Year 15: developer strategies SEPTEMBER 24, 2019

ABOUT AHC 40-year track record of developing complex projects from concept to lease-up Over 7,500 units of low- and moderate- income rental housing More than 50 communities developed In-house construction management, asset management, resident services and property management Non-profit Regional developer (Baltimore to Newport News) About 70% units at 60% AMI or below

YEAR 15 Options: REFINANCE RECAPITALIZE REDEVELOP

Questions developers ask ourselves…. Other partners in the mix? How big a renovation is needed? (market, operations, sustainability) Is the property fully occupied? Turnover? Prepayment penalties for existing debt? How long are the affordability restrictions? What does the next 5-10 years look like for us and for this property? How can we streamline costs and time? What loan products can Ed offer me right now? Early exit of LP is helpful! What about other lenders? Investors? JVs? Scope of work Relocation is expensive – as non-profit AHC prioritizes non-displacement; often must comply with URA; Arlington rules; etc Prepayment and affordability can constrain future financing options AHC is long-term owner so we tend to see things through that lens – impacts reno scope decisions and partnership decisions ED will talk about range of loan products and where rates are at the moment.

Refinance: Lafayette apartments (Fairfax, va) Year 15 property acquired in 2016 JV with Jonathan Rose Companies Fully occupied 100% unit survey revealed light scope needs Acquired in 2016 through a partnership with JRC and Community Development Trust Right around Year 15; EUA ends in 2032 Current financing had a lock-out period, took time to evaluate options Performed 100% unit survey, architect put together scope matrix Decision factors: Partnerships – no new LIHTC gives more flexibility on exit; desire to retain some cash flow during reno Scope – light, less than 2 building systems Loan products…. ED speak about 223f v d4 - Davis Bacon – not triggered by 223f but triggered by 221d4. may matter in some jurisdictions and not others 2018 HUD 223f refinancing No new LIHTC

REFINANCE 100% units received sustainability upgrades: LED lighting, HVAC systems, appliances ~25% units received marketability upgrades: bathrooms, kitchens, flooring, paint Most work was done tenant-in-place Remaining upgrades to be done on turnover Relocation was a driving factor: 223f did not have an IO period in this case. We were able to hold a certain number of units vacant for on-site moves; used community space as day “hospitality” space.

Redevelop: the Berkeley / apex (ARLINGTON, VA) Owned by AHC since 2000 138 LIHTC / market-rate apartments (80% / 20%) 1960s buildings had a lot of challenges Opportunity to add affordable units and improve design of community? Condition of buildings (1960s- plumbing, mechanical, structural); Potential for increased density/affordability and exciting new construction project; AHC as patient long term owner… Decision to go all-in on redevelopment! Despite challenges: Year 15 & extended use compliance issues 3 ½ year site plan process (1st reviewed under cross jurisdictional Four Mile Run master plan) Relocation 9% app competetiveness

Redevelop The APEX Sources include 9% and 4% LIHTCs, Arlington County funding, VHDA financing, deferred developer fee Two newly constructed, modern, and energy- efficient buildings 138 units are becoming 256 including 119 NEW, committed affordable units 80% units before IA 80/20 dating from our acquisition; retained approximate affordability mix to accommodate returning residents. (too early to take advantage of income averaging!) ED/EH – talk about financing complexity, touch on twin aspect with respect to shared use, and multiple lenders

Recapitalize: colonial village west (ARLINGTON, VA) Project that Ed and L worked on together, will go into a bit more detail

70 units (1-, 2-, 3- bedroom units) Owned by AHC since 1982 70 units (1-, 2-, 3- bedroom units) 100% affordable; all units supported with HAP project-based rental assistance - Past Year 15: LP was bought out in 2017 -Garden apartment complex listed on national register, plus local site plan in place -- renovate rather than redevelop -Superb location near metro and many amenities. In fact, location was SO superb that… Two surprising things happened before we recapitalized: mark-up-to-market raised HAP rents by 30+%; and appraisal came in twice higher than expected. This had big impacts on what we were ultimately able to structure.

Goals of recapitalization Preserve affordable housing and protect existing residents Take advantage of lower interest rates Renovate major building systems for long- term sustainability Reduce operating expenses Perm loan was bearing interest at 6.64% Major building systems are aging and some needed significant work in short-term (scope: plumbing, windows, roofs, ADA upgrades to leasing office, new community room) Opportunity to reduce operating expenses through green building upgrades, addressing ongoing maintenance needs, etc Closed in October 2018, renovation is wrapping up this year

The Analysis HUD 221(d)4 or 223(f)? Private placement or balance sheet? Fannie/Freddie GSE? LIHTC/Non-LIHTC Developer’s thoughts… Minimize costs Flexibility & simplicity Vacancy restrictions Rates and terms ED to review this briefly; Laura can weigh in on developer’s thought bubble.

Fannie/Freddie tax-exempt loan advantages Will underwrite to HAP rents (assuming loan term corresponds with HAP term) Immediate perm eliminates construction loan fees, interest - as opposed to private placement Depending on product, allows certain amount of construction-period vacancy and interest-only period Existing rents covered full debt service (though we were also approved for IO). Equity paid for rehab Underwrite to HAP overhang Minimize costs of issuance and construction-period interest Maximize simplicity – typically look to minimize number of parties involved in the deal Allow some construction period vacancy, as plumbing work necessitates temporary relocation – unlike 223f! Rates and overall terms

DEVELOPER CONSIDERATIONS 4% LIHTC equity Ran projections to evaluate project without LIHTC… = PAB program survived and the choice was clear Would the PAB program exist in 2018!? LIHTC is expensive and time-consuming - certain number of fixed costs which burden smaller projects Some VHDA requirements not geared towards light/moderate rehabs Ran projections to evaluate project without LIHTC: Maxed out loan at HAP rents, reduced cash flow Reduced available funds for renovation and fees Reduced any potential for cash out at acquisition

DEVELOPER CONSIDERATIONS Seller Note Monetize AHC’s equity by adding LIHTC acq. basis Use to meet 50% test and save on construction-period interest – $$$ ERIK – Seller Note digression Allows AHC to partially self-finance the acquisition/rehab NOTE that since claiming acquisition credits, must be a market-rate loan: size to appraised value and terms per market Directs additional cash flow to AHC entity, not taxable LP Can be used to meet 50% test and save on construction-period interest – hundreds of thousands of dollars

Construction Loan (Tax-Exempt Bonds) NO INTEREST PAYMENTS HERE! TYPICAL STRUCTURE PROPOSED STRUCTURE Construction Loan (Tax-Exempt Bonds) “B bonds” for 50% test NO INTEREST PAYMENTS HERE! Permanent Loan (Taxable or Tax-Exempt) Permanent Loan (Tax Exempt) Seller Note (Taxable) Seller Note (Taxable) Tax-Exempt There are a number of jurisdictions that allow this tax-exempt seller note structure, but not all. Norfolk, Richmond, Arlington, Fairfax LIHTC Equity LIHTC Equity

Lessons learned Know your goals Think intentionally about rehab scope and relocation implications Work closely with your lender and stay flexible!

laura.manville@ahcinc.org | edmund.delany@capitalone.com Almost done! laura.manville@ahcinc.org | edmund.delany@capitalone.com