1. Preservation Opportunities for Affordable Housing and Year 15 Transactions
By Richard Froehlich, COO, Exec. VP and General Counsel

2. Continuing Challenges of Preservation Transactions
Scale of Projects
Operating expenses escalating faster than rents
The need for additional subsidies
Syndicators want to exit projects but the projects need additional assistance and management
Loss of Other Subsidies
Weakness in certain management
Market Strength and Expiring Affordability Requirements
Strong housing markets are convincing more developers to leave affordable housing programs

3. Reasons for Preservation
Major priority in furthering the Mayor’s plan for creating and preserving 200,000 units in NYC
More economical to preserve than to build new
Less vacant land available for new construction
New capital needed to modernize
Funding for system upgrades
Capital resources needed for modernization
Services needed for tenancy
Present choices for projects that need to be recapitalized after 15 or more years of operations either through capital infusions or through broader re-syndication program

4. Mitchell-Lama Overview
Mitchell-Lamas were developed in the 1960s and 1970s under Article 2 of the Private Housing Finance Law, enacted in the 1950s.
The program resulted in the construction of approximately 140,000 rental and cooperative units.
Of those units, over 62,000 were funded and supervised by the City.
Mitchell-Lama developments provide housing for families of low and moderate income. The law generally provides that household incomes cannot exceed 100% of Area Median Income (AMI) upon initial move-in (or 125% of AMI for families with 2 or more dependents). 4

5. Mitchell-Lama Overview
In order to encourage the development of Mitchell-Lama housing, the City and State provided mortgages at low interest rates and the City provided tax benefits in exchange for a requirement that owners:
remain in the program for at least 20 years
receive a limited return on their initial investments
be subject to HPD or DHCR supervision
HPD and DHCR are the respective supervisory agencies for Mitchell-Lama developments, depending on whether the City or State provided the initial mortgage. Each agency promulgated its own set of rules. 5

6. Mitchell-Lama Preservation Background:
HDC’s Mitchell-Lama Preservation Program was created in 2004 to effectuate a large scale and long-term preservation of critical affordable housing resources under Mayor Bloomberg’s 165,000 unit New Housing Marketplace plan
Aging housing stock in need of repairs and upgrades
Affordability of this vast housing stock
HDC created two programs: Repair Loan Program and Mortgage Restructuring Program 6

7. Mitchell-Lama Preservation Accomplishments:
Over $1.2 billion bonds issued
Over 40,000 Mitchell-Lama units preserved
A total of 55 developments, spread across all 5 boroughs
Monetized a portion of the debt associated with the City’s Mitchell-Lama portfolio
$81.4mm paid to the City since inception
Additional 5,000 units to be rehabilitated and refinanced by 2017 7

8. Preservation Programs
Mitchell-Lama Restructuring Program
HDC is offering owners the chance to:
Restructure the first and second mortgages held on the properties.
Refinance mortgages with a lower interest rate and extended term
40,000 apartments preserved
Stevenson Commons, 947-unit Bronx Mitchell-Lama.
Mitchell-Lama Repair Program
The HDC Repair Loan Program is an effort to preserve Mitchell-Lama housing by offering a loan to owners in order to make needed capital improvements.
Over 22,000 apartments repaired 8

9. Section 236 Decoupling
Many Mitchell Lamas have Section 236 Interest Reduction Contracts
Similar issues for rehabilitation aging systems
Decoupling permits continued IRP contract payments while also allowing tenants to receive enhanced vouchers to cover increased rent
Use of tax exempt bonds, tax credits, IRP payments and enhanced vouchers is a potent tool to revitalize this aging but important affordable resource
Developments underwritten to tax credit rents 9

10. Continuing Challenges of Preservation Transactions
Scale of Projects
Operating expenses escalating faster than rents
The need for additional subsidies
Loss of Other Subsidies, for example:
Rent Supplement Contracts
Interest Reduction Payments
Vouchers (future uncertainty)
Market Strength and Expiring Affordability Requirements
Strong housing markets are convincing more developers to leave affordable housing programs 10

11. Year 15 Preservation Program Background:
Since 2007, the Year 15 capital program repositioned and preserved the affordability of 140 projects totaling over 10,000 units.
Primary preservation strategies have included the leveraging the tools that the city often uses for financing new construction of affordable housing but with a particular focus on the needs of preservation
This is meant to be a simpler program with easier tools than what might be used in re-syndication

12. Year 15 Preservation Program Background:
The capital program relies on the following tools:
Residential tax exemptions
Mortgage extensions and workouts
Up to $15K per unit funding for capital work and project reserves
Restructuring rents
Management improvements or changes
Inclusionary bonus (select projects only)

13. Year 15 Preservation Program Challenges
Distressed portfolios
May include significant capital needs and deferred maintenance, operating deficits, interest arrears, municipal arrears, and inability to pay mortgage balloons and other project obligations when due
These developments need more assistance and a greater capital infusion of resources
May also require changes in ownership and property management
Enhanced value of affordable housing asset and repayment of underlying debt

14. Year 15 Preservation Program Challenges
The healthy portfolios have market opportunities
Exiting affordable housing programs might be appealing to developers with portfolios after the Tax Credit compliance period expires
The owners of these developments may want enhanced returns that can come from a re-syndication
The City can require continued affordability because it has large subordinate subsidy loans on much of the affordable housing developed or preserved under City programs in the last 20 years.

15. Utilizing Tax Exempt Bonds 4 Percent Credits (as of right)
Per the HDC Preservation Terms Sheet, a deal must have:
A minimum of 50 units, and
Incur rehabilitation costs no less than the greater of: (i) $6,000/unit, or (ii) 20% of eligible basis (tax credit rules – Section 42(e)(3)).
The general tax exempt bond rules apply of 20% of units to be rented to families at or below 50% of AMI or 25% (in NYC) at or below 60% AMI
Requires an allocation of private activity volume cap covering 50% or more of the aggregate basis of each building

16. Utilizing Tax Exempt Bonds 4 Percent Credits (as of right)
For a Year 15 re-syndication with tax exempt bonds to be feasible, two issues relating to the existing City debt must be addressed:
Extending and subordinating existing City debt to run concurrent with new financing term and LIHTC affordability restriction period.
Existing City mortgages may be extended to run concurrent with the term of new debt, to the extent that the City has the loan authority to do so.
Where the City does not have the authority to extend the existing debt, HDC may purchase the debt to restate and extend term so that maturity dates are coterminous.

17. Utilizing Tax Exempt Bonds 4 Percent Credits (as of right)
Ensuring tax exempt bonds fund more than 50% of the total development cost at construction.
HDC may issue bonds to pay down subordinate debt and fund construction, so that the project meets the 50% test. In some cases, HDC may then reissue the subordinate debt to pay down bonds to supportable level and to count the debt as acquisition in basis.
But there are challenges to this to ensure that there is no over-issuance of bonds pursuant to tax exempt bond rules.

18. Recycled Bonds as Preservation Tool: Tivoli Towers
Tivoli Towers is a 320 unit rental tower in the Crown Heights section of Brooklyn.
Originally built in 1975; Tivoli has a Section 236 contract.
Decoupling the contract led to rents (with most tenants getting enhanced vouchers) that are higher than would be normally eligible for tax exempt bonds.
Underwriting to the decoupled rents allowed for more bond proceeds than would have happened in a tax credit deal.
Significant rehab funds provided under recycled loan.
Tivoli Towers
Recycled Bonds: $37.2 Million
Funds for Rehab: $16 Million
Restructured 2nd Loan: $6 Million

19. Challenges of restructuring existing debt on Year 15 projects
Projects have more debt than can be effectively paid off or serviced under proposed structures.
HDC can restructure debt and it can be extended without any forgiveness or potential phantom gains.
Need to treat restructured debt in basis.
The City needs to be willing to extend loans and understand that such extension reduces the value of such debt in any loan securitization.
The restructured debt may now become current paying or even amortizing depending on the financial structures of the resyndication.

20. Utilizing Tax Exempt Bonds 4 Percent Credits (as of right)
Underwriting Assumptions
Cash flow assumptions:
DCR of 1.15% on all financing or greater
Minimum reserve requirements:
Operating Reserves:
6 Months of Maintenance and Operating Expenses
6 Months of Debt Service
Replacement Reserves: $500 per unit

21. Benefits of Year 15 Preservation and Re-Syndication Transactions
Long term affordability with federal compliance monitoring during initial affordability period.
Preserve affordable housing resource under responsible ownership and management.
More flexible funding sources for capital and non-capital needs including maintenance work and project reserves
Enhance affordable housing resource and value of asset, including debt.
Requires little new City subsidies other than extension of prior debt and tax abatements

22. Challenges Facing HDC/Market
Finance Concerns and Capital Markets
High prices are making transactions harder
Access to volume cap is a serious constraint to future issuance
The market for tax credit syndication is very strong but we remain wary after the challenges of
Financial constraints limits the availability of subsidy funds
Mitigate constraints on HDC subsidy by maximizing and optimizing all other available Federal, State and City subsidy sources
Real Estate Market Concerns
Strong demand for Affordable Housing
Monitor Portfolio for signs of weakness and intervene quickly
Potential to reclaim previously subsidized developments for affordable housing in response to exploding over-leveraged transactions