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Using ODMH and MR/DD Capital Funds with Low Income Housing Tax Credits
April 24, 2007
HOUSING OHIOCOHHIO’s Annual Statewide Conference
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Who we are…Ohio Capital Corporation for Housing
OCCH was created in 1989 by the Ohio Housing Finance Agency and is an independent nonprofit corporation with its own Board of Directors
OCCH’s mission is: “to cause the construction, rehabilitation, and preservation of affordable housing throughout Ohio”
Raised over $1,000,000,000 in tax credit equity and completed over 16,000 units in over 300 Projects
Establish equity funds of corporations doing business in Ohio
Provide technical assistance to nonprofit and for-profit developers in structuring and financing affordable housing tax credit transactions as well as property/asset management training
Manage assets of the equity funds for the 15-year life of the partnerships
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Who we are…Community Housing Network
Franklin County ADAMH contract housing provider
Own over 600 units of ODMH Housing
Develop, own, and manage 5 tax credit projects
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Recent Legislative Change
ORC Chapter 154 was amended to permit ODMH and MRDD capital funds to be issued under a section of the Constitution that allows the funds to be used by a for-profit tax credit company.
The amendment is retroactive so that projects already developed with ODMH or MRDD funds can benefit from tax credits.
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HOUSING OHIOCOHHIO’s Annual Statewide Conference
Overview of the
Tax Credit Program
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LIHTC Program
Federal housing programs have traditionally taken the form of direct cash subsidies (e.g., HUD capital advance to project developer)
Tax Credits are indirect cash subsidies that attracts private investors who invest equity in low-income housing projects in exchange for tax credits that reduce their income tax obligation
Because only for-profit entities pay federal income taxes, only for-profit owners can take advantage of tax credit program.
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LIHTC Projects
Tax Credit Company: Nonprofit and for profit owners partner with for-profit investors.
Companies form a for-profit tax credit company to own the property being developed or rehabilitated.
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LIHTC Projects
For-Profit Investors’ Role:
For-profit investors contribute cash (equity) to the project in exchange for receiving the tax credits.
For-profit investors are silent partners with limited power to provide day-to-day project management.
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LIHTC Projects
Nonprofit Company’s Role:
Nonprofit company uses equity and other gap financing to develop low-income housing.
Nonprofit company has sole management power and is required to operate the project for low-income individuals with disabilities for at least 30 years.
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Hypothetical Tax Credit Deal
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NEW LIMITED PARNTERSHIP • For Profit Tax Credit Company • Buys New Property Or Existing MH Housing
Provider Property
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MH HOUSING PROVIDER
• General Partner in New Company • Completely Controls Project • Contributes ODMH and Other Funds to Deal in
Exchange for Commitment to Serve SMI
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INVESTORS • Limited Partner in New Company • No Management Authority • Contribute Cash to Deal in Exchange for Tax Credits
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Funds Used For Project
• Tax Credit Equity (through Investor Limited Partner) • ODMH Grant (through MH Housing Provider) • Other Gap Funds (through MH Housing Provider)
o E.g.: ß Loan (Bank, Bonds, etc.) ß Other Grants
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How LIHTC Credits Flow…
State HousingFinance AgencyState Housing
Finance Agency
Tax Credits
$$$ $
$$$ $
$$$ $
$
Tax CreditAuthority
Tax CreditAllocation
Cash EquityInvestment
US Treasury(IRS)
US Treasury(IRS)
InvestorsInvestors
Rehabilitated MH Project LP
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4% Tax Credit/Bond Deals
Finance Project by Using:Tax Credits: Amount of Tax Credits: depends on value of project, but generally will cover 30% of project costs.Tax Exempt BondsAvailable Grants (Rehab Projects: assumption of existing ODMH/MR/DD debt by project).
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Conventional vs. Tax Credit Deal
General Project Information
Estimated Value of Property 2,000,000$ No. of Units: 80(FOR CONVENTIONAL: ASSUME 4
Estimated Mortgage Amount (Assuming Loan-to-Value Ratio of 80%) 1,600,000$ DEALS/20 UNITS EACH)
Current Debt:Soft Debt (e.g., ODMH) (770,000)$ Hard Debt (600,000)$
Total Current Debt (1,370,000)$
Estimated Additional Hard Debt 230,000$
Summary of Total Estimated Sources & Uses of Funds
Conventional Refinancing with
New Debt (ASSUME 4 DEALS/20 UNITS
EACH)
Sale to New Tax Credit Co. to
Restructure w/ New Debt & Tax Credit
Equity
Estimated Sources:Refinancing Proceeds 57,500$ N/ANew Bond Debt (Bond) N/A 830,000$ New Grants (HDAP, FHLB, HOME, etc.)* 350,000$ 1,000,000$ Assumption of Soft Debt: ODMH -$ 770,000$ MH Hsg Provider Contribution (Sale Proceeds) -$ 630,000$ Tax Credit Equity -$ 1,862,400$
Total Estimated Sources 407,500$ 5,092,400$
*Additional grants may available only to new entity
Estimated Uses:Acquisition -$ 2,000,000$ Rehab 337,500$ Rehab per unit 1,837,200$ Rehab per unitSoft Costs (Professional Services, Loan Fees, Etc.) 60,000$ 4,219$ 890,000$ 22,965$ Relocation Expense 10,000$ 40,000$ Lease Up Reserves -$ 5,200$ Operating Reserves -$ 320,000$
Total Estimated Uses 407,500$ 5,092,400$
Totals $2M Less Hard Debt
$1.6 M Less Soft Debt
Hypothetical Rehab: Conventional Refinancing v. Tax Credit Refinancing
(1/4 of $228K Add'l Hard
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Sample Development and Proforma Budget
Hypothetical 4% Bond/Tax Credit Rehab
Development BudgetRent Subtotal 470,400$
SOURCE OF FUNDS 5,092,400$ Less Vacancy 7% (32,928)$ Gross Income 437,472$
New Bond Debt 830,000$ Less Operating Expenses (312,498)$ New Grants 1,000,000$ Net Operating Income 124,974$ Soft Debt Carry Over: ODMH 770,000$ Less Replacement Reserves $350 (28,000)$ MH Hsg Provider Contribution (Sale Proceeds) 630,000$ Net Income Before Debt Service 96,974$ Tax Credit Equity 1,862,400$ Less Annual Debt Service (54,801)$ Total 5,092,400$ Cash Flow After Debt Service 42,173$
Debt Coverage Ratio 1.77 USE OF FUNDS 5,092,400$
Acquisition 2,000,000$ Rehab 1,837,200$ Soft CostsBond Issuance Costs 90,000$ Unit Type BR Size Units Rent TotalArchitect & Inspection 135,000$ Affordable (Rent Subsidized) 1 BR 80 490$ 470,400$ Survey 1,490$ Engineering 17,000$ Construction Insurance 24,400$ Management Fees 8% 34,998$ Construction Loan Interest 115,000$ Asset Mgt/ TC Compliance 14,000$ Construction Loan Fees 30,160$ Maintenance Salaries/ Taxes 90,000$ Real Estate Taxes 6,800$ Common Utilities: Water & Sewer 85,500$ Appraisal 4,900$ Accounting/ Audit 6,000$ Market Study 2,200$ Insurance 32,000$ Environmental Study 3,500$ Property Taxes 50,000$ OHFA Tax Credit Fee 500$ $312,498 $3,906 Per UnitOHFA Tax Credit Res.Fee 18,600$ OHFA Monitoring Fees 35,150$ Debt Service Rent Up/ Marketing Costs 7,300$ Title/ Recording 5,000$ Source % DEBT RATE TERM MO. PMTLegal Costs 20,000$ New Bond Debt 15% 830,000$ 6.00% 480 $4,567Accounting 7,300$ New Grants 17% 1,000,000$ N/ A N/ A $0Developer Fee 365,700$ Soft Debt Carry Over: ODMH 13% 770,000$ N/ A N/ A $0
Relocation Expense 40,000$ MH Hsg Provider Contribution (Sale Proceeds) 11% 630,000$ N/ A N/ A $0Lease Up Reserves 5,200$ MH Hsg Provider Contribution (Sale Proceeds) 11% 630,000$ N/ A N/ A $0Operating Reserves 320,000$ Tax Credit Equity 33% 1,862,400$ N/ A N/ A $0Total 5,092,400$ Total 100% 5,722,400$ N/ A N/ A $4,567
Annual $54,801
Stabilized Year PF
Annual Operating Expenses
Income/Expense Assumptions
Annual Income
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Sample Multi-Project Pool
Project A Project B Project C Project D Total ProjectNumber of Units 80 7 13 10 110Total Project Cost 5,092,400$ 445,585$ 827,515$ 636,550$ 7,002,050$
Source/ Total Source/ UnitNew Bonds 830,000$ 72,625$ 134,875$ 103,750$ 1,141,250$ 16% 10,375$ New Grants 1,000,000$ 87,500$ 162,500$ 125,000$ 1,375,000$ 20% 12,500$ Soft Debt Carry Over: ODMH 770,000$ 67,375$ 125,125$ 96,250$ 1,058,750$ 15% 9,625$ MH Hsg Provider Cont (Sale Proceeds) 630,000$ 55,125$ 102,375$ 78,750$ 866,250$ 12% 7,875$ Tax Credit Equity 1,862,400$ 162,960$ 302,640$ 232,800$ 2,560,800$ 37% 23,280$
Total 5,092,400$ 445,585$ 827,515$ 636,550$ 7,002,050$ 100% 63,655$
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HOUSING OHIOCOHHIO’s Annual Statewide Conference
Overview of Bond
Financed Projects
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What is the 50% Test?
Must Finance “At least 50% Of Projects Aggregate Basis + Land” With Bonds
Or
…roughly ½ of total project costs.
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How Bonds Can Be Used
Three Ways Bonds Can Be Used:
Construction FinancingPermanent FinancingBoth Construction & Permanent
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What Commitments Come With Bonds & 4% Credits
Deed Restriction:20/50 or 40/60 Set Aside
Pretty Much The Same As LIHTC, One Caveat, Must Extend To Bond Term If Longer
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Credit Enhancement
Two Types:
FHA Insurance:Letter of Credit
Un-Enhanced Bonds:
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Bond Rating
Rated By One of Two Main Agencies: Standard & Poors OR Moodys
OR
Unrated:Bought By Direct Investor
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Costs Of Bonds
A Lot…Participant List: Issuer, Bond Counsel, Underwriter, Underwriter’s Counsel,
Owner, Owner’s Counsel, Lender, Lender Counsel, Credit Enhancer or Letter of Credit Bank, Rating Agency, Trustee, Tax Credit Syndicator, Syndicator’s
Counsel
Figure 7% Of The Bond Amount With Permanent Financing, Less
For Construction Only
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Bond Pools
Several Small Projects Can Be Pooled Into One Bond Issuance
Can Be In Multiple Locations, Cities, Counties, Etc…
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Expected Timeline
Forever….
Expect A Year To 18 Months
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Issues With Tax Exempt Bond Deal
1. Deals Are Very Complicated2. Many Players Involved3. Financing Can Be Very Expensive
Get A Good & Knowledgeable Development Team!
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HOUSING OHIOCOHHIO’s Annual Statewide Conference
Sources of
Gap Financing
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HOUSING OHIOCOHHIO’s Annual Statewide Conference
Other Considerations
to Financing
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Tax Credits Compliance Overview
HIGHLIGHTS OF THE PROGRAM
Income Restrictions
Rent Restrictions
Occupancy Restrictions
Lease Requirements
Recertification Requirements
Special RulesUnit Transfer Rules
Next Available Unit
Vacant Unit Rules
Record Retention Requirements
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Income Restrictions
Minimum Requirements:At least 40% of the property must be set aside for families earning below 60% of Area Median Income, or
At least 20% of the property must be set-aside for families earning below 50% of the Area Median Income
Cuyahoga County: Family of Four
50% AMI=$30,700 60% AMI = $36,840
Cuyahoga County: One Person Household
50% AMI=$21,500 60% AMI = $25,800
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Rent Restrictions
Rents are restricted by income group, bedroom size, and Area Median Income
Cuyahoga County1 Br 2 Br
3Br50% Area Median Income $575 $691
$79860% Area Median Income $690 $829
$957
Rents include tenant portion of rent, plus utility costs and all other costs that are required by owner
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Property must remain as a low income property for at least 15 years and most properties will have an additional 15 year extended use period
Students - households consisting entirely of full-time students are not eligible for tax credit units
Occupancy Restrictions
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Lease Agreement
Program does not permit transient occupancy
Initial Lease Term must be at least 6 monthsUnless property is an SRO or transitional housing for the homeless
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Recertifications
Must be completed within 12 months from Lease start date
May sign Tenant Income Certification up to 60 days before effective date
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Rehab of Existing Properties
RelocationHUD Handbook 1378.0
www.hudclips.org
www.fhwa.dot.gov
www.communitychange.org/issues/housing/
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Asset Management Overview
Role of Asset Management
Watchlist Criteria
Monitoring and Reporting
Monthly, Quarterly and Annual Requirements
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Key Players in Tax Credit Program
IRSResponsible for allocating tax credits to the states & enforcing rules & regulations
State Allocation AgencyResponsible for awarding credits that have been allocated by IRS and monitoring & reporting non-compliance
Property Owner (GP)Often hires a property manager to operate property, who is responsible for compliance.
Equity Investors (LP)Responsible for financial & regulatory compliance oversight
Management AgentResponsible for setting up systems & procedures to ensure on-site staff are equipped to comply with the program requirements.
On-Site Management StaffResponsible for renting to qualified households, and for ensuring that the leasing, documentation & other management aspects are in compliance with the requirements of the program
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Assists sponsors and managers in maintaining the quality of housing for residents and preserving the value of Fund investments
Monitors to assure that our performance standards and expectations are being met regarding:
financial condition;
physical condition;
regulatory and statutory compliance; and
Reporting
Asset Management
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CRITERIA DEFINITION INFORMATION SOURCE
Rental Delinquency > 7% of gross potential rent Quarterly & Monthly Report Vacancy • > 10 % of all units
• Vacancies beyond 30 days
Quarterly & Monthly Report
Debt Coverage Ratio • Less than 1.10 on must pay debt
• Any draw s on debt service reserve not replaced w/in 30 days
Quarterly Asset Management Report
Unpaid Taxes • Property taxes more than 3 months past due
• Tax & Insurance Escrow not funded
Quarterly & Monthly Report
Mortgage delinquency Any must pay debt service pmt more than 30 days late
Quarterly & Monthly Report
Mortgage default Default on first mortgage or any subordinate debt
Quarterly & Monthly Report
Unauthorized debt Any unauthorized liens or subordinate debt
Quarterly Report
Insurance Expired property insu rance Quarterly & Monthly Report Reserves • Reserves not funded on
schedule • Unscheduled use of
reserves
Quarterly & Monthly Report
Regulatory, lender or investor notices
Budget variances Variance > 5% and $1,000 Quarterly Report
Watchlist Criteria - Financial
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CRITERIA DEFINITION INFORMATION SOURCE
Deferred Maintenance • Any deferred maintenance in excess of $5,000/unit or $100,000, whichever is less.
• Material change in property physical condition
Annual Site Visit
Extraordinary Repairs • Any repairs not budgeted in excess of 3% of EGI or $25,000, whichever is less
• Draws on replacement reserve not refunded in 6 months
• Quarterly & Monthly Report
• Reserve Withdrawal Requests
Natural disaster insurance incident
Any incident over $5,000/unit or $100,000, whichever is l ess until resolved
Quarterly & Monthly Report
Watchlist Criteria - Physical
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CRITERIA DEFINITION INFORMATIONSOURCE
Compliance Issues Any qualified unit out ofcompliance for more than 60days
Non-compliance with 10% ormore of qualified units (rentlevels, tenant income,certification)
No receipt of AnnualOwner’s Certification
IRS Form 8823 issued Notice of IRS claim or audit
Quarterly Status Report Annual Owner’s
Certification Annual Site Visit Monthly & Quarterly Report
Transfers ofOwnership/Reorganization ofProject Sponsor
Any change Annual Owner’s Certification
Strength of Sponsor/ManagementCompany
Decline in sponsor’sfinancial condition
Deterioration of its assetmanagement capability
Annual Site Visit
Default under Partnershipagreement, mortgage or loanagreementLitigation Any
litigationQuarterly report
Reporting Reports more than 30-days late
Watchlist Criteria Compliance & Other
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Data Collection• Construction Reports• Weekly Leasing Reports• Monthly Reports• Quarterly Reports• Compliance Reports• Property Inspections• Annual AuditEvaluation• AHIC Criteria• Risk Rating
OCCH Project Reporting
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Training Opportunities
Basic Compliance & Intermediate Compliancewww.homebuyerohio.com/compliance_tc/training.htm
MAHMA State Meetingwww.mahma.com/mahma_training.htm
TheoPro Compliance & Consulting www.icomply42.com
Elizabeth Moreland Consulting, Inc.www.housingcreditcollege.com
Annual Ohio Housing Conference
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Websites
OHFA: www.homebuyerohio.com
OCCH: www.occh.org
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HOUSING OHIOCOHHIO’s Annual Statewide Conference
Technical Assistance
NAMI Ohio
747 East Broad Street
Columbus, Ohio 43205
Phone 614-224-2700
Fax 624-224-5400
Tollfree 800-686-2646
NAMI Ohio
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Housing Assistance Websites
COHHIO (Coalition Homeless+Housing) www.cohhio.org Corporation for Supportive Housing www.csh.orgDataplace www.dataplace.org/NAMI Ohio www.namiohio.org
Ohio Capital Corp for Housing www.occh.orgOhio Department of Development www.odod.state.oh.usOhio Department of Mental Health www.mh.state.oh.us/Ohio Housing Finance Agency www.ohiohome.orgSAMSHA www.mentalhealth.samhsa.gov
Substance Abuse and Mental Health Services Administration
Technical Assistance Collaborative http://tacinc.org/HUD www.hud.gov
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www.namiohio.org/assets/images/housingtoolkit.pdfwww.namiohio.org/assets/images/housingtoolkit.pdf
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Ohio Capital Finance CorporationOhio Capital Finance Corporation
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Purpose and Background
PurposeTo establish a flexible source of funds that can be utilized by development partners of Ohio Capital Corporation for Housing for use as predevelopment funding, acquisition financing, bridge financing and homeownership development.
BackgroundFrom 2000-2004 OCCH lent out over $3.6M in predevelopment loansLoans limited to $50,000Used for Short Term and Predevelopment CostsIn 2002 the Ohio Capital Finance Corporation received CDFI Fund CertificationIn 2004 the Ohio Affordable Housing Loan Fund was created - $10,000,000In 2006 over $10,000,000 in loans have closed and the Fund has begun to revolveThe Loan Fund has experienced no write-offs or loans at riskContinued demand for existing loan productsBorrowers appreciate new source of capital that understands the tax credit marketplace
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Products, Rate and TermTax Credit Products
Predevelopment Loan – Maximum $150,000Acquisition Loan - Maximum $1,000,000Year 15 Bridge Loan - Maximum $1,000,000
Non Tax Credit ProductsPredevelopment Loan – Maximum $100,000Acquisition Loan - Maximum $1,000,000Homeownership Loan - Maximum $500,000
Interest RatePrime minus ½ (8.25% - ½ % = 7.75%)Interest accrues for life of loanVariable rate
TermUp to 18-24 Months Principal & Interest repaid at construction loan closing
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Lending Guidelines
All Tax Credit Predevelopment and Acquisition Loan projects must have a valid reservation of tax credits80% of units must be affordable to 60% of AMIAll projects will entail either multifamily or single family propertiesThe minimum loan amount is $10,000Borrowers may be nonprofit, public housing authority or for-profit entitiesThe maximum lending limit per loan is $1,000,000The maximum lending limit per borrower is $3,000,000There are no prepayment penalties with any loanDeveloper Fees and Operating Costs are not eligible for funding
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Predevelopment Loan (tax credit)
Maximum Loan Amount: $150,000Uses: architectural drawings, zoning, permitting, legal fees, phase I environmental report, engineering, real estate taxes, soils report, carryover costs, etc.Collateral: full recourse guarantee and/or first mortgage if available
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Acquisition Loan (tax credit)
Maximum Acquisition Loan - $1,000,000
Uses: To assist in acquiring land and/or buildings
Limited to 100% loan to value (as is)
Collateral: full recourse guarantee and first mortgage
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How to Apply
For an Application and Closing Checklist Contact:
Jon Welty
An OCCH Development Officer
www.occh.org/predevelopment lending
Return completed signed Application along with documents from the Closing Checklist to begin the application process.
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Frequently Asked Questions
Can I borrow the loan fees? YesCan I borrow funds twice, once for predevelopment and once for acquisition? –YesWho is the borrower? – The tax credit partnership for tax credit loans or developer for non tax credit loanDoes the Partnership (borrower) have to be formed? - YesCan funds be wired to the General Partner or Developer’s bank account? – No, the funds need to be transferred to the borrower’s checking accountCan you accept a mortgage instead of a guarantee? – NoCan I payoff the loan in installments? – NoWill you accept a check or do you prefer a wire? – A wire is preferred Can the loan be extended? – Yes, please provide notice to the fund for an extension – there are no extension fees
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Additional Information
Community Housing NetworkSusan Weaver – 614.251.1700 x106Samantha Shuler – 614.251.1700 x114
Ohio Capital Corporation for Housing - 614.224.8446Doug KlingensmithMelanie ShapiroJon Welty
Ohio Housing Finance AgencyKevin Clark – 614.752.4550
Federal Home Loan BankMary Hernandez – 513.852.7604
NAMI OhioRon Rett – 614.224.2700
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HOUSING OHIOCOHHIO’s Annual Statewide Conference
Discussion
Questions???
