U.S. Department of Housing & Urban Development IPED Conference HUD Financing Programs Todd Wendorf, HUD OPHI J

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

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

3. Introduction 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

4. 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

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 PHA’s with the ability to address the immediate needs of their aging housing stock.

6. Introduction 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

7. Introduction 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.

8. Fundamentals • 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

9. Fundamentals Fundamentals, (cont.) • Financial Structure/Business Terms • Optional – Monies for debt service don’t flow through PHAs. Payments made directly to Trustee or Lender. • CFF Amendment to the ACC. • Buffer – Each FY, 1st Payment of debt service on April 1. • Principal = 1st 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

10. Fundamentals 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)

11. Fundamentals 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 HUD’s approval of Authority’s 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.

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. 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. 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. 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. 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. Sensitivity Analysis

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 propertiesin order to generate new capital for meeting the needs of other properties in the portfolio, or for new development.

19. 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 • Prioritizeneeds to ensure that properties are safe, suitable and sustainable • Develop capital plans for each property that are achievable

20. 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 isn’t 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.

21. Strategic Analysis

22. Strategic Analysis

23. Mixed Finance & CFFP 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

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 PHA’s other functions and activities? • Seattle • Modernized Senior Portfolio • 2,000 units • 21 projects • 3 phases

25. Getting Started • 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

26. Getting Started • 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.

27. Getting Started • Where does a PHA find information regarding the necessary documentation? • HUD’s website http://www.hud.gov/offices/pih/programs/ph/capfund/cffp.cfm • Local Field Office http://www.hud.gov/offices/pih/programs/ph/capfund/cffprolefo.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 Confidential - Internal Distribution

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

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. 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. 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 attorney’s opinion that PH assets are not pledged or otherwise encumbered.

32. Legal Provisions 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 Borrower’s 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.”

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. PHMP Risks Key Risks • 1st 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 1st 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. PHMP Federal Liability NO FEDERAL LIABILITY. —No action taken under this section shall result in any liability to the Federal Government.

36. 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

37. Question & Answer