If you were to ask Michael Carper “How do you preserve 376 units of affordable housing?,” he would probably tell you to first get control of the 376 units. As president of the Housing Development Corporation (HDC) MidAtlantic (formerly the HDC of Lancaster County), Carper and his team of development officers and analysts, project managers, and property management and compliance experts did just that. In January 2012, the HDC MidAtlantic refinanced 376 affordable rental units in seven properties located in Lancaster, Berks, and Dauphin counties in Pennsylvania. The consolidation of properties under one ownership enabled a $26 million refinancing, which lowered debt service and provided $8.4 million for renovations. This transaction is believed to be the first of its kind in Pennsylvania.
An experienced nonprofit developer of affordable rental housing, the HDC MidAtlantic has developed and currently manages more than 3,100 affordable rental units in 11 counties in central and northeastern Pennsylvania. When several properties that were either built or renovated using federal low income housing tax credits (LIHTCs) came close to the end of the 15-year compliance period, the HDC MidAtlantic started looking at ways to update the units and preserve affordability. The HDC MidAtlantic’s goal was to make sure that the units remained affordable. “I looked at this transaction as a preservation effort,” explained Carper. “These properties are in strong rental markets where local investors would scoop them up at the right price.” Moreover, the refinancing provided funds for the HDC MidAtlantic to develop handicapped-accessible units as well as make energy-efficient improvements to generate additional savings.
The Lancaster County Housing and Redevelopment Authorities (LCHRA), which had originally financed some of the properties, suggested to the HDC MidAtlantic the idea of refinancing multiple properties as one project using tax-exempt multifamily housing bonds. One of the attractions of this type of private activity bonds is that once the Pennsylvania Housing Finance Agency approves their use, the project automatically becomes eligible for the 4 percent LIHTC. “The economy of scale gained by the large size of this transaction is what made it a good candidate for bond financing,” explained Matthew Sternberg, executive director of LCHRA. “In Lancaster County, we have a number of large, affordable rental housing developments that could feasibly be refinanced with multifamily housing bonds. The legal and accounting costs of bond financing make it necessary to spread these costs over a large number of units, and the developer needs latitude in selecting properties to bundle together. This is where our ability to reach into neighboring counties really helped.”
“Working with the limited partner equity investors was the easy part,” said Carper. They are sophisticated investors that understood the benefits and compliance requirements from the beginning and had calculated their exit gains and costs at the outset. Once a project reaches the end of its 15-year compliance period, investors typically no longer have an economic interest in the property. The original limited partner investors in all seven projects agreed to transfer their interest to the HDC MidAtlantic, which was the general partner in each project. Enterprise Community Investment, Inc., a nationally well-known syndicator of LIHTCs, purchased all of the tax credits awarded to the new transaction, thus becoming the sole limited partner.
Another challenge in refinancing was that all of the properties had public money — the Community Development Block Grant Program, the HOME Investment Partnership Program, county trust funds, and other sources with various self-amortization structures and use restrictions — invested in them. Working with each municipality and with staff and elected officials who were frequently not familiar with the original project development took a lot of time and persistence on everyone’s part. Orchestrating the refinancing of each of these seven properties at the same time was a daunting task, according to Carper. The HDC MidAtlantic worked on this refinancing from the summer of 2011 until closing on January 31, 2012.
One might expect that the actual underwriting of the project refinancing would also be a major challenge, but that was not so much the case as one might think, according to Tracy Fletcher II, vice president and community development officer at Fulton Bank in Lancaster, PA, who coordinated the transaction for the bank. Fulton originated and purchased the bonds issued through LCHRA to cover both the construction and permanent financing for the project. “We had previously purchased bonds from LCHRA and had also worked with the HDC and other parties in this transaction,” explained Fletcher. He identified several factors that made the bonds attractive to the bank. First, the buildings were occupied and had an occupancy history, so the lease-up risk is largely eliminated. Second, once the renovations are completed, the units will have a competitive edge in the affordable rental market. Third, the properties had positive operating histories, which are expected to improve further due to the new energy-efficiency improvements and the lower debt service.
With the refinancing in place and the most complicated legal and financing aspects of this transaction behind the organization, monitoring the renovations at all seven properties simultaneously became the next hurdle. According to Richard Ross, HDC MidAtlantic’s senior construction and facilities manager, the project could be accomplished only by using one contractor large enough to commit to a scheduled completion date for all the properties. As a single project, all units must be placed in service before the post-construction tax credits can begin.
The HDC MidAtlantic received third-party estimates that utility costs will be reduced by 18 to 20 percent with the installation of solar panels, high-efficiency boilers for heating systems, and energy-efficient windows. The HDC MidAtlantic and the residents will realize these savings. Both Carper and Sternberg said separately that both for-profit and nonprofit developers of affordable housing could preserve a large number of their properties through this type of transaction.
For more information, contact Michael Carper at 717-291-1911 or