Private Placement: Market North Apartments
By Mark Fogarty
5 min read
Need for Speed Drove North Carolina Hurricane Rehabs
When a hurricane has devastated a project and the developer wants to get rehab work done before the next deadly storm season, speed is of the essence.
A private placement helped put the pedal to the metal for a North Carolina project needing major repairs after September 2018’s Hurricane Florence.
Thirty-eight buildings at Market North Apartments in Wilmington, NC required new roofs and extensive interior and exterior repairs after the storm hit Wilmington, located on the Atlantic coast of North Carolina just above the South Carolina border. The storm brought heavy rain that lingered in the area for days and caused major damage.
The need for speed meant efficient financing had to be negotiated. The solution, according to Jim Spound, president of R4 Capital Funding, New York, was a private placement that provided a single capital source for a conventional acquisition loan and a conventional construction loan, as well as tax-exempt bonds with four percent Low Income Housing Tax Credits.
Having a single asset manager and loan servicer made for a smooth transition from the conventional to the tax-exempt bond construction period, he told a recent meeting of the National Housing & Rehabilitation Association in Palm Beach, FL.
An Early Start
The efficiency provided by the private placement allowed the acquiring developer, Vitus Group, to get construction started even before the state announced its tax credit allocations for the year, he said.
Spound’s group worked with a bank investor to get acquisition and construction loans so rehabs could begin in July of last year, before the peak of the next hurricane season.
“Through a single investor, we were able to provide a taxable acquisition loan and construction loan that allowed them to purchase the property in July and begin construction immediately,” he said.
There were a couple of pressing reasons to get started before tax credits were allocated and bonds issued, Spound said.
“All the tenants had been displaced by the hurricane, so they were spread out and there was a need to bring those tenants back. The developer thought it would be important to begin construction that summer and seal the envelopes of those buildings and get through much of the exterior work before the next hurricane season. That’s what they were able to do.
“By buying the bonds in October when the project was in mid-construction, they were able to continue on and transfer seamlessly from being a conventional construction loan to a tax-exempt construction-to-perm loan,” he said.
In the Books
The recent market disruption caused by the coronavirus shutting down major parts of the national economy should not affect the project, Spound said.
“It’s paid for and in the books. The project is very close to completion.”
Is the private placement model one that will hold up well in the current market disruption?
“Absolutely,” he said.
“The public tax-exempt markets have been disrupted because there has been a tremendous demand of liquidity,” he said. “If you were doing a Federal Housing Administration deal, selling credit enhanced bonds or a Fannie Mae M.TEB deal, which are publicly sold credit enhanced bonds, there has been a disruption. Hopefully it will be short term.”
The private placement world, though, “has remained very much intact. There hasn’t been any significant hiccup to this point,” Spound said.
Total cost of the project is $51 million for 204 Low Income Housing Preservation and Resident Homeownership Act (LIHPRA) units. A competitive rate of 220 basis points over Treasury was achieved, with a 40-year amortization and low combined origination fees of 1.75 percent.
Three Stages
The financing was done in three stages. The first was the acquisition, in July 2019, for $32.5 million. The developer brought considerable equity ($6.5 million) to the closing table and the bank loaned $26 million. This financed the land acquisition ($3.6 million), the building acquisition ($20 million), hard construction costs ($7.5 million) and a few other costs.
The second stage, between July and September, was the TEB construction financing, bringing the total to $47.6 million, which paid another $10 million in hard costs, as well as $3 million in financing costs and a $1 million developer’s fee.
The final stage, permanent financing, brought in additional LIHTC equity to bring the total development cost to $50.5 million. R4 Capital, an affiliate of R4 Capital Funding, was the syndicator on the $14.7 million in four percent tax credit equity.
One “nuance” of the deal came when the tax credit allocation came in lower than what the participants would have liked. This necessitated two further bond series, Series B for taxable construction through perm period and C, short-term construction (bridge financing).
The Wilmington Housing Authority issued the $27 million in tax-exempt bonds and, according to local news reports, residents started moving back into their units in November of last year, 14 months after the hurricane.
Key Takeaways
Keys to this successful transaction? “We were able to come up with one coherent structure to take us all the way through the process,” Spound said. “The economics were attractive. A private placement is much more analogous to a bank loan. Many fewer parties are involved and there’s a very centralized decision making, which allows us to be flexible and agile in a transaction like this.”
Spound pointed out, “It’s very difficult to switch from one capital source to another in midstream. By having one capital source that was able to jump in before bonds were available to close they were able to move very quickly from start to finish. We were able to close quickly.And then the day the bonds were allocated we were ready to upgrade the transaction to a bond and tax credit transaction.”
Story Contact:
James Spound
President, R4 Capital Funding, NY
[email protected]
Sources of Funds
Series A Bond…………………………………………………. $27,000,000
Series B Bond……………………………………………………. $7,850,000
Deferred Developer’s Fee……………………………………. $482,714
LIHTC Equity…………………………………………………… $14,684,000
General Partner Equit…………………………………………………. $100
Pre-Stabilization NOI……………………………………………. $517,453
Total………………………………………………………………. $50,534,267
Uses
Land Acquisition……………………………………………….. $3,672,000
Building Acquisition………………………………………… $19,928,000
Hard Costs………………………………………………………. $17,270,807
Financing Costs…………………………………………………. $3,960,198
Soft Costs…………………………………………………………. $1,704,227
Reserves…………………………………………………………… $1,395,035
Developer Fee………………………………………………….. $2,600,000
Total……………………………………………………………….. $50,534,267
