September 2016 | Volume XXVIII No. 9

P U B L I S H E D I N A S S O C I AT I O N W I T H T H E N AT I O N A L H O U S I N G & R E H A B I L I TAT I O N A S S O C I AT I O N

Disparate Impact One Year Later CRA Results Twinning Tax Credits www.housingonline.com

Tax Credit Advisor | September 2016

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Courtesy of WaterFire Providence / Photo by John Nickerson

Burning Issues

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TABLE OF CONTENTS SEPTEMBER 2016 A L

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Low-Income Housing Tax Credit C=0, M=35, Y=85, K=0

14 Wrestling with Disparate Impact

Fair housing developments a year after Supreme Court’s decision



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Blueprint for September Feel the Burn



by Marty Bell

by Harry J. Kelly

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The Efficacy of CRA A survey of industry responses

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Font Family: Cambria — Regular, Bold, Bold Italic

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Columns

by Mark Olshaker

Thom Amdur: New Developments Bonding

David A. Smith: The Guru Is In Turning refugees into Americans

27 CohnReznick Housing Tax Credit Monitor A

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Asset Management Raising Rent Via Amenities Adding value between recapitalizations by Christian Robin

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Asset Management

New Markets and Historic Tax Credits C=0, M=35, Y=85, K=0

28 “Twinning” Tax Credits

WaterFire utilizes New Markets and Historic Tax Credits by Joel L. Swerdlow

30 The Uniqueness of Blue Butterfly

A sanctuary for homeless vets and abuse survivors by Bendix Anderson

34 Providence in Providence

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Story Architects Meet this month’s contributors



Talking Heads Jeff Whiting, CREA LLC: Listening to clients



by Darryl Hicks

37 NH&RA News 38 Member News 40 State Roundup 42 Bulletins

Breaking news from Washington and elsewhere

44 Numbers

At Risk LIHTC Properties by State

Amos House provides food, shelter and jobs by Bendix Anderson

Cover photo: Providence, RI annual spectacular WaterFire celebration.

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Tax Credit Advisor | September 2016

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Tax Credit Advisor

WE SAW AN OPPORTUNITY TO PROVIDE MORE OPPORTUNITIES

Story Architects Thom Amdur (New Developments, p. 4) is the Executive Vice President and Executive Director of the National Housing & Rehabilitation Association, Associate Publisher of TCA and has been the leader in the creation and presentation of the Preservation Through Energy Efficiency program. Bendix Anderson’s (The Uniqueness of Blue Butterfly, p. 30 and Providence in Providence, p. 34) work has appeared in Urban Land Magazine, Affordable Housing Finance Magazine, National Real Estate Investor and many others. He likes to imagine how abandoned, old houses and crumbling landmarks might turn into something beautiful. Darryl Hicks (Talking Heads, p. 8) is the Vice President, Communications for the National Reverse Mortgage Lenders Association and a 17-year veteran of associations managed by Dworbell, Inc, the management company of NH&RA. Harry J. Kelly (Wrestling with Disparate Impact, p. 14), Partner, Affordable Housing Practice Group, Nixon Peabody LLP focuses on transactional and litigation aspects of housing, fair housing, reasonable accommodations, and accessible design, government contracts, financial institutions, and bankruptcy law. Kelly writes and lectures widely on matters such as fair housing and antidiscrimination laws, accessibility, management, occupancy, operational issues, and administrative enforcement matters. Mark Olshaker (The Efficacy of CRA, p. 18) is a best-selling author of fiction and non-fiction and an accomplished researcher in the areas of crime and medicine. Olshaker has written 14 books, most recently Law & Disorder with former FBI Agent John Douglas.

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Christian Robin (Raising Rent Via Amenities, p. 25) joined NH&RA as Policy Manager in May of 2016. He formerly worked in a policy role at NeighborWorks America and is a graduate of Elon University School of Law. He lives in Washington, DC and enjoys hiking and playing lacrosse. David A. Smith (The Guru Is In, p. 6) is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free electronic periodical, “State of the Market,” available by emailing [email protected]. Joel L. Swerdlow (“Twinning” Tax Credits, p. 28) is an author, researcher, professor and journalist whose work has appeared in Harpers, Atlantic, Rolling Stone, Harvard Business Review, Washington Post, and most major American newspapers, as well as academic and scientific journals. He covered the White House for NPR and was Associate Editor and Senior Writer for National Geographic Magazine.

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Tax Credit Advisor September 2016 Vol. XXVIII No. 9 ISSN 2324-6111

BLUEPRINT FOR SEPTEMBER By Marty Bell

Publisher: Peter Bell Associate Publisher: Thom Amdur Editor: Marty Bell 202-939-1745 • [email protected] Communications Coordinator: Jessica Hoefer Staff Writers: Bendix Anderson Mark Olshaker Joel Swerdlow Advertising: Scott Oser 301-279-0468 • [email protected] Copyright 2016 by Dworbell, Inc. Photocopying or other reproduction of any part of this publication without the permission of the publisher is prohibited. Subscriptions are $329 per year. Special rates are available for community-based nonprofit groups; call 202-939-1790. Address correspondence to: Circulation 1400 16th Street, NW, Suite 420 Washington, DC 20036 Tel 202-939-1790, Fax 202-265-4435 www.housingonline.com Editorial office at same address as above.

Editorial Advisory Board Jerome Breed Bryan Cave LLP Will Cooper Jr. WNC & Associates, Inc. Anthony Freedman Holland & Knight LLP Cash Gill Gill Group, Inc. Richard Goldstein Nixon Peabody LLP Scott Hoekman Enterprise Community Investment, Inc. Debra Koehler Sage Partners, LLC Bob Lefenfeld Real Property Research Group, Inc. John Leith-Tetrault National Trust Community Investment Corporation Kenneth Lore Katten Muchin Rosenman LLP Ginger McGuire Austin Stone LLC Lee Peterson CohnReznick, LLP Nancy Rase Homes for America, Inc. Mark Shelburne Novogradac & Co. LLP Timothy Sherry SVA Ronne Thielen R4 Capital Inc. Barbara Thompson National Council of State Housing Agencies Armand Tiberio CBRE Affordable Housing Marianne Votta Bank of America Merrill Lynch

Advertise Your Business! Tax Credit Advisor accepts advertising. For information or to place an order, contact Scott Oser, Director of Advertising Sales, 301-279-0468, [email protected]

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Feel the Burn

T

he flames glowing along the Providence River you see on this month’s cover are part of an event called WaterFire, that began as an artistic installation and has grown into an annual Rhode Island arts festival and celebration. When the photos of this event were presented at the NH&RA Summer Institute, I immediately decided this would be our next cover, for two reasons: (1) the new headquarters for WaterFire are being financed by “twinning” of New Markets and Historic Tax Credits, a unique process you can read about in Joel L. Swerdlow’s story, “Twinning” Tax Credits on page 28; and (2) flames on water struck me as an apt metaphor for topics our writers were going to tackle in these pages, burning issues, urgent ideas, that concern us and defy being doused. At the top of the list – and our lead piece – is the impact of the Supreme Court’s disparate impact decision, for which we now have a year of history and a small number of court decisions. We asked attorney Harry Kelly of Nixon Peabody to review the decisions made in response to the ruling and explain what they mean going forward. (Wrestling with Disparate Impact, p. 14) The Community Reinvestment Act is in its 40th year of implementation and has both encouraged funding for affordable housing and influenced where projects are located. It would seem that the Affirmatively Furthering Fair Housing (AFFH) rule that came from HUD following the Court’s disparate impact decision can be in conflict with the CRA requirements. And so we asked staff writer Mark Olshaker to survey a variety of industry participants – developers, investors, community officials, regulators – about the results of CRA and how they might be influenced by AFFH. (The Efficacy of CRA, p. 18) Methods of funding development and preservation, as well as management of assets are always hot topics. In his New Developments column this month (p. 5), NH&RA Executive Director Thom Amdur looks at the drift towards the usage of tax exempt bonds and the need to prevent that finance mechanism from being limited by volume caps. And NH&RA’s latest staff addition, Policy Manager Christian Robin, makes his debut in TCA by exploring amenities that can be utilized to raise rents in Section 8 projects in between capitalizations. (Raising Rent Via Amenities, p. 25) In addition to the WaterFire project, this month we present two other case studies, both by staff writer Bendix Anderson, that utilized New Markets and/or Historic Tax Credits and had important social impacts in their communites: The Uniqueness of Blue Butterly (p. 30) looks at the development of housing for homeless vets and women who experienced sexual abuse and Providence in Providence visits Amos House, as it expands into the largest soup kitchen in Rhode Island. And please do not overlook this month’s provocative The Guru Is In column (p. 6) in which David A. Smith proposes innovations to create appropriate housing for refugees. Do you feel the burn yet? Just turn this page and I know you will. Marty Bell, Editor Tax Credit Advisor | September 2016

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THOM AMDUR:



New Developments

Bonding

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n our June 2016 issue, we dedicated our cover story to the resurgence of tax exempt bonds. In that issue, Bond Attorney and NH&RA Director Wade Norris asked our readers, “Are we on the verge of a volume shortage?” And the answer in an increasing number of states is yes. This has caught many in our industry by surprise; after all, since the financial crisis, the volume cap across the country has been abundant. But if the current trend continues, the non-competitive credit might soon become competitive in a diverse mix of states including California, Connecticut, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Tennessee, Utah, and perhaps others. The steady increase in tax credit equity pricing (driven by CRA investors and the overall attractiveness of our sector as an investment) and historically low interest rates Thom Amdur have driven the drift towards bond deals. Innovative policies, including the elimination of artificially low developer fee caps and targeted new gap financing sources, have had a tremendous impact in some jurisdictions as well. Should Senators Cantwell’s and Hatch’s recently introduced legislation – that would, among other things, fix the rate of as-of-right credits associated with tax exempt bonds at 4% – pass, we should expect even greater demand. Because of the as-of-right credits that come with multifamily bonds, agencies certainly get more bang for their buck than from other private activity bonds (e.g. industrial development bonds, student loan bonds, singlefamily mortgage revenue bonds, etc…). But we should not assume that a state agency will automatically increase the amount of volume cap for multifamily bonds just because there is demand. The fact of the matter is many HFAs keep the proverbial lights on with their single-family programs and cannot afford to dedicate cap to multifamily if it means curbing back their single-family. While there seem to be fewer industrial projects financed by tax exempt bonds in recent years, I think a Governor would be hard pressed to not dedicate volume cap to a major new facility promising substantial construction and jobs. And in the current political environment where student debt has become a major political talking point it is even conceivable that student loan bonds could make a comeback in the next administration. In the short-term, developers (particularly in the preservation space), advocates and practitioners need to watch this trend carefully and be ready to lobby their HFAs, State Treasurer’s offices, Governors, and Legislatures to preserve and expand multifamily volume cap. Even if the LIHTC is expanded and improved as proposed in the Cantwell-Hatch legislation, the 9% LIHTC alone is insufficient to meet our nation’s growing affordable housing needs. In just the “at risk” states I cite above, there are thousands of properties and in excess of 130,000 units of LIHTC properties with subsidies expiring in the next three years. (See chart on p. 44, Numbers.) If these projects are to be preserved and new units developed, we need every tool currently in our tool box, as well as some new, innovative tools. For example, should there be a national pool for unused volume cap? And, in an aggressive tax reform scenario, we may need to defend private activity bonds, which are not loved in all quarters. We also need to come up with creative state and local solutions to demonstrate that the resource is not just viable in urban centers with high market rents. HFAs can follow the leads of California, Ohio, and Tennessee and eliminate some restrictions or expand developer fee policies to increase tax credit basis and help fill gaps. Existing housing trust funds and state credits can be expanded and targeted to support bond deals in harder to reach markets. HUD, USDA Rural Development, and individual HFAs can take more aggressive steps to coordinate and encourage portfolio recapitalizations that create transactional efficiencies. The solutions are out there. As an industry, we just need to reach for them, advocate for them, make them policy.

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DAVID A. SMITH:

The Guru is In

Turning refugees into Americans

I

f the world’s 60 million refugees1 were a nation, they would be the world’s 23rd largest2, with more people than South Africa or Italy. All of them have lost their homes, and all of them desperately want a home – in fact, not just a home, but a secure and stable place from which they can build new lives. While many may feel emotionally that ‘home’ is where they came from, most know that to build a new life they must migrate somewhere – within their country or to a new country. Those who move migrate from failed or failing places to more successful ones3, and among the people I’ve encountered in emerging nations worldwide, via my work at the Affordable Housing Institute4, the gold standard is America. Aside from the migrants’ desires, as I’ve written elsewhere no nation on earth is more ready to let immigrants become citizens than the US, it is embedded into our cultural DNA that we want to enable worthy5 immigrants to come, if in coming they will become Americans. But what makes an immigrant ‘become American,’ how does the way we as Americans respond to the newcomers influence whether they rise or fall, and where does this intersect with affordable housing? Ever since the Irish potato famine a century and a half ago, waves of immigrants displaced by some disaster at home have streamed into the United States. In the main, each wave brought people who were asset-poor, culturally unfamiliar with America, often challenged by language or other barriers, and in desperate need of orientation and embrace. The result, was in most cases, the emergence of ethnic neighborhoods within the larger landing cities (Boston, New York, San Francisco) and industrial jobhttp://www.cnn.com/2016/06/20/world/unhcr-displaced-peoplesreport/ 2 https://en.wikipedia.org/wiki/List_of_countries_and_dependencies_ by_population 3 To do this, the ambitious and desperate will transit emerging countries. The children along the southern US border mostly came from the three failing states of Central America (Guatemala, Honduras, and El Salvador), with Mexico simply a country they had to cross. Many of those now encamped around Calais originated in Syria and have crossed Turkey and the Balkans. 4 http://affordablehousinginstitute.org/what-we-do/our-approach/ research-and-innovation/instant-cities 5 For purposes of this article, I refuse to be drawn into a political debate about who is worthy. 6 I am using ‘refugee’ in its commonly understood sense, though under US law, ‘refugee status’ is a specific legal concept that triggers a cascade of rights, obligations, and agencies. 1

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creating interior ones (Pittsburgh, Detroit, Chicago, St. Louis), and today those same cities proudly celebrate their Chinatowns and Little Italy’s. Refugee6 immigrants gravitate to David A. Smith the cities for four things: income, housing, schooling, and exposure to American language and culture. For many of them, income comes from entrepreneurship – the same ambition and self-motivation that brought them here drives them to find work that pays, and for many that means entrepreneurship. These may be service-based, such as hotel maids or taxi/Uber drivers, or small-asset businesses, such as food trucks or plumbing/masonry contractors, or larger enterprises, like grocery stores or nail/hair salons. Usually they employ the whole family, which lives nearby or, in an ideal case, upstairs. And out of any of these professions comes a further by-product – facility in English, which often flows upward from the children to their parents, because children can consume a new language like ice cream. Affordable urban housing should be the cornerstone of this resettlement strategy; without housing there can be no family stability, no chance for children’s education, no security to create recurring income. Without good housing, instead of becoming Americans, refugees can take another path, one into idleness, isolation, and bitterness. Put them in a holding pen – whether it is a ‘camp’ or a trailer or a decrepit concrete high-rise – that is spatially and spiritually isolated from the rest of the city and they fall into themselves, becoming effectively stateless. The Brussels bombers came from Molenbeek, an enclave two decades in the making; the 2005 Paris rioters from Clichy-sous-Bois, a location not served by any highway, major road, or rail/Metro lines, and thus the city’s most isolated, crime-ridden, and depressing ‘suburb’ (banlieue). If affordable housing has a major influence on whether immigrants become Americans or stateless interlopers, the housing they need usually isn’t the typologies we have

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designed for US citizens. Few immigrant families could run our eligibility and application gauntlet for LIHTC, public housing, or elderly housing, and even if they were somehow eligible, it is not as though we have such apartments begging for lack of American demand. The people we want to become Americans want to be economically productive, they want to become homeowners if they can and if not for their children to become homeowners, and we want them to be so motivated. That means we need to develop, pilot, incentivize, and scale new housing typologies such as: • Owner-occupied commercial. A property that is revenue-producing on the ground floor and residential on the floor(s) above, where both the occupancy value and the potential commercial value can be underwritten and then financed. • Small-owner-occupied landlord. The triple-decker or six-flat where the owner family lives in one of the apartments, renovates and rents the others.

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• Foreclosure urban homesteading. The family buys a foreclosed home in a wobbly neighborhood from the bank that doesn’t know what to do with it, and with a combination of home improvement loan and sweat equity, stabilizes and improves it. Government will not design these programs; we have to design them because we know how, and then give away the designs for free, as open-source franchise, for the good of our country. Fifty, 100, and 150 years ago, prior waves of immigrants (my family’s forbearers, perhaps yours too) moved into just such properties as these, transforming them into today’s vibrant ethnic neighborhoods; some neighborhoods even cycled through multiple waves of immigrants, a hand-me-down landing-pad into America. Chinatown or Molenbeek? The answer depends on housing. The housing depends, not on the LIHTC, but on us.

Tax Credit Advisor | September 2016

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Talking Heads Jeffrey Whiting, CREA, LLC Listening to Your Clients By Darryl Hicks

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effrey Whiting made headlines this summer when he announced that the Indianapolis-based syndication company he started in 2001, City Real Estate Advisors, found a new financial backer, Stone Point Capital through Omni Holding Company, LLC, and changed its name to CREA, LLC. Whiting started CREA with one employee, himself. Today, CREA has 81 employees, who have raised $3.2 billion in Low-Income Housing Tax Credit (LIHTC) equity that has financed the construction/rehabilitation of 337 properties and 30,390 units of affordable housing in 43 states. Whiting is one of the affordable housing industry’s most important thought leaders and policy advocates, which is why Tax Credit Advisor sat down with him to talk about the recent transaction, what makes him and his company successful, and where he sees the affordable housing business headed. Tax Credit Advisor: Where did you grow up? Where did you go to college? What was your college major? How did you become involved in affordable housing? Jeffrey Whiting: I grew up in Fort Wayne, Indiana and attended Indiana University as a Business-Finance major. My introduction to affordable housing started in the late 1980s. I was the youngest guy on a municipal bond desk right after the ’86 tax act. My shelf life was pretty short at that point because municipal bonds were being altered by the tax code. Being the youngest guy, I was the most vulnerable. An old sales guy walked up to me and said, ‘There is a new section in the tax code. I am not sure what it is, but I think some of my clients could buy these credits. Can you figure it out?’ That’s how I got introduced to the Low-Income Housing Tax Credit. It was a small, regional municipal bond firm called Summers & Company founded by a gentleman named Tom Summers. He was like a father to me. Tom took me under his wing and taught me the rules of business and how to conduct myself, which I still follow to this day.

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TCA: You started CREA by yourself 15 years ago and grew the company into one of the largest LIHTC syndicators in the country. What led to the creation of CREA? What do you attribute the company’s success to? Whiting: I left the municipal bond side of the business Jeffrey Whiting and brokered LIHTC deals from 1990 to 1995. In 1995, Tom passed away and Summers & Company faded into the mist. Around that time, I went to work for a developer, a great group of guys at Pedcor Investments in Indianapolis. I learned an enormous amount from Bruce Cordingley and Phil Stoffregen, two of the main principals. If Tom Summers was like a father to me, then Phil Stoffregen was, and still is, like a brother to me. Phil taught me as much about LIHTC, tax laws, and real estate as I could have learned in any school. One day, I proposed the idea for a syndication platform, that we could do more than just what we worked on because of our ability to finance deals. Bruce and Phil considered my plan, but chose not to pursue it. But I couldn’t let go of the idea. Several guys I worked with at Summers & Company moved to another broker/dealer in Indianapolis called City Securities. I pitched the idea to the Board of Directors and they took a chance on me. I was employee number one. We just kept working at it, doing deals in Indiana and then concentrically around the state of Indiana and we kept growing and growing. TCA: Now that you have a new owner, what role will Omni play in the day-to-day operation of CREA? Whiting: Before answering that question, I’d like to briefly discuss the sale itself. Roughly 75% of the shareholders in Talking Heads, continued on page 10

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Affordable housing isn’t just a goal of ours. It’s a result. Partnering with investors and developers, CREA has provided equity to 351 LIHTC properties, including 31,651units in 44 states and the US Virgin Islands. We are invested in affordable housing.

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CityRealEstateAdvisors.com | @CREA_LLC Credit| Advisor 2016 Indianapolis | Boston Tax | Austin Portland | |September St. Petersburg | San 9Diego

Tax Credit Advisor

Talking Heads, continued from page 8

City Financial, the holding company for City Securities, CREA and City Securities Insurance, are 70 and older. It’s a privately-held company operating in a brutally competitive fixed-income market. The owners looked at this deal and concluded strategically that it was time to divest of CREA. The board of directors had been looking at strategic alternatives and once they concluded that there was not much growth in fixed income, it was time to start divesting. CREA had a wonderful relationship with the parent company, but understood the challenges that it faced and said, ‘Let’s try to find the right home for us.’ Stone Point/Omni is a capital partner in the purest sense. It has no day-to-day operational oversight. We have Board meetings similar to the structure we had with City Financial, which was, ‘When you need something, come ask us. Otherwise, do your thing.’ TCA: What new services will CREA offer its client base? Whiting: We want to maintain the same consistency that we have had over the past 15 years. For the next 12 to 18 months, we want to show that we are the same company and that we are going to keep the same strategy and culture. I am more concerned about where the market is headed, as opposed to products we could be offering. TCA: How is CREA different from its competitors? What added value do you bring to your developer clients and to your investor clients? Whiting: The most valuable lesson I ever learned was to just listen. When there is a need from our partners, developer or investor, we want to be there to serve their needs – not ours. We differentiate ourselves from within and that shows the outside world who we truly are. So the number one priority for us is our partners. Their interests always come first. The number two priority is our employees. We make sure every employee is empowered to do their job and give voice to their opinion. They can have a very long, productive career with us. If an individual comes into my office and says, ‘Jeff, this is the growth path I want to pursue. I want to go from being an Acquisitions Analyst to being an Account Manager, and ultimately an originator,’ then my job is to ensure that individual achieves his or her personal

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goals. Even if they approached me and said, ‘I want to be President of a syndication company,’ my job is to see that they become President of a syndication company. I’ve had people approach me about this and I’ve said, ‘I will see what I can do to get you there, but here is the caveat: it won’t be CREA, because I really like my job.’ The third piece to the puzzle is our shareholders. Notice how they are last. If you put the shareholders first, you are putting your interests ahead of your clients and your employees. And by putting clients and employees first, we create shareholder value. TCA: How do you position CREA to compete in a very competitive market place with direct CRA motivated investors? Whiting: It is a tough business. There is a reason why they call it work. From our perspective, it is about clientrelations and making sure we hear what our clients are saying. We want to take care of their needs. If we do that in a way that appears as though it’s easy, even when this is a hard business to be in, then people will want to work with us. Nobody likes noise. We don’t create problems just to demonstrate we have a solution. All that does is create undo anxiety and aggravation. Our job is to eliminate the angst of transactional finance for developers and investors. We differentiate ourselves in a way so that people like to work with us because it is a smooth process. We listen to their needs and are reliable. TCA: What types of new (perhaps non-traditional) investors are you cultivating? Whiting: First and foremost, we take care of the investors that we have. Our partners have been very good to us over the years, so when we have product that they want – we call them first, because we are a loyal group. However, we are still working on those large publiclytraded “C” Corporations that just cannot wrap their heads around 15-year investments. Our main focus is still financial services, insurance companies that are not active in the marketplace, and banks that are continually growing and getting close to the asset threshold under the Community Reinvestment Act. Talking Heads, continued on page 12

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Tax Credit Advisor | September 2016

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Tax Credit Advisor

Talking Heads, continued from page 10

TCA: Advocacy plays a big part in your life. You are a past President of the Affordable Housing Tax Credit Coalition and past Board member of the National Housing & Rehabilitation Association, which supports this newsletter. Why is advocacy so important? How can younger professionals get involved? What issues are you currently focused on? Whiting: Mike Novogradac once told me, ‘You’re either at the table, or on the menu.’ Which is really good advice for somebody young who wants to get involved. It’s not hard to get involved. You show up and you listen. You learn more by sitting around the table with people like Mike Novogradac, Bob Moss, Rick Goldstein, Bobby Rosen, and Jim Miller, all of them smart on advocacy and policy. When you start listening to them, you realize that participation is the key to all of this. Then you realize that making the credit better not only benefits your business and the industry at-large, but our society. In CREA’s 15

years of business, I’ve never seen a greater demand for affordable housing than we have right now. When you realize the small things we can do within NH&RA, NCSHA, HAG, NAHB and the Affordable Housing Tax Credit Coalition, talking to members of Congress and their staffs about making policy changes that benefit individuals and families, you get a real sense of satisfaction. It is amazing how many studies have come out over the past five years from some of the finest minds in America showing how Maslow got it right about the hierarchy of needs. Shelter is a basic need. When you don’t have shelter, then you’re really not able to create a stable environment, not just for yourself but for your children. If a child has a stable home, then nourishment becomes easier. Once a child has those two basic needs, they have the beginnings of an educational process, which allows them to escape a generational cycle of poverty and homelessness. That’s why I’m involved in advocacy. TCA: Where do you see the affordable housing industry, and your company, headed over the next 5 years?

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12 Tax Credit Advisor | September 2016

Whiting: I think the goal for the industry is to see the Cantwell/Hatch bill become law, which increases the LIHTC by 50% over five years. There are also some technical corrections that have been introduced by Senator Cantwell, which are really good ideas. Senator Cantwell is a true champion for affordable housing. It is important that we continue to build support in Congress and that they understand that this is an effective program – one of the few that Congress ever passed that does exactly what it intended to do. As for CREA, our next five years are dependent on where we see the market go in the next 12 to 18 months. We continue to gain market share. We are blessed to be working with so many quality developers and active investors, who we want to ensure are properly served. We do not want to get too big that we can no longer serve them. I think there is a limit to what you can do in this industry. Whether it is me or our chief operating officer, we want to be accessible. If we are no longer accessible, if we are too busy to take phone calls or sit down to have a conversation one-on-one, then that’s when we’ve become too big for our own good and that defeats everything I have been taught over the years.

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WHO IS AFFORDABLE HOUSING’S ROOKIE OF THE YEAR FOR 2015?

Facebook revenue went from $0 to $9 million in its first year. Wilt Chamberlain set NBA records for most points and rebounds, then lost in the finals, but won MVP and Rookie of the Year awards. Berkadia closed over $750 million in affordable housing transactions in 2015, and we’re just getting started. We ranked 7th overall among affordable housing lenders, and 2nd among non-banks in 2015.* We are able to execute across the entire suite of Freddie Mac TAH, Fannie Mae MAH and FHA products. Our Affordable Housing Group is a dedicated team of mortgage bankers, underwriters, and other specialists working exclusively to support your affordable housing transactions. * Per Affordable Housing Finance

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Tax Credit Advisor | September 2016

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Wrestling with Disparate Impact Fair Housing Developments A Year After Supreme Court’s Decision By Harry J. Kelly (Partner, Affordable Housing Practice Group, Nixon Peabody LLP)

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n June 2015, the U.S. Supreme Court affirmed that policies Font Family: and practices that have an unintentionally discriminatory Cambria — Regular, Bold, Bold Italic impact on minorities and other protected persons – referred to as “disparate impact” liability – could constitute violations of the Fair Housing Act (“FHAct”). Texas Dept. of Comm. Affairs v. The Inclusive Communities Project, Inc., __ U.S. __, 135 S. Ct. 2507 (2015). Since that time, agencies and courts have wrestled with the consequences of that decision. In some instances, agencies have seen the decision as expanding the scope of possible liability for housing providers, while courts have so far applied it sparingly, to address the so-called “heartland” of disparate impact cases involving barriers to housing integration. One year in, the Inclusive Communities decision has thus far resulted in more concerns and less certainty. Inclusive Communities: Limited Approval of Disparate Impact under the FHAct While most federal courts recognized that policies or practices that unintentionally have a discriminatory impact on protected classes could violate the FHAct, the Supreme Court had never addressed the issue. In 2014, it decided to accept the Inclusive Communities case, in which the plaintiffs asserted that the Texas agency that awarded Low-Income Housing Tax Credits used allocation policies that tended to concentrate tax credits in economically disadvantaged and minority-concentrated neighborhoods, making it more difficult for those minorities to locate affordable housing in “high opportunity” neighborhoods, with better schools and employment opportunities and lower minority concentrations. According to the plaintiffs, the Texas agency’s allocation policies had a disparately harmful impact on housing choices for minorities. In his narrow 5-4 majority opinion, Justice Anthony Kennedy explained that while the FHAct does recognize disparate impact liability, it should be used sparingly, stressing the need to observe “safeguards” to prevent possible “abusive” results. These safeguards include requiring plaintiffs to satisfy “robust causality requirements,” to show that the challenged practice actually caused the alleged

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discriminatory effect. Mere statistics are not sufficient to prove causation, he said, suggesting that causation wouldn’t be satisfied where discriminatory impacts resulted from multiple causes. Justice Kennedy also adopted a “burden-shifting” approach, explaining that, if a plaintiff successfully showed that the challenged policy was the cause of the alleged harm, the defendant should be allowed to demonstrate, as a defense, that the policy was adopted to accomplish a legitimate goal. If the defendant presented a legitimate policy defense, the burden would finally switch back to the plaintiff to show that the defendant could have adopted a less-discriminatory approach to accomplish the same goal. Kennedy stressed that it was not permissible to use disparate impact to put housing providers into a “double bind,” where any choice they made would lead to liability. Instead, Justice Kennedy argued that disparate impact should focus primarily on eliminating “artificial, arbitrary, and unnecessary barriers” to housing opportunities and should not be used to merely second-guess decisions by public agencies and private providers. In the months following the Inclusive Communities decision, commentators presented divergent views of the decision. HUD and many housing advocates argued that the decision represented a resounding affirmation of existing disparate impact law previously established by the federal courts. Other commentators focused on Justice Kennedy’s concerns about potentially “abusive” uses of disparate impact, the need to impose safeguards to prevent those abuses, and the ultimate goal to eliminate artificial and unnecessary barriers to housing. The divergent position of commentators is reflected by actions taken by HUD and by the courts. HUD: Inclusive Communities threatens crime screening practices HUD wasted little time seizing the initiative offered by the Supreme Court’s Inclusive Communities decision. Anticipating the Supreme Court’s scrutiny of disparate impact Disparate Impact, continued on page 16

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liability, HUD had already adopted its own regulations for establishing disparate impact claims under the FHAct, reflecting a burden-shifting approach similar to the one adopted by the Supreme Court. (See 24 CFR §100.500.) Likewise, shortly after the Supreme Court’s action, HUD announced a broad “Affirmatively Further Fair Housing” Font Family: Cambria — Regular, Bold, Bold Italic (“AFFH”) initiative, under which public housing agencies (“PHAs”) and other grantees of HUD funding must develop detailed plans to encourage affordable housing in those “high opportunity” areas on which the Inclusive Communities decision focused. The AFFH initiative appears to arise from HUD’s unhappy experience in litigation with Westchester County, New York, an affluent suburban community that resisted developing affordable housing – which, presumably, would attract minority renters. The AFFH proposal directs PHAs and other HUD grantees to use sophisticated statistical analyses to identify obstacles to affordable housing, and to incorporate those initiatives in their planning process, including extensive public participation. The AFFH initiative is not directly tied to the Inclusive Communities decision – in its public announcements, HUD has taken pains to point out that, long before the Supreme Court’s action, the FHAct required HUD grantees to affirmatively further fair housing – but it has similar goals: breaking down artificial barriers to affordable housing to increase housing opportunities for the FHAct’s protected classes. With a more specific eye on the Inclusive Communities decision, HUD’s Office of General Counsel (“OGC”) issued guidance earlier this year warning housing providers about the use of criminal records to screen prospective tenants. According to OGC, minorities are arrested and incarcerated in numbers disproportionate to the nation’s population generally. Thus, to the extent that owners screen prospective tenants on the basis of criminal backgrounds, they tend to disproportionately reject minorities – in other words, to disparately impact minorities. In its guidance, OGC makes several recommendations. First, they urge housing providers not to use arrest records to screen tenants, pointing out that a mere arrest, without an actual conviction, is not proof of any wrongdoing. While HUD appears to recognize that persons with records of criminal convictions pose a threat to the safety of tenants and staff, HUD urges owners to avoid “one-strike” rules that exclude anyone with a criminal history. Instead, HUD encourages

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owners and managers to consider the “nature, severity and recency” of criminal conduct, so that persons are not permanently denied housing. In other words, HUD urges housing providers to make distinctions between violent and nonviolent crimes, between felonies and misdemeanors, and between old and new violations. In addition, applying its burden-shifting regulations, HUD urges owners to seek less discriminatory alternatives to strict crime screening rules, by making “individualized assesments” of applicants’ criminal history, including consideration of the applicant’s age when the crime was committed and whether there is evidence of later rehabilitation. OGC’s crime screening guidance unleashed a furor among housing providers, many of whom use tough crime screening policies to exclude persons that they believe pose a threat to other tenants. They fear that by reducing scrutiny of incoming tenants, they will increase risks of crime, drug use and gang-related activity. They also point out that objective crime screening policies are race-neutral – in other words, people with criminal histories are rejected regardless of their race. They fear that to the extent they are compelled to make “individualized assessments,” the risk of bias, even unintentional bias, increases. It is an open question whether the OGC’s crime screening guidance will result in greater housing opportunities for persons with criminal backgrounds, or just more complication, time and expense for both housing providers and renters. Courts Wrestle With Applying Disparate Impact Liability It is too early to draw firm conclusions about how the federal courts are applying disparate impact in the year since Inclusive Communities was decided, but some themes appear to be emerging. Thus, courts seem to be receptive to disparate impact theory where local government agencies have adopted zoning and other permitting policies that make it difficult to develop affordable housing. (See, e.g., Long Island Hous. Servs. v. Nassau Cnty. Indus. Dev. Agency, 2015 U.S. Dist. LEXIS 161008, Case No. 14-cv-3307 (Dec. 1, 2015)). These cases reflect what Justice Kennedy referred to as the “heartland” of disparate impact, where local governments adopt policies that, intentionally or not, allegedly reduce housing opportunities for minorities. On the other hand, courts have been far more critical of attempts to interfere with facially-legitimate action by public agencies or private housing providers. For example, in Burbank Apts. Tenants Assn. v. Kargman, 48 N.E.3d 394 (Mass. 2016), tenants and other community members argued that an owner’s decision not to renew its

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property’s Section 8 contract had a disparate impact on minority residents of the property, even though the owner complied with all requirements to notify government agencies and the tenants about the nonrenewal decision. The Massachusetts Supreme Judicial Court ultimately rejected the tenants’ claims, not on the basis of compliance with rules governing renewal decisions, but, following the Inclusive Communities decision, because of the lack of evidence that the decision not to renew the contract actually caused the injury alleged by the plaintiffs. Among other things, the court pointed out that there were actually more tenants eligible for Section 8 assistance after the Section 8 contract ended than before. Courts have also applied Inclusive Communities to dismiss disparate impact claims relating to alleged predatory lending practices (Los Angeles v. Wells Fargo & Co., 2015 U.S. Dist. LEXIS 93451, Case No. 2:13-cv-09007-ODW(RZx) (July 17, 2015)) and strict code enforcement practices (Ellis v. Minneapolis, 2016 U.S. Dist. LEXIS 40750, Case No. 14-cv-3045 (March 28, 2016)). Heeding Justice Kennedy’s concerns, these cases strictly pressed plaintiffs to demon-

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Tax Credit Advisor | September 2016

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The Efficacy of CRA

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A survey of industry responses

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he Community Reinvestment Act – CRA – was enacted in 1977 as a means of encouraging commercial banks and other consumer financial institutions to meet the needs of borrowers throughout the commuFont Family: Cambria — Regular, Bold, Bold Italic nities in which they operate. CRA has been credited with everything from ending the practice of discriminatory redlining to creating vibrant inner city neighborhoods, and blamed for everything from forcing banks to make unwise or over-leveraged loans to helping foment the 2008 sub-prime mortgage crisis. The landmark legislation was conceived, in fact, to stamp out redlining by banks and financial institutions: the odious practice of separating out certain neighborhoods or geographical areas where minorities and lower-income individuals who were not considered credit-worthy, lived and did business. It is part of the same social and regulatory movement that began with the 1964 Civil Rights Act, and followed the passage of the 1968 Fair Housing Act, the anti-discrimination against disability Rehabilitation Act of 1973, the Housing and Community Development Act of 1974 and the Age Discrimination Act of 1975, as well as a string of executive orders. CRA itself has been subject to a number of updates and refinements over the years. CRA directs the appropriate regulatory agency – the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board of Governors and the Federal Deposit Insurance Corporation (FDIC) – to assess each financial institution under its jurisdiction as to how well and completely that institution is fulfilling its obligation to its communities’ credit needs. This evaluation is then used in considering requests for bank charters, mergers, acquisitions, and new branches. “Further,” according to the OCC, “CRA provides a framework for depository institutions and community organizations to work together to promote the availability of credit and other banking services in low- and moderate-income communities and for low- and moderate-income individuals.” Does It Work? To get a sense of the actual effect of the law, we reached out to people from various aspects of the affordable housing industry.

By Mark Olshaker

“CRA plays a valuable role in creating affordable housing and bringing capital to underserved markets,” states Marianne Votta, a Senior Vice President at Bank of America in Boston, who serves as the asset management executive of the bank’s Tax Credit Investment Group. “We’re here to help our clients do business. A lot of them are developers, and by following them, we’ve had great financial and ‘feel good’ success.” She says that Low Income Housing Marianne Votta Tax Credits (LIHTC), New Markets and Historic Preservation deals “have all worked very well. Tax credits have done a great job in revitalizing inner cities at a time when there weren’t many other subsidies. And CRA is a major driver of why financial institutions are in this space.” Robert “Rob” Likes, National Manager of Community Development, Lending and Investment for KeyBank, headquartered in Cleveland, Ohio, notes that Key’s CRA-qualified loans and investments have been among the lowest risk and best performing. Rob Likes “Part of our culture is to help our clients and communities thrive,” he says. “We are committed to safe, decent affordable rental housing in the communities which we serve. We have an entire dedicated platform that I run. We actually go out and originate loans, source them and manage them until they’re paid off. We have a very large tax credit portfolio.” This success also shows that despite criticism from certain circles, CRA does not foster bad or risky loans through mandating investment in economically weak or deprived areas. “Clearly, there’s nothing that says a bank should make a bad loan,” says Likes. “We’re in lowincome and affordable housing and community-driven development, and we do it with safe loans with good returns.” KeyBank has had eight straight “Outstanding” CRA ratings, which are “a point of pride at the bank,” according to Senior Vice President and Director of Community Efficacy of CRA, continued on page 20

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Development Norman “Norm” Bliss. “It is part of our DNA: an overriding philosophy of commitment to the communities we serve. And the fact that CRA has required us as bankers to take a look at what we’re doing has Font Family: Cambria — Regular, Bold, Bold Italic changed the industry dynamic. Billions Norm Bliss and billions of dollars have been invested in these underserved neighborhoods. In fact, I would encourage CRA to get involved [through appropriate legislation] in other kinds of financial institutions. It would be wonderful for everyone to get involved in these communities.” “Performance Context” Though Barry Wides, Deputy Comptroller for Community Affairs in the Office of the Comptroller of the Currency, says, “We want all banks to achieve their CRA objectives and we offer to meet with them to discuss CRA performance and offer training as well.” He points out that a “Satisfactory” rating, which more than 85% of institutions achieve, is perfectly, well, Barry Wides satisfactory. As the program has developed, separate categories and criteria have been established for small, medium, and large (by assets) financial institutions. Wides concedes that some small banks might consider CRA a burden, but says, “Most banks have incorporated CRA into their business strategies. If you’re a community bank lender, you have most of the guidance you need. We’re there to help these banks understand heightened CRA expectations as they grow.” Among the services offered are training sessions that help with community development goals. The assessment criteria are purposely broad and, as Wides notes, “We don’t have numeric benchmarks. We’re not a ‘Gotcha’-type regulator. We give banks a lot of flexibility and latitude in undertaking activities that have a significant qualitative input; that is, we take ‘Performance Context’ into account.” This is a critical concept. As Bliss explains it, “Through Performance Context, the regulation allows us to tell our own story. When you evaluate us, you consider: Who are

we? What is our business focus? And what community interests do we serve?” And CRA regulations allow institutions of any size the option of submitting a strategic plan, which the regulator will comment on and approve, if appropriate. When the plan has been put into place, it will be evaluated and a rating issued. The CRA Effect The take-away seems to be that though CRA imposes certain requirements and responsibilities on lending institutions, their effect has been to expand business. From the perspective of the nonprofit affordable housing developer, the response is equally positive. “Overall, I think the benefit has been significant,” says Sharon Geno, Senior Vice President of Legal Affairs for Volunteers of America, a 120-yearold institution that is the largest nonprofit affordable housing provider in the country. Prior to VOA, Geno Sharon Geno was a partner at Ballard Spahr law firm, where she specialized in housing, governmental, and community development issues. “I’m like a kid in a candy store here,” she says, despite the longer hours and lower compensation. Ronne Thielen, Executive Vice President of R4 Capital, a national affordable housing syndicator in Newport Beach, California, agrees, “CRA has been an extremely beneficial program. It brings on competition and makes us compete with big Ronne Thielen banks. In California, there have been a lot of tax credit and bond deals and it’s great to have CRA for the more remote areas. We’ve spent a lot of time going out to smaller and regional banks. “If a bank says to us, ‘I only need CRA credit for Fresno,’ we can say to the bank, ‘Okay, we’ll give you a deal only for Fresno, and we can give you a letter that the regulatory agency will recognize and accept.’ That has worked great to bring in smaller banks that can’t do it on their own.” The effect on tax credits has been “really significant over time,” says Geno. “Where banks need LIHTCs, they Efficacy of CRA, continued on page 22

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are highly motivated and there has been a lot of overbidding – well over a dollar in California. It’s a less risky vehicle and they have the tax credits: a win-win. On the flip side, areas that are not CRA hotbeds – not driven by bank expansion plans – lose out.” Font Family:

Cambria — Regular, Bold, Bold Italic On the Contrary A contrarian view to the generally positive reaction is voiced by Edward J. Pinto, Resident Fellow at the American Enterprise Institute and Co-director of AEI’s International Center on Housing Risk. “CRA has a couple of general problems,” he states. “If you rate lenders compared to their peers, you end up chasing your tail.” And he challenges the Edward Pinto idea that CRA requirements can always be done according to safe and sound lending practices. “It’s very easy to take undue risks with bad consequences. Imposing CRA standards means more leverage and looser lending.” And he does tie the 2008 financial crisis in part to CRA. “CRA was the training wheels for sub-prime,” Pinto contends. “Every lending bank started with a large CRA involvement, and when banks were looking for other banks to acquire, they looked for CRA experience. There are a lot of unintended consequences that come out of this. Combine it with affordable housing goals and all of the push by government policymakers, pushing leverage, and you have to ask the question: Is leverage the problem, rather than the solution?”

The Digital Age Given that CRA was conceived and instituted before the advent of the digital age, there has been criticism that Internet-based institutions without physical branches or local footprints are not subject to the same scrutiny as traditional banks. How does one define “community” in a virtual world? “I would like to see CRA reinterpreted so that as the world changes, various solutions can be incentivized through CRA,” says Geno of VOA. “I believe there will be a need at some point to look at CRA and reassess,” KeyBank’s Likes comments. Wides agrees, “If a bank has been responsive to the

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community development needs in its assessment area, it can receive CRA consideration for community development activities in the broader statewide or regional areas that includes the bank’s assessment area.”

Given that CRA was conceived and instituted before the advent of the digital age, there has been criticism that Internet-based institutions without

Disparate Impact physical branches or Then there is the local footprints are question of whether CRA not subject to the dovetails with last year’s Supreme Court decision same scrutiny as on Disparate Impact and traditional banks. Inclusive Communities (See Wrestling With Disparate Impact, p. 14) or is in conflict with it and HUD’s subsequent Affirmatively Further Fair Housing (AFFH) initiative, as some critics have suggested. In other words: Does CRA’s mandate for banks to invest in economically disadvantaged communities take away from lowerincome individuals’ opportunities to relocate to so-called “high opportunity” neighborhoods? “It remains to be seen,” says Geno. “My own personal concept is that moving people around is unfair to communities of color. They’ve built relationships and want to be beneficiaries of these investments that they’ve waited for so long.” Votta “can argue it both ways. I think there is a need [for AFFH], but I worry about taking money out of traditionally underserved or underinvested areas.” Likes thinks the court decision and CRA “go hand-inhand for the most part,” and Thielen “sees no conflict.” Nor does Wides. “CRA is very accommodating of the principles surrounding AFFH. CRA does not look at where the affordable housing is, as long as it’s serving those who need it.” Bliss sees it as “harmony among higher-order concepts in this industry. Today, fair lending and CRA are not two sides of the same coin; they are the same side. There is nonpartisan support; it helps low- and moderate-income constituents and seniors; for-profit and nonprofit developers and is a direct offset on our federal tax liability. That’s an ecosystem that works for everyone.”

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HOUSIN

1. $5-$10 Rent Increase Amenities Per RCS guidelines, it is possible for certain amenities to deem a $5-$10 increase in rent without market support. Simple, cost-effective amenities may include ceiling fans, microwaves, picnic areas, playgrounds, security cameras or part-time security patrol officers,

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or maximizing the value of Section 8 properties, cost-effective amenities are a tool to consider. Depending on the market and the specific attributes of the property, particular amenities can yield higher rents while maintaining low cost. While appraisers can assist developers in identifying appropriate amenities for a substantial rehab, they can also assist asset managers during the lull between recapitalization periods – where simple and small additions may create large value through increased rent (marking-up-to-market). The vehicle for increasing rents, as deemed by HUD, is a Rent Comparability Study (RCS). In order to perform a mark-up-to-market utilizing an RCS, the project requires 1) a passing REAC score (60 or better), 2) for-profit ownership, 3) rents between 100 and 150% of the FMRs and 4) no low-or moderate-income use restriction without the option for unilateral termination by the owner. If the project doesn’t meet the above requirements for what is called “entitlement” mark-up-to-market, it may be eligible for a “discretionary” mark-up-to-market which requires that the project serve a vulnerable population, is located in a low-vacancy area, or has community support. Note that in either situation, a mark-up-to-market requires, at minimum, a five-year renewal contract. According to Jay Wortmann, MAI, President of Lea & Company, who performs RCSs around the country, “the right amenity is going to make your property more competitive in the market, which translates to higher rent.” If a property is lacking amenities that certain nearby properties have, or if the property becomes the only property with a particularly desirable amenity amongst comparable properties, completing an RCS will increase rents. Which amenities yield the greatest increase in rent for the lowest upfront cost of implementation? Mr. Wortmann offered successful examples from his experience:

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By Christian Robin

emergency call systems, and transportation (monthly bus passes). It’s also worth investigating local programs regarding these items, for example, the District of Columbia offers residents and business owners rebates for installing security cameras, and Chicago is considering a similar program. 2. Greater than $10 Rent Increases When market support is provided, it is possible for an amenity to merit more than a $10 increase in rent. These amenities could include car ports (placed over surface parking), storage spaces, free basic cable, and free Wi-Fi. Mr. Wortmann put particular emphasis on items like Wi-Fi, noting that it is “a direct savings to tenants which you can treat just like a utility; it’s a savings of $30-$60 for your residents and you can pass that savings onto rents. This should be an especially simple and affordable addition for single building properties.” The above-mentioned amenities still depend on the market. While installing washers and dryers in each unit isn’t usually cost-effective, some markets support it and certain properties may have pre-existing infrastructure to allow for such an investment. If the property has preexisting unused space, then storage units or a business center could be affordable amenities to implement. Emergency call systems may increase the value significantly for senior housing and have no effect on family housing. When building an expensive swimming pool results in a $5 rent increase and installing one or two wireless Wi-Fi routers increases rent by $40, it becomes apparent that there is real strategy in maximizing a property’s potential value. Monica Sussman, an attorney with Nixon Peabody, cautions asset managers to keep the big picture in mind. “If you’re planning on selling or doing a major preservation transaction [in the near future] you hurt yourself by doing a little mark-up-to-market now because your rents are not going to be at the requisite below-market amount.” For properties nearing a period of recapitalization, this is a definite concern. That said, if a recapitalization period occurred five years ago, and something was left out, opportunity may be present between recapitalization cycles for a well-placed, cost-effective amenity.

Tax Credit Advisor | September 2016

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Helping our clients manage their financial future

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505 Sansome St., Ste. 1700 San Francisco, CA 94111

San Francisco Linda Hill - Vice President 415.983.5443 [email protected]

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FOR INVESTORS Cedar Rapids Lynn Ambrosy - Vice President 319.355.5871 [email protected] www.aegonrealty.com/en/Home/Investment-approach/Tax-Credit-Investing

26 Tax Credit Advisor | September 2016



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HOUSING TAX CREDIT MONITOR An Operating Expense Update

September 2016

Housing Credit Pricing

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In the July 2016 issue of the Tax Credit Advisor, CohnReznick published an article previewing the forthcoming report, The Low Income Housing Tax Credit Program at Year 30: An Operating Expense Analysis.



The gross operating expenses map included in the article required changes to the median gross expenses presented for Maine and New Hampshire. The corrected map will be included in the final report, but is also shown here:



On an equity-weighted average basis, participants in our latest survey (conducted in August 2016) reported a $1.04 net equity price and a 4.70% IRR among national multiinvestor funds. While the average credit price remained unchanged, average IRR increased from the 4.59% level reported in the July 2016 issue of this publication.

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The following graph represents the distribution of lower tier pricing for participating syndicators in the last 60 days based on 112 properties, presented in comparison to survey data from a year ago. The average reported housing credit price in the last 60 days was $1.03 across the 112 deals, consistent with the average reported price two months ago.

Current National Multi-Investor Funds Syndicator/ Fund Name

Estimated Fund Size (millions)

Projected After -Tax Cash Needs IRR

Net Equity Price

Target Closing

Current State & Regional Multi-Investor Funds Regions

Estimated Fund Size (millions)

Projected After -Tax Cash Needs IRR

Net Equity Price

Target Closing

MI, IL, IN, MN, NY WI

$165

Tiered 4.50% - 5.00%

$1.03

8/16

DE, MD, PA, NJ

$40

4.00%

$1.056

11/16

CA

$80

Tiered

TBD

11/16

Midwest

$165

5.00%

TBD

9/16

MHIC - MHEF XXIII

MA

$87

5.25%

$1.02

9/16

VA

$50

3.75% - 4.50%

$1.00 $1.06

12/16

Syndicator/ Fund Name

Boston Capital - Fund 43

$150

TBD

TBD

12/16

BFIM - Institutional Tax Credits 46

$210

Tiered 4.00% - 5.50%

$1.04

11/16

Enterprise - EHP 27, 28

$320

Tiered

TBD

10/16

R4 - Housing Partners VI

$150

Tiered

TBD

9/16

R4 - Housing Partners VII

$225

Tiered

TBD

12/16

Raymond James - Fund 42

$200

Tiered

TBD

Q3/16

RBC - Tax Credit Equity National Fund 24

$175

Tiered

$0.95 $1.24

9/16

Redstone - 2016 National Fund LP

$125

Tiered 3.75% - 5.00%

$0.90 $1.08

9/16

Stratford - Fund 21

$120

Tiered

$1.03

11/16

VCDC - Housing Equity Fund of VA XXI

WNC - Institutional Tax Credit Fund 42, LP

$102

5.00%

$1.01

Q3/16

Equity-Weighted Average

Equity-Weighted Average All National Funds

Net Equity Price

Projected After-Tax IRR

$1.04

4.70%

Cinnaire - Fund 31 Cinnaire - MidAtlantic Fund 3 Enterprise CalGreen IV MHEG - Fund 46, LP

State / Regional Funds Excluding CA California Funds

Net Equity Price

Projected AfterTax IRR

$1.03

4.80%

NA

NA

Note: In calculating the equity-weighted average net equity price and projected after-tax IRR, tiered pricing and IRR data were averaged for those funds who reported a range. All fund data was provided by fund sponsors and compiled by CohnReznick. Neither CohnReznick nor the Tax Credit Advisor takes responsibility for the accuracy of the data represented by the sponsors. If you would like a fund included in the next Housing Tax Credit Monitor, please contact [email protected] or (617) 648-1414 to speak with a professional in CohnReznick’s Tax Credit Investment Services practice. Please visit CohnReznick’s website at www.cohnreznick.com.

www.housingonline.com

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“Twinning” Tax Credits

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WaterFire utilizes New Markets and Historic Tax Credits Courtesy of WaterFire Providence / Photo by Teresa Testa

By Joel L. Swerdlow

The annual celebration on Providence rivers.

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aterFire is a non-profit arts organization whose activities include simultaneously lighting nearly 100 bonfires suspended just above the rivers that run through downtown Providence—accompanied, according to founder and Executive Artistic Director Barnaby Evans, “by music and other art surprises” that bring “joy and energy” to the way people experience and explore the City. Businesses benefit from the crowds attracted by WaterFire celebrations and from civic pride generated by its unique artistic expressions. All of this is innovative and instructive, as is the financing of WaterFire’s new Arts Center in a long-abandoned building constructed in the 1920s as a tire factory for the U.S. Rubber Company. Essential to the financing is additional equity generated by “twinning” Federal Historic Tax Credits (HTCs) and New Markets Tax Credits (NMTCs)—as shown in the chart below, twinning funded $770,000 in equity of the $11,200,000 construction cost of the project. This twinning is far more than simply using two tax credits together. “Twinning the NMTC and the HTC permits the historic equity to be enhanced by NMTC,” explains Jerry Breed of Washington, DC’s Bryan Cave law firm, who helped structure the Waterfire financing. “In a side-by-side, nontwinned Federal Historic and New Markets Tax Credit deal, no portion of the HTC qualifies for NMTC; thus, the HTC investor invests in the master tenant and the NMTC investor makes a loan to the property owner/lessor.”

28 Tax Credit Advisor | September 2016

Such additional equity can be crucial for non-profits, which often rely on grants and charitable donations to service debts incurred during construction projects. “What surprised me most in all this,” says WaterFire’s Barnaby Evans, “was that tax credits, clearly designed— and able—to achieve positive social ends, can become so complicated.” In NMTC-HTC twinning, the complications—in the form of restrictions—all come from the HTC. “Under the Internal Revenue Service’s Revenue Procedure 2014-12,” says Breed, “the sponsor/developer is prohibited from loaning money to the investor to acquire an interest in the project. And in addition, the NMTC transaction must be separate and independent from the HTC transaction.” Waterfire’s twinning structure, he continues, “resolves these two hurdles. First, because the investor supplies all of the equity that is used to make the HTC investment and no leverage is used in that portion of the transaction structure, the sponsor has clearly not provided any loan to finance the investor’s acquisition of an interest in the master tenant. And second, the NMTC side of the transaction is separate and independent because it is priced at the NMTC market price and does not utilize any portion of the HTC enhanced equity. A leverage loan can be provided by the sponsor/developer to the NMTC side of the structure without raising questions that the sponsor is financing the acquisition of an interest in the master tenant.” Other twinning structures, Breed emphasizes, also www.housingonline.com

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were available for WaterFire. For example, the HTC investor could contribute cash to the master tenant entity and the cash then could be immediately lent to the investment fund or to an affiliate of the sponsor/developer who would bundle the proceeds with other leverage loan sources for the NMTC side of the transaction. “With any complex financial structure,” says Bostonbased Mary Thompson, Senior Originator for Bank of America Merrill Lynch, which is providing New Markets Tax Credit allocation and is investing in both the New Markets Tax Credits and the Historic Tax Credits, “you need open communication and a clear understanding of the roles and responsibilities of each party. We also try to identify potential issues early in discussions, which helps manage transaction costs. In this case, because the structure is unique, the CDE needed to be comfortable with using a second sub CDE to facilitate the HTC/NMTC twinning along with the sponsor having an ownership interest in the sub CDE, as well as having the sub CDE own the Master Tenant.” At $11.2 million construction cost, the WaterFire project is relatively small—and leaves unanswered the question, Would NMTC-HTC twinning work well for larger projects? “The twinning structure utilized in WaterFire triggers the requirement that a CDE invest the QEI proceeds within 12 months,” says Breed. “All of the historic equity comes into the CDE on day one and the CDE holds that equity until certain benchmarks are met, such as completion or lease-up. The project must be able to hit those benchmarks within 12 months. The larger the project, the more difficult it may be to meet this 12-month requirement.” If the project is delayed, the CDE can “loan the remaining funds to the QALCIB with a requirement that the funds can’t be released from an account until the benchmarks are met,” says Breed. “But if the project melts down, the QEI proceeds need to be reinvested in another project within the 12-month period.” New Markets Tax Credit twinning with HTC have been common since the first rounds of NMTC allocations in 2001-2002, but faded after the 2012 U.S. Court of Appeals

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Courtesy of WaterFire Providence Photo by Heidi Gumula – DBVW Architects

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Third Circuit Historic Boardwalk Hall decision ruled that equity investors must have a meaningful financial interest in the success or failure of a project—and the subsequent issuance of Revenue Procedure 2014-12 by the IRS in 2014, which made twinning more complicated. But Breed says that, as evidenced by WaterFire, twinning transactions will now “become more common, thanks, in large part, to IRS issuance on July 21, 2016 of 50(d) guidance—which, says Breed, “most people believe” will decrease the equity prices for FHTC by 15 to 20%. Thus, he says. “twinning can go a long ways towards filling the equity gap in post-50(d) guidance transactions.” Bank of America Merrill Lynch’s Thompson agrees, adding, “We plan to continue to invest in twinned deals. The additional equity from twinning HTC/NMTCs will provide much-needed funding for many projects that couldn’t be completed without it.” In the meantime, WaterFire, which since its founding in 1993 has been producing events from rented sites scattered throughout Providence, will soon have a structure large enough to gather all of its creative teams and support equipment into one place, augmented by new facilities, including classrooms and performance space—making it possible, according to Evans, “to imagine even larger interactions and realize more of our dream projects.” These dreams include to expand WaterFire’s role as a national leader in the fast-changing field of Creative Placemaking— using artists and the arts to add vitality to communities. Evans clearly sees that arts are essential to economic success and that there are no limits to what imagination can achieve—which can also describe the financial plans that make projects, such as WaterFire, possible.

Sources of Funding The total development cost $14.1 million. NMTC $3.27 million Federal HTC $1.71 million State HTC $2.25 million Deferred developer fee $622,000 WaterFire leveraged $6.27 million, including: $3.16 million state cultural facilities grant $600,000 EPA Brownfields cleanup grant $450,000 recoverable grant $265,000 local foundation grant $1.79 million in capital campaign pledges.

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The Uniqueness of Blue Butterfly A sanctuary for homeless vets and abuse survivors By Bendix Anderson

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n a park-like corner of a former naval base in the San Pedro neighborhood of Los Angeles sits a community that clearly demonstrates how affordable housing can better lives. Blue Butterfly Village, opened in April 2015, reserves its units for veterans experiencing homelessness. There is a move-in priority for families led by women who have survived domestic abuse or military sexual trauma. The 73 homes at the Village are large enough to raise a family, each with two-bedrooms and its own front door. The homes are spread over a hilly, nine-acre site, set back from Palos Verdes Drive North, a busy Los Angeles street. Even though it is surrounded by a dense urban neighborhood, the community includes gardens, playgrounds, a walking path and even a protected butterfly sanctuary. “While we are in an urban area, it’s actually idyllic,” says Bob Pratt, President and CEO of Volunteers of America (VOA) Los Angeles. VOA can target these particular people by providing project-based rental subsidies that serve this population. “We had to get approval from regulatory agencies for our preference to house victims of domestic violence and assault,” says Pratt. “We couldn’t get a gender preference.” The Village provides these families with a full suite of sup-

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Blue Butterfly homes accomodate families.

portive housing services from counseling and case management to drug treatment and job training The families living in 61 of the housing units receive rental subsidies provided by Sec. 8 vouchers through the Department of Housing and Urban Development-Veterans Affairs Supportive Housing (HUD-VASH) program. The other families living in the other 12 units receive rental subsidies with a preference for veterans under California’s Mental Health Services Act. The fight for the site The homes at the Village were originally built in the 1990s for military personal at the Long Beach Naval Shipyard as part of a large military housing campus covering dozens of acres in San Pedro. The shipyard closed in 1997 and in 2000 VOA applied to turn the empty, duplex units into housing for the homeless. VOA seemed to have a reasonable chance at winning at least part of the site, since the law governing how cities re-use military bases prioritizes renovations that help homeless people. But a committee of local officials refused VOA’s plan Blue Butterfly, continued on page 32

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Blue Butterfly, continued from page 30

to create new supportive housing. The San Pedro area of L.A. has relatively few homeless people, according to their data. Instead, local officials decided to give parts of the site to a new college campus and a prep school. VOA appealed the decision to federal officials. “We found a good pro-bono law firm,” says Pratt. “HUD invalidated the city’s process – they were supposed to use city-wide data.” L.A. as a whole has a significant need for new housing for the homeless. VOA eventually won the right to develop nine acres of the old Navy Village, next to the new Rolling Hills prep school and new campus of Marymount California University, which are now open. Finding the funds The next challenge was finding the funding to build. It cost $24.4 million to develop Blue Butterfly. VOA would need an allocation of Low-Income Housing Tax Credits (LIHTCs) to pay for the project. The competition for 9% LIHTCs is brutally competitive in California. Developers apply for many times more tax credits than the state has to distribute. VOA’s plan for the Village would score highly in most aspects, but lost points because its location is slightly too far away from services and amenities its residents need. The secluded site is a mile’s walk from San Pedro’s downtown and about a half mile from two smaller shopping centers, including a grocery store and coffee shops. “We were too far away from amenities to earn the points we needed,” says Pratt. VOA worked with local officials to get a bus stop within a quarter mile of the Village. The developer also began to negotiate with tax credit officials to show that the benefits of a private, peaceful site for the Village’s residents outweighed its somewhat inconvenient location. “The location was part of the reason the property is good for people with a difficult past,” says Patrick Sheridan, VOA’s Vice President for Housing. The community includes the Palos Verdes Blue Butterfly Sanctuary – an area protected by the U.S. Fish and Wildlife Service that is the habitat of an endangered species of butterfly. VOA hoped tax credit officials might give special consideration to their plan. If not, VOA’s other plan was to attempt to raise private funds to build.

32 Tax Credit Advisor | September 2016

An opportunity opened for the Village when the State of California closed its network of redevelopment agencies in the state budget battles after the Great Recession. Many affordable developers had to delay their applications for LIHTCs while they replaced the funding once supplied by the agencies. Suddenly the competition for LIHTCs was not so difficult. “There were more tax credits than there were applicants,” says Pratt. In 2013, VOA applied for LIHTCs and won a reservation. The $24.4 million project received $18.3 million from the sale of Low-Income Housing Tax Credits to the National Equity Fund (NEF), which syndicated the tax credits to Bank of America. The project also received $2.7 million in soft financing from the Los Angeles Housing + Community Investment Dept. and another $1.2 million in soft financing from the City of Los Angeles Department of Mental Health. The Federal Home Loan Bank’s Affordable Housing Program provided another $1 million. VOA deferred $600,000 of its developer fee. Charitable foundations also lent a hand, including a $500,000 grant from the Home Depot Foundation. “We had three separate Home Depot events on the property,” says Sheridan. “They built a gazebo and a community garden.” A local nonprofit called Designed from the Heart offered to provide original interior designs for the homes at the Village. “Each unit is decorated differently and furnished,” says Sheridan. “The residents just love it. Just about everything about this project is unique.”

Sources of Funding $18.3 million, Low-Income Housing Tax Credit investment by National Equity Fund (NEF), syndicated to Bank of America $2.7 million, Los Angeles Housing + Community Investment Department (soft financing) $1.2 million, City of Los Angeles Department of Mental Health (soft financing) $1 million, Federal Home Loan Bank (Affordable Housing Program) $500,000, Home Depot Foundation (grant) $600,000, deferred developer fee $24.4 million, total development cost

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Providence in Providence C=0, M=35, Y=85, K=0

Amos House provides food, shelter and jobs

By Bendix Anderson

E

ven on the coldest New Englandwinter days, there is a steady, long line outside the soup kitchen at Providence, Rhode Island’s Amos House. When it was founded in 1976 in the city’s Upper South neighborhood, where a third of the residents live in poverty, Amos House planned to serve 30-50 meals per day. But now the demand has grown to 500-800 meals per day. The dining room was no longer able to accommodate the community’s needs and Amos House fought for nearly ten years to replace it. This May, the doors opened to the new brick and masonry building with a dining hall that could accommodate 125 at one time, making it the largest soup kitchen in Rhode Island, as well as space upstairs for the extensive menu of counseling and job-training services the social service agency provides and a third floor of administrative offices. This newest $7.5 million addition to, what has grown into, a 14-building campus was funded by local charitable giving, as well as New Markets Tax Credits allocated by the Massachusetts Housing Investment Corporation and bought by Bank of America Merrill Lynch. “This has been a life-changer for us,” says Eileen Hayes, President and CEO of the nonprofit social services provider. A thorough and innovative agency From the small soup kitchen conceived by founder Eileen Murphy, Amos House has grown into an innovative agency devoted to the poor, the homeless and the addicted in the Divine City, founded in 1636 by Roger Williams, a religious exile from the Massachusetts Bay Colony. Named after the prophet Amos who focused on social justice and is credited with writing the Book of Amos, Amos House now provides daily meals, recovery based shelter, supportive housing, vocational and literacy training, and prescrip-

34 Tax Credit Advisor | September 2016

The new Amos House feeds over 500 meals per day.

tion drugs. It provides housing for 165 men, women and children nightly. Its creative programs include culinary and carpentry training and mother/daughter reunification. Financing expansion The nonprofit has worked to create its new home since 2007, when it hired an architect and started a $6 million capital campaign, seeking to provide $5 million to create a new building plus another $1 million to create an “endowment” to provide services. Early on, the respected nonprofit received one of the last “earmarks” from the U.S. Congress. In 2010, Senator Jack Reed (D-R.I.) wrote a grant for $730,000 for Amos House into the federal budget. Years before, as a young lawyer, Sen. Reed did pro bono work for Amos House. “They told me to use the earmark within five years,” says Hayes. It took almost five years before Amos House could www.housingonline.com

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close on its financing and use the money. “We didn’t draw on the earmark until 2014.” Amos House also gathered $2 million in contributions and pledged contributions from individuals and foundations, including $750,000 from Champlin Foundations, $250,000 from Citizen’s Bank Foundation, $200,000 from Providence Journal Charitable Foundation and $150,000 from Ocean State Job Lot. Nearly 100 individual donors also contributed, including $45,000 from the staff of Amos House. More than half of that staff were once homeless themselves, before being helped by the nonprofit’s programs. The board members for Amos House pledged another $200,000. As time passed and Amos House raised money, the cost of the development also expanded – to a total of $7.5 million. The nonprofit explored New Markets Tax Credits (NMTCs) to fill the gap in its budget. Amos House partnered with Massachusetts Housing Investment Corporation (MHIC), a community development entity with enough NMTC allocating authority to generate NMTCs from $7.5 million in qualified equity investments. That would generate $2.9 million in NMTCs. Bank of America Merrill Lynch agreed to pay $2.5 million for the tax credits, or 85 cents on the dollar, which counted towards the qualified equity investment. “That was pretty much the market price at the time,” says Andrea Daskalakis, Chief Investment Officer for MHIC. BofA was an ideal partner for this particular NMTC transaction, because the bank has had a long relationship with Amos House. “They grabbed at the opportunity, and they will continue to support the organization,” says Daskalakis. However, not all of the $2 million in donations counted towards the qualified equity investment, since not all of the pledges had been paid yet. The nonprofit still had to find $3.4 million to close the deal to build Amos House. If they could come up with just another $1 million in qualified equity investment, the Boston Community Loan Fund would provide the rest with a $2.4 million bridge loan. Amos found the investment it needed in June 2014, when the Rhode Island Housing and Mortgage Finance Corp. committed to provide a $1 million homelessness grant. “It was very unusual for them,” says Hayes. “and it was the game changer for us.” Amos House now had its total of $7.5 million in qualified equity investments.

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However, the nonprofit had already spent $914,000 of its contributions on soft costs, like fees for its architects. To include those expenditures in the NMTC transactions, BofA provided a one-day loan of $914,100. That money, along with all the other qualified equity investments, flowed through the NMTC entities and generated tax credits according to the IRS rules for the program. The deal closed in October 2014, and construction began on the new building soon afterwards. Building a new home The new building rose right next to Amos House’s old dining hall, filling the parking lot and coming right up to the edge of the other building. The big windows of the new dining hall looked out on the old walls of the original dining hall, which continued to welcome the community to eat together until the new building was ready to serve its first meal in May 2016. “We only interrupted our food program for one week,” says Hayes. Amos House then demolished the old dining hall in April, working carefully to take down the old building without damaging the new dining hall a few feet away. “There were hundreds of people watching the old building come down and lots of tears,” says Hayes. Amos House is not finished building. The nonprofit is planning a second phase of new development, including the rehab of a four-family house – known as “the Blue House” – where Amos House used to provide social services. Now that its new office space has opened in its new building, Amos House can turn its old “Blue House” into four units of additional, newly-renovated supportive housing.

Sources of Funding $2.5 million, New Markets Tax Credit investment, Massachusetts Housing Investment Corporation, syndicated to Bank of America Merrill Lynch $2.4 million, Boston Community Loan Fund (bridge loan, construction financing) $2 million, contributions from individuals and foundations $1 million, Rhode Island Housing Finance Agency (homelessness grant) $730,000, U.S. Congress, federal earmark

Tax Credit Advisor | September 2016

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36 Tax Credit Advisor | September 2016

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Tax Credit Advisor

NH&RA News Information on NH&RA and its Councils is available online at http://www.housingonline.com

Asset Management Council Update NH&RA launched a new working group of its Asset Management Council focusing on industry surveying and benchmarking. The Council anticipates launching its first survey, focusing on how asset management departments are structured and staffed within affordable housing development and management companies. The Council will host a series of asset management oriented webinars for members this Fall. The Asset Management Council launched in 2015 providing a peer network for affordable housing asset management executives, and owners to discuss best practices, revenue opportunities, expense management, human resources, staff, asset management technology, and data products. NCHMA Annual Meeting To Explore Redevelopment Challenges in Michigan and Beyond NCHMA 2016 Annual Meeting, scheduled for October 17-18 at the Westin Book Cadillac Hotel in Detroit, Michigan will

be using the city as a lens to explore critical topics in affordable housing finance and neighborhood redevelopment. Featured panel sessions include: •

Housing Policy Roundtable: Exploring How State and Local Governments and the Philanthropy Community Are Collaborating in Michigan

•

Spotlight on Detroit: Neighborhood Redevelopment and Revitalization Case Studies

•

The Role of Place-Making and Affordable Housing Policy and Development

•

Wonks of the World Unite! How Demographics & Data Are Informing Housing & Redevelopment Policy

NCHMA will also present the association’s latest updates to its white paper Best Practices in Defining Housing Market Areas. Early registration discounts expire on September 12. NH&RA News, continued on page 39

AFFORDABLE HOUSING TRANSACTION ADVISORY l FINANCIAL PROJECTIONS l COST CERTIFICATIONS l FINANCIAL STATEMENT AUDITS l EXIT STRATEGIES (YEAR 15)

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Tax Credit Advisor | September 2016

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Tax Credit Advisor

Member News

Spruce Hill, an $11 million acquisition loan in Asheville, North Carolina. With the Federal Housing Administration’s LIHTC pilot program that protects lenders from loss on defaults and a low interest rate secured for the next 35 years, Bellwether Enterprise provided the debt to support a construction budget for renovations. Although the property’s existing subsidy program was expiring, loan originator Victor Agusta, Senior Vice President in Bellwether Enterprise’s Raleigh office, arranged the refinancing using a tax exempt bond and 4% Low Income Housing Tax Credits from the North Carolina Housing Finance Agency. As Asheville continues to face a shortage in the supply of housing for low-income families, this loan will keep 174 affordable units available in the city.

Boston Capital Invests in Mixed-Income, Historic Project in Milwaukee, WI Boston Capital is investing in the construction of The Germania, a 90-unit apartment community for families in Milwaukee, Wisconsin. The general partner is Cardinal Capital Management, based out of Milwaukee and Madison. The Germania will be built with tax credit equity from the Low Income Housing Tax Credit (LIHTC) and Federal and State Historic Tax Credit programs. The Germania will feature 44 tax credit and 46 market rate units in a vacant, eight-story building built in 1896 which is currently listed on the National Register of Historic Places. The first floor of the building will include 8,500 square feet of commercial space. Tax credit units will be available to families earning 60% or less of the Area Median Income (AMI). The Germania will provide 38 one-bedroom and 52 two-bedroom units ranging from 446 square feet to 1,210 square feet with an average of 761 square feet. Unit amenities will include washers and dryers, central air conditioning, and dishwashers. Community amenities will include a leasing office, community room with kitchen, fitness center, and tenant storage lockers. Boston Capital’s investment in this development adds 90 homes to its apartment portfolio.

Freedom Hills Ranch Apartments, a $20,150,000 permanent financing loan in San Antonio, Texas. Freedom Hills Ranch Apartments is a proposed three-story, garden style apartment community with one, two, and three bedroom units, 252 of which are reserved affordable. The complex also includes a community clubhouse, sports facilities, playground, resource center, and on-site laundry facilities. Galaxy Builders has begun construction on the property and is expected to be completed by summer 2017. Bellwether Enterprise loan originators Phil Melton, Executive Vice President in Dallas, and Cindy Hannon, Senior Vice President in Duluth, provided the borrower, Hogan Property Company, with an insured loan from the U.S. Department of Housing and Urban Development under the construction program for tax exempt bonds. For the property to receive 4% tax credits, the Texas Department of Housing and Community Affairs required rents to be limited to 50% and 60% of area median income.

Martin Kent Joins Lancaster Pollard as Chief Credit Officer Lancaster Pollard has hired Martin Kent to serve as the firm’s new chief credit officer. Kent, most recently the Director of Multifamily Credit/Underwriting for Fannie Mae’s seniors housing programs, will provide credit oversight for all the firm’s banking activities. During his 11 years with Fannie Mae, Kent oversaw both the seniors and affordable housing credit functions as a risk manager and ultimately as director. In those roles, he structured and underwrote numerous loans and trained and managed underwriters. In addition, he reviewed and updated credit policies for Fannie Mae’s Delegated Underwriting & Servicing (DUS®) Guide and approved loans of up to $250 million. Kent, who will be based in Columbus, has nearly three

Bellwether Enterprise Closes $130 Million for Affordable Housing Loans in June Bellwether Enterprise Real Estate Capital LLC (Bellwether Enterprise), the commercial and multifamily mortgage banking subsidiary of Enterprise Community Investment Inc. (Enterprise), announced the lending of $130 million for 13 affordable housing loans in June. Two of these spotlight deals include:

38 Tax Credit Advisor | September 2016

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decades of experience in credit policy. Prior to joining Fannie Mae, he spent 18 years in commercial banking, both at PNC Bank and at Bank of America, as a credit officer for various segments of real estate finance. CREA, LLC Announces Closing of $224.8M Corporate Tax Credit Fund CREA, LLC (CREA) is pleased to announce the closing of CREA Corporate Tax Credit Fund 48, LLC (“Fund 48”) with total capital raised $224.8 million from 12 investors; ten of which are repeat relationships for CREA. Since inception, CREA has raised over $3.2 billion in LIHTC equity in 48 corporate funds. The fund is fully specified with 30 properties in 13 states, creating 2,676 units of affordable housing, while also expanding CREA’s developer base with the addition of five new developer relationships. There were four investment classes offered: Premium, Class CRA I, Class CRA II and Class CRA III. Approximately 57% of the fund was claimed for CRA.

NH&RA News, continued from page 37

NH&RA Announces Agenda for 2016 Fall Developers Forum NH&RA will host its 2016 Fall Developers forum on November 1-2 at the Langham Hotel in Boston. Featured topics include: •

Workforce Housing Case Studies

•

Emerging Financial Services for Developers

•

Tax Exempt Bond and Tax Credit Equity Updates

• Real Estate Tax Mitigation Strategies and Resources The event will feature the presentation of NH&RA’s 2016 Affordable Housing Vision Awards and its 2016 J. Timothy Anderson Awards for Excellence in Historic Rehabilitation. Early registration rates expire September 26. NCHMA Submits Comments to Louisiana Housing Corporation NCHMA recently submitted comments to the Louisiana Housing Corporation asking that market studies be a free market item ordered by developers rather than by LHC. The letter followed-up on a LHC board meeting held one week prior. NCHMA is also working on developing a template comment letter addressing several common issues around the country in order to streamline communications with state HFAs.

THE BEST CHOICE FOR RESULTS IN AFFORDABLE HOUSING As the recognized leader in the affordable housing market, CBRE Affordable Housing understands the complexities of the affordable housing market. Our fully integrated platform combines investment sales, advisory, financing, and mortgage banking with a wealth of experience, to provide our clients with comprehensive solutions that deliver.

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39

Tax Credit Advisor

State Roundup More state qualified allocation plan updates, deadlines, and documents at www.housingonline.com/resources/ facts-figures/qualified-allocation-plans/ Maryland Completes 2016 QAP and Receives Governor’s Approval The Maryland Department of Housing and Community Development announced on August 10th that Governor Hogan approved both the QAP and Multifamily Rental Financing Program Guide (the “Guide”). DHCD’s website contains copies of redline and clean versions of several draft iterations of each document from February onwards. Some significant changes include: • More points and flexibility to encourage development in Communities of Opportunity. This includes: o §4.8.8.1 Family projects in Communities of Opportunity may receive up to 120% of as-is value for acquisition costs. o §5.2.2 Family projects in Communities of Opportunity qualify for the state DDA 30% basis boost. • §4.3.3 Incentivizes higher bedroom counts through QAP scoring. • Point Deductions: o A reversion back to 2013 QAP language regarding deduction of points for going over the per square foot development cost caps. The caps range from $98 to $153 and depend on factors, like building type and new construction versus rehabilitation. o §5.1.2 Points will be deducted if a member of the project team has in the past increased construction costs after closing without DHCD’s approval. • §4.8.8.3 Targeting Populations at or below 20% AMI: Projects may request up to a 5% additional developer fee if the entire fee is escrowed with a lender to fund an internal rent subsidy for units set aside for populations at 20% AMI or below. Tennessee Announces Interim Head of Multifamily Division The Tennessee Housing Development Agency recently named Ed Yandell interim head of THDA’s Multifamily division. Ed has 22 years of experience working at THDA. The former head, Mike Blade, left THDA in July for a position with a private law firm. Michigan: Applications for 1st Competitive Funding Round Due Oct. 3rd Michigan State Housing Development Authority released the Notice of Funding for the first round of competitive tax credit allocations. This round will allocate approximately 50% of Michigan’s credit ceiling. Applications are due by 5:00 pm on October 3, 2016.

40 Tax Credit Advisor | September 2016

MassHousing: Beth Elliot Named General Counsel, Charles Karimbakas Named CFO MassHousing Executive Director Tim Sullivan recently named Beth Elliott as MassHousing’s General Counsel, and Charles Karimbakas as Chief Financial Officer. As General Counsel, Ms. Elliott is responsible for all legal aspects of MassHousing’s operations, including the issuance of tax-exempt bonds, multifamily and single family mortgage lending, administration of project-based Section 8 contracts, and funding and/or operation of numerous other state funding programs and initiatives. As CFO, Mr. Karimbakas is responsible for all of the Agency’s finances and financial operations, including issuing municipal debt and working collaboratively with investors, ratings agencies, underwriters, attorneys, and organizational decision-makers both internally and outside MassHousing. Connecticut Hosts 2016 QAP Overview Session Sept. 19th, Applications Due Nov. 9th Connecticut’s 2016 Qualified Allocation Plan and Procedures (QAP) await the Governor’s approval. CHFA will host a discussion on the 2016 QAP, the LIHTC application process, and new Guidelines. Connecticut Department of Housing (DOH) staff will also be present to discuss the availability of its funding in support of this round. Applications are due November 9, 2016. Event Details: The Lyceum 227 Lawrence Street Hartford, CT Monday, September 19, 2016 1:00 p.m. - 3:00 p.m. Please RSVP to [email protected] by Friday, September 9, 2016 Kentucky Releases Tax-Exempt Bonds and Gap Financing NOFA, Due Sept. 15th Kentucky Housing Corporation (KHC) is making available a combined total of $19.2 million of KHC’s Equity Bridge Loan, HOME Investment Partnerships (HOME) Program, National Housing Trust Fund (NHTF), and Affordable Housing Trust Fund (AHTF) monies. In addition, the urban county governments of Louisville and Lexington have committed funds to be allocated via Notice of Funding Availability (NOFA.) NOFA responses must be submitted through the Universal Funding Application. Applicants should select the “2016 TEB NOFA.” NOFA responses are due by Thursday, September 15, 2016. Ohio Releases Draft 2017 QAP The Ohio Housing Finance Agency (OHFA) released its draft 2017 QAP, including a redline version. Comments should be sent to [email protected]. The following is a non-exhaustive list of some of the proposed changes:

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• Prevailing Wage Requirements Added: Applicants would be required to include in their proposal summaries whether Davis-Bacon Wage Rates or State Prevailing Wages apply to the development.

N AT I ON ’ S # 1 F H A M A P & L E A N L E N D ER b y Lo ans C l o s ed i n H UD FY 15

• Equity Pricing Review Considerations Added If equity prices are significantly above or below the pool average without sufficient explanation as to why, OHFA would reserve the right to underwrite to the pool equity pricing average. • Basis Boost Policy Amended to be available for: o New Family Developments in High Opportunity Census Tracts o Permanent Supportive Housing Pool developments earning 25pts for Continuum of Care Priority o Developments in Single Family Infill Development pool located in areas experiencing moderate, high, or very high rates of positive change. o Removes any categories eligible for basis boost in the past not listed above • Set-Asides o Family Housing: increased for high opportunity areas o Family Housing: set-aside added for non-QCTs • Family and Senior Pools Adjusted – Family pool increased from $4M to $5M • Net New Stable Job Growth Priority Eliminated (inability to obtain census tract level data) Kentucky: Registration Open for Affordable Housing Conference Registration is now available for the 2016 Kentucky Affordable Housing Conference. This year’s conference will be Tuesday and Wednesday, October 1819, 2016, at the Crowne Plaza Louisville Airport Expo Center. Conference information is available on KHC’s website.

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JOSEPH R. HAGUE Vice President 614.857.3176 • [email protected]

THE FACE OF LENDING AFFORDABLE HOUSING Bond Financing* • Bridge Lending Fannie Mae DUS® • FHA MAP 800.837.5100 • redcapitalgroup.com *Services provided by RED Capital Markets, LLC (Member FINRA/SIPC) and its registered representatives. DUS® is a registered trademark of Fannie Mae.

Tax Credit Advisor | September 2016

41

Bulletins

Breaking news from Washington and beyond

Nearly Three Quarters of Likely Voters Agree that Affordable Housing Should Be a Core Component of Democratic and Republican Party Platforms 75% of likely voters agree that affordable housing should be a core component of the Democratic and Republican parties’ platforms, according to a new poll conducted between July 8-11, 2016 from Ipsos Public Affairs and Make Room, a nationwide campaign giving voice to American renters. Similarly, nearly 76% of likely voters agree that they are more likely to support a candidate who has made affordable housing a focus of his or her campaign. Support of the two positions is strongest among likely voters who self-identify as Democrats and independents, but also comprises a majority of Republicans. Despite a lack of attention the issue usually receives, these findings demonstrate that affordable housing is a national issue and that policy makers must take action to address it. The Democratic and Republican parties would be advised to include affordable housing in the party platforms and urge their nominees to support the issue during the presidential campaign.

NMTC Data Released: Commercial Real Estate and Higher Distress Areas Dominate The CDFI Fund released data on the first 12 rounds of New Markets Tax Credit investments, from 2003-2014. The data covers 4,541 total Qualified Active Low-Income Community Businesses and almost $38.5B in NMTC investments. 1,985 QALICBs (43.7%) were Real Estate QALICBs and they received over $19.4B (50.4% of all investments). Beyond that, 66.9% of all investments were used for the purpose of real estate development or leasing activities (non-real estate type businesses may direct investments towards real estate purposes). The bulk of this, however, is attributable to commercial real estate. As for housing, multifamily rehab and new construction accounted to 0.6% of all investments, or roughly $206M. The most recent year of reporting, 2014, shows that every allocatee devoted at least 75% of investments to areas of higher distress. The data release shows specifically where investments were made, providing data on city, state, zip code, and census tract, as well as breaking down data by metro and non-metro.

42 Tax Credit Advisor | September 2016

New Online Resource Illustrates Challenges to Developing Affordable Housing Urban Institute and National Housing Conference have created an interactive webpage which illustrates the need for subsidy when charging affordable rents to low-income families. The site introduces readers to affordable housing issues in America – stating that for every 100 extremely low-income households, only 29 adequate and affordable units are available. The site further explains the costs of development – covering items like acquisition costs, construction, and developer fees. The interactive tool then allows users to attempt to develop their own virtual 50 and 100 unit buildings to illustrate the challenges in developing low-income housing.

Congress Unanimously Approves Housing Opportunity Through Modernization Act The Housing Opportunity Through Modernization Act of 2016 (H.R. 3700) passed the Senate on July 14th and is now expected to be signed into law by The President. The “common sense” legislation received a unanimous vote in both the House and Senate.

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The Rural Housing Service’s Rural Development Voucher Program On June 29, 2016 The Rural Housing Service (RHS) published a notice informing the public of the general policies and procedures for the Rural Development Voucher Program (RDVP) for fiscal year 2016. The vouchers are only available to low-income tenants of RD financed multifamily properties where the RHS Section 515 loan has been prepaid prior to the loan’s maturity date. Participation by eligible tenants means that a voucher obligation form must be submitted within ten months of the foreclosure or prepayment. In the event of a prepayment or foreclosure, RD will notify tenants of the availability of vouchers and how to obtain a voucher. $15 million of RHS Vouchers will be made available to any low-income household residing in a property financed with a Section 515 loan that was prepaid after September 30, 2015. Low-income tenants in the prepaying property are eligible to receive a voucher to use at their current rental property, or to take to any other rental unit in the United States and its territories. Limitations on voucher use: • The rental unit must pass an RD health and safety inspection, and the owner must be willing to accept an RD Voucher; • The Voucher cannot be used for units in subsidized housing, such as Section 8 or public housing, when two housing subsidies would result; and • The Voucher may not be used to purchase a home. For eligibility tenants must meet the following requirements: • Tenants must reside in the Section 515 project on the date of the prepayment or foreclosure; • Must be a US citizen national, or a resident alien; and • Must be a low-income tenant on the date of prepayment or foreclosure (their income may not exceed 80% of the area median income as defined by HUD). If determined that a tenant is low-income, they have ten months from the date of prepayment or foreclosure to return the Voucher Obligation Request form and citizenship declaration to the local RD office.

IRS Releases Long-Anticipated Guidance on 50(d) Income On July 21st, the IRS released guidance regarding Internal Revenue Code 50(d)(5). The long-awaited guidance affects market-rate transactions involving Historic Tax Credits. As the guidance was released during NH&RA’s Summer Institute, a quick briefing session was delivered on some of the basics: • • • • •

Affects pass-through of tax credits to a master tenant Provides for amortization over the life of the lease The investor absorbs all income Does not increase capital loss at exit Provides for election to accelerate income inclusion outside of the recapture period – of course, it could be a better idea to take this over time, but as was discussed during the session, maintaining records for 30 years can be a challenge.

ASSISTING THE DEVELOPMENT COMMUNITY Pepper counsels on all aspects of the multifamily housing process. Developers, lenders, owners, public agencies, nonprofits, syndicators, investors and others rely on our more than 40 years of experience with federal housing programs and related matters. Our lawyers are veterans of HUD, Fannie Mae, the IRS, state and local agencies, and Congressional committees, and are involved daily with HUD’s 2530 previous participation process, REAC and APPS program officers.

Shel Schreiberg | [email protected] | 202.220.1421 Scott E. Fireison | [email protected] | 202.220.1572 Berwyn | Boston | Detroit | Harrisburg | Los Angeles | New York | Orange County Philadelphia | Pittsburgh | Princeton | Silicon Valley | Washington, D.C. | Wilmington

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Tax Credit Advisor | September 2016

43

Numbers Potentially at Risk LIHTC Properties with Subsidies Expiring Before January 1, 2019 State

# of Properties

# of Units

State

# of Properties

# of Units

Alabama

145 8,075

Nebraska

85 2,724

Alaska

22 788

Nevada

30 4,340

Arizona

84 7,856

New Hampshire

34

1,061

Arkansas

117 6,517

New Jersey

65

7,406

California

542 49,000

New Mexico

36

3,035

Colorado

87 7,256

New York

427

23,218

Connecticut

79 5,357

North Carolina

453

10,207

Delaware

26 1,339

North Dakota

25

761

Florida

183 38,849

Ohio

Georgia

145 20,661

Oklahoma

Hawaii

9 702

166 6,209

Pennsylvania

476 10,876

35 1,379

Illinois

157 14,253

Rhode Island

Indiana

181 9,042 72 2,292

Kansas

116 6,566

50 3,009

Oregon

Idaho

Iowa

483 25,767

33

2,446

South Carolina

146

5,535

South Dakota

62

1,758

Tennessee

282 10,328

Kentucky

64 1,983

Texas

459 41,155

Louisiana

101 3,175

Utah

79 5,357

Vermont

47 1,351

Maine Maryland

74 2,429 130 10,748

Virginia

146 12,996

Massachusetts 119 9,273

Washington

215 12,250

Michigan

283 16,133

West Virginia

Minnesota

197 9,648

Wisconsin

200 8,165

Mississippi

42 3,241

Wyoming

18 886

Missouri Montana

374 13,063

Total

31

1,591

7,464 452,800

32 744

States in red are states where there are actual or potential volume cap constraints

44 Tax Credit Advisor | September 2016

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45

NATIONAL COUNCIL OF

PRSRT STD US Postage PAID Merrifield, VA Permit No. 1253

Dworbell, Inc. 1400 16th Street, NW, Suite 420 Washington, DC 20036

HOUSING MARKET ANALYSTS

2016 Annual Meeting October 17-18, 2016 The Westin Book Cadillac Detroit Detroit, MI

NATIONAL HOUSING & REHABILITATION ASSOCIATION

2016 Fall Forum November 1-2, 2016 The Langham, Boston Boston, MA

REGISTER TODAY AT:

Housingonline.com/events.aspx UPCOMING EVENTS

National Housing & Rehabilitation Association 2017 Annual Meeting February 22-26, 2017 Hyatt Regency Coconut Point • Bonita Springs, FL National Housing & Rehabilitation Association 2017 Spring Developers Forum May 8-9, 2017 The Ritz Carlton • Marina del Rey, CA 46 Tax Credit Advisor | September 2016

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