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Preservation Work Session with Key Oregon Partners

Preservation Work Session with Key Oregon Partners. September 12, 2006. Presentation Outline. Background on National Housing Trust Critical Need to Preserve Existing Affordable Housing Resources-National and Oregon State What is Federally Assisted Affordable Housing?

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Preservation Work Session with Key Oregon Partners

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  1. Preservation Work Session with Key Oregon Partners September 12, 2006

  2. Presentation Outline • Background on National Housing Trust • Critical Need to Preserve Existing Affordable Housing Resources-National and Oregon State • What is Federally Assisted Affordable Housing? • Threats to the Federally Assisted Housing Stock • Why Preserve? • Preservation Approaches and Resources • Oregon Housing Community Service Programs • Partnership Risks/Rewards and Due Diligence • Case Study

  3. Background: National Housing Trust • Committed to safeguarding affordable housing; • Only national nonprofit engaged in housing preservation through real estate development, lending and public policy initiatives; • Four principal activities: • Policy/Advocacy: Advocate for government policies that save affordable homes and apartments; • Technical Assistance: Helped others preserve more than 13,000 apartments in more than 35 states and provided preservation training to nonprofits; • Lending: Provide predevelopment and bridge financing to nonprofit purchasers of affordable housing. Loans helped save more than 4,400 apartments; and • Development: Partner with other nonprofits to purchase and revitalize affordable housing. Preserved 3,000 affordable homes.

  4. States Where NHT and Its Affiliates are Active

  5. Oregon Housing Needs • Of the nearly, 170,000 Extremely Low Income Households in the State, nearly 108,000, approximately 64% spend more than 50% of their income on housing. • According to the National Housing Trust, Oregon has already lost over 1000 affordable, subsidized, dwelling units.

  6. What Does the Government Assisted Housing Stock Look Like? • The federal government subsidizes nearly • 1.4 million publicly owned housing units • Just over 1.9 million privately owned units. • In addition, the federal housing choice voucher program provides rental subsidies (Section 8 “portable” vouchers) to nearly 1.6 million households.

  7. What is Federally Assisted Housing? Historical Overview: • National Housing Act of 1949 • First Government Sponsored affordable housing program was “Public Housing.” • Properties developed and owned by the government • Residents pay 30% of income towards rent; government picks up the difference necessary to fund property operations.

  8. Historical Overview Continued: “Older Assisted Housing” • In 1960’s, two programs emerged: Section 221(d)(3) Below Market Interest Rate (“BMIR”) and 236 programs. • 221(d)(3) = direct low interest loan (3%) from government • 236 = government subsidizes interest rate of loan to 1% • Both programs require minimal Owner investment and allow for a modest limited return. In exchange, Owners required to make units available to low-moderate income households. • Both programs utilize “budget-based rents” • This stock is often referred to as “Older Assisted Housing”

  9. Historical Overview Continued: “New Construction/Substantial Rehab” • In the 70’s, two new federal housing programs: Section 8 New Construction and Section 8 Substantial Rehabilitation. • Pure rental subsidy program. No special mortgages or interest subsidies. With project-based Section 8, residents pay 30% of their income towards rent. • Section 8 contracts usually for 15 or 20 years • This stock is sometimes referred to as “Newer Assisted Housing” • Finally, another 600,000 units of Sec. 515 stock, rural assisted housing.

  10. Threats to Federally Assisted Housing • Changes in the market make property more valuable under different use -- Owners prepay or “opt-out” to release affordability restrictions to convert. • As Section 8 contracts expire, owners have right to “go to market.” • Owners no longer want to deal with bureaucracy of a federal program. • Insufficient property funds and/or owner attention to maintain properties to decent standards

  11. NHT Study on Housing Loss: Over 1000 affordable apartments lost from Oregon’s affordable housing inventory • Studied the period from 1995-2003 • Studied loss of housing that was supported by Section 8 or subsidized through their HUD-insured mortgage • Found that 300,000 apartments had been lost nationwide to the affordable housing inventory over that time frame • The nation has lost more than 15% of its housing inventory dedicated to serving poor people since 1995 Complete study can be found at www.nhtinc.org

  12. Oregon Housing at Risk According to National Housing Trust: 200 properties consisting of nearly 6,800 HUD assisted, affordable apartments are subject to expiration of their Section 8 contracts between now and the end of 2011.

  13. data

  14. Why Preserve? • The supply of our most affordable apartment homes is decreasing: • The number of apartments that rent for $400 or less declined by 1.2 million between 1993-2003. • New construction alone will not produce enough affordable housing: • The housing we produce costs approximately $900/1 bedroom. The housing we need costs about $450/1 bedroom. • Preservation saves resources: • Revitalizing existing housing costs 40 percent less than new construction and is far more energy efficient. • For “hotter markets,” the choice is to hang on to what we have or lose existing affordable housing forever.

  15. Preservation is Cost Effective • Rehabilitation properties received less than $40,000 in tax credit equity for each apartment • Each newly constructed apartment received almost $65,000 in equity

  16. Preservation Approaches and Resources

  17. Federal policy response: Section 8 properties • Contract renewals now generally for any term up to 20 years, but funding one year at a time • Tenant protections when owners prepay, opt-out or are disqualified: • HUD Enhanced Voucher can cover full rent • Troubled properties or Section 8 disqualifications: some tools but HUD “flexible authority” • FY 06 Appropriations measure: Schumer Amendment: Sec. 311 generally requires retention of project-based Section 8 at Foreclosure or dispo sale

  18. HUD Enhanced Vouchers • Available to most tenants in residence in prepayment or opt-out buildings; current issue re $$ for vacancies • Can use to stay or move • “Enhanced”: Value and anti-displacement protection • Value: can cover entire rent for stayers • PHA must approve new rent as “reasonable” • PHA must adjust annually for increases • Anti-Displacement: Owner must now accept if rental use (per HUD Guide, Letters & Cases); good cause eviction requirement

  19. Typical Preservation Resources • Section 8 Mark UP to Market – nonprofit owners & transfers to nonprofit owners • Section 8 Mark (down) to Market Restructuring • Low Income Housing Tax Credits • Tax-exempt bonds • HOME and CDBG • Local resources • Foundations • Layering of multiple resources from above

  20. Section 8 Mark UP to Market – Nonprofit • May be utilized to facilitate transfer to a nonprofit or to fund capital improvements for existing nonprofit owner’s property. • Owner must enter into 20-year use agreement which requires owner to accept Section 8 of offered by HUD • Nonprofit owners must meet several other requirements to be considered acceptable (e.g., relevant experience, exempt under IRS 501(c), ties to the community) • New rents < “street rent” or 150% of FMR. • Nonprofits not entitled to distributions, but may seek waiver from HUD.

  21. Section 8 Mark (DOWN) to Market • Project must be FHA insured, with Section 8 contract rents > “street” • Full restructuring involves breaking up mortgage; new 1st sized to be supported by street rents, 2nd -and 3rd if necessary- supported by percentage of surplus cash. • Process requires capital needs assessment; underwriting to include costs of necessary repairs/improvements • Owner required to infuse capital investment equal to 20% of rehabilitation. • Owner entitled to a “Incentive Performance Fee” of 3% of annual effective gross income. • Transfer to a Qualified Nonprofit can be achieved. 2nd and 3rd mortgages may be forgiven (or assigned) to Nonprofits, for a period of up to 3 years after closing of a restructuring.

  22. Notice Requirements Section 8 Opt-out or Termination or Renewal • Owner: One-Year Written Notice of Expiration or Termination to HUD and Tenants (42 USC §1437f(c)(8); HUD Section 8 Guide (1/19/01)) • Owner: 4 months’ Notice of Opt-Out, Intent to Restructure or Renew to HUD (per HUD Notices) Prepayments • Most HUD-Subsidized mortgages (“eligible low-income housing”): 5 months’ (150-day) Notice prior to Prepayment (must occur within 9 months), with some exceptions (PL 105-276, §219 (1998)) State or Local Law Requirements? (see below)

  23. State & Local Regulatory Initiatives • Additional notice requirements, beyond Fed. • Often create purchase rights or opportunities upon conversion for preservation purchasers to retain subsides and affordable use • Often cover all federally assisted and LIHTC • States: e.g., IL, MD, CA, WA, MN, RI, TX • Cities: e.g., NYC, SF, LA, Denver, PORTLAND (210 day notice of intent to 9opt out and City may buy at fair market value)

  24. Federal Preservation Bills • Congress presently considering 3 bills that would significantly alter preservation landscape. • Mark to Market Reauthorization • Rural Housing Preservation Bill • Exit Tax Relief, sponsored by Sen. Gordon Smith (R-OR)

  25. Mark to Market Reauthorization • Mark to Market simply allows owners to restructure debt, pay less and use difference to help pay for rehab, ongoing operating expenses, etc. • Current bills, both Senate and House, would add reforms, including allowing nonprofits advantages when they purchase properties. • Will be decided sometime in December “omnibus bill.”

  26. Federal Rural Preservation • HR5039 has bi partisan support • Would allow rural housing owners right to prepay. • Would provide tenants vouchers if they choose to stay • Would allow owners to modify their debt structure and do rehab. • Probably will be brought up again next year.

  27. Senator Smith IntroducesExit Tax Relief • Sen. Gordon Smith (R-OR) and Sen. Charles Schumer (D-NY) have introduced S.3715. • S.3715 would eliminate depreciation recapture for owners who sell to a State approved ‘preservation entity’ that agrees to keep the property affordable for another 30 years. • Support Sen. Smith’s efforts.

  28. National Issue: Local Challenge • While preservation is a national challenge, the wide variety of local conditions requires a local, tailored response. • Success requires • a competent developer with local understanding of the market, • the population being served, and • the support for preservation at the local and state level. • Many States, Cities and Counties have resources dedicated to preservation of affordable housing. • Resources come in the form of soft loans, grants, allocation of tax credits, or tax relief (e.g., real estate tax abatement).

  29. 5 Attributes of Good State Preservation Policy • Early knowledge or warning system and coordinated response: Ohio, Minnesota and Illinois examples • Meet and share knowledge • Share data • Determine what properties are most at risk. • Work together at state and federal level. • Commitment at highest level, meaning hiring someone to coordinate. • Flexibility to meet owners/nonprofits’ needs; • Stressing the relatively low cost of preserving; • Provide an array of preservation resources, i.e., short term and long term debt; low yielding equity; predevelopment; bridge financing, etc.

  30. State Housing Finance Agencies Answer the Call • State housing agencies are increasingly dedicating resources to preservation • State and local finance agencies employ a variety of strategies to preserve affordable housing • These strategies include: • Setting aside low income housing tax credits • Using private activity bonds and 4% credits • Allocating state housing trust fund money • Providing predevelopment and bridge loans • Allowing owners equity take-outs • Providing tax incentives to owners who agree to maintain the housing as affordable Complete working paper on State and Local Preservation Initiatives available at www.nhtinc.org

  31. State Housing Finance Agencies Increasing Resources for Preservation • Five years ago, 6 states set aside 9% credits for preservation. Today, 45 states provide incentives for preservation in their tax credit plans. • State and local finance agencies employ a variety of strategies to preserve affordable housing, including: • 9% low income housing tax credits • Private activity bonds and 4% credits • State housing trust funds • Predevelopment and bridge loans For details on State and Local Preservation Initiatives, see NHT website: www.nhtinc.org

  32. Increasing Trend in the Use of Low Income Housing Tax Credits for Preservation • In 2000, approximately 20,000 affordable apartments were preserved using low income housing tax credits • By 2005, the number of affordable apartments that were preserved using low income housing tax credits increased to more than 56,000 apartments.

  33. State 9% Set Asides • Three years ago, only 4-5 states set aside or prioritized Low Income Housing Tax Credits for preservation. • Today, according to information gathered by the Trust, more than 40 states prioritize preservation through points or a specific preservation set-aside in their competitive tax credit program. • 16 states set aside at least 10% of their 9% tax credits for preservation: • Massachusetts, Wisconsin – 35% set aside • Michigan – 30% set aside • Ohio, OREGON – 25% set aside • Illinois, Iowa, Montana, North Carolina, Pennsylvania, West Virginia – 20% set-aside • Indiana, Texas, Utah – 15% set aside • New York, North Dakota – 10% set aside

  34. Other State and Local Preservation Initiatives • Fairfax County, Virginia has dedicated “one penny for housing” from real estate tax levy to raise $18 million for affordable housing preservation fund in first year. Want to preserve 1,000 affordable apartments by 2007. • Virginiaand Washington State have developed nonprofit CDFIs (approved by U.S. Treasury) that fund predevelopment or provide bridge financing for preservation transactions • State and Local Housing Trust Funds used for preservation (e.g. Arizona, District of Columbia, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Missouri, Montana, Ohio, Oregon, Rhode Island, Utah, Washington, Los Angeles, CA, Fairfax County, VA) • Minnesota and Montgomery County, MD use state/local tax revenue for preservation. • Washington DC has set up a $20 million “Acquisition Fund.”

  35. State of Oregon and Portland Preservation Programs • 25% set aside in QAP (actually used 40% in 2004) • Oregon Housing Dev. Grant Program • City of Portland prioritizes CDBG, HOME and tax increment funding for preservation of Section 8 housing • City exploring a proposed regional real estate transfer tax for preservation?

  36. State HFA Financed Transactions • In early 1980s, Oregon participated heavily in building Section 8 properties with OHCS financing • Now some of those properties are at risk; • Some states, e.g., Michigan, have prioritized 9% credits for such buildings; • Michigan also targeted an additional $100 million in tax exempt bonding capacity to save MSHDA financed properties.

  37. Getting Comfortable With Section 8 Risk • Starting assumption: elderly are ‘totally safe.’ • Depending on the market, a Section 8 reserve is not uncommon. Hotter markets require less reserves • Underwrite at lower of street rents or tax credit rents, if applicable.

  38. The Power of Partnerships NHT/Enterprise’s Experience

  39. NHT/Enterprise Preservation Corporation "Preserving Affordable Housing, Creating Community Assets" • NHT and the Enterprise Foundation launched venture almost four years ago • Organization to buy and hold where no local nonprofit interest lies in preserving. Has preserved 3,000 units in Mid-Atlantic, Midwest, South, and Southeast • Staffed by seven underwriters and asset managers employed by NHT • Often partners with other “for profit” and nonprofit developers • Owns and operates over 3000 affordable apartments.

  40. Joint Ventures • NHT/Enterprise assumed that we would be working with local partners all over U.S. • Generally has been true. • We had anticipated working only with nonprofits. That hasn’t always been the case. We’ve been surprised at the possibilities of joint ventures with for profit companies. • Our joint ventures typically have a sharing of responsibilities. The key with this is to define tasks up front in detail.

  41. Joint Ventures • Partners typically share risks and rewards. • In a project w/ low income housing tax credits, there are a number of ‘guarantees’ that must be made to the investor. • Critical question: What entity will take on guarantees?

  42. Due Diligence Costs • Typical due diligence: • Staff: project underwriter and manager • Attorney • Architect • Capital Needs Determination • Environmental Assessment • Negotiation. • Can easily run over $100,000 • How paid: through a loan or grant. NHTCDF is one such lender. Others include Enterprise and LISC. • Critical question: Do you want to take on loan or use its own funds to pay for due diligence tasks?

  43. Sample: Friendship CourtCharlottesville, VA • Here, local nonprofit was offered opportunity to purchase last available affordable housing property in rapidly gentrifying Charlottesville, VA. • NHT/Enterprise took risk and shared guarantees w/ local nonprofit. • Preserved and improved property. • Now local nonprofit shares in fees and provides services on site, including but not limited to after school activities, computer activities, job training and Earned Income Tax Credit returns. • Property fully occupied.

  44. 51st and King Drive ApartmentsChicago, Illinois A Case Study in Preservation

  45. 51st & King Drive Apartments Background: • 96-unit apartment building in Chicago, IL • Located on the edge of a revitalizing area; potential for loss of affordable housing. • Section 236 HUD mortgage (HUD pays down mortgage with Interest Reduction Payment every month) • 38 Section 8 project-based units; 30 families with Section 8 tenant-based vouchers; remaining families with a range of incomes

  46. 51st & King Drive Apartments(continued) • All major systems were in need of work: replaced windows, hot water heat and boiler systems, domestic water supply, upgrade of electrical service, kitchen and bathroom renovations • Abandoned beauty salon converted into Neighborhood Networks Learning Center • Stable property with many long-term residents

  47. Acquisition Plan • Reputable, mission minded, for profit developer, Chicago Community Development Corporation and NHT/Enterprise formed partnership. • $3.1 million rehabilitation ($32,100/unit) • FHA-insured private activity bonds with 4% tax credits • Prior HUD Sec. 236 mortgage restructured to help fund portion of the rehabilitation expense • Section 8 rents increased to help fund rehabilitation and new computer center • Gap funding through IHDA Trust Fund loan and FHLB AHP grant

  48. 51st & King DriveSources and Uses of Funds 6.04 %, 40-year Bonds This translates into approximately $7,800 per unit 0%, 40-year cash flow loan from Illinois Housing Trust Fund $32,000 per unit

  49. Why Joint Venture Worked • Joint Venture with CCDC, worked well • CCDC took lion’s share of guarantees • Share cash flow and developer fee • CCDC chose management and receives fee for same • NHT/Enterprise provided underwriting • CCDC oversaw construction of over $30,000/unit in rehab. • CCDC paved the way for soft funding of transaction. • Post closing CCDC agreed to provide critical information to our asset managers on a quarterly basis

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