6/3/2014 AFFORDABLE HOUSING ISSUES TOOLS AND TOPICS FOR TURBULENT - - PDF document

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ALABAMA MISSISSIPPI CONNECTICUT VIRGINIA 500 Office Park Drive, Suite 300 / Birmingham, AL 35203 www.navigatehousing.com

AFFORDABLE HOUSING ISSUES

TOOLS AND TOPICS FOR TURBULENT TIMES

ERIC Q. STRONG, CEO estrong@navigatehousing.com

THE REALITY OF THE LAST TEN YEARS

Deferred Maintenance A 2010 Report showed the Public Housing stock had a $26 billion dollar backlog in deferred maintenance. Fewer Affordable Housing Units HUD is losing over 12,000 units annually Unstable Funding Public Housing Operating and Capital Funds are declining. The current Capital need is projected to be $25,000 per unit and increasing by $3,000 annually. PHA reserves are being offset. Section 8Multi-Family funding is also stressed. While still never pro-rated, funding is short-term -- less than 1 year -- with residual receipts being offset to cover HAP payments (does not apply to RAD deal HAP contracts).

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OVERVIEW

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OVERVIEW

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TOOLS AND HOT TOPICS FOR TURBULENT TIMES

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Strategic Planning – Assessing organizational structure and corporate culture - determining and defining the future of your agency Regulatory Changes

• New HUD Secretary
• HUD Multi-family Transformation
• Flat Rents

Portfolio Re-engineering – Taking a holistic view of the “tools in the toolbox”

• RAD
• LIHTC
• Demolition/Disposition
• FHA Mortgages
• Consortia

OVERVIEW

Strategic planning can generally be divided into two areas, Planning for Physical Assets and Planning for the Organization. Components of a Strategic Plan for an Organization:

• Vision Statement – which describes what your PHA will look like at a certain

point in the future.

• Mission Statement – which briefly expresses the purpose of your PHA,

specifically, “why do we exist?”

• Values Statement – which describes the principles that guide the planning,
• perations, and programs of your PHA

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STRATEGIC PLANNING TOOLS IN THE TOOLBOX

“Framework for a Basic Strategic Plan Document for a Nonprofit.” Management Help, October 2013. http://www.managementhelp.org/freenonprofittraining/strategic-plan-framework.htm Mittenhal, Richard A. (2002). “Ten Keys to Successful Strategic Planning for Nonprofit and Foundation Leaders.” The TCC Group. Retrieved from http://www.tccgrp.com/knowledge/strategy.phd

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Components of a Strategic Plan for an Organization (continued)

• External Strategic Analysis – to define the external challenges and
• bstacles along with the opportunities for your PHA
• Internal Strategic Analysis – to define the strengths or weaknesses
• f the organization. In example, human resources, the budget, or

technology could all be considered a strength or weakness for a PHA.

• Board of Commissioners/Directors Goals and Objectives
• Staff Goals and Objectives
• PHA Action Plan

STRATEGIC PLANNING TOOLS IN THE TOOLBOX

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RENTAL ASSISTANCE DEMONSTRATION (RAD)

• Can provide the framework

for using the other portfolio re-engineering tools

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PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

LOW INCOME HOUSING TAX CREDIT (LIHTC)

4% LIHTC – Non-competitive – depending upon the Qualified Allocation Plan AP in your state, can be as good or better option than 9%; works great with FHA financing 9% LIHTC – Great capital generator; fierce competition; review your state’s QAP. There are three primary documents that govern the terms of most LIHTC deals. They are:

• Development Agreements
• Partnership/Operating Agreements
• Management Agreements

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PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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PORTFOLIO RE-ENGINEERING

LOW INCOME HOUSING TAX CREDIT (LIHTC) continued Development Agreements – will be between the PHA and Developer and:

• List the obligations of both parties with respect to the development

and generally be entered into before the closing of the financing for the project.

• Lay out the financial commitments of both parties, including who will

pay for pre-construction cost such as architectural and engineering fees

• Set out the milestones to be met by the Developer, such as a date

certain for a funding commitment, closing and completion of construction

• Give the PHA the right to terminate the agreement if the milestones

are not met

TOOLS IN THE TOOLBOX

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PORTFOLIO RE-ENGINEERING

LOW INCOME HOUSING TAX CREDIT (LIHTC) continued

Partnership/Operating Agreements – will govern the entity created to own and

• perate the redeveloped project. It will set out:
• The ownership interest of the Developer and the PHA
• Set out how decisions are made by the entity owning the redeveloped project

The key issue is to limit the Developer's ability to make decisions regarding the project without input from or control by the PHA. Management Agreements – will be between the entity created to own the redeveloped project and the day to day manager of the project. If the Developer wants to manage the project, the Agreement will:

• Outline compensation
• Give standards for how the redeveloped project will be managed day to day.
• Provide clear standards for termination of the manager for non-performance

TOOLS IN THE TOOLBOX

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PORTFOLIO RE-ENGINEERING

LOW INCOME HOUSING TAX CREDIT (LIHTC) continued

How to Protect Your PHA and Reduce Risk of “Loss of Control”

• Find and work with people who excel in the industry because of skills,

integrity, reputation and experience. Do not use professionals who are not experienced in the field – even if they are good.

• Call you colleagues
• Construct a Term Sheet that defines everyone’s role, responsibilities,

guarantees, compensation, etc. and that reflects the business and

• perational aspects of the deal. Give it to your lawyer to guide the legal

aspects of the deal.

• READ EVERYTHING. Your lawyer’s perspective is legal. Your

perspective is operational.

TOOLS IN THE TOOLBOX

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PORTFOLIO RE-ENGINEERING

LOW INCOME HOUSING TAX CREDIT (LIHTC) continued

How to Protect Your PHA and Reduce Risk of Loss of Control

• Require the property comply with specified HUD rules and regulations. In

example, all but the LP will need to be in the APPS (F47) system with no flags.

• Include performance standards in the management agreement, maintain

approval of management fees or a range of fees, and any bonus payments

• The development agreement should explicitly spell out the right to buy out

the developer at a predetermined price or based on a predetermined formula at the end of the holding period

• Maintain approval of any substantial changes to the project
• Maintain approval of any capital expenditure above a specific threshold

TOOLS IN THE TOOLBOX

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SECTION 18 DEMOLITION/DISPOSITION Historically, the most common disposition option due to the flexibility of the use of the proceeds and the high likelihood of tenant protection vouchers.

• Change in neighborhood
• Value of underlying land allows replacement
• PHA otherwise determined that disposition appropriate

Section 18 Disposition can be used with RAD – not either/or Allows for partial vouchers and ability to convert less than 1 for 1 units under RAD. Notice PIH 2012-07 raised the bar for disposition.

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PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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SECTION 18 DEMOLITION/DISPOSITION (continued)

Notice PIH 2012-07 requirements include: Must have environmental review completed before submission (Part 50 or Part 58) PHA Plan/Significant Amendment Resident Input into “Overall Plan of Disposition”– not just an

• ffer to sell

Specific guidelines on “safe harbor” when disposition is for physical condition and not feasible to be remedied.

PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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TOOLS IN THE TOOLBOX PORTFOLIO RE-ENGINEERING

THE “OTHER” DISPOSITION Two disposition options in QHWRA

• Section 33 required conversions: Nuanced and complex conversion

that works best for large bedrooms/highest PHA cost properties

• Section 22 “voluntary” conversions

Similar in outcome (not identical) to RAD with PVA option – though no 60,000 unit cap May be best option for poorest performing /highest cost PHA assets Proper Strategic Planning – understand the spread between the PHA payment standard (Cap Funds + Op Funds) vs voucher payment

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SECTION 22 DEMOLITION/DISPOSITION

PORTFOLIO RE-ENGINEERING

Notice PIH 2012-07 included the lesser-used Section 22 “voluntary conversion” as an option. Approved when – cost analysis of conversion assessment demonstrates – the total costs of ongoing maintenance and

• perations for a property exceed the total costs of providing tenant-

based assistance. [Costs more as PHA than other assistance.]

TOOLS IN THE TOOLBOX

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WHEN DOES SECTION 22 DEMO/DISPO WORK

PORTFOLIO RE-ENGINEERING

• Low Density
• High Voucher Standard vs. Cap

Fund + Operating Fund

• Low Vacancy (property &

market)

• Good physical condition
• DOFA date within last 20-30

years (or less)

• Big property > 250 units
• Early DOFA Date (Old)
• High Average BR size
• Continuing High Vacancy
• Not Energy Efficient
• Cap Funds + Op Funds > FMR

GOOD CANDIDATE NOT SO GOOD CANDIDATE

TOOLS IN THE TOOLBOX

FHA MORTGAGES FHA 223(f)

• Repair cost limits moderate +/- $17,500;
• Moderate fees;
• Faster close than 221(d)(4);
• Good rate;
• Non-recourse, fixed rate and up to 40 year term

FHA 221(d)(4)

• Higher capital costs;
• Higher fees
• Very slow close – easily 12 months
• Good fixed rate;
• Non-recourse and up to 40 year term

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PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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CONSORTIA (24 CFR § 943.100)

Through a consortium, a PHA can benefit from economies of scale to successfully, and efficiently, operate program important to their mission. What is a consortium:

• Two or more PHAs may join together to perform a variety of planning,

administrative and management functions as specified in a Consortium Agreement.

• The lead agency collects the assistance funds and allocates them

according to the Agreement.

• Another key factor, all participants must adopt the same fiscal year.

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PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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CONSORTIA (24 CFR § 943.100)

What PHA programs can be included in Consortium functions?

• Public Housing
• Housing Choice Vouchers (Section 8 Voucher and Certificate program)
• Section 8 Moderate Rehab
• Other project-based Section 8 under an ACC, except those

assigned to a PHA for contract administration under the RFP

• riginally published 05/19/1999
• Any grant or program in connection with the PHA’s public housing
• r Section 8 program

PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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CONSORTIA (24 CFR § 943.100) Consortium operations are governed by an agreement that includes:

• Names of participating agencies and the programs covered and the

name of the lead agency (cannot be designated “Troubled”)

• Functions to be performed by the lead agency and other participating

PHAs during the term

• The allocation of funds the administration of the funds paid to the

consortium

• Period of existence and the terms under which a PHA may join or

withdraw before the end of that period

• Acknowledgement that the participating PHAs are subject to the joint

PHA plan submitted by the lead agency

PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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CONSORTIA (24 CFR § 943.100) Despite participation in a consortium, each participating PHA remains responsible for its own obligations under its ACC.

Some of those general responsibilities include:

• Assuring all program funds, including funds paid to the lead agency

for administration by the consortium, are used in accordance with HUD regulations and requirements

• The PHA program is administered within HUD requirements
• Each participating PHA is also responsible for the performance of

the consortium as a whole

PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

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CONSORTIA (24 CFR § 943.100)

Potential Downsides to Consortia

• Reporting: Although required by QHWRA and other regulations, HUD has not yet

consolidated reporting to facilitate the formation of consortia

• IT Forms and Reporting Systems: PIC has not yet been updated to include a

feature to allow for improvement in consolidating reporting functions across programs

• Definition of a PHA: There are still questions as to how HUD will implement the

amended definition of a PHA from the FY 2014 Consolidated Appropriations Act. If HUD approaches consortia as a legal entity with one consolidated ACC it could result in a loss of flexibility for small PHAs in areas such as: Consortia could exceed 400 unit threshold and have to adopt asset management Could exceed 250 units and loose fungibility between operating and capital fund Could exceed 250 units and be required to submit annual plans, conduct PNAs, etc.

PORTFOLIO RE-ENGINEERING TOOLS IN THE TOOLBOX

HUD SECRETARY NOMINEE – Mayor Julián Castro Mayor Castro, first elected in 2009, was re-elected in 2013 to a third term as mayor of the City of San Antonio, Texas.

Accomplishments include:

• Implemented housing and economic development programs in the city

including an urban revitalization and investment initiative, the expansion of the Pre-K program and a college preparation program

• A Bloomberg Philanthropies grant recipient (City of San Antonio) to

deliver free one-on-one financial counseling on the city’s East and West sides of town. Mayor Castro has a B.S. in political science and communications from Stanford and a J.D. from Harvard

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REGULATORY CHANGES TOOLS IN THE TOOLBOX

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REVISED MULTIFAMILY TRANSFORMATION PLAN

April 2013 HUD announces major reorganization of field offices. The new model is based

• n utilizing technology and an Asset Management Model concept that involves:
• Workload Sharing
• An Underwriter Model in Production and an Account Executive Model in

Asset Management 50 Multifamily offices will be consolidated into 10 HUD staff were given the option of retirement, a buy-out, or a transfer Spring 2014 HUD announced it would move forward with the Transformation with one change:

• Multifamily office consolidation suspended HUD working with Congress to

pursue full approval of its plan, including consolidation of Asset Management, as part of the FY 2015 budget process.

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REGULATORY CHANGES TOOLS IN THE TOOLBOX

UPDATED FLAT RENT REQUIREMENTS – Notice PIH 2014-12 (HA)

Applies To PHAs that operate public housing programs & Moving to Work (MTW) PHAs Compliance Deadlines June 1, 2014 – must have initiated amendments to the PHA Annual Plan (non-qualified agencies) or the public hearing process (qualified agencies) October 31, 2014 – on this date or 90 days from adoption, must have started applying new flat rent schedules General Requirements Establish flat rents based on the market rent of comparable units in the private, unassisted rental market – set at no less than 80% of the FMR. If a family’s existing rental payment increases by more than 35%, phase in thenew rent to ensure payments do not increase by more than 35% annually.

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REGULATORY CHANGES TOOLS IN THE TOOLBOX

UPDATED FLAT RENT REQUIREMENTS – Annual Compliance

Annual Compliance requirements include:

• Using a rent reasonableness methodology to calculate flat rent
• If the existing rent is at least 80% of FMR

Adjusting the flat rent to the amount determined by the study

• If flat rent is less than 80% of FMR

Adjusting the flat rent to no less than 80% of FMR, subject to utilities adjustments

• Continuing to permit a new admissions family to choose between

the flat rent amount and income-based rent; Existing families on flat rent must also be permitted to choose at the next annual rent

• ption
• Reviewing flat rents upon issuance of new FMRs by HUD

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REGULATORY CHANGES TOOLS IN THE TOOLBOX

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“Change is the law of life. And those who look only to the past or present are certain to miss the future.”

John Fitzgerald Kennedy – June 1963 Address in the Assembly Hall at the Paulskirche in Frankfurt

POSTSCRIPT

THANK YOU

PLEASE DIRECT QUESTIONS TO:

Eric Q. Strong

888.466.5572, extension 2720 estrong@navigatehousing.com www.navigatehousing.com