Investment Strategies to Preserve USDA Properties

2019 Indiana Housing Conference – Indianapolis, IN

Moderator: Charyl Luth, AHAIN Panelists: - Evan Thie, IHCDA- Mitch Walters, Justus Property Management - Nick Surak, Woda Cooper Companies - Doug Wright, USDA Rural Development

SESSION FORMAT….

Introductions Introduction to RD 515 Program overview Background on the Indiana portfolio

Audience questions Role of RD in preservation What IHCDA is doing to aide in preservation Case Study: 4% tax credit deal Case Study: 9% tax credit deal Questions and discussion

BACKGROUND ON USDA RD

WHAT IS USDA RURAL DEVELOPMENT?

Established in 1990 by Farm Bill

Agency under the United States Department of Agriculture

Divided into three agencies:1. Rural Utilities Service 2. Rural Business-Cooperative Service3. Rural Housing Service

Serves areas with populations up to 20,000

Indiana State Office – 7 field offices

SECTION 515 PROGRAM

Established in 1963

515 Loan: - Low-interest rate of 1%- AMT up to 50 years- Term of 30 to 50 years

New construction or rehabilitation of existing properties

No new construction since 2001 – focus on preserving existing stock

Over 13,000 multifamily rental properties nationally

More than 415,000 affordable units

INDIANA PORTFOLIO

457 Properties

12,537 Units

12,729 Tenants

91.40% Occupancy

7,013 RA households

WHO LIVES IN THESE DEVELOPMENTS? Average Indiana Income: $13,402 ($290 above national average)

Elderly/Handicapped Households

Household Members

Rental Assistance Household Members

Income Level Percentage

Tenant Subsidy Households

Source: USDA MFH Fair Housing Occupancy Report FY2018

HOW WE LOSE AFFORDABILITY

Mortgage Maturity or Prepayment Results:

• Loss of restrictive use provision = affordability • Loss of Section 521 RA• Possible conversion to market rents • Possible closure

Who is eligible for prepayment?

What leads to foreclosure?

Owner Options: 1. Prepay the loan 2. Pay off the loan at maturity 3. Foreclosure 4. Recapitalize debt 5. Transfer Ownership

PRESERVATION TOOLS

• Assumption of existing USDA Loan • Assumption of Rental Assistance Contract • New USDA loan (Section 538)• HOME Funds (nonprofit)• FHLB: Affordable Housing Program (AHP) • Low-Income Housing Tax Credits • Owner Equity • And more…..

ROLE OF USDA RD IN PRESERVATION OF 515 PROPERTIES

WHAT IHCDA IS DOING TO AIDE IN THE PRESERVATION OF 515 PROPERTIES

ROLE OF IHCDA Policy: - Rental Housing Tax Credits (4% and 9%)

Within the 2020-2021 QAP: o Preservation Set-Asideo Rural Set-Aside o Scoring:

Preservation of Existing Affordable Housing (6pts) Non-IHCDA Rental Assistance

- HOME Investment Partnerships Program (HOME) Within the 2019 HOME Rental Policy

o Eligible nonprofit o Certified CHDOs eligible – $1,500,000 o Note: Davis Bacon > 12 units

- Special Initiative: Moving Forward RD RPQ for three developers to rehab 30+ 515 properties

o Combining 4% and 9% credits (General Set-Aside)o IHCDA seeds three rural revolving loan funds via nonprofit o Collaboration with RD on state and national level

CASE STUDY: BUNDLED PORTFOLIO BOND TRANSACTION

DBG Properties LP

Panoramic III –Centerville, IN

Panoramic IV –Centerville, IN

Panoramic I (Liberty, IN) – 32 RD Units (27 of RA, 93% occupancy)Panoramic III (Centerville, IN) – 32 RD Units (22 of RA, 92% occupancy)

Panoramic IV (Centerville, IN) – 32 RD/HUD Units (100%, 98% occupancy)23 South Apartments (North Liberty, IN) – 22 RD units (100%, 98% occupancy)

$8.0 Million Transaction $2.9 million of Rehab for 118 units ($24k per unit)

$2.3 million of 4% equity $3.2 million of tax exempt bonds/538 loan funds

Challenges/Hurdles – Lessons Learned

• Appraised Values – Equity for seller to exit?• CRCU (Conventional Rents for Comparable Units)• Rents vs. Rehab (Investor vs. RD)• Document Expirations – HUD/RD/Tax Credit (making it all

work)• Non-Subsidized Units – Private Subsidy Account (funded at

closing)• Owner responsible until tenant moves out• After move out must rent at basic rent ($700 in Rural Indiana is

difficult)

Bond Deal Process

• Initial Meetings with Owners – 2013• Transfer Application submitted to RD in Fall of 2014 • IHCDA Application submitted to IHCDA in February 2015• Deal closed November 2016 (goal was October 2015)• Rehab began January 2017• Rehab complete December 2017• 8609 issued 2018

Team Members

• Developer – West York LLC, Nappanee, IN (Mitch and Steve Walters)• Consultant – Neighborhood Development Associates, South Bend, IN• Contractor – CPM Construction, Fishers, IN• 538 Lender – PR Mortgage, Indianapolis, IN• Equity Investor – Cinnaire, Indianapolis, IN• Legal – Kuhl and Grant LLP, Indianapolis, IN• Bond Work – The Sturges Group, Columbus, OH• Architect - ATA-Beilharz Architects, Cincinnati, IN• Relocation – A. Arnold World Class Relocation, Indianapolis, IN• CNA Provider – Zeffert & Associates Inc., St. Louis, IN• Market Study / Appraisals – Mitchell Appraisals, Indianapolis, IN

Panoramic I Apartments – Liberty, IN

Pre-Rehab (2013) Post-Rehab

(2017)

Panoramic III Apartments – Centerville, IN

Pre-Rehab (2013) Post-Rehab

(2017)

Panoramic IV Apartments – Centerville, IN

Pre-Rehab (2013) Post-Rehab

(2017)

23 South Apartments – Walkerton/North Liberty, IN

Pre-Rehab (2013) Post-Rehab

(2017)

CASE STUDY: 9% TAX CREDIT DEAL

CRYSTAL VALLEY MANORMiddlebury, IndianaSenior Property 40 units – 39 with Rental Assistance

Total Project Cost: $5,035,294

• $4,233,920 in tax credit equity from

9% RHTC allocation

• $601,174 in assumed Section

515 Debt

• $200,000 in Project Reserves

Project Challenges

• Difficult seller – purchased property from an estate, which protracted the property transfer process with Rural Development.

• Applied for competitive 9% credits, so no guarantee of an award.

• To reach a winning score, committed to Enterprise Green +10 points (roughly equivalent to LEED Platinum), capture and reuse of rainwater runoff, and installation of insulation 15% above code.

• Restored poorly functioning boiler system for heat and replaced through-the-wall AC units with split system.

• Scope of work was over $50,000 per unit in hard costs, necessitating temporary relocation of all tenants.

Project Timeline

Site Control – July 2015Application for 9% Tax Credits Submitted November 2015Awarded 9% Credits – February 2016Rural Development Approval of Transfer in August 2017Start of Rehab – September 2017Completion of Rehab – September 20188609s – May 2019

Pre-Rehab

Pre-rehab exterior featured three different colors of siding, satellite dishes, defunct television tower on the roof

Units had odd corner sink layout, mostly original cabinets, linoleum flooring, single pane windows, and no heating or cooling in common areas

Post-Rehab

Replacement of all flooring, cabinets, appliances, light and water fixtures, increase in handicap accessible units, replacement of all windows.

QUESTIONS & DISCUSSION