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Key Issues for Combining RAD with LIHTC
NAHRO National ConferenceOctober 16, 2015
Gerald Cichon, Housing Authority of the City of El PasoBarry Palmer, Coats Rose, P.C.
Jeff Weiss, Alden Capital Partners
RAD: ANUNPRECEDENTEDOPPORTUNITY
REVITALIZING AND TRANSFORMING PUBLIC HOUSING
Construction Timeline
RAD Phase I 1,590 units
2015 2016 2017 2018 2019
RAD Phase II A-D2,174, units
RAD Phase II-Balance 1,654 units
Acquisition Credits: Free Money!
a) Under RAD HUD transfers ownership of the project to the Housing Authority. Housing Authority then sells improvements (under a ground lease) to the project partnerships and generate acquisition credits and funds for the Housing Authority.
Example: Improvements Valued at $5M sold to the partnership creates:
• $5M receivable for the Housing Authority (Seller Note)
• $1.6M in Federal LIHTCs
b) Equity From Acquisition Tax Credits can then be used to fund rehabilitation expenditures or make a payment under the Seller Note.
KEY ISSUES COMBINING RAD WITH LIHTC
Most RAD deals will be done with 4% credits. 4% credits work really with rehab deals. The reason it will work so well:
Valuation of existing improvements: Value a property with zero NOI?
a) Public Housing Properties generally operate on a reimbursement system. Housing Authority reimbursed for 85-95% of the expenses associated.
• Public Housing is not structure to operate at a “Profit”
• Where Expenses exceed Income you have zero or negative NOI
b) Multi Family Properties are generally valued using an income approach
• Net Operating Income / CAP Rate = Value
• Where you have zero or negative NOI you have no value
c) For Acquisition Credit purposes the property needs to be valued
• Without income restrictions
• Utilizing market expenses
• Taking into account the property’s current condition
• Want the valuation as high as possible for acquisition credits
Related Party Issues Under the Internal Revenue Code
a) You cannot have 50% or more ownership or economic interest in both the buyer and the seller.
b) The Housing Authority owns 100% of seller.
c) The tax credit investor will own 99.99% of buyer.
d) Cash flow would ordinarily go 90% to GP, 10% to LP
• You cannot do this because of related party issues.
e) Structure Housing Authority economics through seller note
Scope of Rehab: RAD requirements (RPCA – RAD Physical Condition Assessment) may differ greatly from LIHTC Investor requirements.
a) Goal of RPCA is to verify project is financially feasible for 20 years:• Looks at work to be performed now and over 20 years• Includes cash flow analysis• Allows for use of reserves
b) Conflict with Investor Requirements• RPCA defines minimum scope of rehab, does not address or consider
improvements to allow for the property to compete in the market• LIHTC Investors require all required rehabilitation work to be performed
as part of the initial rehabilitation
i. Don’t want to Rely on “Projected” cash flow or reserves
ii. Performing work now allows cost to be included in eligible basis
Relocation: HUD has very specific rules for notice.
• Temporary (< 12 months): 30 day notice
• Permanent (>12 months): 90 day notice
• You are not allowed to do anything to accelerate these periods.
• Difficulties in finding enough vacancies when the Housing Authority is fully leased
Right to Return: Under RAD each public housing resident has the right to return to their project, not unit, regardless of their income.
a) Inherent conflict between Public Housing and LIHTC income regulations:• Public Housing up to 80% of AMI• LIHTC up to 60% AMI
b) Public housing residents can be over 80% AMI so long as their income at the time they moved into Public Housing was at or below 80% of AMI• Under RAD over income households must be allowed to return to
their property, but their units will not generate tax credits. • Prohibition against encouraging over income households to move.• You are allowed to right size the household, i.e. move to smaller unit
if they have been previously over housed.
c) Need to look at income level of current tenant base and determine number of over income household and effect on LIHTCs
Public Private Partnership:
• Who is responsible for what part of the transaction?
• What guarantees are being provided by what parties?
− Typical Investor Guarantees
• Construction Completion
• Stabilization
• Operating Deficits (3-5 years)
• Tax Credit Compliance
• Issues with Housing Authorities providing guarantees or pledging public
funds.
• Does the Housing Authority have a non-profit affiliate with assets to
provide a meaningful guaranty?
Property Management: Housing Authority wants to continue to manage properties; they have management experience with properties and tenant base, but not always with LIHTC Compliance.
a) Effect of Non Compliance under RAD and LIHTC differs greatly
• RAD: Rental assistance payments are withheld until non compliance issue is resolved
• LIHTC: Could put entire credit stream for unit in jeopardy resulting in loss of credits or 15 year credits
b) How do you balance Housing Authority desire to maintain control with Investor’s need for compliance?
• Third Party Compliance Training
• Third Party Compliance Oversight
c) Need to look at HUD scoring and past economic occupancy. Discuss third party compliance contract and training
GAP Financing
a) Seller Financing
b) Housing Authority Financing
• Capital funds
• Developer fees recycled into next phases
c) Municipal Funds
• HOME
• Tax increment funds
Underwriting Issues: Multiple opportunities for conflict with HUD, Lenders and Investors:
a) Vacancy
b) Section 8 Overhang
c) Operating Expenses
d) Scope of Rehab
e) Rehab Assistance Rents – Income During Construction
f) LIHTC Equity Pay-in
g) Size and control of reserves
HUD Timing
a) Multiple Filing deadlines and constant conflicts
• State and Federal LIHTC Requirements
• Investor deadlines
• HUD deadlines
b) When can I close? No sooner than 30 days following issuance of RCC
Exit Strategy
a) Need to Remember that intention of the program is to use RAD and other funding sources to revitalize the Public Housing Stock. As such, properties must remain available to low income families in the long term.
b) In Public Private Partnerships, Housing Authorities need to be accountable for their actions and must be subject to removal from partnerships for defaults. However, removal can not jeopardize the goal of the units remaining available for low income families in the long term.
c) Treatment of Ground Lease and Loan payments will most likely be reduced or suspended if the Housing Authority is removed from the partnership.
Right of First Refusal
a) Should not require consent of investor to exercise
b) No bona fide 3rd party offer
c) Survive a removal event
Gerald CichonHousing Authority of the City of El Paso5300 E. PaisanoEl Paso, Texas(915) [email protected]
Barry PalmerCoats Rose, P.C.9 Greenway PlazaSuite 1100Houston, Texas (713) [email protected]
Jeff WeissAlden Capital Partners15260 Ventura BoulevardSuite 600Los Angeles, CA 91403(818) [email protected]
