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Navigating The Sea of Development Alphabet Soup Presented By: Michael H. Syme msyme@foxrothschild.com 412-391-2450

Where Are We Today?

CAPITAL FUNDS

PUBLIC HOUSING OPERATING SUBSIDY 20 year average = 93.89% 10 year average = 91.36% 5 year average = 93.68%

OPERATING SUBSIDY In the last 20 years, it has met 100% of eligibility five times (25%) In 2013, sequestration meant that subsidy met 81.86% of eligibility In 2014, the proration was 88.79% In 2015, the proration was 85.36% In 2016, the proration was 90.21% In 2017, the proration was 93.10% In 2018, as of October, 93%

FUNDING The Present Funding reductions are representative of a long-term trend whereby: Funding is regularly reduced Properties continue to age and deteriorate

What's A Housing Authority To Do? Create new authority by: Earn non-federal funds Leverage non-federal funds Build capacity to create future cash flow In short – continue affordable housing in the absence of HUD 8

Why Not Just Go Forward And Develop?

Scope & Complexity Development is complex and requires special skill sets Housing Authority may lack the experience, expertise or staff to self-develop or simply lack of time Every year funded at % of 100 What will it mean?

Options The Acronym Oasis LIHTC CNI QHWRA PBV RAD PBRA RHFF SVC MF CFFP

Federal Funding MF = Mixed Finance CFFP = Capital Fund Financing Program RHFF = Replacement Housing Factor Funds CNI = Choice Neighborhoods Initiative RAD = Rental Assistance Demonstration QHWRA = Quality Housing Work Responsibility Act PBV = Project Based Vouchers PBRA = Project Based Rental Assistance SVC = Streamline Voluntary Conversion Sec 35 allows mixed finance Largest driver, but very competitive Only if 4% Elsewhere: State Apartment Incentive Loan State Housing Initiatives Partnership Program

NON-FEDERAL FUNDS AVAILABLE LIHTC - Low-income housing tax credits (issued by Florida Housing Finance Corporation) NMTC - New market tax credits – Historical tax credits, etc. AHP - Federal Home Loan Bank, Affordable Housing Program CLP - Federal Home Loan Bank, Community Lending Program

COMBINATION OF FUNDING SOURCES PROVIDES THE FUNDING NECESSARY

TAX CREDITS WITHOUT PUBLIC HOUSING Advantages: No oversight from HUD No total development cost restrictions No Safe Harbor limitations Rent at tax credit rent without 30% income limits No Declaration of Trust Disadvantages: No public housing operating subsidy No Capital funds No HUD oversight of developer

TAX CREDITS WITH PUBLIC HOUSING Advantages: Continue receipt of public housing operating subsidy Continue receipt of Capital funds Units available to extremely low-income residents Possible use of Capital Fund Financing Program Disadvantages: HUD oversight Total development cost restrictions Safe Harbor Limitations

TAX CREDITS WITH SITE-BASED SECTION 8 Advantages: Higher rents, lower reserves Predictability of subsidy Disadvantages: Awarding project-based vouchers Uncertainty of contract renewal (15 years) More regulations

COMMON DENOMINATOR Tax Credits

THE TAX CREDIT PROGRAM A capital subsidy program for building or rehabbing rental housing Product of Reagan era tax reform (1986 Tax Reform Act) Partnership between private sector and the government ("PPP") Competitive credits (9% low-income housing tax credit "LIHTC") and automatic credits (4% LIHTC) 19

BASICS LIHTC are available pursuant to Section 42 of the Internal Revenue Code of 1986 Tax credits are a dollar-for-dollar credit which offsets taxes for a ten (10) year period But, low income use of property must be maintained for a minimum of 15 years to avoid recapture

TYPES OF CREDIT The 70% subsidy – commonly referred to as 9% credit –this is now a set 9% credit and doesn’t fluctuate The 30% subsidy – commonly referred to as 4% credit – this is a fluctuating credit amount up to 4%

HOW TAX CREDITS WORK State Allocating Agency Federal Government Investor Tax Credits Equity Point out private and public partners – I will focus on private, Patti on public Point out where I am in the process (Tax Credit Project) Interface with Investor typically through a Limited partnership structure General partner owns just 0.01%, but controls and operates the project and provides all guaranties Passive limited partner invests equity in return for 99.99% ownership Distinguish between direct investor and syndicator Tax Credit Development

9% Credit Available for new construction or substantial rehabilitation In an amount of approximately 9% of the qualified building costs every year for 10 years Highly competitive

4% Credit Available for new construction or substantial rehabilitation Available for acquisition In an amount of approximately 4% of the qualified building costs every year for 10 years The credits are automatic with an allocation of the state's Volume Cap.

The Parties Texas Department of Housing and Community Affairs Issues Credits to the project Syndicator Purchases Tax Credits Developer – Serves as Manager Real Estate Owner – Housing Authority Consultants

Benefits To Investor Dollar-for-dollar credit against their federal tax liability Tax benefits from losses and depreciation Community Reinvestment Act (CRA) "credit"

Texas Department of Housing and Community Affairs General Partner(s) Tax Credit Investor LIHTC allocation Owner Entity

Who Develops? Use a developer Become partner Self-develop

Developer Develops financing plan Causes the development to be constructed, directly or through an owner entity that it creates Provides guarantees to investor

Catch 22 The Developer must be prepared to provide guarantees to investors – but HUD will not allow guarantee using federal funding

Overview - Simplified Developer Housing Authority Owner Equity General Partner/PHA Affiliate .49% Housing Authority Managing General Partner/Developer .51% Developer Investor(s) 99+% Ownership in Fund

Who Manages? Developer manages Third party manager Housing authority manages

Housing Authority As Property Manager Housing authority can be sole property manager Must have expertise to manage non-public housing units, particularly tax credit units Housing authorities can have input into property management in a variety of ways: Review selection of private property manager and contract terms Joint venture with experienced private management firm to learn private-sector approach If a housing authority manages, it must have a licensed real estate broker

WHAT IS RAD? Rental Assistance Demonstration program which means Public Housing Conversion

OVERVIEW HUD program authorized in Fiscal Year 2012 (FY 2012) Appropriations Bill to restructure assistance to Public Housing and Mod Rehab projects. No new funding authorized – units are converted to RAD program with existing Public Housing funding Initially 60,000 units authorized by Congress for Demonstration Increased to 225,000 units (18% of public housing stock) Increased to 445,000 (36% of public housing stock)

How Does RAD Benefit HUD? Total outstanding capital needs of over $40 billion Increasing by $3.4 billion a year This equates to: $36,000 per unit nationally Each unit converted decreases capital needs (according to HUD’s bookkeeping) If 225,000 units are converted to RAD, the capital needs drop by $8.1 billion If all 445,000 units are converted to RAD, the capital needs drop by over $16 billion No cost to HUD, makes HUD look good

Uses of RAD Convert public housing assistance to: Project-Based Rental Assistance; or Project-Based Vouchers Convert at “current funding” only (operating subsidy + capital fund) Awarded projects exempt from Public Housing Assessment System

Public Housing Current Funding Rent Levels

Understanding RAD contract rent caps PBRA: Lower of current funding or 120% of Fair Market Rents ("FMR") (less any utility allowances ("UAs") HUD may approve rents in excess of 120% up to 150% based on Rent Comparability Study PBV: Lower of current funding, “reasonable rent” or 110% of FMR (less any UAs) Make sure developers, lenders and investors aren’t projecting RAD contract rents above applicable program caps

Choice Mobility And Residents Residents who move into converted development must be allowed to move after 12 months (PBV) or 24 months (PBRA) with portable vouchers Does not reduce number of RAD units PHA can limit Choice Mobility moves to 15% per year Exemptions to be granted to 10% of total Demonstration units Right of return for residents of converted RAD units Returning residents cannot be re-screened for admission

Affiliated Entity Shields Authority from Liability Availability When Federal Funds Cannot Be Used Resolve Tax Credit Investor's Depreciation Issue Separate from Authority (and HUD)

Affiliated Entity Use a different affiliate for each of: Serving as co-developer Serving as co-general partner or co-managing member Acting as a management agent Providing guarantees

Co-Developer A not-for-profit affiliate Earns developer fee of non-federal funds

Co-General Partner Co-Managing Member A for-profit affiliate Ultimately the owner of the new development Can be subsidiary of the not-for-profit entity

Management Agent Can be a for-profit or non-profit Generally, must have licensed real estate agent. Depending on the property, may need low-income housing tax credit certification If a not-for-profit, it can be an LLC with the not-for- profit as the sole member

Overview - Complex Housing Authority Owner Entity Managing Member, LLC Not-For-Profit Central Office Cost Center Section 8 Public Housing Developer Entity Management Entity Investor Investor 99.99% 46

Affiliated Entity – Treatment Under State Law Governed by Texas Business Organizations Code Treated as a separate legal entity Separate board Separate meetings and minute books Proper financial accounting

Affiliated Entities–Treatment By HUD HUD's Notice: Applicability of Public Housing Program requirements to transactions between Public Housing Agencies (“PHA”) and their related affiliates and instrumentalities.

Key Definitions "Affiliate(s)/Affiliated entity" shall mean entities, formed by the PHA under state law in which a PHA has a financial or ownership interest or participates in their governance. The PHA need not control nor manage the assets or operations of the Affiliate. Affiliates, for purposes of this notice, include only entities that use public housing funds for carrying out development functions of the PHA. An Affiliate is treated in the same manner as any unrelated third party contractor. "Instrumentality" shall mean a subsidiary branch of the PHA through which functions or policies are implemented. An Instrumentality assumes the role of the PHA and is the PHA under the public housing requirements for purposes of implementing public housing development activities and programs. Instrumentalities must be authorized to act for and to assume the responsibilities of the PHA.

Issues Related To Affiliate Formed For Public Housing Development Conflict of Interest - Financial interest. A bonus provided to a board member by the Affiliate would be a financial interest, while a bonus provided by the PHA for the development director's service to the PHA would not be considered a financial interest. Use consultant agreements. Cannot be employed by both.

Affiliates Must keep up all corporate formalities: separate meetings, officers, boards, books, etc. If an affiliate uses Authority assets, there must be an agreement and consideration (lease, license or sale). For use of employees, the affiliate enters into a consulting agreement to pay the Authority for the employee's time. No employee can be paid by more than one employer.

New Set Of Books The Affiliate must maintain a complete and accurate separate “Set of Books” General ledger Chart of accounts Journals Cash receipts and cash disbursements Registers Fixed assets, payroll

Cash Accounts When a housing authority works with Affiliates and cash is moving from program to program, etc. Separate the relationship Do an actual cash transfer, not just book entries No inter-funds!!

Q & A