Preservation Pitfalls and
Windfalls
DEAL FEASIBILITY AND LESSONS LEARNED
PHFA HOUSING FORUM MAY 2015
Agenda
Intro
Feasibility Factors
9% vs. 4%
Lessons learned
Two Projects (or Three)
Robert Saligman Apartments
180 unit 202 built in 1978
HUD 202 loan, HAP renewing annually
Converted Holiday Inn
Addition built in late 1990s—not part of project
Shared common spaces, sitework, elevators via
condo
Ground floor office space leased to sponsor
Renovations will upgrade common areas, address
deferred maintenance, position property for
continued success
Ephraim Goldstein Apartments
154 unit 202 built 1980
HUD 231 loan, HAP renewing annually
Shared common spaces, sitework,
elevators via cross-easement
Ground floor office space leased to
adult day provider
Renovations will upgrade common
areas, address deferred maintenance,
position property for continued
success
SHALOM HOUSE
Ephraim Goldstein Apartments
114 unit 202 built 1985
Original HUD loan prepaid in 2003, HAP
renewing annually
Built as addition/companion to Shalom House—
also part of project
Shared common spaces, sitework, elevators via
cross-easement
Ground floor office space leased to adult day
provider
Renovations will upgrade common areas, address
deferred maintenance, position property for
continued success
ARBOR HOUSE
Sponsor—Federation Housing, Inc.
•Founded 1970
•Own/manage 10 affordable independent living sites for
seniors in Northeast Philadelphia and Eastern
Montgomery County
•Serve 1500+ seniors with housing and services
•Experienced and very capable staff
•Active and highly experienced board
Approach
Renew HAP—as long as possible, rents as high as possible
Partnership acquire property--high price
Keep tenants in place
Control rehab costs but address all deferred maintenance
Earn developer fee and sale proceeds for developer
Costs
•Construction—control costs but scope should address as
much as possible
•Soft costs—bonds will add to costs, higher legal fees
•Acquisition—as high as (reasonably) possible
Sources
•Equity—from rehab and acquisition credits
•How much permanent debt?
•HAP rents
•Operating expenses (big projects easier)
•Real estate taxes (PILOT/Exemption)
•Gap—how to fill?
Gap Financing
The Windfall
Generate acquisition credits>>
equity via sale of property to
partnership
Seller:
•Pays of existing debt
•Loans a portion of net proceeds to
project to fill gap
•Still nets $2 million
Deal Feasibility Factors
Current building value (high)
Existing debt (low)
Potential HAP rents (high)
HUD regulatory restrictions (manageable and understood)
Rehab costs (low—but do everything!)
In place rehab possible?>>boosts equity raise
4% vs. 9%
•Bonds add a layer of complexity
•Must cover at least 50% of costs—seller loan as bond?
•Must be outstanding for at least 18 months
•Can only pay for “good” costs
•Less reliance on scarce subsidy
4% vs. 9%
•More structuring issues to deal with
•Seller loans
•Relationships between seller and buyer
•Establishing a need for the bonds
4% vs. 9%
•4% does not always work (see Deal Feasibility Factors
above)
•Deal should be “cooked” when you submit to PHFA
•No “application risk”
•While you wait for PHFA approvals: HUD approvals,
issuer approvals, design process, investor/lender due
diligence
Lessons Learned
You don’t have to be a HUD expert, but you need one
• To help assess feasibility up-front
• To obtain HUD approvals:
• HAP extension/increase
• Prepayment of mortgage
• Disposition of residual receipts and replacement reserves
• To help with quirks, issues, signatures
Lessons Learned
The bonds are not mysterious
•Mostly like a conventional loan
•Direct placement—simplest, most common
•Bond attorneys and issuers care about things you have
never heard of
Lessons Learned
Strong property management is key
•Highest equity raise = in-place rehab, and relocation is difficult
for elders
•Daytime relocation for the duration of unit rehab—3-5 days
•448 co-occurring home renovation projects
•Legal notices, clear communication about work schedules
•Complaints about dust, noise
•Compliance issues still have to be addressed
Lessons Learned
Experienced general contractor is key
•In-place rehab: tenants vacate their apartments during the
work day 7 to 3 (hospitality suite or day program)
•3 to 5 days in each unit
•Specialized work teams
•Common area and systems work ongoing throughout
•GC/property manager coordination
Lessons Learned
You need a lot of hands on deck
•Federation: staff bore the brunt—adds to normal
workload
•4 or 5 board members who devoted 5 – 40 hours per
week over 6 months
•Consultant: approximately 1.5 FTEs avg over 6 months
including construction oversight
Lessons Learned
Good stewards are rewarded
•Higher as-is appraised value (more equity)
•Lower rehab costs
•Higher replacement reserves
•Higher residual receipts
Lessons Learned
Today’s smaller projects will be harder to rehab in 20 years
•Cause: resource constraints
• Less project-based rent subsidy
• Less development subsidy
•Effect: smaller projects, higher per unit operating expenses, less
debt supported
•Will this approach work in 20 years?