AFFORDABLE HOUSING 101 Brian Lloyd, Vice President Beacon - - PowerPoint PPT Presentation

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AFFORDABLE HOUSING 101 Brian Lloyd, Vice President Beacon - - PowerPoint PPT Presentation

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EASTSIDE HUMAN SERVICES FORUM June 20, 2019 AFFORDABLE HOUSING 101 Brian Lloyd, Vice President Beacon Development Group Session Outline Session Outline 1. What is affordable housing? How is it defined? Who does it serve? Who

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Brian Lloyd, Vice President

Beacon Development Group

EASTSIDE HUMAN SERVICES FORUM

June 20, 2019

AFFORDABLE HOUSING 101

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Session Outline

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

Session Outline

1. What is affordable housing?

▪ How is it defined? ▪ Who does it serve? ▪ Who provides it and why?

2. What’s the process? 3. How is it funded?

▪ Local, state, federal ▪ Capital and operating

4. How do you make it pencil?

▪ Development sources & uses ▪ Operating pro forma

5. How does the future look?

2

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Our Experience

3 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion 3

Project Experience Project Types

Projects Units Value Completed 83 4,567 $730M Under Construction 3 505 $147M Fully Funded 3 186 $71M In Development 5 1,198 $64M Total 95 6,456 $1.10B Family 46 projects Agricultural Workers 24 projects Sustainable Building 30 projects Historic 8 projects Senior 20 projects Special Needs 26 projects Acquisition/Rehab 16 projects Urban/Mixed Use 25 projects

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Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

What is Affordable Housing?

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Agricultural worker family housing

Varney Court Housing Authority of the City

  • f Pasco and Franklin County
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Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

What is Affordable Housing?

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Senior Housing

Pearl at Oyster Bay American Baptist Homes of the West

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Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

What is Affordable Housing?

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TOD / Mixed Use

Plaza Roberto Maestas El Centro de la Raza

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Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

What is Affordable Housing?

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Historic Buildings

Agnes Kehoe Place Spokane Housing Authority

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What is Affordable Housing?

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion 8

Senior Housing

MarketFront Pike Place Market PDA

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HopeWorks Station Phase 2

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion 9

Special Needs

HopeWorks Station Phase 2 HopeWorks / Housing Hope

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Colby Avenue Youth Center – Cocoon House

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion 10

Special Needs

Colby Avenue Youth Center Cocoon House

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1. Residents pay at most 30% of their income in housing costs

▪ Rental Housing Cost = Rent + Utilities ▪ Ownership Housing Cost = Principal + Interest + Taxes + Insurance

2. Includes a wide range of housing types

▪ Shelter – night to night or permanent beds ▪ Special Needs – homeless, disabled, etc ▪ Veterans ▪ Farm worker ▪ Working “poor” minimum wage, 30% to 50% ▪ Workforce 60% to 100% ▪ Ownership – Single Family, Townhouse, Condo

3. Percentages – Area Median Income (census data)

▪ 0 – 30% = Extremely Low Income ▪ 30 – 50% = Very Low Income ▪ 50 – 80% = Low Income (60% is maximum for tax credits) ▪ 80 – 120% = Moderate Income

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

What is Affordable Housing?

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What is Affordable RENTAL Housing?

30% AMI 50% AMI 60% AMI Yakima

$17,550

$29,250 $35,100 Spokane $18,030 $30,050 $36,060 King/Sno $28,890 $48,150 $57,780

WSHFC Income Limits (2018): 3 person household

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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What is Affordable RENTAL Housing?

30% AMI 50% AMI 60% AMI Yakima

$17,550

$438

$29,250

$731

$35,100

$877 Spokane

$18,030

$450

$30,050

$751

$36,060

$901 King/Sno

$28,890

$722

$48,150

$1,203

$57,780

$1,444

WSHFC Rent Limits (2018): 2 bedroom units

Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

Who Provides Affordable Housing?

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▪ Housing Authorities ▪ Non-profit / social service organizations ▪ Public Agencies ▪ Private Market

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  • I. Project Definition & Feasibility

15 15 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 1. Who are you going to serve?

▪ What’s the market? (i.e. the need) ▪ What makes you the right provider? ▪ Impact of prioritizing populations?

  • 2. Due Diligence

▪ Survey, Phase I, title report, design studies

  • I. Project Definition & Feasibility

16 16 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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3. What are the costs?

▪ Site Acquisition ▪ Financing & Soft Costs ▪ Construction/A&E ▪ Replacement & Operating Reserves

4. What are the likely development and operating sources?

▪ Local subsidy and support ▪ Tax credits: Are you competitive? What’s the equity calculation? ▪ Rent levels

  • I. Project Definition & Feasibility

17 17 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • II. Funding Applications

18 18 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 1. Applications are required to: City, County, State,

Finance Agency. Common application helps, but each has a different addendum/focus.

  • 2. Will you get an award:

▪ Local capital subsidy, then State capital subsidy, then

  • perating subsidies, then tax credits!!!

▪ Current system headed in direction of being population based, vets, etc.; not project oriented, less predictable, timing uncertain ▪ Challenge is to conserve $ while trying to get to yes

  • II. Funding Applications

19 19 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • III. Design and Permits

20 20 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • III. Design and Permits

1. Design a functional, bullet-proof building that can be built at rock bottom construction costs 2. Meet all funding requirements ▪ Green/Sustainable ▪ Prevailing Wages and Labor Standards ▪ Program space ▪ Lender preferences ▪ Historic, Neighborhood, or other constraints 3. Line up permits with closing of all subsidies and the tax credit partnership

21 21 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • IV. Closing

22 22 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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1. Meet the requirements of 3 – 5 different lenders simultaneously 2. Get 3 – 5 different attorneys to agree on anything 3. Priority Agreement ▪ Who’s on First? What’s on Second? 4. Manage guarantees (if possible) ▪ Construction completion ▪ Tax credit delivery ▪ Operating deficit

  • IV. Closing

23 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion 23

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Funding Sources (Capital Stack) State Housing Trust Fund

  • Application
  • Note
  • Deed of trust
  • Loan agreement and assignment for security

purposes

  • Regulatory agreement
  • Subordination agreement
  • Compliance

24 24 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • V. Construction

25 25 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • V. Construction

26 26 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

1. Try to find a contractor you trust with your life 2. But one that’s hungry and willing to do high quality work for as little

  • verhead and profit as possible

3. Try to find a contractor who can navigate all the subsidy requirements: ▪ Green Requirements ▪ Prevailing Wage and other labor standards ▪ Hire Section 3 and WMBE firms ▪ Meet apprentice program requirements 4. Meet tax credit and investor delivery deadlines despite weather and unforeseen site conditions

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  • VI. Lease-Up & Management

27 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 1. Lease-Up

▪ Deliver units according to the schedule you set with the investor 12 – 18 months earlier so you don’t lose equity ▪ Lease up to fully qualified households who meet all the income and lease guidelines and will be stable happy residents

  • 2. Management

▪ Then starts the hard part – operating a financially and socially stable housing community for the long term ▪ Next Class: Affordable Housing Management 101

  • VI. Lease-Up & Management

28 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 1. What is affordable housing?
  • 2. What’s the process?
  • 3. How is it funded?
  • 4. How do you make it pencil?
  • 5. How does the future look?

Housing 101

29 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 1. Local, State and Federal Resources

▪ Capital Side – subsidize cost of construction and development ▪ Operating Side – subsidize operations, maintenance, and services

  • 2. Local – City & County

▪ Entitlement Cities & Counties – pass-through of CDBG and HOME funds ▪ Local property tax levies  City of Seattle, City of Bellingham, City of Vancouver  King County Veterans and Human Services Levy ▪ 2060 & 2063 for services – recording fees ▪ Regional consortia – ARCH ▪ General funds ▪ Philanthropy

How Is It Funded?

30 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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How Is It Funded?

  • 3. State

▪ Housing Trust Fund  $200M in the 2007 – 2009 budget  $130M in the 2009 – 2011 budget (100 + 30)  $137M in the 2011 – 2013 budget (50 + 67)  $51M for 2013 – 2015 biennium  $49M for 2015 – 2017 biennium (21 + 28)  $100M for 2017 – 2019 biennium  $175M for 2019 – 2021 biennium ▪ CDBG Housing Enhancement –non-entitlement communities ▪ 2060 & 2063 – recording fees, state portion ▪ Consolidated Homeless Grant – homeless services

31 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 4. Federal

▪ Housing & Urban Development  202/811 Capital/operating programs  HOME & CDBG  McKinney for homeless services  Public Housing Authorities  Section 8 Vouchers, VASH Vouchers, RAD Vouchers  FHA – federally guaranteed loans  National Trust Fund (WA ~4M in 2017) ▪ US Dept of Agriculture – Rural Development programs

How Is It Funded?

32 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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And last but not least…

Which Federal Agency runs the nation’s largest housing production program?

How Is It Funded?

33 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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What is the Low-Income Housing Tax Credit?

34 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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What is the Low-Income Housing Tax Credit?

▪ Began with Tax Reform Act of 1986 ▪ Section 42 of the Internal Revenue Code ▪ Federal tax incentive to encourage private investment ▪ Tax credits are now the primary vehicle for low-income rental housing construction and rehabilitation in the U.S. ▪ 3 Million units of housing since inception

35 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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What is the Low-Income Housing Tax Credit?

▪ Dollar for dollar reduction in federal tax liability ▪ 10 year credit period; 15 year recapture period; 15+ exit ▪ Investors purchase the tax credits by providing equity for the construction or rehab of housing ▪ 9% (competitive) vs. 4% (automatic) ▪ Money comes from CRA investors (banks) and economic investors (insurance companies, Google, Verizon) ▪ Syndicators vs. Direct Investors ▪ Money is equity, not debt, returns are from benefits, not cash

36 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Owner (Limited Partnership) Sponsor/Developer General Partner .01% Investor(s) Limited Partner 99.99% Housing Equity Tax credits Tax savings

  • ver 10 years

$10,000,000 $9,500,000 × $0.95 per credit

Credit to Equity Example : $1,000,000 in Credit

37 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Owner (Limited Partnership) Sponsor/Developer General Partner .01% Investor(s) Limited Partner 99.99% Housing Equity Tax credits Tax savings

  • ver 10 years

$10,000,000 $8,500,000 × $0.85 per credit

Credit to Equity Example : $1,000,000 in Credit

38 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Why can’t affordable housing work without all these subsidy programs? Development Side

1. Conventional Real Estate Development:

▪ Total Project Cost = Debt + Owner Equity ▪ Debt paid by rental income ▪ Equity re-captured by Owner through cash flow, appreciation, and sale of asset

2. Affordable Real Estate Development

▪ Reduced rents mean little or no debt ▪ Non-Profits: no Owner equity or re-sale of assets ▪ Investor equity based on sale of tax credits ▪ Gap funding from public sources for the difference

How Does It Pencil?

39 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Why can’t affordable housing work without all these subsidy programs? Development Side

1. Conventional Real Estate Development:

▪ Total Project Cost = Debt + Owner Equity ▪ Debt paid by rental income ▪ Equity re-captured by Owner through cash flow, appreciation, and sale of asset

2. Affordable Real Estate Development

▪ Reduced rents mean little or no debt ▪ Non-Profits: no Owner equity or re-sale of assets ▪ Investor equity based on sale of tax credits ▪ Gap funding from public sources for the difference

How Does It Pencil?

40 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Financing Comparison

$8M Bank Debt $2M Owner Equity

Conventional Deal

41 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Why can’t affordable housing work without all these subsidy programs? Development Side

1. Conventional Real Estate Development:

▪ Total Project Cost = Debt + Owner Equity ▪ Debt paid by rental income ▪ Equity re-captured by Owner through cash flow, appreciation, and sale of asset

2. Affordable Real Estate Development

▪ Reduced rents mean little or no debt ▪ Non-Profits: no Owner equity or re-sale of assets ▪ Investor equity based on sale of tax credits ▪ Gap funding from public sources for the difference

How Does It Pencil?

42 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Financing Comparison

$6-$7M LIHTC Equity $250K-$1M Bank Debt $ City $ County $ State $0 Owner Equity

Affordable Deal

43 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Operating Side 1. Conventional Real Estate Development

▪ Market Rents - Operating Expenses = Net Operating Income which drives debt ▪ Net Cash Flow goes to Owner as Return on Investment

2. Affordable Real Estate Development

▪ Reduced Rents based on income targeting ▪ Operating Expenses same or higher based on population being served ▪ Projects serving 50% - 60% AMI may be able to break even or support a small amount of debt ▪ Projects serving 30% and below can’t break even, so need operating subsidies

How Does It Pencil?

44 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Operating Side 1. Conventional Real Estate Development

▪ Market Rents - Operating Expenses = Net Operating Income which drives debt ▪ Net Cash Flow goes to Owner as Return on Investment

2. Affordable Real Estate Development

▪ Reduced Rents based on income targeting ▪ Operating Expenses same or higher based on population being served ▪ Projects serving 50% - 60% AMI may be able to break even or support a small amount of debt ▪ Projects serving 30% and below can’t break even, so need operating subsidies

How Does It Pencil?

45 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Cash Flow Comparison

Market Rents Operating Expenses Debt Payments Cash Flow

Conventional Deal

46 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Operating Side 1. Conventional Real Estate Development

▪ Market Rents - Operating Expenses = Net Operating Income which drives debt ▪ Net Cash Flow goes to Owner as Return on Investment

2. Affordable Real Estate Development

▪ Reduced Rents based on income targeting ▪ Operating Expenses same or higher based on population being served ▪ Projects serving 50% - 60% AMI may be able to break even or support a small amount of debt ▪ Projects serving 30% and below can’t break even, so need operating subsidies

How Does It Pencil?

47 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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50% - 60% Deal

Cash Flow Comparison

Restricted Rents Operating Expenses Debt Payments Cash Flow

48 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Cash Flow Comparison

30% and below

Restricted Rents Operating Expenses and Supportiv e Services Subsidy (i.e. S8, O&M, Service $) Break Even

49 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Sample 9% Project: 60 Units

USES Ttl Dev Cost Elig Basis Land & Related Cost 1,000,000 Construction Contract 12,250,000 12,050,000 Contingency (10%) & Sales Tax (10%) 2,450,000 2,450,000 Furnishings 50,000 50,000 Architect and Engineer 857,500 857,500 Surveys & Construction Testing 50,000 50,000 Permits & Impact Fees 500,000 500,000 LIHTC Fees 120,000 Construction Loan Fees & Expenses 100,000 100,000 Construction Loan Interest 350,000 250,000 Legal & Closing 25,000 25,000 Perm Financing Fees & Expenses 50,000 Insurance, Accounting, Lease-Up 90,000 40,000 Developer Fee-Sponsor 950,000 900,000 Reserves 250,000 Syndication Costs 85,000 19,177,500 17,272,500

50

Introduction What is it? Funding Financial Feasibility The Process The Future Conclusion

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Sample 9% Project: 60 Units

9% LIHTC Calculation -- A Eligible Basis 17,272,500 Calculated Credit Amount x applicable % (9%) 1,554,525 Adjusted Credit Amount x 130% 2,020,883 Maximum Credit per WSHFC 60 units x 20,957 1,257,420 Total Credit x 10 years 12,574,200 Investor Share of Credit x 99.99% 12,572,943 Price per Credit $ 0.95 Credit per unit 11,944,295

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Introduction What is it? Funding Financial Feasibility The Process The Future Conclusion Sources -- A LIHTC Equity 11,944,295 62% State HTF 2,500,000 13% Local Funding 4,500,000 23% Deferred Developer Fee 233,205 1% Private Debt

  • 0%

Total Sources 19,177,500 100% Total Costs 19,177,500 Surplus (Shortage) (0)

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Sample 9% Project: 60 Units

9% LIHTC Calculation -- B Eligible Basis 17,272,500 Calculated Credit Amount x applicable % (9%) 1,554,525 Adjusted Credit Amount x100% 1,554,525 Maximum Credit per WSHFC 60 units x 16,153 969,180 Total Credit x 10 years 9,691,800 Investor Share of Credit x 99.99% 9,690,831 Price per Credit $ 0.95 Credit per unit 9,206,289

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Introduction What is it? Funding Financial Feasibility The Process The Future Conclusion Sources -- B LIHTC Equity 9,206,289 56% State HTF 2,500,000 15% Local Funding 4,500,000 27% Deferred Developer Fee 233,205 1% Private Debt

  • 0%

Total Sources 16,439,494 100% Total Costs 19,177,500 Surplus (Shortage) (2,738,006)

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Sample 9% Project: 60 Units

Introduction What is it? Funding Financial Feasibility The Process The Future Conclusion Operating Proforma

  • Yr. 1
  • Yr. 2
  • Yr. 3

Units Max Rent Tax Credit Utility Allowance Net Rents inflation: 2.5% 1BR - 30% AMI 10 504 38 466 55,920 57,318 58,751 1BR - 50% AMI 14 840 38 802 134,736 138,104 141,557 2BR - 30% AMI 15 605 53 552 99,360 101,844 104,390 2BR - 50% AMI 13 1008 53 955 148,980 152,705 156,522 3BR - 30% AMI 5 699 70 629 37,740 38,684 39,651 3BR - 50% AMI 3 1165 70 1095 39,420 40,406 41,416 Gross Rents 60 516,156 529,060 542,286 Rental or Operating Subsidy

  • Laundry or Other Income

3,000 50 3,000 3,075 3,152 Vacancy 7% (430) (36,131) (37,034) (37,960) EFFECTIVE GROSS INCOME 483,025 495,101 507,478

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Sample 9% Project: 60 Units

Operating Expenses

  • Yr. 1
  • Yr. 2
  • Yr. 3

inflation: 3.5% Utilities & Garbage 125,000 129,375 133,903 Grounds & Maintenance 65,000 67,275 69,630 Replacement Reserve 21,000 21,735 22,496 Management Off-site 35,000 36,225 37,493 Management On-site 95,000 98,325 101,766 Other Operating 45,700 47,300 48,955 Services 30,000 31,050 32,137 Total Op Expenses 6,945 416,700 431,285 446,379 NET OPERATING INCOME 66,325 63,816 61,099 Debt Service Cash Flow (before payment of partnership fees) 66,325 63,816 61,099 Introduction What is it? Funding Financial Feasibility The Process The Future Conclusion

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1. Resource demand outpacing funding

▪ State budget – McCleary decision ▪ Insufficient resources ▪ Federal budget – funding for vouchers v. capital expenditures

2. Anti-tax sentiment

▪ Fewer dollars for services ▪ Lower support/increasing competition for organizational dollars

3. Fraying safety net

▪ Increased need for housing ▪ Increased needs for those already in housing ▪ Complexity of homelessness

What Does the Future Hold?

55 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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  • 4. Urban - Suburban - Rural

▪ All areas of state being impacted ▪ High wage – high cost areas; lower wage – lower cost areas ▪ Traffic and transportation

5. Tax Credit market

▪ Strong investor interest; but less available capital ▪ Tax reform changed appetite

6. Construction costs

▪ Increasing focus; public awareness behind the curve

What Does the Future Hold?

56 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Session Outline Policy Directions / Connections

Future Resource Opportunities

  • Health Care
  • Medicare/Medicaid
  • Medical system expense reduction
  • System Connected Housing
  • Incarceration system
  • Mental illness system
  • Emergency services – ER visits
  • Education
  • Improved performance/ attendance

57 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Parting Thoughts

1. Very difficult to do this work alone. Find partners with experience who can help get the deal done. 2. Work with all the resources available. 3. Be creative but make sure the fundamentals are sound. 4. Do not work the numbers until the deal works. Work the deal until the numbers work. 5. Remember that real families and individuals will benefit from this work.

58 Introduction What is it? Process Funding Financial Feasibility The Future Conclusion

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Thank You for supporting Affordable Housing

http://beacondevgroup.com