How to make 4% LIHTC deal work: Case Study from Fairfax County

1. How to make 4% LIHTC deal work: Case Study from Fairfax County Presented by: Aseem Nigam, Director, Real Estate Finance & Grants Management Division, Fairfax County Department of Housing & Community Development

2. Common Challenges • Common challenges facing 4% transactions: • Transactions costs, particularly acquisition costs, remain high in Fairfax County • Interest rates have been rising

3. Addressing the Challenges • Use of local funds to bridge financing gaps • Fairfax County makes annual allocation of local dollars to help bridge financing gaps • For 2014, anticipate providing approximately $8M in local funding • Low interest rate, flexible repayment terms (cash flow, deferred) • Example: Mount Vernon House- preservation of 130 units, structured with TE bonds, 4% and HBF gap financing

4. Addressing the Challenges • Reduce transaction costs by reducing/eliminating acquisition cost • Fairfax County encourages development on County/FCRHA owned land through public-private partnerships • County enters into a long-term ground lease with the developer • Ground lease payments are well below market • Eliminates cost of acquisition through this structure • Example: Residences at Government Center • Developer has a ground lease for 8.1 acres of land adjacent to the Fairfax County Government Center complex • 100 year lease for $100 • Land valued at $13.5M • More details about this transaction to come

5. Addressing the Challenges • Use of taxable-tax-exempt structure to help leverage 4% credits and garner lower rates • Financing structure calls for the issuance of tax-exempt bonds during construction/rehabilitation • Allows transaction to realize lower interest rate of the taxable GNMA execution while leveraging the value of the 4% LIHTC equity • Bonds are 100% cash collateralized by the GNMA loan eliminating risk to the issuer and bond holder • Tax-exempt bonds are retired at after PIS, taxable loan through permanent period

6. Addressing the Challenges • Hybrid 4%-9% transaction • Financing large transaction by splitting the property into separate financing components- one financed using 9% credits and the other using 4% credits • Allows for cost allocation method that can shift some additional costs to the 9% portion of the transaction since the value of the credit is greater, helps to “reduce” the transactional cost on the 4% portion and make the property financially feasible

7. Case Study: Residences at Government Center • This transaction is utilizing several of the components discussed previously to “make the deal work” • Fairfax County Board of Supervisors owner of 86.6 acre parcel of land that comprises the Government Center campus • County Issued an RFP under Virginia’s Public-Private Educational Facilities and Infrastructure Act of 2002 (PPEA) to solicit proposals for the development of 8.1 acres on the Government Center campus

8. Case Study: Residences at Government Center • The Board entered into a Contract to Ground Lease with JPI to develop 270-unit affordable, multifamily complex • Unsubordinated ground lease • 99-term • One time payment of $100 • Affordability is guaranteed for long-term (project must be maintained as affordable through ground lease term) • JPI subsequently transferred their interests to Jefferson Apartment Group (JAG) • Using the PPEA model, the County effectively eliminated the cost of acquisition • Appraised value of the 8.1 acres is approximately $13.5M

9. Case Study: Residences at Government Center • Though ground lease, eliminated acquisition costs, the Project was unable to close on 4% tax-exempt transaction last year. • Restructured to utilize value of both 4% and 9% LIHTC • Created condominium regime to legally divide property for ownership & financing • Condo A consists of 150 units (Buildings 1, 2, 3 and cellar spaces of Buildings 4 and 5) • Applied for and allocated 9% LIHTC • Condo B consists of 120 units (Building 4 and 5) • 4% LIHTC & Tax-Exempt Bonds • Ground lease will need to be severed, or split, and each Condo entity will then execute a ground lease with the County.

10. Case Study: Residences at Government Center • Using taxable-tax exempt financing structure • Tax-exempt bonds are issued allowing project to leverage 4% LIHTC equity • Bonds are outstanding only through the end of the construction period (approximately 24 months) • Condo B will be financed using tax-exempt bonds that are fully cash collateralized by the proceeds of a 221(d)(4) FHA loan.

11. Case Study: Residences at Government Center • At the same time as the bonds are issued, the borrower will also secure FHA insured 221(d)(4) mortgage • Bond proceeds are drawn upon from the construction account, an equal amount of proceeds of the FHA Loan derived from the sale of GNMA Securities will be issued and deposited into the collateral account held by the bond trustee under the bond indenture. • The bond proceeds construction account and the collateral account combined will always equal the amount of bonds issued. • This financing structure allows the bonds to be 100 percent cash collateralized ensuring that the bond holders will never be at risk.

12. Case Study: Residences at Government Center • The bonds will be redeemed at the time the project is placed in service. • Keeping the bonds outstanding until the project is placed in service tax credit equity through 4 percent LIHTC. • Current interest rate environment, the taxable rates of FHA Loans are lower than the tax-exempt rates, the proposed • Bonds will have a short term interest estimated to be 40BP • FHA loan is anticipated to have an interest rate of 4.90% (including MIP)

16. Questions?