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Navigating the Sea of Development Alphabet Soup

Explore the complexities of affordable housing development and discover the various funding options available to housing authorities. Learn about tax credits, federal funding, and non-federal funds to continue providing affordable housing in the absence of HUD support.

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Navigating the Sea of Development Alphabet Soup

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  1. 99491550.1

  2. Navigating The Sea of Development Alphabet Soup Presented By: Michael H. Syme msyme@foxrothschild.com 412-391-2450

  3. Where Are We Today?

  4. CAPITAL FUNDS

  5. PUBLIC HOUSING OPERATING SUBSIDY 20 year average = 93.89% 10 year average = 91.36% 5 year average = 93.68%

  6. OPERATING SUBSIDY • In the last 20 years, it has met 100% of eligibility five times (25%) • In 2013, sequestration meant that subsidy met 81.86% of eligibility • In 2014, the proration was 88.79% • In 2015, the proration was 85.36% • In 2016, the proration was 90.21% • In 2017, the proration was 93.10% • In 2018, as of October, 93%

  7. FUNDING • The Present Funding reductions are representative of a long-term trend whereby: • Funding is regularly reduced • Properties continue to age and deteriorate

  8. What's A Housing Authority To Do? Create new authority by: Earn non-federal funds Leverage non-federal funds Build capacity to create future cash flow In short – continue affordable housing in the absence of HUD 8

  9. Why Not Just Go Forward And Develop?

  10. Scope & Complexity Development is complex and requires special skill sets Housing Authority may lack the experience, expertise or staff to self-develop or simply lack of time

  11. Options The Acronym Oasis LIHTC QHWRA RAD RHFF MF CFFP CNI PBV PBRA SVC

  12. Federal Funding • MF = Mixed Finance • CFFP = Capital Fund Financing Program • RHFF = Replacement Housing Factor Funds • CNI = Choice Neighborhoods Initiative • RAD = Rental Assistance Demonstration • QHWRA = Quality Housing Work Responsibility Act • PBV = Project Based Vouchers • PBRA = Project Based Rental Assistance • SVC = Streamline Voluntary Conversion

  13. NON-FEDERAL FUNDS AVAILABLE LIHTC - Low-income housing tax credits (issued by Florida Housing Finance Corporation) NMTC - New market tax credits – Historical tax credits, etc. AHP- Federal Home Loan Bank, Affordable Housing Program CLP - Federal Home Loan Bank, Community Lending Program

  14. COMBINATION OF FUNDING SOURCES PROVIDES THE FUNDING NECESSARY

  15. TAX CREDITS WITHOUT PUBLIC HOUSING Advantages: • No oversight from HUD • No total development cost restrictions • No Safe Harbor limitations • Rent at tax credit rent without 30% income limits • No Declaration of Trust Disadvantages: • No public housing operating subsidy • No Capital funds • No HUD oversight of developer

  16. TAX CREDITS WITH PUBLIC HOUSING Advantages: • Continue receipt of public housing operating subsidy • Continue receipt of Capital funds • Units available to extremely low-income residents • Possible use of Capital Fund Financing Program Disadvantages: • HUD oversight • Total development cost restrictions • Safe Harbor Limitations

  17. TAX CREDITS WITHSITE-BASED SECTION 8 Advantages: • Higher rents, lower reserves • Predictability of subsidy Disadvantages: • Awarding project-based vouchers • Uncertainty of contract renewal (15 years) • More regulations

  18. COMMON DENOMINATOR • Tax Credits

  19. THE TAX CREDIT PROGRAM • A capital subsidy program for building or rehabbing rental housing • Product of Reagan era tax reform (1986 Tax Reform Act) • Partnership between private sector and the government ("PPP") • Competitive credits (9% low-income housing tax credit "LIHTC") and automatic credits (4% LIHTC) 19

  20. BASICS • LIHTCare available pursuant to Section 42 of the Internal Revenue Code of 1986 • Tax credits are a dollar-for-dollar credit which offsets taxes for a ten (10) year period • But, low income use of property must be maintained for a minimum of 15 years to avoid recapture

  21. TYPES OF CREDIT • The 70% subsidy – commonly referred to as 9% credit –this is now a set 9% credit and doesn’t fluctuate • The 30% subsidy – commonly referred to as 4% credit – this is a fluctuating credit amount up to 4%

  22. HOW TAX CREDITS WORK State Allocating Agency Federal Government Tax Credits Tax Credits Investor Tax Credits Equity Tax Credit Development

  23. 9% Credit • Available for new construction or substantial rehabilitation • In an amount of approximately 9% of the qualified building costs every year for 10 years • Highly competitive

  24. 4% Credit • Available for new construction or substantial rehabilitation • Available for acquisition • In an amount of approximately 4% of the qualified building costs every year for 10 years • The credits are automatic with an allocation of the state's Volume Cap.

  25. The Parties • Texas Department of Housing and Community Affairs • Issues Credits to the project • Syndicator Purchases Tax Credits • Developer – Serves as Manager • Real Estate Owner – Housing Authority • Consultants

  26. Benefits To Investor • Dollar-for-dollar credit against their federal tax liability • Tax benefits from losses and depreciation • Community Reinvestment Act (CRA) "credit"

  27. Texas Department of Housing and Community Affairs General Partner(s) Tax Credit Investor LIHTC allocation Owner Entity

  28. Who Develops? • Use a developer • Become partner • Self-develop

  29. Developer • Develops financing plan • Causes the development to be constructed, directly or through an owner entity that it creates • Provides guarantees to investor

  30. Catch 22 The Developer must be prepared to provide guarantees to investors – but HUD will not allow guarantee using federal funding

  31. Overview - Simplified

  32. Who Manages? • Developer manages • Third party manager • Housing authority manages

  33. Housing Authority As Property Manager Housing authority can be sole property manager Must have expertise to manage non-public housing units, particularly tax credit units Housing authorities can have input into property management in a variety of ways: Review selection of private property manager and contract terms Joint venture with experienced private management firm to learn private-sector approach If a housing authority manages, it must have a licensed real estate broker

  34. WHAT IS RAD? Rental Assistance Demonstration program which means Public Housing Conversion

  35. OVERVIEW HUD program authorized in Fiscal Year 2012 (FY 2012) Appropriations Bill to restructure assistance to Public Housing and Mod Rehab projects. • No new funding authorized – units are converted to RAD program with existing Public Housing funding • Initially 60,000 units authorized by Congress for Demonstration • Increased to 225,000 units (18% of public housing stock) • Increased to 445,000 (36% of public housing stock)

  36. How Does RAD Benefit HUD? • Total outstanding capital needs of over $40 billion • Increasing by $3.4 billion a year • This equates to: $36,000 per unit nationally • Each unit converted decreases capital needs (according to HUD’s bookkeeping) • If 225,000 units are converted to RAD, the capital needs drop by $8.1 billion • If all 445,000 units are converted to RAD, the capital needs drop by over $16 billion • No cost to HUD, makes HUD look good

  37. Uses of RAD • Convert public housing assistance to: • Project-Based Rental Assistance; or • Project-Based Vouchers • Convert at “current funding” only (operating subsidy + capital fund) • Awarded projects exempt from Public Housing Assessment System

  38. Public Housing Current Funding Rent Levels

  39. Understanding RAD contract rent caps PBRA: • Lower of current funding or 120% of Fair Market Rents ("FMR") (less any utility allowances ("UAs") • HUD may approve rents in excess of 120% up to 150% based on Rent Comparability Study PBV: • Lower of current funding, “reasonable rent” or 110% of FMR (less any UAs) Make sure developers, lenders and investors aren’t projecting RAD contract rents above applicable program caps

  40. Choice Mobility And Residents • Residents who move into converted development must be allowed to move after 12 months (PBV) or 24 months (PBRA) with portable vouchers • Does not reduce number of RAD units • PHA can limit Choice Mobility moves to 15% per year • Exemptions to be granted to 10% of total Demonstration units • Right of return for residents of converted RAD units • Returning residents cannot be re-screened for admission

  41. Affiliated Entity Shields Authority from Liability Availability When Federal Funds Cannot Be Used Resolve Tax Credit Investor's Depreciation Issue Separate from Authority (and HUD)

  42. Affiliated Entity • Use a different affiliate for each of: • Serving as co-developer • Serving as co-general partner or co-managing member • Acting as a management agent • Providing guarantees

  43. Co-Developer • A not-for-profit affiliate • Earns developer fee of non-federal funds

  44. Co-General PartnerCo-Managing Member • A for-profit affiliate • Ultimately the owner of the new development • Can be subsidiary of the not-for-profit entity

  45. Management Agent • Can be a for-profit or non-profit • Generally, must have licensed real estate agent. • Depending on the property, may need low-income housing tax credit certification • If a not-for-profit, it can be an LLC with the not-for-profit as the sole member

  46. Overview - Complex Section 8 Central Office Cost Center Public Housing Developer Entity Management Entity Investor Investor 99.99% 46

  47. Affiliated Entity – Treatment Under State Law Governed by Texas Business Organizations Code Treated as a separate legal entity Separate board Separate meetings and minute books Proper financial accounting

  48. Affiliated Entities–Treatment By HUD HUD's Notice: Applicability of Public Housing Program requirements to transactions between Public Housing Agencies (“PHA”) and their related affiliates and instrumentalities.

  49. Key Definitions "Affiliate(s)/Affiliated entity" shall mean entities, formed by the PHA under state law in which a PHA has a financial or ownership interest or participates in their governance. The PHA need not control nor manage the assets or operations of the Affiliate. Affiliates, for purposes of this notice, include only entities that use public housing funds for carrying out development functions of the PHA. An Affiliate is treated in the same manner as any unrelated third party contractor. "Instrumentality" shall mean a subsidiary branch of the PHA through which functions or policies are implemented. An Instrumentality assumes the role of the PHA and is the PHA under the public housing requirements for purposes of implementing public housing development activities and programs. Instrumentalities must be authorized to act for and to assume the responsibilities of the PHA.

  50. Issues Related To Affiliate Formed For Public Housing Development Conflict of Interest - Financial interest. A bonus provided to a board member by the Affiliate would be a financial interest, while a bonus provided by the PHA for the development director's service to the PHA would not be considered a financial interest. Use consultant agreements. Cannot be employed by both.

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