mi underwriting workshop - fhlbi

MI Underwriting Workshop

COMMUNITY INVESTMENT

• Wendy Carty-Saxon, Avalon Housing, Inc.• Sonali Allen, Mercantile Bank of Michigan• Julius Edwards, Michigan Economic Development

Corporation• Mike Recker, Federal Home Loan Bank of Indianapolis

September 16, 2020FHLBI Underwriting Affordable Housing Workshop

Overview▪ Background on Avalon

▪ Development Identification

▪ Identifying Target Population

▪ Development and Operating proforma

▪ Working with Member Banks

▪ Overlapping Funding Source Considerations

“Avalon’s mission is

to build healthy, safe and inclusive supportive housing communities as a long-term solution to homelessness.

Avalon background▪ Started in 1992

▪ Built and developed properties in Ann Arbor and Chelsea – 294 units,

26 properties

▪ Partner with private landlords throughout Washtenaw

▪ Public housing partnership in Ann Arbor

▪ Serve 800 people, including 200 children

▪ 9 LIHTCs

▪ 26 FHLBI AHPs

Our Properties

Site Selection and Design

Accessibility, Visitability, No-Step Entries

Green Features

Making the Numbers Work▪ Who are we planning to house?

▪ What can they afford?

▪ What is considered an affordable rent

▪ How much money do we need to

make this happen?

Affordable Rent: The BIG Challenge

Income Household Size

Area Median Income %

Affordable Rent

Wash County Fair Market Rent

SSI $9,396/year

1 13% $235 $900 (efficiency)

$9.65/hour Min. Wage ($20,072/yr)

1 28% $502 $921(1 bedroom)

$15/hour ($31,200/yr)

2 38% $780 $1124 (2 bedroom)

$40,600/yr ($19.52/hr)

2 50% $1015 $1124(2 bedroom)

$60,900/yr ($29.28/hr)

4 60% $1522 $1445 (3 bedroom)

100% of Area Median Income in Washtenaw County in 2020 is $71,100 for a 1-person household and $101,500 for a 4-person household.Affordable Rent is defined as 30% of household income.

Strategies for Affordability

• Low or no debt service payments

• Capital Subsidies/Equity

• Local PILOT

• Project-Based Vouchers

Real Estate Proformas

Development

▪ What will it cost to build or rehab the property?

▪ What are our sources of funding?

Operating▪ What will it cost to manage and maintain the property for the next

15+ years?

▪ What is our income?

Development UsesHilltop View 815/821 Gott

▪ Acquisition $187,500 $500,000

▪ Construction/Rehab $6.6 million $278,000

▪ Developer Fee $593,000 $105,000

▪ Soft Costs (loan fees, $1.05 million $94,100

interest, legal, arch, envir

title, eng, reserves)

Typical Funding Sources▪ MSHDA Low Income Housing Tax Credits

▪ Washtenaw Urban County HOME/CDBG

▪ Federal Home Loan Bank AHP

▪ Other State/Local Sources

▪ Permanent Loan with debt service

▪ Construction Loan

▪ Project-based vouchers

▪ Predevelopment Loan

▪ Services funding

Hilltop View Apartments 24 units; $8.5 Million Total Development Costs

▪ $7,507,280 Tax Credit Equity (National Equity Fund-Syndicator)

▪ $400,000 FHLBI AHP

▪ $290,000 Washtenaw County HOME

▪ $ 50,000 Sponsor Loan

▪ $ 20,100 GP Capital

815/821 Gott

6 units; $977,120 Total Development Costs

▪ $368,720 FHLBI AHP

▪ $375,000 Washtenaw County HOME

▪ $ 50,000 Ann Arbor Affordable Housing Fund

Operating Proforma

Income

▪ Rents (tenant paid and subsidy)

▪ Misc (Laundry)

Expenses

▪ Mgt salaries

▪ Mnt salaries

▪ Supplies

▪ Contractual work

▪ Insurance/legal/audits/taxes/PILOT

▪ Replacement reserve

Link between Development and Operating

▪ Debt Service/Loan Amount

▪ Operating Costs/Operating Reserve

▪ Impact of Rents/Number and Size of Units

Benefit from Avalon as property manager

Working with Member Banks▪ Early Outreach

▪ Familiarity with AHP

▪ Capacity

▪ Community Involvement

▪ Commitment to the Housing

▪ Communication

▪ Perm/Construction/Equity

▪ Increase business relationships

Considerations with overlapping sources▪ Consistency among applications

▪ AMI commitments

▪ Tenancy Commitments

▪ Who can pay for what

▪ Underwriting

Developer Fee Max

Architectural Fees

Maximum per unit costs

Operating Costs per unit

Challenges with overlapping sources▪ Liens

▪ Permanent loan considerations if there are LIHTC

Non-recourse15+ year termRate fixed at construction loan closing

▪ Timing of pay-out

▪ Relationship of Lenders/Syndicators

▪ Flexibility

Success! And on-going operations . . . .

▪ 15 years of reporting

▪ On-going tracking of income and tenancy commitments

Questions???

Thank you!Wendy Carty-Saxon, Director of Real Estate Development

[email protected]

FHLBI Underwriting Affordable Housing

Sonali AllenCompliance & Community Development

Community is at our core

• Based in Grand Rapids, we operate 40 banking offices in Michigan.

• Community Reinvestment Act assessment area consists of 21 counties.

• Four consecutive “Outstanding CRA Ratings”• Over 30,000 employee volunteer hours.• Employees volunteer on over 349 Boards &

Committees.• 391 financial education classes taught impacting

almost 7800 individuals and families.• Active participant in FHLBI programs.

NIP• Started in 2009• Total: 213 Households Impacted• Total: $1,753,712 in grants• 2020: 21 Grants for $148,925• 5 Partners

HOP• Started in 2010• Total: 64 Households Impacted• Total: $485,500• 2020: 3 Grants for $22,000• Highest: 2019, 15 Grants

DRP

AMP

Homeownership Programs

Affordable Housing Program Grants

▪ Applications: 16▪ 11 Funded ▪ $5,112,000▪ 468 Affordable

Units

▪ Types▪ Shelter▪ Senior Citizen▪ Special Needs▪ Homeownership

Member

Getting Started

• Understand the Benefits and the Risks

• Communicate Benefits and Risks to Management

• Determine your capacity• Determine the kinds of projects you

want to be involved with.• Understand your role as the

Member• Determine what area of the Bank

will be responsible for handling grants.

• Document your process and procedures

Finding Projects/Partners

• Current nonprofit customers• FHLBI Events• Commercial loan relationships• FHLBI Member Lists• Grant Writers• Referrals from grant recipients

Benefits of AHP

• Community impact• Builds goodwill• Builds relationships• Facilitates development of

affordable housing units• Banking relationships• CRA Credit

• Community development loan

• CRA service credit for hours spent administering AHP grants.

Sponsor

• Communicate early with Member• Provide the Member with an overview of the project

• Location• Type of project• # of Units• Population served• Funding sources• Previous affordable housing development experience• Key partners• Banking relationship• Donation request

• Writing and Submitting the Grant• Sponsor does the heavy lifting• Read the implementation plan• Attend all trainings• Member is the primary point of contact with FHLBI• Keep Member updated on the progress of the pre-application and the final

application• Review pre-application and final application with member• Ask the member how much time they need to review the applications

• Disbursements & Monitoring• Responsible for all disbursement and providing documentation to member.• Complete all monitoring on a timely basis.• Update Member of any changes to primary contact

Underwriting and Monitoring an AHP

Underwriting

• Relationship with Sponsor• Banking Relationship

• Sponsor’s Primary Bank• Construction, bridge or permanent financing for

the project.• Underwrite for ability to repay the AHP• If there is no loan relationship we will still require 3

years of financial statements to underwrite the AHP

Monitoring• Monitored through the construction loan process

and construction draws• Site visits prior to disbursement of funds• Site visits during semi-annual reporting• Ongoing visits/communication at least on an annual

basis.

SEPTEMBER 16, 2020

COMMUNITY DEVELOPMENT INCENTIVE PROGRAMS

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PRESENTER BIO

JULIUS L. EDWARDSSenior Commercial Real Estate Investment ManagerMichigan Economic Development Corporation (MEDC)

Julius has over 20 years of experience in commercial lending working in various capacities, spending the last 8 years underwriting and structuring incentives for the MEDC’s Michigan Community Revitalization Program. He has experience in LIHTC (7+ years with MSHDA), NMTC, HTC, and HUD lending products.

FUNDING PRIORITIES

• Local and Regional Impact

• Creation of Place

• Economically and Financially Viable

PROPERTY ELIGIBILITY

• Functionally Obsoleteo Unable to perform the function it was originally intended(Michigan Advanced Assessing Officer

or Michigan Master Assessing Officer declaration required)

• Historico Historic building or structure located designated by the national register of historic places, the

state register of historic sites, or a contributing building in designated historic district.

• Blightedo Attractive nuisance to children, utilities permanently disconnected, fire hazard, subsurface debriso Tax reverted o Designated by local governmento Under the control of a Land Bank

PROPERTY ELIGIBILITY CONT’D

• Facilityo Property where a hazardous substance in excess of concentrations that satisfy the cleanup

criteria for residential use. Phase I and Phase II Baseline Environmental Assessment necessary.

• Food Initiative or “Other” o Property that will be used primarily as a retail supermarket, grocery store, produce market, or

delicatessen that is located in the downtown or a development area (as defined the CIA – PA 57 of 2018)

o Sets aside a minimum of 5% of annual allocation for grocery storeso NOT eligible if located within 1 mile of an existing retail supermarket, grocery store, or produce

market as determined by the board

LOCAL AND REGIONAL IMPACT

• Priority project with community financial support;

• Project supports local master plan and economic development strategy;

• Significant taxable value increase.

Funding Priorities

CREATION OF PLACE

• Mixed-income, mixed use, and multi-story developments;

• Revitalization of a historic structures;

• Low-impact and sustainable development approaches;

• Significant brownfield conditions;

• Significant square footage being revitalized and activated. Funding Priorities

ECONOMICALLY AND FINANCIALLY FEASIBLE

• Financially feasible project after gap financing;

• All other potential funding resources have been maximized;

• Reasonable costs;

• Significant financial contribution by developer/owner (10–20 percent);

• High ratio of private dollars to public dollars (state and federal funding).

Funding Priorities

MICHIGAN COMMUNITY REVITALIZATION PROGRAM

(MCRP)

• Replacement for the State Historic and Brownfield Credit Programs

• Annual appropriation from Legislature

• Competitive and Need-Based Gap Financing

• Grants, Direct Loans, Loan Participation, Equity Investments

• Grants up to $1.5M per statute (limited to $750k per policy). $10M into any single project.

MCRP

EVALUATION CRITERIA

• Importance of the project to the community & community financial support

• Financial need • Economically viable (but for…)• Will be a catalyst for additional development• Other Community Development Priorities

▫ Downtown & Traditional Commercial District Tool

▫ Mixed-use & mixed-income▫ Rehabilitation or infill▫ Historic preservation▫ Green buildings and Green site practices

MCRP

FINANCIAL EVALUATION CRITERIA

MCRP

• Debt Coverage Ratio (DCR) typically greater than or equal to 1.2:1• Owner equity minimum of 10% (net of dev. Fee)• Developer fees typically not to exceed 4% of total development cost• Developer return generally limited to 12%• MCRP investment generally will not exceed 30 years• Maximum incentive is typically limited at 25% of eligible investment for

historic resources and 20% otherwise

ELIGIBLE INVESTMENT

• Hard Costso Demolition, lead & asbestos abatemento New constructiono Building rehabilitationo Site improvementso Machinery and equipment

• Soft Costso Architectural feeso Engineering feeso Survey & environmental fees

MCRP

GRANTS

• Legislation allows grants up to $1.5 million, however, MCRP policy generally limits grants up to $750,000

• Funding typically disbursed following construction completion and issuance of a “Certificate of Occupancy”

MCRP

LOANS

Direct Loans Loan Participations• Greater than $750,000• Money loaned directly to the

project• Funding typically disbursed

following construction completion and issuance of a “Certificate of Occupancy”

• Greater than $750,000• Participate with a federally

insured lending institution• Funding available at or around

closing

MCRP

OTHER ECONOMIC ASSISTANCE

Equity Investments

• Greater than $1,000,000

• Funding available at or around closing

• Preferred return between 3-5%

MCRP

COMPATIBILITY

MCRP can be used in conjunction with other Community Development Incentives and federal programs such as:

• Brownfield Act 381 Tax Increment Financing (TIF)

• Brownfield Michigan Business Tax (MBT) Credits

• Community Development Block Grant (CDBG)

• Historic Tax Credits• New Market Tax Credits• Low Income Housing Tax Credits• HOME• HUD Loans and Guarantee Programs

STATE PROGRAMS FEDERAL PROGRAMS

MCRP

COMMUNITY DEVELOPMENT BLOCK GRANTS (CDBG)

• Funding Sourceo US Department of Housing and Urban Development (HUD) allocates

CDBG funding to the State, through the Michigan Strategic Fund. o CDBG allocation for State program averages $30M

• Eligible Communitieso Small cities, townships, and villages of less than 50,000 in population,

and non-urban counties generally are eligible to apply for grants under the Michigan CDBG Program (Non-Entitlement Communities)

• Eligible Projectso Must meet a National Objectiveo Must have an Eligible Activity

• Funds used for Community and Business Development projects

NATIONAL OBJECTIVES

• Benefit Persons of Low to Moderate Income (LMI) o Job creation/retention – 51% of jobs will be held by LMI individualso Area benefit – 51% of population are considered LMI individualso Housing – 51% of units occupied by LMI individuals

• Prevention or Elimination of Slum or Blight – Must Designated by the Communityo Spoto Area wideo Historic preservation

• Urgent – Pose an Immediate Risk to Public Health

CDBG

EVALUATION CRITERIA

• Economic Impact

• Financial Viability of the Project

• Local Participation

• Located in a Traditional Downtown or Commercial Core

CDBG

BUILDING REHABILITATION

• Minimum Award $50,000

• Maximum Award $2,000,000

• 50% Match Requirement

• Open Application

CDBG

JOB CREATION/RETENTION


• Maximum Award $35,000/Job

• Wages must be Greater Than or Equal to 75% of County Average

• Creation of a Minimum of 10 Permanent Jobs


CDBG

FAÇADE IMPROVEMENTS


• Maximum Award $750,000

• 25% Match Requirement for each Property

• Leverage Greatest Amount of Private Financing


CDBG

CONTACT INFORMATION

• MCRPJulius [email protected]

• CDBGGreg [email protected]

Please Visit For More Information: MiPlace.orgCDBG

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Underwriting Affordable Housing

Mike Recker, AHP Portfolio Manager

S e p t e m b e r , 2 0 2 0

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N E E D F O R S U B S I D Y

The project’s estimated sources of funds shall equal its estimated uses of funds, as reflected in the project’s development budget. The difference between the projects’ sources of funds and uses of funds is the project’s need for AHP subsidy, which is the maximum amount of AHP subsidy the project may receive. §1291.5(c)(2)(i)


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N E E D F O R S U B S I D Y

Timing of evaluation▪ Application review▪ Disbursement request▪ Completion of projectAnalysis items▪ AHP financial workbook▪ Funding source documentation▪ Cost documentation▪ Operational income/expenses▪ Use of AHP


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F I N A N C I A L F E A S I B I L I T Y

Feasibility Analysis▪ Total development cost

▪ Per unit development cost– Requires 3rd party

documentation if it exceeds $250,000

▪ Hard costs vs. soft costs– Hard cost should be at least 70% of TDC

▪ Contingencies– NC – Not to exceed 10% of hard costs– Rehab – Not to exceed 20% of hard costs


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▪ Fees– Developer/Consultant

▫ Not to exceed 15% of TDC less DF, consultant fee, land acquisition, operating/supportive service reserves

▫ Total fees can’t exceed $1,380,000 or max established by State HFA– Deferred Developer Fee

▫ AHP may be applied toward the reduction of deferred developer fee in an amount not to exceed 50%.

– Construction Management/Contractor Fees (GR, P, & O)▫ Not to exceed 14% of hard costs


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▪ Reserves– Operating

▫ Up to 12 months operating expense plus 12 months of debt service or $1,500/unit, whichever is greater

– Replacement▫ Up to $350/unit for rehab or new construction▫ Up to $420/unit for historic preservation or single family units

– Rent-up– Supportive service

▪ Rental income– Tenant paid rents

▫ Cannot exceed 30% of targeted income level including tenant paid utilities– Rent subsidies


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▪ Per unit operating cost– At least $3,500 per unit/year– Yrs 1 – 5 - $4,550 per unit/year– Yrs 6 – 10 - $5,250 per unit/year– Yrs 11 – 15 - $5,700 per unit/year

▪ Effective Gross Income to Total Annual Expenses Ratio▪ Debt Coverage Ratio

– 1.15 minimum – 1.40 maximum▪ Debt service▪ Cash flow


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Other considerations▪ Mixed use developments

– Requires separate commercial sources/uses and proforma

▪ Supportive housing projects– Requires separate supportive services sources/uses and

proforma– Banked funds for fundraising and equity activities

▪ Market need– Should demonstrate sufficient demand in market– Should support income and rent levels identified– Should be relevant to the housing population served


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M E M B E R C O N S I D E R A T I O N S

Understanding the AHP requirements/expectationsCommunity needsMember goalsPartnering with sponsorsLevel of financing to the projectProject oversight during construction and throughout the retention period


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R E T E N T I O N R E Q U I R E M E N T S

AHP Retention Agreement▪ Legal mechanism recorded to ensure property is used for affordable housing during retention

period– 15 years for rental, 5 years for homeownership– Deed restriction– Specific language required by regulation

Sponsor Loan to Project (LIHTC only)▪ May not exceed applicable AFR (generally not to exceed 3%) at the time the note is executed▪ Interest payments deferred until fulfillment of 15-year retention period


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W H E N T O A P P L Y

When to apply

▪ Site control/zoning

▪ Funding commitments

▪ Costs

▪ Open awards

▪ Project currently under construction


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AFFORDABLE HOUSING PROGRAM STAFF

AHP Portfolio Manager

Mike Recker –[email protected]

Senior Compliance Analysts

Devin Day – [email protected]

Erica Petty-Saunders – [email protected]

Ashlen Sharpe –[email protected]

Federal Home Loan Bank of Indianapolis

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(800) 442-2568 (toll free) www.fhlbi.com

mi underwriting workshop - fhlbi

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