Navigating through the Crisis: Developers and Public Housing Authorities

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 Today’s 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 • 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. • PHA Plan not complete, not completed in accordance with HUD requirements, or not approved. • Evidence of effective DOTs in first position, lacking or insufficient. • Adjustments to CFP to reflect activities that would reduce grant. Source: U.S. Department of Housing and Urban Development

23. Capital Fund Appropriations History *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 AuthorityTom 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