Kansas, Denver Projects Show How Stimulus Dollars Are Rescuing Deals
By Caitlin Jones
9 min read
Tax Credit Advisor, November 2009: Two of the earliest closed transactions using federal stimulus act dollars illustrate how these subsidies are rescuing stalled new low-income housing tax credit (LIHTC) projects, and the tortuous paths taken by their developers to piece together all their financing.
The projects are Pioneer Adams II, being built in Topeka, Kansas by local developer Pioneer Group, Inc., and Denver Gardens, being developed in Denver, Colo. by Steele Properties LLC.
Financing for Pioneer Adams II closed in mid-August and includes a loan from the Kansas Housing Resources Corporation of federal Section 1602 credit exchange dollars. Financing for Denver Gardens closed in September and includes a loan from the Colorado Housing and Finance Authority of federal Tax Credit Assistance Program (TCAP) monies.
The TCAP and credit exchange programs were created by the American Recovery and Reinvestment Act of 2009. The purpose of each is to provide federal dollars through state housing credit agencies to proposed LIHTC projects – stalled because of funding gaps due primarily to the inability to attract sufficient tax credit equity – to enable them to proceed to construction and completion. TCAP is administered by the U.S. Department of Housing and Urban Development (HUD); Section 1602 credit exchange by the U.S. Treasury Department.
The Kansas Housing Resources Corporation (KHRC) administers both programs, as well as the LIHTC program, in Kansas, while the Colorado Housing and Finance Authority (CHFA) administers all three in Colorado.
TCAP as “˜Life Saver’
Ross Freeman, president of Pioneer Group, Inc., says the credit exchange program has been a “life saver” for smaller developers like his firm, which undertakes one or two LIHTC projects a year in Kansas and Missouri. “I think it has saved affordable housing right now,” he notes. “It is one of the stimulus programs that is really working.”
Pioneers Adams II, a 100% LIHTC development which received its building permits and began construction on September 1, will contain 49 affordable rental units for families – 25 three-bedroom townhomes and 24 apartments – in 11 buildings expected to be completed during August 2010 through January 2011.
Freeman expected the project to be a breeze at the outset. The first phase, an LIHTC development called Pioneer Adams, was completed in August 2008, fully rented in September, and reached break-even in October. “We’ve never had a project like that before,” says Freeman. “It was unbelievable.” The first phase consisted of 39 three-bedroom townhomes with attached garages, plus eight one- and two-bedroom apartments. Forty percent of the waiting list applicants, though, preferred apartments to townhomes, which prompted an adjustment of the unit mix for Pioneer Adams II.
Pioneer Group applied for 9% housing credit allocation for Pioneer Adams II in August 2008, and received an award of $512,441 in November 2008. “But then, in December, the equity investor told us that they didn’t have the funds to close, and the commitment for the construction and the permanent debt was pulled,” says Freeman.
The original lender dropped out for good, but Freeman lined up a replacement, Nebraska’s Horizon Bank. Pioneer Group hung in with the equity provider, Midwest Housing Equity Group (MHEG), which later lined up investors. MHEG also referred Freeman to Horizon Bank. Freeman said this is the first time his firm has used MHEG as the syndicator for a project.
Pioneer originally planned to close on the financing for Pioneer Adams II in December 2008. But the deal tumbled into “limbo” – because of the funding gap – until August 2009. By then the equity was firmed up, though in a smaller amount than originally anticipated, and Pioneer Group received an award of credit exchange funds from KHRC. Pioneer received a lower price for its housing credits than the 80 cents originally anticipated, and KHRC cut the original credit allocation amount by 40% because of the provision of exchange funds. The restated partnership agreement will still give the investors 99.9% of the depreciation benefits, thereby boosting their return.
KHRC provided the credit exchange funds as a 15-year, no-interest loan advance that will be forgiven after 15 years. KHRC will disburse the exchange funds in the same manner as a construction loan, with the developer reimbursed after submitting each draw.
The project’s total development cost is $6,006,907. Final funding sources and amounts include: LIHTC equity, $2,719,145, or 45.3% of the total; exchange funds, $1,812,762 (30.2%); permanent debt, $1,200,000 (20%); and deferred developer fee, $275,000 (4.5%). The permanent mortgage is at 6.5% for 15 years with 30-year amortization. The construction loan is fixed at 6%.
“We were very disappointed that we had to wait so long” to close, says Freeman. “But when all is said and done, it turned out to be a pretty good deal.” He noted, “Waiting paid off for us. We think that Pioneer Adams II will be as successful as Pioneer Adams, and the only way we were able to get started on it was the presence of the exchange funds.”
Freeman said Pioneer decided to apply for exchange funds instead of TCAP because of the numerous “strings” attached to the TCAP program. Among these are mandatory successful completion of a federal environmental review, and payment of Davis-Bacon wages.
Pioneer didn’t submit any applications for housing credits in KHRC’s August 2009 allocation round, but is reviewing three or four deals for possible applications in the February 2010 round. “Part of the question we need to get decided before we move forward is, is the exchange program going to be in place next year?” Freeman says.
Meanwhile, Pioneer Group continues to redevelop historic buildings located on the U.S. Department of Veterans Affairs (VA) hospital campus in Leavenworth, Kansas. Pioneer several years ago received a 75-year enhanced use lease for 38 historic buildings on the campus and has completed historic renovations using 20 so far. Another five are currently being renovated in two projects, including an adaptive reuse to create a new VA regional call center.
Denver Gardens Project
Denver Gardens involves the purchase and rehabilitation of an existing 100-unit project-based Section 8 affordable rental housing development for seniors. Steele Properties LLC, a Denver-based for-profit developer, is developing the project in a joint venture with local nonprofit Community Housing Concepts, Inc., which acquired the 1979, three-story building.
Chad Asarch, a principal of Steele Properties LLC, said the total development cost will be just over $14 million, including “comprehensive” renovations of more than $30,000 per unit with significant “green rehab.” The latter include upgrades to Energy Star appliances, double-paned energy-efficient windows, super-efficient boilers, and insulation. Rooftop photovoltaic solar panels will be installed to generate electricity for the property.
Asarch said Denver Gardens was the first TCAP-assisted project in the country to close. Renovations have begun and should be completed by mid-2010, with tenants remaining in place during rehabilitation. About 93% of residents make less than 30% of the area median income.
The original plan was to finance the project entirely with tax-exempt bond proceeds and equity generated by 4% credits. “But when everything fell apart,” Asarch says, “the deal didn’t work that way at all.” With the tax-exempt bond market tanked and LIHTC equity investors not interested in 4% deals, the sponsors changed course and applied for 9% housing credits in February 2009, and received a reservation in April 2009, of $758,970. By this time CHFA and other state credit agencies were developing plans for their TCAP and credit exchange programs.
“Once we got the reservation and had that next round of conversations with the lender and the syndicator,” Asarch explains, “we realized we were going to have a gap, and we sat down with CHFA and started to have those conversations about how they were going to use their stimulus funds.” He said once the time came for CHFA to pick a project to go first, “we were ready to proceed.”
The project’s final funding sources include LIHTC equity of $5.5 million from WNC & Associates, Inc., Irvine, Calif.; a TCAP loan of $1.78 million from CHFA; and a 30-year Fannie Mae first mortgage originated by Citi Community Capital. In addition, the nonprofit made a contribution and two grants were received that will help fund resident services and various energy efficiency improvements.
Michael Byrd, WNC’s project manager for Denver Gardens, noted, “The TCAP funds were truly the funds that leveraged all of the project financing sources and moved this $14 million investment.”
All of the TCAP dollars – provided as a 17-year, zero-interest, deferred payment loan – were used to cover acquisition costs. Asarch praised CHFA and its staff for their speedy design and activation of the TCAP and exchange programs.
Denver Gardens’ sponsors submitted an application to CHFA for TCAP or credit exchange (TCEP) funds less than 24 hours after the application window opened.
“I would have happily taken TCEP or TCAP,” says Asarch. “But all things being equal, given our expertise in these types of things and our competence and ability to execute, we were happy to take TCAP and get the deal done quickly.”
The project’s price tag has increased, since Davis-Bacon wages will now be paid – something not in the original plan.
Asarch said the Denver Gardens project will create 100 construction and 222 related support jobs, and generate nearly $30 million in economic benefits. “It’s a project that’s going to do good,” he notes.
In conjunction with CHC’s acquisition of the property, HUD approved a conversion of the project’s existing Section 8 Housing Assistance Payments contract, set to expire in January 2011, to a new 20-year term.
