A publication of Great Lakes Capital Fund
Volume 21 | Issue 1 | 2014
FUND SERV ICE ITAL P S CA
Promises Made, Promises Kept. Syndicators and lenders will attest to our rock solid reputation.
For more information, contact our administrator at 248.833.0550
FEATURES REBOOT...................................................................... 6 RAD LENDER SELECTION............................................ 10 DEVELOP MICHIGAN: AN INNOVATIVE REAL ESTATE FINANCING PROGRAM.......................... 12 GREEN FINANCING.................................................. 15 the lender’s perspective: financing affordably-priced housing communities........... 16 capital fund services: predevelopment & acquisition loans at-a-glance........................ 19
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year 15: evaluate refinancing............................ 23
DEPARTMENTS CEO’s Message.......................................................... 5
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The Lending Business advertiser index..................................................... 26
Ginosko Development Company “Building a Brighter Future Today” Ginosko Development Company (GDC) is a real estate development company specializing in quality affordable housing creation and preservation. GDC, through its subsidiaries and joint ventures, engages in the acquisition, development, redevelopment, ownership, and operational oversight of multifamily properties primarily in the United States. Its activities include the acquisition and development of residential properties and undeveloped land reserves for development or sale. Ginosko is the Greek meaning for, “to understand completely” or “to know.” We at Ginosko Development Company, believe that a thorough understanding and comprehensive knowledge is the unbreakable foundation for any successful real estate venture. GDC’s communities are known for their careful planning, attention to detail and respect for the environment. GDC strives to lead in the evolution of real estate use in order to meet the market needs of a global economy.
41800 West 11 Mile Road, Suite 209 | Novi MI 48375 office 248.513.4900 | fax 248.513.4904
www.Ginosko.com
CEO’s MESSAGE GOVERNING BOARD Wendell Johns, Chair Retired Michael J. Taylor, Secretary/Treasurer PNC Bank James S. Bernacki Comerica Bank Catherine A. Cawthon Fifth Third CDC Derrick K. Collins Chicago State University William C. Perkins Wisconsin Partnership for Housing Development, Inc. James W. Stretz George K. Baum & Company Donald F. Tucker Don Tucker Consulting Paul J. Weaver Retired
CORPORATE OFFICERS Mark S. McDaniel, President & CEO Christopher C. Cox, CFO James L. Logue III, COO Jennifer A. Everhart, Executive Vice President Rick Laber, Executive Vice President Kevin Crawley, Executive Vice President This magazine is published quarterly by the Great Lakes Capital Fund (GLCF) to provide readers with information on affordable housing and economic and community development resources. This publication is copyrighted. The reproduction of Avenues to Affordability is prohibited by law. For additional copies, comments, concerns or to be added to the mailing list, please contact the Great Lakes Capital Fund office at 517.482.8555 or visit www.capfund.net. Editorial and Advertising Mary McDaniel, CMP • Alternative Solutions, LLC 517.333.8217 • mcdaniel64@comcast.net Graphic Design Melissa Travis • Ink Ideas Graphic Design, LLC 989.272.3101 • www.inkideasgraphicdesign.com Lansing Headquarters 1118 S. Washington Avenue Lansing, MI 48910 Phone 517.482.8555 Detroit Office 1906 25th Street Detroit, MI 48216 Phone 313.841.3751 Illinois Office 225 West Washington, Suite 1350 C Chicago, IL 60606 Phone 708.781.9603 Indianapolis Office 320 N. Meridian, Suite 1011 Indianapolis, IN 46204 Phone 317.423.8880 Wisconsin Office 2 E. Mifflin Street, Suite 101 Madison, WI 53703 Phone 608.234.5291 Delaware Office 100 W. 10th Street, Suite 302 Wilmington, DE 19801
the lending business BY MARK MCDANIEL, CEO/PRESIDENT GREAT LAKES CAPITAL FUND
Welcome to our Lending edition of Avenues. GLCF has been in the business of lending since our early days. Initially, we used our own surplus funds to provide creative capital sources in the market where there was no one providing such to our developer partners. In the late 1990’s our advisor, Enterprise Social Investment Corp., realized the value we were creating to our partners and offered to give use access to a number of programs the Enterprise Foundation was operating to make community development loans. This allowed us to leverage our fund resources to serve a wider group of partners. This lead us to a relationship, with a faith based pension fund who approved access to 30 million of lending authority for larger term fixed rate debt tools to support affordable housing and commercial development. This early experience gave us a very successful track record, knowledge, and operational platform for lending. In 2002, we formalized our lender efforts through the creation of Capital Fund Services (CFS), our nonprofit lending company. We focused on building that entity to enable us to apply and become a Community Development Financial Institution in 2005. As our CDFI has matured we have been able to be awarded and attract numerous sources of capital programs to support our development partners. Our designation as a Fannie Mae Affordable Housing Lender four years ago told us that we had reached a very high bar of recognizing our capabilities as a lender. We also were able to enter into a memorandum of understanding with Love Funding to deliver FHA executions through GLCF. At the same time our pension fund partner has renewed their support of CFS with a very strong lending product for multi-family housing. As you know the terms of these programs are pretty much the same no matter who you might select. The difference maker is on the execution. Are you getting through the due diligence and closing process in a timely basis with loan sizing at the level it was committed to? This is what we believe and have heard from our partners. It is what makes us different from many. We base our lending philosophy on the four elements of building trust, integrity, intent, competency and results. That is who we are and have been for over 20 years. This edition of Avenues will provide a very good overview of all the lending products that are in the market today for multi-family housing and how they work best to meet your needs. This is written as a guide to show how the programs work and not to sell you on GLCF and our partners as being the only ones to work with. It would be nice to have that. We assume you will see the difference with us and make that decision based on your trust in us. Hope this miserable weather is over soon and that your spring and summer will be warm and successful. 5
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REBOOT
Rental Assistance Demonstration (“RAD�) was authorized by the Consolidated and Further Continuing Appropriations Act of 2012 (Public Law 112-55, approved November 18, 2011). The second component of RAD received additional authorization by the Consolidated Appropriations Act of 2014 (Public Law 113-76, approved January 17, 2014), which provided fiscal year 2014 appropriations for HUD (2014 Appropriations Act). The first component allows projects funded under the public housing and Section 8 Moderate Rehabilitation (Mod Rehab) programs to convert their assistance to long-term, project-based Section 8 rental assistance contracts. The second component allows owners of projects funded under the Rent Supplement (Rent Supplement), Rental Assistance Payment (RAP), and Mod Rehab programs to convert tenant protection vouchers (TPVs) to PBVs, upon contract expiration or, for owners of Rent Supplement and RAP projects, termination, occurring after October 1, 2006, and no later than December 31, 2014 . BY Carlos E. Guice, Sr. c. ray baker & associates, inc.
D
uring a recent trip to Washington, D.C., I had dinner with my son. During our dinner conversation, he taught me a new word. That word is “reboot”. This young, up-and-comer in the video game industry helped me understand that successfully managed assets in the video game industry are intellectual properties that grow into franchises. As the theory goes, once a consumer is captivated by a series they will prefer the next installment over a new game they don’t recognize, giving birth to sequels, prequels, and remakes. I learned that sequels and prequels are a real challenge because they have to be consistent with the original story and, as we all know, remakes don’t leave much to the imagination. My son explained that reboots are different because they let the creators keep the fundamentals that made the original story great yet allows them to take the story in a fresh direction, making it relevant for the new generation of gamers. We finished dinner; said goodbye, and left the restaurant. Walking back to the hotel, I reflected on our discussion. An analogy formed in my mind and I engaged in a thought experiment. I asked myself the following question. If RAD were a video game; would it be a sequel, or would RAD be a reboot? I wondered. The Cost of Public Housing The public housing program is funded and regulated by the U.S. federal government; however, housing production and program service delivery are implemented by local public housing authorities (“PHAs”) created by state enabling law. While most PHAs are independent, quasi-governmental entities, some are located within the structure of the local municipal government.
AVENUES TO AFFORDABILITY
Collectively, they manage the nation’s public housing stock which totals some 1.17 million units located in 13,000 properties, providing housing for some 2.1 million residents. There are around 3,117 PHAs operating across the nation. The findings of the 2010 report, Capital Needs in the Public Housing Program commissioned by the U.S. Department of Housing and Urban Development (“HUD”) estimated an $89 billion price tag associated with the capital repairs needed to adequately maintain the nation’s public housing portfolio over a 20-year horizon. This looming price tag represents a major fiscal challenge for the public housing program and highlights a significant risk factor that could impact the ability of PHAs to provide safe, sanitary, and affordable housing to their residents. Rental Assistance Demonstration Program Rental Assistance Demonstration (“RAD”) was authorized by the Consolidated and Further Continuing Appropriations Act of 2012 (Public Law 112-55, approved November 18, 2011), RAD is pilot program designed to measure the degree to which a more stable funding platform can alter the investment decisions of debt and equity providers in the affordable housing market. Will the capital markets make room in its collective portfolio and allocate funds to provide the investment needed to address the immediate and long-term capital needs of the nation’s public housing stock? The conversion of public housing properties to long-term, projectbased Section 8 rental assistance combined with mortgage insurance provided by the Federal Housing Administration (“FHA) is a clear signal that HUD is providing the right incentives to engage the +$8 billion, low income housing tax credit equity market. The PHAs will receive no new funding; however, they will swap their current funding programs and receive a subsidy sufficient to cover mortgage payments, operating expenses, and replacement reserves. Operating subsidy, capital funds, tenant rents, and utility allowances are combined under housing assistance payment contract to cover the contract rents and utility allowances. For example:
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applications. Whereas, PHAs located in the Northeast, Midwest, and Western state represented 17%, 16%, and 11%, respectively.
Program Demand The demand for program participation is high; this was demonstrated by an upsurge in PHA “first component” applications. In 2012, Congress approved a 60,000-unit conversion cap. As of December 2012, HUD had received 122 “first component” applications, requesting conversion of some 13,709 units. After extensive dialogue with PHAs throughout the country, HUD made some program and policy adjustments mid-year 2013. By December 31, 2013, HUD had received “first components” applications for over 1,000 projects from 382 separate PHAs, requesting conversion of 176,048 units – that’s 15% of the national public housing portfolio.
Relative demand can be demonstrated through a quick analysis of “first component” RAD applications by percentage across census regions. As of December 31, 2013, RAD applications submitted by PHAs located in Southern states represent 56% of all RAD 8
Composition of PHA Applicants Of all the PHA RAD applicants , 45% own and operate between 250 and 1,250 low-rent units; 40% own and operate less than 250 low rent units. Only 15% of the PHA applicants own and operate more than 1,250 units. It appears that demand for the RAD program is driven by the small to medium size PHAs.
Structure of the PHA Pool Unit Allocation If you consider the composition small, medium, and large PHAs, it’s clear where the long-term demand is located. There are some 3,117 PHAs that own and operate 1,174,498 units of GREAT LAKES CAPITAL FUND
low-rent, public housing. The top ten PHAs collectively hold 28% of the national inventory in their portfolio, or approximately 332,468 units. Including this will skew the analysis. Controlling for this we exclude these for now. This leaves a PHA population of 3,107 PHAs holding 842,030 units, or 72% of the national portfolio. This is what we found about this PHA population: • 101-units represent the median number of low rent units owned; • 25% of all units are owned by small-sized PHAs; • 38% of all units are owned by medium-sized PHAs; • 63% of all units are owned by the small and medium-sized PHAs combined; and • 37% of the balance of the units are owned by large-sized PHA (exclusive of the top ten). PHA Allocation Approximately, 2,334 or 75% of all PHAs are considered smallsized; 652 or 21% are medium-sized. The remaining 131 PHAs as large-sized PHAs that 4%, inclusive of the top ten. These numbers indicate that if RAD is to have long term success, its implementation has to occur deep within strata of the small to medium-sized PHAs which represent 96% of the entire PHA population. Conclusion For the small and medium-sized PHAs, two elements will be critical factors for success; they are: sustained capacity development and a disciplined approach to change management. Sustained capacity development is a long-term process that is not amenable to delivery pressure, quick fixes or short-term result seeking. Capacity resides within individuals, organizations, and larger systems and enabling environments. A well-functioning system or enabling environment provides the infrastructure for individuals and organizations to be able to perform.
Within the institutional framework of the affordable housing industry federal agencies; state, regional and county housing finance agencies; local community development corporations; municipal government, and community stakeholders are all part of this enabling environment. The market is also a critical component of the enabling environment. As such, the collective actions of lenders, investors, developers, lawyers, accountants, and consultants play a critical role in providing an enabling environment that will support sustained capacity development for PHA seeking conversion. This can be reflected in the market’s approach to product and service delivery. For example, financial products and services could be re-engineered to include an education and capacity building component. Business is increasingly become a knowledge driven enterprise; the affordable housing industry is no different. Consultants can focus on helping PHAs adopt a more disciplined approach change management, conducting innovative board retreats, strategy sessions, and assisting with developing business or transition plans. Moreover, the need for more sophisticated accounting, compliance, and reporting services will also increase. As to my earlier question: my answer is “reboot”. RAD is more than a “bricks and mortar” program; RAD is more than a “real estate transaction”; RAD provides an opportunity for leverage and growth. It is an opportunity to take this portfolio in a fresh direction, making it relevant for the times. If sustained capacity development can be achieved, I see no reason why RAD could not give birth to hundreds of non-profit housing corporations, providing valuable services to affordable housing residents in the local and regional markets in which they operate. To be clear, the challenge for PHAs across the nation is nothing short of reinvention. HUD seems to have gotten the policy right with the RAD program because it offers a platform for reinvention and change. The real questions is: Can our industry provide PHAs with an enabling environment for change, transformation, development, and growth? One can hope. Carlos E. Guice, Sr. has over 29-years’ experience in the banking and finance industry with extensive investment banking, real estate finance, and community development expertise in both the public and private sector. He is chief operations officer at C. Ray Baker & Associates, Inc., a minority owned, consulting firm headquartered in Detroit, Michigan.
AVENUES TO AFFORDABILITY
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RAD LENDER SELECTION
WHAT, WHEN AND WHICH? BY BRUCE P. GERHART LOVE FUNDING
Q
uestions, questions, questions — aren’t there enough with RAD? You and your team have answered hundreds of questions deciding to apply for RAD and completing the application. Now, you face even more when it comes to financing options. What programs should a lender have deep experience with to best serve you and your RAD project? When should a lender be added to your RAD team? Which lender should be selected? No daunting questions here, right? Then let’s move on. In all seriousness, glossing over these questions can cause significant issues down the line. Adding a lender to a RAD team and deciding when to do so are critical decisions. RAD is a new program. Though it utilizes many existing components of affordable housing programs, the new combinations and rules that go with them are unique. What’s more, you are unique. You need a lender that understands your specific needs and how they can be met with all the available components. As with any new endeavor, it is those who have studied, researched, invested hours in training and consultation, and have successfully engaged in the work, that you want to consider. Many lender solicitations are likely to contain some very self-serving proposals that may result in a lot of disappointment for you. What? So, what are some of the key attributes you should look for in your RAD lender? 1. Section 8 Rental Assistance Contract underwriting experience and assistance for clients renewing contracts and appealing rents. 2. Substantial Affordable Housing experience with local, state,
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and federal programs and mixed source financing. 3. Real Estate Tax Abatements, Payments In Liu of Taxes, TIFFS, and other partial or full abatements and the structuring of A and B loans to accommodate them. 4. Significant Loan Sizing, Closing, Construction Draw, and Draw Inspection experience. 5. Construction Loan Management Experience. 6. Experience with Equity Partners, particularly LIHTC investors. 7. Retained Servicing so you will have consistency after the loan funds and for the full term of the loan. When? As soon as possible! An experienced lender can be an invaluable part of the team in shaping the sizing and structure of both the loan and equity components with the other partners and determining if other sources of funding are needed. Which? If you are currently working with Great Lakes Capital Fund or considering them as your equity partner, you have one of the best sources to aid you in your search. We have worked with Great Lakes Cap Fund for many years and have many clients in common. We partner with people we trust and who in turn trust us. This is Love Funding’s 30th anniversary year. Our affordable housing roots are deep and experienced. The Love Funding team has the knowledge and resources to identify the best options to maximize your investment and to manage the complex financing details of your transaction. In the last two years, Love Funding has arranged over $2 billion of FHA financing around the country, a major portion of GREAT LAKES CAPITAL FUND
P�������� S������� M��������� S������� ��� R��������, C����������, ��� D��������� ������ ��� ������� which funded Affordable Housing. In fact, Affordable Housing Finance recognized Love Funding in 2013 as one of the leading FHA affordable lenders in the country. Love Funding is an approved HUD MAP & LEAN lender serving clients across the country. We offer refinance, construction, rehabilitation and acquisition financing programs for multifamily and affordable housing, as well as senior housing and healthcare facilities. BRUCE P. Gerhart IS THE REGIONAL DIRECTOR OF LOVE FUNDING. GERHART opened Love Funding’s Cleveland office in 2001 as a commercial loan originator. In 2007 he was promoted to regional director. In this capacity he oversees and originates multifamily, affordable and healthcare loans as well as the overall business development and support for Love Funding’s operations in the upper Midwest. He has over 35 years of experience in the real estate and banking industry.
AVENUES TO AFFORDABILITY
102 South Main Street Mt. Pleasant, Michigan 48858 Phone: (989) 772-3261 www.kmgprestige.com
For more details on how KMG Prestige can benefit your community contact
Karen Mead Vice President of Business & Development (989) 400‐4828 kmead@kmgprestige.com
OVER 20 YEARS EXPERIENCE IN ALL PHASES OF AFFORDABLE HOUSING • Audits • Cost Certifications Mt. Pleasant & Midland Michigan
• LP Tax Returns • Mortgage Certifications
Phone 989.772.4673 | Fax 989.772.6371 | Email jbourland@bbcpapc.com
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DEVELOP MICHIGAN AN INNOVATIVE REAL ESTATE FINANCING PROGRAM BY GREG NICHOLAS DEVELOP MICHIGAN
In September 2013, Mark McDaniel, President and CEO of Great Lakes Capital Fund announced a new real estate financing tool, Develop Michigan, Inc. (DMI) for Michigan-based commercial real estate projects. DMI is an innovative, not-forprofit development finance organization formed through a partnership between the Michigan Strategic Fund (MSF), Great Lakes Capital Fund (GLCF), and the Development Finance Group (DFG) . The principals of DFG, Belden Daniels, Steven Klein and Debbie La Franchi, have more than 80 years of economic development, commercial real estate and fund development experience. The mission of DMI is to serve as a key financing partner for project developers and sponsors committed to the transformation and revitalization of the Michigan economy. DMI provides lending in the form of senior debt and mezzanine capital for real estate transactions. For existing, stabilized assets or less risky tranches of investment capital that meet underwriting criteria, DMI provides competitive, longer-term senior debt financing solutions. For higher-risk tranches of a transaction, DMI offers mezzanine or gap financing to complete a capital structure. In either case, DMI provides a streamlined and integrated origination, underwriting, and asset management process through a 12
single point of contact. DMI seeks to achieve the following goals: • Generate risk-adjusted market rates of return; and • Contribute to Michigan’s economic development, focusing on projects that produce jobs revitalize local economies and generate tax revenue by investing in low and/or moderateincome communities across the state. DMI targets several asset classes, including: • Mixed-Use Commercial and Residential • Office Buildings • Light Industrial Facilities / Warehouses • Community Facilities • Retail Operations Loan Terms DMI does not compete with traditional bank financing. Instead, DMI seeks to identify and finance transactions that traditional providers of capital are not financing. To accomplish this objective, DMI offers two distinct real estate financing products: 1. Senior Debt Loans: 5-7 Year terms at competitive interest rates with required yield maintenance. While specific loan
terms will be negotiated on a project by project basis, general senior loan terms would be as follows: a. Maximum Loan to Value: 75% b. Minimum Debt Service Coverage: 1.30 times to 1 c. Security: First mortgage d. Term: 5 – 7 years e. Amortization: Varies by property type, age, location and leverage, but no greater than 30 years 2. Mezzanine Loans: Shorter-term subordinated debt terms with possible preferred equity participation. The general loan terms for mezzanine loans include: a. Maximum Combined Loan to Value: 90% (30% maximum loan to value) b. Minimum Debt Service Coverage: 1.15 times to 1 based on stabilized underwriting c. Security: Varies by transaction, typically a second lien and a pledge of partnership interest d. Term: 2 – 5 years e. Amortization: Typically interest only GREAT LAKES CAPITAL FUND
Is your firm all in?
The target investment size for DMI is $3 – $10 million with a total targeted project size of $5 - $35 million. Project Origination DMI relies on GLCF’s statewide reputation and network to procure a continuous inflow of investment opportunities for DMI. GLCF has a broad network from which it originates its transactions. GLCF has three originators and has assigned one originator to focus solely on DMI opportunities. In addition, GLCF has a 42-member staff and management team, each with a broad network of real estate relationships from which to originate projects throughout Michigan. In particular, GLCF maintains close contacts with local community economic development organizations, capital providers (banks and Community Development Financial Institutions), development-focused non-profits, real estate brokers and their network of developers. Outreach efforts with each of these groups are ongoing. As a result, an active pipeline of projects throughout Michigan has been developed. Project Underwriting Before closing on a project, DMI’s staff underwriters review the project to see if it meets financial, impact and community support thresholds. If the project meets these thresholds, DMI moves to due diligence, covering: • Developer capabilities and reputation (including personal and corporate financial statements, tax returns, and professional references); • Analysis and verification of project financials, both historic and pro forma; • Review of comparable properties to test expense assumptions and revenue forecasts; • Third party inspections to review plans, specs, construction contingencies and funded reserves; and • Review of expected major tenants.
It’s time to count on more. From our integrated business systems and tools, to our dedicated teams of experienced attorneys and professionals, our full-service framework and entrepreneurial drive enables us to deliver the results you deserve. clarkhill.com
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{Questions answered.} You will benefit from the skills we have refined helping clients like you with the countless business and financial choices faced in putting together a deal. Our experienced consultants bring an in-depth understanding of community development and housing projects and are qualified to deliver knowledge, value, and guidance to help you see your project to completion, resulting in
a higher return on experience.
Contact: Robert Edwards 517.336.7460 robert.edwards@plantemoran.com hcd.plantemoran.com
AVENUES TO AFFORDABILITY
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Project Asset Management DMI staff coordinates with GLCF’s experienced asset management team that handles GLCF’s 550 real estate investments. GLCF’s Asset Management department consists of 14 staff members (three vice
presidents, ten asset managers, and one administrative assistant) who handle the daily operations of the department. Six of the members of GLCF’s Asset Management team have spent most of their careers in the asset classes targeted by DMI.
We are a family of companies serving the needs of families.
• MANAGEMENT • DEVELOPMENT • CONTRUCTION • CONSULTING
Medallion Management, Inc. Medallion Management, Inc. 834 King Highway Suite 100 Kalamazoo, MI 49001-2578
Medallion Management
Fax: 1-269-381-3609 Phone: 1-269-381-0350 TTY: 1-800-649-3777 www.Medallionmgmt.com
"We specialize in Non-Profit Consulting and Joint Ventures"
Our timely, economical and business-minded professionals have been providing environmental due diligence, site investigation, and Brownfield consulting services to our clients for over 20 years. • Phase I & II Environmental Site Assessments (ESAs) • Baseline Environmental Assessment (BEA) and Due Care consulting • Hazardous Materials Management and Consulting • National Environmental Protection Act (NEPA) Compliance • HUD Project Capital Needs Assessments (PCNAs) • ASTM E-2018 Property Condition Assessments (PCAs) • Low-Income Housing Tax Credit (LIHTC) Capital Needs Assessments (CNAs) • Fannie Mae, Freddie Mac Physical Needs Assessments (PNAs)
Call 800-313-2966 or visit www.pmenv.com
They are utilized for asset management based on their specific commercial real estate specialties. DMI Staff Jim Logue is the CEO of Develop Michigan and is responsible for capital raising, ensuring the day-to-day activities and growth of the organization are undertaken by the staff, and is a member of the DMI Investment Committee. Mr. Logue has been the Chief Operating Officer for Great Lakes Capital Fund (GLCF) since 2004, having joined the company in 2003. Rick Laber is the President of Develop Michigan. Mr. Laber focuses on the strategic priorities of DMI, overseeing the origination, underwriting and asset management platforms and is a member of the DMI Investment Committee. Mr. Laber has been Executive Vice President of GLCF since 2009, having joined GLCF in May 2006. David Levinson, as the Chief Underwriter of Develop Michigan is responsible for the policies and procedures relative to DMI underwriting, as well as the management of financial analysis and modeling of the investments. Mr. Levinson is responsible for presenting the final investment package to the Investment Committee. Greg Nicholas, as the Lead Originator of Develop Michigan, is responsible for outreach across the state of Michigan to find high-impact, economically feasible projects that would benefit from senior debt and mezzanine capital and that have the potential to generate targeted returns. Peter Giles is the Financial Manager for Develop Michigan. Mr. Giles has primary responsibility for developing and maintaining pro forma models and various underwriting tools. Mr. Giles also serves as the New Markets Tax Credit manager at Great Lakes Capital Fund. To learn more about DMI or to discuss a specific project, please contact Greg Nicholas at (517) 489-4455 or David Levinson at (517) 3648943.
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GREAT LAKES CAPITAL FUND
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green financing
capital fund services partners with michigan saves Great Lakes Capital Fund (GLCF) through its wholly‐owned subsidiary, Capital Fund Services (CFS) has entered into an agreement with a nonprofit called Michigan Saves to provide financing for “GREEN” retrofit improvements at apartment communities and commercial properties across the state. Our “GREEN” financing is supported by a $4 million “Loan Loss Reserve” provided to CFS by the Michigan Strategic Fund. This reserve will leverage up to $16 million in private sector loans or leases – using a 4:1 leverage ratio. Our “GREEN” financing will support the up-front capital needed to make properties more energy efficient, comfortable, healthy and sustainable. Ultimately the “GREEN” retrofits will improve the owner’s cash-flow and net assets. The Loan Loss Reserve may also support the financing of large-scale commercial or industrial projects (including retooling) that will result in energy savings or increased cash-flow from the generation of renewable energy. Our financing will follow underwriting criteria which meets the U.S. Department of Energy (DOE) and Michigan Energy Office (MEO) guidelines. To assist in marketing our ” GREEN” financing program, we entered into an agreement with Michigan Saves, a nonprofit organization dedicated to making energy efficiency upgrades (along with the installation of small-scale renewable energy systems) more affordable for all types of consumers—businesses, schools, municipalities and residents. Michigan Saves received its initial funding from the Michigan Public Service Commission and AVENUES TO AFFORDABILITY
the U.S. Department of Energy. Michigan Saves helps reduce installation costs and provides a streamlined process for securing financing at preferred rates. To do this, Michigan Saves leverages third- party capital with innovative credit enhancement mechanisms (such as the Loan Loss Reserve) and it works closely with contractors and utility companies to access rebates for its borrowers. Working through industry and community partners, Michigan Saves offers a statewide network of authorized and professional building contractors with expertise in energy efficiency and on-site renewable- energy systems. It is working with CFS to promote GREEN financing for owners of multi-family apartment communities and commercial properties across Michigan. CFS and Michigan Saves have arranged special “GREEN” financing using a lease arrangement through Ascentium Capital. . The “lease-to-own” financing arrangement provides several advantages for property owners, including:
• Quick financing approval (typically 2 days) • No lien on the real estate • Up to 7 year payment plan (tied to the anticipated savings on utility bills) • Up to $250,000 in financing per property • GREEN improvements can include: o Replacement of old windows and doors with new, energy efficient products o Replacement of HVAC systems o Installation of new or improved insulation, caulk and weatherstripping o Replacement of old appliances with new EnergyStar™ Appliances o Replacement of old lighting fixtures with new LED fixtures o Installation of water conservation measures For more information, contact Greg Nicholas at (517) 489-4455 or Tom Edmiston at (517) 364-8907 and visit www.Michigan Saves.org.
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THE LENDER’S PERSPECTIVE FINANCING AFFORDABLY-PRICED HOUSING COMMUNITIES BY ZINA RISK GREAT LAKES CAPITAL FUND
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n the world of affordable housing the choices for permanent debt products are predominantly supported by: Government Sponsored Enterprises (GSEs) — Fannie Mae and Freddie Mac — FHA, local and national banks, and the occasional life insurance company or conduit lender. The beauty of a GSE lender, and specifically Fannie Mae, is that it has been a steady source of funding for 20+ years and has ALWAYS closed on its commitments! Underwriting nuances such as loan to value and debt coverage requirements have varied over time depending on market conditions, but Fannie Mae is always there in good times and in bad — providing liquidity to the market. Did you ever see the cartoon about how different parties in a real estate transaction perceive the same property? The assessor sees a mansion. A potential buyer sees a shack. But in reality, the owner would like the assessor to see a shack and the buyer to see the mansion. What does the lender see? A large part of the answer depends
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on just who the lender is and what information they derive from the owner, the property manager, the development and the market. At its heart, Fannie Mae is a cash flow lender! Just about all of the due diligence items that are required and the underwriting that is performed go to answer questions that surround the predictability of cash flow which will support the monthly loan payments and the ability to pay-off the mortgage at maturity. Items that don’t deal with cash flow tend to focus on the project’s stability and predictability as well as the sponsor’s capacity. What do you need to think about before you talk to your lender; and how can you help your lender evaluate the merits of your loan request? Personal Financials If it’s all about the real estate, you might ask, “Why are there so many questions about my personal financials”? Although the typical Fannie Mae loan for affordable housing is non-recourse, the lender wants to confirm that the borrower has the financial capacity to handle significant events during the life of the loan, whether the event includes an unexpected repair or a condemnation. To do this analysis, the lender will compare the borrower’s liquidity (i.e. verified liquidity which is not held in property operating accounts) to the borrower’s total monthly real estate payment obligations (as shown in his/her Real Estate Owned – REO portfolio). Ideally, the lender would like to see this ratio be close to 6 months. Also, the lender will look for a portfolio Debt Coverage Ratio (DCR) that is sustainable (i.e. better that 1.15 to 1) and if a property has a DCR below 1.0 there GREAT LAKES CAPITAL FUND
should be a detailed plan for addressing its problems. The lender will ask who your equity partners are and how they have performed in difficult situations. Lastly, the lender will look closely at any loans you have which will mature within the next 24 months and assess if you can refinance them or if you have the liquidity to carry them forward on your own. Expense Ratio As a rule of thumb, underwriting assumes annual rent growth will be 2% and expense growth will be 3%, which translates into a stable or increasing DCR as long as the expense ratio does not exceed 66.6%. The reality is that many affordable housing deals, especially those with deep rent restrictions, have an expense ratio that pushes upward toward 70%. This leads to a decreasing DCR and it generally causes it to fall below 1.00 over time. The equity side mitigates this risk with heavy operating reserves – a bucket of cash set aside to bring the property back to neutral - should it go negative; but the lender, as you recall, is focused on cash flow from operations and doesn’t want to rely on operating reserves for loan payments. Certainly the lender will mitigate risk with cash reserves for lease-up risk or the loss of tax abatement, but not for the basic loan payment. So how do you get around this? Look to see if some of your operating expenses are too high. Is the management fee priced higher than the market? Can you split the fee and arrange for part of it to be a cash-flow contingent (an incentive management fee) so a portion falls below the Net Operating Income (NOI) line, creating a higher DCR? Is this property absorbing too much of the entire portfolio’s expenses for items like advertising? The next time you focus on expenses (which you should do ALL of the time), look at the expense ratio as well as the total expense dollars.
that this property: outperforms its competition, serves the market, and can continue to operate effectively over the loan term. A perception exists that apartment communities with rents priced affordably for households earning 50% to 60% of Area Median Income (AMI) are essentially “market rate” units. The lender will want to confirm that a rent-restricted property can compete with a market rate property with regards to its appeal, its finishes and its level of customer services. The lender will conduct a rental comparable analysis and use adjustments to reconcile whether or not the affordable property has a value proposition. The lender will also research the market, submarket and neighborhood for job and population growth. The lender will survey the area for vacant land and potential future competition. So the moral of the story is: know your market and make sure your lender knows that you do! In summary, if you view things through the eyes of the lender, this will help as you package and present the items requested by your lender in order to make an informed decision about financing your apartment community. They’ll want to know about you, your development team and your track record. They’ll want to understand the operations of the property (past, present and future); and they’ll want to know how the property will continue to compete well in the market. If you’d like for Capital Fund Services and Great Lakes Capital Fund to help you obtain financing for your affordable housing development - we’re just a phone call away. Zina Risk joined the Chicago-area office of Great Lakes Capital Fund in 2012 as a Senior Underwriter. RISK’s fifteen years of experience in multifamily lending includes all aspects of due diligence, underwriting, and closing agency (Fannie Mae and Freddie Mac), bank, and institutional
Markets Matter Just like with a market rate project, the lender wants to know AVENUES TO AFFORDABILITY
permanent loan products on a national basis for multi-national and local lenders.
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FEATURE
CAPITAL FUND SERVICES PREDEVELOPMENT AND ACQUISITION LOANS AT-A-GLANCE BY ASHLEY BARKER GREAT LAKES CAPITAL FUND
Capital Fund Services (CFS) hit an important milestone in 2013: 10 years of providing flexible, low-cost Predevelopment and Acquisition Loans. In 2004, three borrowers were lent a total of $600,000. By year’s end in 2013, CFS had extended nearly $26M in Predevelopment and Acquisition Loans to 47 unique borrowers the vast majority being affordable housing developers. In fact more than 95% of endbeneficiaries are low-income households. Although these loan products are available for both new construction and rehabilitation projects, approximately 80% of loans have supported the preservation of affordable developments – a primary focus for CFS. Predevelopment Loans As any multifamily affordable housing developer can attest, predevelopment
AVENUES TO AFFORDABILITY
financing can be quite difficult to secure; and when it’s available, the cost of capital may be too high to be considered viable. This often prevents worthy projects from taking root. CFS’ Predevelopment Loans are specifically tailored to address this gap in the market and to meet the needs of our developer partners. Predevelopment loans can be used for items like: architectural and legal costs, market analyses and other consultant fees, site control, environmental studies, applications and other preconstruction activities. We typical provide financing on a cost-share basis with up to 90% of the financing for each line item provided by CFS loan proceeds. Acquisition Loans CFS offers Acquisition Loans for developers to purchase existing affordable housing properties. One of the primary
benefits of this product for our developer partners is our speed of execution. This helps them secure the best terms possible on the acquisition. This capital is not a permanent financing solution; but enables the developer to gain control of a property while arranging permanent financing (often involving housing Low Income Housing Tax Credits - LIHTC). In determining the feasibility for an Acquisition Loan, CFS will analyze the development’s recent operating statements (i.e. the past 3 years) and CFS will review the Capital Needs Assessment. Generally the development should be a candidate for tax exempt bond financing with 4% LIHTC just in case the developer is un19
Investing in Neighborhoods & People. Palmer Pointe Townhomes, Pontiac, MI provides 24 townhome-style housing units for low- and moderate-income families. Nine units offer extensive services for those families with a special need. Citizens Bank (now FirstMerit) partnered with Community Housing Network, Inc. to receive an FHLBI Affordable Housing Program grant of $465,000. Visit www.fhlbi.com to learn more about housing and community development programs.
We Do More Than Just Answer Your Questions…
FEATURE able to receive a 9% LIHTC award within a reasonable time period. CFS Acquisition Loans include competitive rates and terms. Banks typically underwrite their loans with a 65% to 70% Loan-to-Value (LTV). However, CFS can offer acquisition financing with an LTV of up to 90%. This difference equates to a developer contributing as little as 10% versus as much as 35% in equity. The development of affordable housing can be a very long process and there are a lot of upfront costs. There are very few sources of Predevelopment and Acquisition financing available to meet the unique needs of affordable housing developers. Simply put, that is why CFS’ Predevelopment and Acquisition Loan products are so critical. As the current CFS loans are repaid, this will enable more loans to be made, enabling CFS to further support our partners as they create and/or preserve vitally important affordable housing in our communities.
Predevelopment Loans
Acquisition Loans
Loan Amount
$25k to $500k
$100k to $3M
Term
Up to 18mos (12 avg)
Up to 24mos
Interest Rate
5-6%
6-8%
Loan-to-Value
Up to 90%
Up to 90%
Fees
2%
2%
WE CREATE THE SOLUTIONS! For more information on our products,
“My properties have shown incredible improvement since you started working with them. I can’t believe how much better the sites are doing today. I don’t know what took me so long to get you involved!” Lora D. Gilbert, Vice President of Asset Management, Larc Properties, Inc.
please contact Katey Forth at (517) 364-8909 or via e-mail at kforth@capfund.net. Ashlee Barker joined Great Lakes Capital Fund in 2006. She currently serves as Community
Operations • Marketing • Leasing • Training Specialists Call Today to Reduce Expenses and Increase Your Occupancy
Impact Analyst, evaluating the social and economic impacts created by GLCF’s portfolio. Additionally, Barker is engaged in real estate market research and analysis; grant writing
800.865.0948 | www.occupancysolutions.com 20
and management; CDFI capacity building.
GREAT LAKES CAPITAL FUND
BUILDING MICHIGAN QUALITY·SERVICE·ETHICS
McCartney & Company, P.C.
FOR 75 YEARS.
Certified Public Accountants Celebrating Over 50 Years of Excellence
C E L E B R AT I N G
1961—2011
Providing a full range of services to a diverse clientele. Committed to exceeding our clients’ expectations. Specializing in affordable housing . 2121 University Park Drive, Suite 150 Okemos, Michigan 48864 Telephone (517) 347-5000 Fax (517) 347-5007 www.mcco-cpa.com
YEARS
With affordable multi-unit projects from Grand Rapids to the U.P., Wolverine has been building in Michigan for 75 years. Here’s to 75 more.
You work with this...
Enhancing the Professional Apartment Industry Proud Partner of GLCF
...and we work with you! SaVE tHE DatE! PMAM GLAStar Education Conference & Awards October 16 –17, 2014
Owners • Developers • Managers
JOin tODay! Call 616.531.5243 or visit pmamhq.com.
WHY YES, the grass is GREENER over here.
Sometimes brilliant advising and accounting isn’t enough. Allow us to give you an extra nudge over the fence.
>
Audit and tax services
>
Cost certification
>
Market studies
>
Transaction consulting
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Securing tax credit equity – Low-income housing – Historic – Energy
Exceptional client service is what separates Baker Tilly from the rest. Our tailored affordable housing services address your needs and deliver the individual attention you deserve. It’s our pledge to you, because in the end, your definition of satisfaction is the only definition that matters.
© 2013 Baker Tilly Virchow Krause, LLP. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.
Come see what’s happening on our side. Connect with us: bakertilly.com Don Bernards, CPA, Partner 608 240 2643 | donald.bernards@bakertilly.com
FEATURE
YEAR 15
EVALUATE REFINANCING
BY JAMES WHITE GREAT LAKES CAPITAL FUND
As the Low Income Housing Tax Credit (LIHTC) industry continues to mature, many General Partners (GPs) and/or Developers awaken to find their project is quickly approaching the end of its compliance period. Many have not even considered the options available to the Investor Limited Partner (LP) as it seeks to end their investment and involvement in the partnership. Well for those few who might fall in this category; don’t fret. Behind every challenge is an opportunity. If you’re a GP or Developer who finds himself in this set of circumstances, take the opportunity to evaluate if this is the right time to refinance your development. During the Year 15 process, your syndicator or Investor Limited Partner (LP) will want to do an assessment of the value of their partnership interest. While an internal assessment is usually performed to determine a “ball park” value, many LPs will want some form of third party assessment of value, either a Broker’s Opinion of Value or an appraisal. While this evaluation is taking place anyway, take the opportunity to reassess the current interest rate and existing terms of your deal. You may determine that exercising your ROFR (Right of First Refusal) or buyout option and holding the asset longer is the most advantageous option for you to meet your long term goals. If so, let Capital Fund Services (CFS) see what our mortgage and AVENUES TO AFFORDABILITY
lending products can do to help improve your bottom line. For instance, maybe you have a 50 unit development that is in good overall condition and only needs some updating. Let’s say the outstanding debt balance is about
$700,000 with an interest rate of 7.43% with 10 years remaining in the term with annual debt service of $94,716 You could refinance the balance with Capital Fund Services at our current rate (approximately 5.30%) using our Fannie Mae 10 year
Construction & Renovation for Residential, Commercial, Industrial & Multifamily • Affordable Housing • Commercial • Residential • Disaster Restoration
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23
FEATURE
term and 30 year amortizaion loan, product and save about $46,645 per yearwhich you could then accumulate for later renovations or a paydown at loan maturity. Couple the refinance with a energy retrofit loan from our “Green Development & En-
ergy Efficiency” lending product, and the savings from improved operating expenses continues to improve the bottom line. [Green development and energy efficiency loans are designed to help owners pay for energy improvements at properties with the loan
being paid back from the energy savings generated by the rehabilitation. We have consultants available to help property owners evaluate the potential savings achievable from making energy improvements. Loan terms are matched up with expected energy savings but generally for a five-year term.]
However, maybe you decide that the best course of action is to acquire the LP’s interest and re-syndicate the project for another 15 years. In this case, you could utilize one of Capital Fund Services Predevelopment or Acquisition lending products to hold and position the asset for re-development while you are preparing your LIHTC application for a 4% noncompetitive LIHTC application or a 9% competitive round of LIHTC credits. In either circumstance, CFS could offer you an opportunity to utilize our FHA 223f partner financing with rates as low as 4.15% (as of 02/10/2014) In addition, Great Lakes Capital Fund could potentially syndicate the credits for equity as well.
Strength in numbers. 3,000 clients | 45 states | 140 employees thanks to our clients, doz is celebrating
25 years of service.
[NOTE: Predevelopment and Acquisition loans are available to developers with healthy balance sheets that have viable development projects that need a little more time prior to final close are eligible. Loan terms are interest-only payments on a quarterly basis and a one-year term. Pre-development loans are full recourse to the borrower.]
In either case, as you evaluate the exit strategy for your development at the end of its 15 year compliance period, know that Great Lakes Capital Fund and our affiliate entities can provide opportunities and solutions to your challenges. At GLCF, our work is about our partners, and our mission is about the people we serve. James White joined the Capital Fund in October 2007 as an Asset & Investment Manager and oversees a $200MM+ equity portfolio comprising of more than 3,500 housing units. In December 2010, James added the role of Year 15 Equity Disposition Manager to his duties
www.doz.net
866.848.5700
leading the team managing the transfer and disposition of Lower Tier Limited Partner Investor partnership interest to various entities.
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GREAT LAKES CAPITAL FUND
ADVERTISER INDEX Baker Tilly Virchow Krause, LLP..............................................22
McCartney & Company, P.C.....................................................21
Blystone & Bailey.....................................................................11
Medallion Management, Inc.....................................................14
Chesapeake Community Advisors, Inc.....................................16
MHT Housing, Inc.....................................................................2
Clark Hill.................................................................................13
Michigan State Housing Development Authority......................28
Community Economic Development Association of Michigan.. 24
O’Brien Construction Company, Inc.........................................25
Dauby O’Conner & Zaleski......................................................24
Occupancy Solutions................................................................20
FHLB Indianapolis...................................................................20
Plante Moran............................................................................13
Fourmidables...........................................................................18
PM Environmental...................................................................14
G. Fisher Construction.............................................................23
Property Management Association of Michigan........................21
Ginosko Development Company................................................ 4
Rohde Construction.................................................................27
KMG Prestige...........................................................................11
Vogt Santer Insights..................................................................11
Loomis, Ewert, Parsley, Davis & Gotting, P.C............................26
Wolverine Building Group........................................................21
Love Funding...........................................................................11
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GREAT LAKES CAPITAL FUND
Great Lakes Capital Fund 1118 S. Washington Avenue Lansing, MI 48910 www.capfund.net
We assist in home ownership, affordable housing, urban renewal, and the fight against homelessness to create vibrant neighborhoods in a thriving state.
AffordAble rentAl Housing
HomeoWnersHip And Home improvement
Homelessness And supportive Housing
Communities, neigHborHoods And doWntoWn revitAlizAtion
Equal Housing Employer/Lender
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