Financing Preservation – The Oregon Experience

Moderator: John Epstein, Wells Fargo Bank

Presenters: Patrick Shea, HUD

Bob Gillespie, Oregon Housing & Community Services

Bill Van Vliet, NOAH

MA Leonard, Enterprise

David Fuks, Cedar Sinai

PATRICK SHEA

SUPERVISORY PROJECT MANAGER

US DEPT. HOUSING AND URBAN DEVELOPMENT

HUD Section 8 Contract Renewals

HUD Portland MFH Portfolio

The Portland MFH Program Center has jurisdiction for the States of Oregon and Idaho.

The Portland MFH Portfolio consists of approximately 580 projects of all HUD program types, which are monitored by 8 HUD Project Managers.

 There are 276 contracts with 9,922 units of project based Section 8 in Oregon, which are administered by Oregon Housing & Community Services (OHCS). 

In Idaho there are 119 contracts with 3,786 units of project based Section 8, which are administered by Idaho Housing Finance Association.

A subset of the Portland Section 8 Portfolio is the Housing Finance Agency (HFA) Section 8 contracts funded under Code of Federal Regulations (CFR) 883.

HUD Portland MFH Portfolio

In Oregon, there were 122 projects and 4, 085 units of Section 8

generated under the 883 program.

In Idaho, there 60 projects and approximately 2,000 units of generated

under the 883 program.

Both OHCS & IHFA have been significant partners with HUD in

generating the bond financed mortgages over 30 years ago, while HUD

has funded the Section 8 Housing Assistance Payments (HAP) contracts

for these projects for the same period. 

These 883 projects, whose mortgages and Section 8 contracts began to

expire concurrently in 2006 and will continue to do so for until 2013 in

Oregon and 2020 in Idaho. 

883 Contracts

This panel will focus on the Oregon Experience, but the lessons

learned could be applied to other 883 Portfolios in the Nation.

Contract expiration and mortgage maturity date are generally

within 90 days of one another

Two versions of 883 HAP contracts exist:

Old Regulation 883 – pre 1981

New Regulation 883 – post 1981

April 10, 2023

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The HUD Role

For Acquisition & Rehabilitation Transactions HUD will: Participate in Scoping Meetings to Identify Potential Challenges

and Clarify Roles Coordinate with the OHCS, as the Performance Based Contract

Administrator (PBCA) on Section 8 Contract Renewal Process Hold Additional Meetings with Industry Partners in the

Transaction for update status and review timelines. Process the Determinative Criteria Review Submission The Determinative Criteria Review is the HUD Approval of the

Transaction for Noninsured Projects with Section 8 HAP Contracts.

HUD will approve new 20 year term Contract for Preservation Purposes.

OHCS Role

Similarly, For Acquisition & Rehabilitation Transactions OHCS will:

OHCS, as the mortgagee must approve the prepayment of the bond financed mortgage.

The Prepayment of the OHCS Mortgage can trigger the early termination of the 883 Old Regulation contracts.

Participate in Scoping Meetings to Identify Potential Challenges and Clarify Roles

OHCS, as the PBCA will process the Section 8 Contract Renewal under Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) Guidelines.

OHCS will underwrite the new permanent financing. OHCS will issue Section 42 LIHTC as part the permanent

financing.

Timelines

The Section 8 Contract Expiration Date drives the process, because of the need to have new permanent financing in place with Initial MAHRA Contract Renewal effective date.

Sellers and Buyers should be communicating at least Two Years before the Contract Expiration.

The early termination of the Old Regulation 883 contract must be factored into the process, if OHCS allows prepayment of the mortgagee.

There is the required 1 year notice to tenants of the contract expiration.

In the sale of a project to a Nonprofit the required notice period to tenants of contract expiration is 6 months.

The OHCS timelines associated with the competition for Section 42 LIHTC must be considered.

Oregon Experience Preservation TransactionPotential Resources

OHCS Bond Conduit Financing

Oregon Affordable Housing Tax Credits

Section 42 LIHTC

Oregon Housing Trust Fund

Oregon Weatherization Funds

HUD Section 108 Loans

HUD Section 8 HAP Contracts

Bond Financed Mortgages - Original Players

The Transactions were more simple 30 years ago.

Project Owners

OHCS – Bond Issuer & Mortgage

Bond Holders

OHCS – Traditional Contract Administrator

HUD – Funding the Subsidy Contract

Acquisition & Rehabilitation Players

Things are not so simple now to Preserve Section 8 Contracts. Seller Buyer Interim Finance, such Network for Oregon Affordable Housing OHCS – Bond Conduit Issuer Bond Holders Tax Credits Investors Gap Finance, such HUD CPD, OHCS, City of Portland OHCS - PBCA HUD – Funding the Subsidy Contract Nonprofit Industry Partners

Successful Preservation Transactions

Despite the challenges briefly described here, HUD, OHCS & Our Industry Partners have been successful in Preserving the Project Based Section 8 Contracts, while providing for physical rehabilitation of the projects and generating stable financing for future.

Of the original 4,085 units of the 883 Section 8o 1,083 units Preserved for the Long Termo 798 units – Owners have chosen to stay in the Section 8

Programo 1, 934 unit – Contract Expiration Not Yet Occurredo 270 units – Lost to Contract Opt Out

The Oregon Experience has provided value lessons in how to Preserve Project Based Section 8 Contract and position the projects for another generation.

BOB GILLESPIE

HOUSING DIVISION ADMINISTRATOR

OREGON HOUSING AND COMMUNITY SERVICES

State Policy and Financing Resources

OHCS Early Recognition of need for Preservation

Uninsured Section 8 portfolio

10% of nation’s total

4,085 units

OHCS is the HUD Contracts Administrator for Oregon

Allows department to work with existing owners to renew HAP contracts

798 uninsured Section 8’s renewed

Legislative Support

$11M in Lottery-backed bonds in the ’07 Session

$19M in Lottery-backed bonds in the ’09 Session

Oregon Affordable Housing Tax Credit (OAHTC) CAP raised to $17M Pass-through requirement for

preservation properties and manufactured parks eliminated

Projects preserved during the 07-09 biennium: 27 projects - 1,096 units

Total project costs: $132,128,098

Total Replacement costs (@ $200,000 p/u): $219,200,000

Total Subsidy retained (@ $72,000 p/u over 20 yrs): $78,912,000

18 HUD Section 8 projects were closed/transferred - for a total of 786 units (bond/4% financed projects)

3 more properties received funding – for a total of 120 units; however, in September of 2008, lost lender and investor. Anticipate closing/transferring properties fall of 2010. Funding allocations have remained with the projects. (bond/4% financed projects)

1 project (46 units) received an allocation of preservation dollars for rehabilitation activities, with a commitment to renew for a 20-year HAP contract.

An additional 5 projects, for a total of 144 units, received funding through the Consolidated Funding Cycle.

Note: Preservation projects that received funding through the Spring 09 CFC and some Fall 08 projects will be counted in the 09-11 preserved unit count, as most required TCAP/1602 (ARRA) resources.

Preservation for the 09-11 biennium

Goal is to preserve 1,598 units

Received $19 M in Lottery Backed Bonds for preservation projects

Approx. $11.3 M has been reserved for bond/4% projects

Approx. $4.7 M is available through the 2010 CFC; and, Approx. $3 M for Manufactured Dwelling Parks (RFP is

currently out and can be found on OHCS’ website)

In addition, approx. $20.7 M of TCAP/1602 (ARRA) resources were committed to 8 preservation projects

Preserved To Date: as of May 15, 2010

3 bond/4%/TCAP - RD projects – 138 units

8 CFC projects – 4 RD / 4 Sec 8 (2 RD w/Section 8 units) – 297 units

14 Existing Owners renewed – 348 units 4 one-year renewals 7 five-year renewals 2 twenty-year renewals

Six projects currently working with NOAH for interim short-term financing through the Oregon Housing Acquisition Fund (OHAF)

Anticipated to be preserved by December 2010:

12 bond/4% projects – 9 RD / 3 Section 8 – 440 units

7 (2008 & 2009) CFC projects – 2 RD / 5 Section 8 – 363

By year end, estimated units preserved: 1,238 (excludes existing owner renewals of 348 units) Total project costs: $145,714,951

Total Replacement costs (@ $200,000 p/u): $231,800,000

Total Subsidy retained (@ $72,000 p/u over 20 yrs): $83,448,000

Funding Availability

2011 Consolidated Funding Cycle: Trust Fund/GHAP Funds HOME 9% Low Income Housing Tax Credits Oregon Affordable Housing Tax Credits Weatherization (PGE area only) Housing Preservation (unknown at this time, dependent on 2011

Legislative allocation)

Conduit / Risk Sharing Bond Program / Elderly/Disabled Bond Program

4% Low Income Housing Tax Credits (w/tax exempt bonds)

Oregon Affordable Housing Tax Credits (out-of-cycle, preservation only)

Housing Preservation Funds (unknown at this time, dependent on 2011 Legislative allocation)

BILL VAN VLIET

EXECUTIVE DIRECTOR

NOAH

Interim and Permanent Lending

NOAH Background:

Statewide not for profit lender formed in 1990 to provide interim and permanent financing for affordable multi-family housing projects

Formed by Oregon banks to share risk and develop lending expertise in affordable housing

Received CDFI designation from US Treasury in 2003

$160 Million in loan capital

NOAH Loan Programs

Program Loan Capital Permanent Loan Fund

$119,432,000 Preservation (OHAF) $ 32,700,000 Predevelopment Fund $

4,696,141 TE Bond Fund $ 3,291,546Total Loan Capital: $160,119,687

Preservation Involvement

Permanent Loans

OHAF (interim acquisition) Loans

Administer Oregon Housing Acquisition Project

Policy formation

Preservation Initiative

Oregon Housing Acquisition Project (OHAP) Statewide initiative to maximize preservation of

expiring federally subsidized apartments

Strong collaboration with State of Oregon and City of Portland

Guided by Steering Committee of industry partners

Meyer Memorial Trust launched the program with significant early grant and PRI support

One of 12 programs nationally selected for significant funding by the MacArthur Foundation

Preservation Initiative

Oregon Housing Acquisition Project—Goals:

Collaborate to preserve 80% of federally rent-assisted units

Establish Comprehensive Data Base and Web Site• www.preserveoregonhousing.org

Establish Oregon Housing Acquisition Fund (OHAF)• $32 million fund

Facilitate Intergovernmental Coordination• Two working groups established and meeting

Include Energy Efficiency Features in Projects• Grant money available for non-profits• First projects under construction

Preservation Initiative

Oregon Housing Acquisition Fund $32 Million fund

Interim acquisition financing

Higher loan amounts to expedite closings

Acquisition loans without identified takeout sources

Interest-only to maximize cash flow to support debt

Preservation Initiative

OHAF Funding:

Foundation PRIs: $ 8,500,000

State of OR (OHCSD): $ 2,000,000

Sr. Bank Debt: $22,200,000

Total: $32,700,000

Foundations: MacArthur, Meyer Memorial Trust, Collins

Banks: Wells Fargo, Bank of America, Key Bank, Chase

OHAF Loans Funded

Location Units Loan Amount Bend* 54 $ 2,075,000 Hermiston* 22 499,000 Hermiston* 24 579,500 Medford 56 2,318,000 Milwaukie* 32 1,919,000 Portland* 31 1,558,000 Portland 30 2,498,000 Portland* 38 1,984,000

287 $ 13,430,500

Avg. Loan/Unit: 46,796

* Paid off

OHAF Loan Terms

Rate: 6.75%-7.50%, interest only fixed at funding

Fee: 1%

Term: Lesser of contract term or 36 months, with one year extensions aligned with one year contract renewals

DCR: 1.10 primary at lowest point during term

LTV: 75%-95% of unrestricted as-is market

Rents: Varies. Possibly up to contract. Assume no rent increases during OHAF period (but inflate expenses)

Require borrower-prepared “reasonable” exit strategies

OHAF Loans

Experience to date: Loan amts limited many ways-- cash flow, LTV, or

maximum allowable debt service (some flexibility during OHAF)

LTV (mkt) range: 43%-95%

DCR range: 1.13-2.13

Challenges: Estimating rents at contract renewal

Plausible exit strategies in current environment

Project valuations at different stages

Walnut Park--before

Walnut Park—exterior renovation

Walnut Park-renovated kitchen

Permanent Loans--Preservation

Rate: 7.50% (current floor)

Fee: 1.0-2.0%

Amortization: 25 years

Term: 20 years or contract exp.

DCR: 1.20 primary/1.10 overall

LTV: 75% of restricted (w/HAP contract)

HAP Contract: 20 year required

Rents: Underwrite to contract, perform downside analysis—breakeven at lesser of Mkt/LIHTC rents

Permanent Loans

Experience to Date: LTV: 38%-80% (restricted) DCR: 1.18-1.64

Challenges: Establishing UW rents prior to construction Timing of contract renewals for “new reg”

contracts Analyzing downside risk of future RCS

adjustments Certain operating expenses not recognized

by HUD

Preservation Challenges

Weak capital markets threaten preservation activity limited OHAF take-out strategies Less capital—both tax credits and perm debt Planned financial structures not viable (bonds/4% credits) More rigorous borrower financial capacity requirements Geographic limitations on capital Project scale limitations

Buyers need even more capital Acquisition prices Closing costs Reserves Predevelopment expenses

Preservation Challenges

Sellers waiting for markets to recover

Buyers risk averse

Reliance on future public sector resources

More interim financing needed

Preservation Challenges

Economy has slowed progress

Preservation effort will take more time, money

Creative interim solutions will be required

MA LEONARD

VP & IMPACT MARKET LEADER

ENTERPRISE COMMUNITY PARTNERS

Tax Credit Equity and Preservation

Radical Changes in Market

Availability/Supply of Equity

Pricing

Underwriting

Supply of Equity

Exit of Equity from Market Geographic Focus of Remaining Equity Challenges to Raising Equity The Discriminating Investor

Size Matters No tolerance for Risk In today’s market, investors call the shots

Pricing

Returns have risen rapidly since 2007

Prices have taken a corresponding drop

Syndicators do not buy “on spec”

Losses are no longer as attractive

Underwriting Considerations

Level of Rehabilitation

Needs to be rehabilitated such that is will not need additional rehabilitation for 15 years

Light, moderate and substantial rehabilitation

Sponsor-Investor Fit – talk to your investor early

Serious Capital Needs Assessment

Determine Scope prior to Setting Purchase price 

Underwriting Considerations

Revenue and Subsidy Risk

Rent levels Duration of Contract Termination Risk Transition Reserves

Underwriting Considerations

Credit Delivery

Critical to have same understanding as your investor

Know start date Understand delivery dates Ideal project from a delivery perspective

Additional Thoughts

Preservation is good policy Deal type FHA Loans Structuring

Seller Stays in deal Early delivery / Late pay helps pricing

Green retrofit Other assistance

DAVID FUKS

EXECUTIVE DIRECTOR

CEDAR SINAI PARK

Rose Schnitzer Tower Preservation

Rose Schnitzer Tower Preservation

Cedar Sinai Park’s Mission

Cedar Sinai Park provides residential and community-based care to our elders and adults with special needs, allowing them to live with comfort, independence and dignity in a manner and in an environment based on Jewish values.

CSP’s Continuum of Services

Residential Care

Nursing Care

Adult Day Services

Assisted Living

IndependentHousing

Home Care

HomeHealth & Hospice

Vendor Partnerships

SpecialNeeds

Housing

CongregateHousing

Motivations for the Preservation

Seller – As business model moved in another direction, the seller was motivated by maintaining continuity in service to the community and in promoting the growth of a community not-for-profit organization.

Buyer – CSP was motivated by the opportunity to increase service to the community, make affordable housing more appealing to its historical constituency and participate in the creation of a housing with services model that would help low income elders and people with disabilities to remain independent for as long as possible.

Statutory Agencies – Prevention of the conversion of the Rose Schnitzer Tower to private apartments or hotel space assured continuity of services and quality of life for 250 low income residents.

Elements of Transaction

Sources: Low income Housing Tax Credits (4% LIHTC) – resulted in

capital infusion through a limited partner (Wells Fargo Community Development) - $12,160,000

3 bond issues: Construction Financing - $4.1 mil. (Wells Fargo) Long Term Financing - $20 mil. (Chase)

Tax exempt bond Housing Development Revenue Bonds subsidized by Oregon Affordable Housing Tax Credits ($14 mil. at 1.75%)

Unsubsidized housing development revenue bonds ($6 mil. at 5.75%)

Loan from Cedar Sinai Park Foundation to the Limited Partnership secured by a second trust deed – ($ 7 mil. at 2.5%)

PDC Loan - $374,500 Oregon Housing Trust Fund - $374,500 Deferred Developers Fee - $2.160 mil.

Elements of Transaction

Uses: Land and building - $30 mil. Developer Fee - $2.150 mil. Rehabilitation - $4.8 mil. Construction Interest - $1.1 mil. Bond Issuance Cost - $400,000 Required reserves - $2 mil. Pre-paid Annual State Inspection Fee -

$749,000

Sample Description• Approximately 130 residents were assessed, with a response rate of over

50% in each of the language groups. • The summary report does not include the Farsi and Korean speakers. • The mean age of the entire sample was 74 years.• Russian residents were significantly older than other groups (mean age of

82.3).• The Chinese residents are composed of Mandarin and Cantonese speakers,

who tend to differ in immigration and socio-economic characteristics.

Rose Schnitzer Tower Assessment

Summary of Illness Status• RST residents reported a mean total of 4.4 illnesses per person (range of 0

– 10 illnesses).• Russian and English residents reported significantly more illnesses per

person than the Chinese.• 23% of the English, 30% of the Russian speakers and only 2 Chinese

residents reported insufficient resources to pay for medical expenses. • Russian speakers also report a larger number of illnesses that interfere

with their activities than do the other groups.• The top ten illnesses reported by resident groups suggest targets for

intervention.

Rose Schnitzer Tower Assessment

Medication Use of RST Residents• The mean number of prescribed medications was 6.28 per resident with a range

of 0 – 22 (not including over the counter medications, vitamins or non-Western medications).

• 35% of residents do not have a workable strategy for remembering to take their medications on time and in the correct dosage.

• Residents frequently reported voluntarily altering their prescription regimens.• Implications: voluntary and involuntary non-adherence leading to hospitalization

and institutionalization, increased morbidity and mortality, falls increase with more than 4 medications due to interactions.

Resident Scores on the Geriatric Depression Scale by %Normal 74%

Mild depression 18%

Moderate –Severe Depression* 8%

*90% of this level accounted for by English and Russian groups

Rose Schnitzer Tower Assessment

Kudos

Jim Winkler Harold, Arlene and Jordan Schnitzer CSP Board of Directors Wells Fargo Community Development Wells Fargo Trust Dept. – Katie Patricelli & John Epstein Victor Merced and staff, Oregon Housing and Community

Services Dept. KomeKalivar, PDC Commissioner Nick Fish, City of Portland Will White, Portland Housing Bureau Sen. Ron Wyden JP Morgan Chase Steve Nepolitano, MMA Doug Blomgren, Batemen Seidel Michele Silver, CPA Susan Asam, Consultant