actions Contractual commitments to other mixed-finance projects Enables PHA to assess the potential amount of CF or RHF funds available for debt service beyond additional fund commitments or reductions Is a requirement for a CFFP submission

16. CFFP Process 16 Sensitivity Analysis What Is a Sensitivity Analysis?: Reflects future adjustments in the Capital Fund (CF) grant and Replacement Housing Factor (RHF) grant Historical use PHA of use for: Administration – BLI 1410 Management improvement – BLI 1408 ; and, Operations – BLI 1406 Enables PHA to more fully assess the amount of CF or RHF funds actually available for debt service and rehabilitation and modernization of the portfolio for the term of the financing Is a useful tool when considering a CFFP transaction

17. CFFP Process 17 Sensitivity Analysis 20-year Capital Fund Projection (from Portfolio Schedule)20,000,000 Less: 20 Year Debt Service Requirement (6,601,200) CF Available After Debt Service 13,398,800 20-year PNA Total Needs(25,634,131) Portion of PNA Met Using CFFP Proceeds (Net Proceeds to Project)3,247,229 Total 20-year PNA Needs Remaining after CFFP(22,386,902) CF Available after 20-year PNA Needs (8,988,102) 20-year 1406, 1408 & 1410 Soft Cost Projection (% based on 5 year avg.)(6,526,331) CF Available after Projected Soft Costs (15,514,433)

18. CFFP Process 18 Moving to Strategic Management How much money can I raise? –Will remaining CFP funds be sufficient for other PNA needs, particularly given any additional uses of Capital Funds? The PHA must consider its options, including: Seeking Additional Funding: Pursue CFFP, Mixed Finance Transaction, HOPE VI grant funds, or other private leveraged funds for rehabilitation of the portfolio assets and surrounding community uses. Sell one or more properties in order to generate new capital for meeting the needs of other properties in the portfolio, or for new development.

19. CFFP Process Moving to Strategic Management What if the anticipated funds are insufficient to meet the estimated needs? (Cont.) The PHA must consider its options, including: Strategically Using the Resources Available: –Confirm the long time viability and suitability of each property –Eliminate properties or portions of properties deemed non-sustainable or viable –Prioritize needs to ensure that properties are safe, suitable and sustainable –Develop capital plans for each property that are achievable 19

20. CFFP Process Moving to Strategic Management KEY POINTS Important factor in the consideration of options: Any net reduction in the total number of public housing units will in turn reduce the total allocation of future Capital Funds and Operating Funds. A Strategic Plan should not be looked at as an emergency tactic when there isnt enough money in the pot. It is a tool to anticipate future demands on the PHA and be prepared for them, and should be periodically revisited. 20

21. CFFP Process 21 Cap Funds 1,000,000 Annual $ Pledge (33%) 330,060 Remaining Cap Funds 669,940 Total Borrowing* 4,000,000 Debt Service Reserve330,060 Capitalized Interest (3 mos)60,000 Expenses140,000 Project Fund 3,469,940 *Assumes 5.495% fixed rate for 20 years, $140,000 in expenses Strategic Analysis

22. CFFP Process 22 Strategic Analysis Loan or BondLoanLeverage (9%)Leveraged (4%) Amount of Borrowing/Loan $ 4,000,000 $ 786,825 $ 2,624,051 Less: Cost of Issuance $ (140,000) $ (107,868) $ (126,241) Debt Service Reserve $ (330,060) $ (64,925) $ (216,524) Capitalized Interest $ (60,000) $ (19,835) $ (42,801) Tax Credit Transaction Costs $ - Net Proceeds $ 3,469,940 $ 594,197 $ 2,238,487 Tax Credit Equity$0 $ 3,052,516 $ 1,307,151 Total Development Costs $ 3,469,940 $ 3,646,713 $ 3,545,638 Interest Costs over Life of Borrowing $ 2,601,199 $ 511,672 $ 1,706,420 Total Capital Funds Expended $ 6,601,199 $ 1,298,497 $ 4,330,472 CFP Savings + Additional Development $ 5,479,475 $ 2,346,425

23. CFFP Process 23 Mixed Finance & CFFP How to make the two processes work together. Timing and other considerations for application for LIHTCs – 4%/9% Combining the CFFP with the MF transactions. Timing and other considerations in regard to CFFP/MFP. RHF Apply for LIHTC Accumulate RHF After LIHTC award, close on CFFP for any outstanding RHF Mixed Finance & CFFP

24. CFFP Process 24 Getting Started Can I spend the money quickly enough? –HUD deadlines to obligate in 2 years, expend in 3 (4 max) –If tax credits, shorter timeframes (e.g. 2 year window for 4% rehab) –Is it better to plan the work in phases to manage the effort and impact on the PHAs other functions and activities? –Seattle –Modernized Senior Portfolio –2,000 units –21 projects –3 phases

25. CFFP Process 25 II.Establish support internally and with Field Office Identify project staffing and resources – effort requires significant resources Educate Board of Commissioners on proposed activity - CFFP - If tax credits, ownership entity - If tax credits, property management entity Seek Board approval for procurements Start updating PHA Plan and others as necessary Alert Field Office Getting Started

26. CFFP Process 26 III. Seek HUD approvals In addition to CFFP, may include Mixed Finance, Demo/Dispo, Development, RHF. Field Office coordination and support can be important. Sequencing tricky – parallel approval processes but different timelines. CFFP approval can lead Mixed- Finance Program (MFP) approval, but will be subject to MFP approval. Approval expires in 60 days. PHAs need a detailed, written schedule. Getting Started

27. CFFP Process Confidential - Internal Distribution 27 Where does a PHA find information regarding the necessary documentation? HUDs website http://www.hud.gov/offices/pih/programs/ph/capfund/cffp. cfm Local Field Office http://www.hud.gov/offices/pih/programs/ph/capfund/cffpr olefo.cfm#1 Contact HUD CFFP Staff Kevin Gallagher - 202-708-4192 Tom Shelton - 202-708-4799 Todd Wendorf - 312-353-6236, x2511 Rochelle McKinney - 202-402-2065 Getting Started

28. CFFP Process 28 Top 4 Things that Slow Down a CFFP Proposal 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. Counsel unresponsive 4.Adjustments to CFP to reflect activities that would reduce grant. CFFP Proposal Process

29. CFFP Process 29 Public Housing Mortgage Program Background The United States Housing Act of 1937 Sec. 30: Public Housing Mortgages and Security Interests (a) GENERAL AUTHORIZATION.The Secretary may, upon such terms and conditions as the Secretary may prescribe, authorize a public housing agency to mortgage or otherwise grant a security interest in any public housing project or other property of the public housing agency. (b) TERMS AND CONDITIONS.In making any authorization under subsection (a), the Secretary may consider –(1) the ability of the public housing agency to use the proceeds of the mortgage or security interest for low-income housing uses; –(2) the ability of the public housing agency to make payments on the mortgage or security interest; and –(3) such other criteria as the Secretary may specify. (c) NO FEDERAL LIABILITY.No action taken under this section shall result in any liability to the Federal Government.

30. CFFP Process 30 Section 30 Possible Missteps Recent Cases from the IG and Departmental Enforcement Center –PHAs engaged in the following activities without written approval from the A/S or DAS Mortgage Administrative Building Mortgage a PH Property which was to be turned into a Mixed Finance Property – however, mortgage done before CFFP or Mixed Finance Approval Offset provision in loan docs. PH funds in bank accounts –Results IG Findings Debarment actions against Executive Directors and Board Members.

31. CFFP Process 31 Section 30 - Lessons Learned If you pledge public housing assets, get written approval from DAS of OPHI. Loan does not involve a pledge of public housing assets? –Are you sure? –Ask your attorney to insert a non-recourse provision in the loan documents that is crystal clear – there is no recourse to public housing assets. –If you borrow funds, make sure you get an attorneys opinion that PH assets are not pledged or otherwise encumbered.

32. CFFP Process 32 HUD will look for legal provisions of a similar nature: Conflicts Clause: –To the extent that any of the foregoing is in conflict with the requirements of the United States Housing Act of 1937, as amended, Federal regulations, and the Annual Contributions Contract, as amended, (Federal public housing requirements), such Federal public housing requirements shall control and govern in such instances of conflict. Non-Recourse Provision –Notwithstanding anything to the contrary herein, the Lender and the Borrower hereby acknowledge and agree that except for assets of the Borrower arising under any program not administered by the U.S. Department of Housing and Urban Development (HUD) under the United States Housing Act of 1937 (42 U.S.C. 1437 et seq), or as otherwise specifically approved in writing by HUD and described below, Lender acknowledges and agrees that the Borrower has no authority to provide Lender with Guarantees, indemnifications, rights of set off, or other pledges involving the assets of any public housing Project (as the term Project is defined in the Annual Contributions Contract (ACC) between Borrower and HUD) or any Housing Choice Voucher (HCV) related assets of the Borrower. Accordingly, Lender acknowledges that it has no legal right of recourse under the Loan Documents against: (1) any public housing Project of Borrower; (2) any operating receipts (as the term operating receipts is defined in the ACC) HCV receipts or Capital Funds of Borrower; or (3) any public housing operating reserve of Borrower reflected in Borrowers annual operating budget and required under the ACC. Should any assets of the Borrower be identified at later date as meeting the criteria set forth above, any guarantees, indemnifications, rights of set off, or other pledges involving those assets will be deemed null, void and unenforceable. Legal Provisions

33. CFFP Process 33 PHMP Real Estate that may be mortgaged (subject to HUD approval) Non-Dwelling Space –Admin Building, etc. Raw Land Dwelling units provided DOT is effective and in first position

34. CFFP Process 34 PHMP Risks Key Risks 1 st lien approvable on vacant land and administrative position. –Foreclosure a possibility –Loss of Admin Building – PHA still must operate public housing portfolio in accordance with PH requirements – or risk sanctions, including receivership PHA must assess Risk PHA must assess ability to continue operating PH portfolio in accordance with PH Requirements if Admin Building is lost Rental Units – DOT must be in 1 st position –DOT renders property of no value to lenders. DOT requires HUD approval for transfer of property DOT requires property to be operated as public housing –Why would HUD approve a security interest in rental housing?

35. CFFP Process 35 PHMP Federal Liability NO FEDERAL LIABILITY. No action taken under this section shall result in any liability to the Federal Government.

36. CFFP Process OFFP Primer Operating Fund Financing Program Authorized by QWARA 9(e) Debt service on loans used to modernize or develop public housing is an eligible use. Draft rule published in 2007 36

37. CFFP Process 37 Question & Answer