Revitalizing Rural Development’s Multi-Family Housing (MFH) Portfolio Saving and creating decent, safe, and sanitary affordable homes for rural renters

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Revitalizing Rural Developments Multi-Family
Housing (MFH) PortfolioSaving and creating
decent, safe, and sanitary affordable homes for
rural renters

• FY 2010 Presentation by Larry Anderson,
• Director, MFH Preservation and Direct Loans
  (MPDL)
• Housing and Community Facilities Programs -
  laurence.anderson_at_usda.gov

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Basic Facts 515/514 Portfolio (1-1-09)

• 16,000 Properties with 452,610 Units (28 units
  avg. size)
• 11.6 Billion Outstanding Principal (3.0
  delinquent)
• The tenants who we serve
• 11.2K Annual Average Income (9.2K for RA)
• 64 receive RA
• 15 receive HUD project or tenant based subsidy
  or other
• 21 receive no deep tenant subsidy
• Tenant Households headed by
• 59 Elderly
• 71 Female
• 30 Minority
• 24 Handicapped or disabled
• 30 Tenant turnover
• 30 Properties in Counties with Declining Income

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Fiscal Year 2009 - Number of Units Served
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Multi-Family Housing Delinquency

• Delinquency is under control

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Direct Loan and Grant Program Direction for FY
2010

• Preserve and revitalize the direct portfolio
• Fully identify capital needs
• Market based sustainable underwriting
• Build super green new where most needed
• Goal of zero net energy consumption
• Goal for property is long term sustainability of
  rents
• Use third party resources ARRA and other
• Simplify, clarify and support the process
• Better working relationships with 3rd party
  funders

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SUPER GREEN What does that mean?

• Energy conservation plus generation
• Build super green new where most needed
• Goal of zero net energy consumption
• Goal for property is long term sustainability of
  rents
• NOFA Scoring Criteria

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Key Revitalization challenges

• Nature of the portfolio
• Aging earliest projects from the 60s
• Small properties
• Rural Markets
• Not enough RA
• Aging of physical structure is project specific
• Nature of ownership entities
• Aging owners and entities
• Conflicting interests within ownership
• Tax consequences for selling or not selling
• Cloud of Prepayment statute litigation now
  lifting
• Franconia Damages to owners possible
• Tucker Act Settlement 731 projects going thru
  process
• Goldhammer APA violation to not follow
  regulation
• Limited pool of purchasers and funding resources
• Tightening Federal budget for traditional
  subsidized housing

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Key Revitalization Study findings

• Comprehensive Property Assessment (CPA) found
• Irreplaceable rural rental housing option
• Portfolio in good shape, but aging and reserves
  under funded
• Addressing now is more cost effective
• Study also said
• Portfolio breaks into 3 segments
• 10 in great markets expensive to preserve
• 10 in bad markets not feasible to preserve
• 80 in the middle feasible to preserve
• Old way - Just using rent increases and more RA
  is too expensive
• New way Use new cost effective revitalization
  tools
• Reinvent program delivery for smarter faster
  decisions

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The Working Revitalization Strategy

• Components of all deals
• Project is needed in market
• Post transaction Owner is eligible
• Basic Feasibility Thresholds
• CNA to determine capital needs, timing and
  funding
• Underwriting to determine feasibility and tools
• SUSTAINABLE RENTS SUSTAINABLE PROPERTIES!
• CNA needs - OM - operating cushion vacancy -
  accounts current
• Seller payments and increased RTO is market based
• Market value for equity loan
• CRCU limit for equity payment and increased RTO
• CRCU test before any MPR tools
• Consider impact on tenants
• Long Term Commitment RDs funding/Owners RUP

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Access to revitalization resources

• MPR (MFH Preservation and Revitalization Demo)
• NOFA rules Access RD rehab funds key tool
  deferrals (pre-92 only)
• Simple (stay in owners)
• Complex (transfers)
• Portfolio (now includes transfers and stay in
  owners)
• Transfer
• Low rents tight deals
• Pie split issues common
• Limited RD funding rehab through MPR
• 3rd party funding only source of seller payment
  outside prepayment process
• Prepayment process
• Incentives (stay in owners or transfers)
• Sales to Non-profits (transfers)
• Substitution of GPs or "no funds transfers -
  white knights beware
• 3rd Party ARRA funds
• DOE HUD Green Retro Fit
• LIHTC TCAP or Exchange

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Revitalization Activity

• MPR (2006 76, 2007 87, 2008 - 135, 2009 94
  SC top State)
• Transfers (top State 2009 SC)
• 60 use third party funding
• 2006 159 closed
• 2007 194 closed
• 2008 235 closed
• 2009 165 closed
• Prepayment process (top State 2009 NC)
• Incentive Loans, RA or Sales to Non-Profits
  obligated
• 2006 - 35
• 2007 - 48
• 2008 - 47
• 2009 - 57

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Preservation Transactions
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MPR Demo Overview - 06/ 07/08/09 results

• Borrower applies per NOFA (4,100/2,400/1,700/1,250
  )
• RD conducts competition and selects candidates
  (150/170/286/360)
• Selected properties get
• Borrower, market eligibility review and CNA
• Underwriting to develop a Financial Feasibility
  Plan (FFP)
• Review Committee Approval
• Documents prepared to reflect deal and new RUPs
• USDA presents and owner approves the deal and mix
  of MPR tools
• USDA obligates financing and arranges closing
• Borrower and USDA close the deal

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MPR Deals obligated by State 06/ 07/08

• 65 SC 4 GA, IL, KY, PA, VT
• ME 3 VI, MI, AZ, CT, IN, MA, NY
• 22 MO 2 WA, NV, OH, OR, MS, CA
• NC, OK 1 VA, NH, NM, RI, MN
• LA 0 AL, AK, CO, DE, MD, HI, NJ, PR
• IA UT, WV
• 10 WI
• ID, MT, SD
• NE, ND
• AR, KS, TX
• 5 FL, TN

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MPR Tools - 06/07/08 Demo results

• Partial or full 515 Deferral (48M/56M/100M)
• Bullet aka Soft-second loans
  (4.5M/2.8M/13M)
• Grants (.2M/.5M/.4M)
• 515 Loan _at_ zero percent interest
  (.3M/2.6M/12.6M)
• Payment to owner of some costs (CNA from reserve)
• Forgiveness of 515 Debt (0/0/0)
• Re-amortization of 515 Debt (yes/yes/yes)
• Subordination of 515 Debt (yes/yes/yes)
• Consolidation of 515 projects (yes/yes/yes)
• Other RD funds (Section 538/515)
  (8.8M/25M/58M)
• Third party funds (1.8M LIHTC/45M/65M)

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Operational Goals for FY 2010 MPR

• Gear up to handle more transactions
• Encourage portfolio transactions/multiple
  property financing
• Find ways to use more third party funding
• Build capacity in all States
• Improve key decision making points and reduce
  bottlenecks
• CNA, CNA reviews Agreed to scope of work
• Underwriting review and analysis
• Develop routine supervising and servicing
• budget integrity and reserve use per CNA
• Establish long term internal controls
• Continue to build funding pipeline of approved
  transactions
• Expand LH participation

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Other Demo Related Improvements

• Transfer handbook updated
• One - simplified application process
• Processing deadlines per HR 3873
• Better handling of third party funding
• Working with portfolio transfers
• Additional guidance
• CNA and CNA review unnumbered letter (August
  2008)
• Underwriting unnumbered letter (October 23, 2008)
• Construction unnumbered letter (under
  construction)
• Improve outreach to buyers, sellers, and funders
• Clarify program benefits and rules
• Reduce barriers to participation
• Website access at http//www.rurdev.usda.gov/rhs/
  mfh/MPR/MPRHome.htm
• Continue to seek permanent legislation

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Revitalization Battleground Sizing the split
rehab, seller and soft costs

• Sustainable rents
• What does CRCU support?
• Rehab
• upfront/spread out
• Seller payment
• loan or cash?
• Soft costs
• loan/cash
• upfront/deferred

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Key concepts with the pie split and the MPR

• Stay in owners No split - Its all about rehab
• Underwritten once
• Full use of MPR tools to fund rehab
• Some soft costs may be included.
• Transfer Its a three way split
• Underwritten twice
• First to fit the CRCU test
• seller payment and soft costs must make economic
  sense
• RD funds can be included if in hand
• If not in hand - use 538 at AFR to size the
  transaction
• Second to fit MPR underwriting
• Deferral used to keep rents affordable
• MPR tools not used for seller payment

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Why is the MPR a good idea for the Program?

• Cheapest way to revitalize a project
• Deferral, soft money, grants and zero percent
  loans are cost effective tools
• 08 average MPR rents went down by 2 or 17 PUPM
• May be the only feasible way to address existing
  capital needs
• Last year rehab plus 20-years CNA needs over
  29K per unit
• Typical project could not afford rehab or higher
  reserves within CRCU without MPR
• Without MPR tools the cost is carried by RA
• Without MPR tool rehab is limited and may leave
  the job half done
• Many owners have no ability to sell or pay off
• The gap between current rents and CRCU is a
  pivotal feasibility measure
• Many projects dont have the market position to
  satisfy all expectations
• Bringing in third party funds through a transfer
  not an option project starts a death spiral
• Mechanism for stay in owner to recapitalize
• Over 50 of MPR transactions with stay in owners
  last year
• Government funds not used for equity payout or
  huge developer fees
• Magnet for third party funding
• Last year 100 Million leveraged by 30 Million
  in MPR BA
• Provides additional funds to get the transaction
  to work

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Portfolio Management Direction for FY 2010

• Reduced portfolio energy consumption
• Improved operations at the property
• Promote energy generation at the property
• Seek better operations by Industry Collaboration
• Role model - IPIA improvement
• Continue to reduce duplicate monitoring
• Major update to automation systems
• Increase flexibility to new programs and
  relationships
• Improve Servicing focus on major challenges and
  reduce the burden of routine tasks

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