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Revitalizing Rural Development’s Multi-Family Housing (MFH) Portfolio “Saving and creating decent, safe, and sanitary affordable homes for rural renters ”. * FY 2010 Presentation by: Larry Anderson, Director, MFH Preservation and Direct Loans (MPDL)

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Revitalizing Rural Development’s Multi-Family Housing (MFH) Portfolio“Saving and creating decent, safe, and sanitary affordable homes for rural renters”

* FY 2010 Presentation by: Larry Anderson,

Director, MFH Preservation and Direct Loans (MPDL)

Housing and Community Facilities Programs - laurence.anderson@usda.gov


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Basic Facts: 515/514 Portfolio (1-1-09)

  • 16,000 Properties with 452,610 Units (28 units avg. size)

  • $11.6 Billion Outstanding Principal (3.0% delinquent)

  • The tenants who we serve:

    • $11.2K Annual Average Income ($9.2K for RA)

    • 64 % receive RA

    • 15 % receive HUD project or tenant based subsidy or other

    • 21% receive no deep tenant subsidy

  • Tenant Households headed by:

    • 59% Elderly

    • 71% Female

    • 30% Minority

    • 24% Handicapped or disabled

    • 30% Tenant turnover

  • 30% Properties in Counties with Declining Income



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Multi-Family Housing Delinquency

  • Delinquency is under control


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Direct Loan and Grant Program Direction for FY 2010

  • Preserve and revitalize the direct portfolio

    • Fully identify capital needs

    • Market based sustainable underwriting

  • Build “super green” new where most needed

    • Goal of “zero net” energy consumption

    • Goal for property is long term sustainability of rents

  • Use third party resources – ARRA and other

    • Simplify, clarify and support the process

    • Better working relationships with 3rd party funders


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SUPER GREEN – What does that mean?

  • Energy conservation plus generation

  • Build “super green” new where most needed

    • Goal of “zero net” energy consumption

    • Goal for property is long term sustainability of rents

  • NOFA Scoring Criteria


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Key Revitalization challenges:

  • Nature of the portfolio

    • Aging – earliest projects from the 60’s

    • Small properties

    • Rural Markets

    • Not enough RA

    • Aging of physical structure is project specific

  • Nature of ownership entities

    • Aging owners and entities

    • Conflicting interests within ownership

    • Tax consequences for selling or not selling

  • Cloud of Prepayment statute litigation now lifting

    • Franconia – Damages to owners possible

    • Tucker Act Settlement – 731 projects going thru process

    • Goldhammer – APA violation to not follow regulation

  • Limited pool of purchasers and funding resources

  • Tightening Federal budget for traditional subsidized housing


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Key Revitalization Study findings

  • Comprehensive Property Assessment (CPA) found:

    • Irreplaceable rural rental housing option

    • Portfolio in good shape, but aging and reserves under funded

    • Addressing now is more cost effective

  • Study also said:

    • Portfolio breaks into 3 segments

      • 10% in great markets – expensive to preserve

      • 10% in bad markets – not feasible to preserve

      • 80% in the middle – feasible to preserve

    • Old way - Just using rent increases and “more” RA is too expensive

    • New way – Use new cost effective revitalization tools

    • Reinvent program delivery for smarter & faster decisions


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The Working Revitalization Strategy

  • Components of all deals

    • Project is needed in market

    • Post transaction Owner is eligible

  • Basic Feasibility Thresholds

    • CNA to determine capital needs, timing and funding

    • Underwriting to determine feasibility and tools

      • SUSTAINABLE RENTS = SUSTAINABLE PROPERTIES!

      • CNA needs - O&M - operating cushion – vacancy - accounts current

    • Seller payments and increased RTO is market based

      • Market value for equity loan

      • CRCU limit for equity payment and increased RTO

      • CRCU test before any MPR tools

    • Consider impact on tenants

  • Long Term Commitment – RD’s funding/Owner’s RUP


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Access to revitalization resources

  • MPR (MFH Preservation and Revitalization Demo)

    • NOFA rules – Access RD rehab funds – key tool: deferrals (pre-92 only)

    • Simple (stay in owners)

    • Complex (transfers)

    • Portfolio (now includes transfers and stay in owners)

  • Transfer

    • Low rents = tight deals

    • “Pie split” issues common

    • Limited RD funding – rehab through MPR

    • 3rd party funding – only source of seller payment outside prepayment process

  • Prepayment process

    • Incentives (stay in owners or transfers)

    • Sales to Non-profits (transfers)

  • Substitution of GP’s or "no funds” transfers - “white knights” beware

  • 3rd Party – ARRA funds

    • DOE – HUD Green Retro Fit

    • LIHTC – TCAP or Exchange


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Revitalization Activity

  • MPR (2006 – 76, 2007 – 87, 2008 - 135, 2009 – 94; SC top State)

  • Transfers (top State 2009 – SC)

    • 60% use third party funding

    • 2006 – 159 closed

    • 2007 – 194 closed

    • 2008 – 235 closed

    • 2009 – 165 closed

  • Prepayment process (top State 2009 – NC)

    • Incentive Loans, RA or Sales to Non-Profits obligated:

    • 2006 - 35

    • 2007 - 48

    • 2008 - 47

    • 2009 - 57



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MPR Demo Overview - 06/ 07/08/09 results

  • Borrower applies per NOFA (4,100/2,400/1,700/1,250)

  • RD conducts competition and selects candidates (150/170/286/360)

  • Selected properties get:

    • Borrower, market eligibility review and CNA

    • Underwriting to develop a Financial Feasibility Plan (FFP)

    • Review Committee Approval

    • Documents prepared to reflect deal and new RUPs

  • USDA presents and owner approves the deal and mix of MPR tools

  • USDA obligates financing and arranges closing

  • Borrower and USDA close the deal


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MPR Deals obligated by State 06/ 07/08

65 SC 4 GA, IL, KY, PA, VT

  • ME 3 VI, MI, AZ, CT, IN, MA, NY

    22 MO 2 WA, NV, OH, OR, MS, CA

  • NC, OK 1 VA, NH, NM, RI, MN

  • LA 0 AL, AK, CO, DE, MD, HI, NJ, PR

  • IA UT, WV

    10 WI

  • ID, MT, SD

  • NE, ND

  • AR, KS, TX

    5 FL, TN


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MPR “Tools” - 06/07/08 Demo results

  • Partial or full 515 Deferral ($48M/$56M/$100M)

  • “Bullet” aka “Soft-second” loans ($4.5M/$2.8M/$13M)

  • Grants ($.2M/$.5M/$.4M)

  • 515 Loan @ zero percent interest ($.3M/$2.6M/$12.6M)

  • Payment to owner of some costs (CNA from reserve)

  • Forgiveness of 515 Debt ($0/$0/$0)

  • Re-amortization of 515 Debt (yes/yes/yes)

  • Subordination of 515 Debt (yes/yes/yes)

  • Consolidation of 515 projects (yes/yes/yes)

  • Other RD funds (Section 538/515) ($8.8M/$25M/$58M)

  • Third party funds ($1.8M LIHTC/$45M/$65M)


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Operational Goals for FY 2010 MPR

  • Gear up to handle more transactions

    • Encourage portfolio transactions/multiple property financing

    • Find ways to use more third party funding

  • Build capacity in all States

  • Improve key decision making points and reduce bottlenecks

    • CNA, CNA reviews Agreed to “scope of work”

    • Underwriting review and analysis

  • Develop routine supervising and servicing

    • budget integrity and reserve use per CNA

    • Establish long term internal controls

  • Continue to build funding pipeline of approved transactions

  • Expand LH participation


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Other Demo Related Improvements

  • Transfer handbook updated

    • One - simplified application process

    • Processing deadlines per HR 3873

    • Better handling of third party funding

    • Working with portfolio transfers

  • Additional guidance

    • CNA and CNA review unnumbered letter (August 2008)

    • Underwriting unnumbered letter (October 23, 2008)

    • Construction unnumbered letter (under construction)

  • Improve outreach to buyers, sellers, and funders

    • Clarify program benefits and rules

    • Reduce barriers to participation

    • Website access at: http://www.rurdev.usda.gov/rhs/mfh/MPR/MPRHome.htm

  • Continue to seek permanent legislation


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Revitalization Battleground – Sizing the split: rehab, seller and soft costs

  • Sustainable rents –

    • What does CRCU support?

  • Rehab

    • upfront/spread out

  • Seller payment

    • loan or cash?

  • Soft costs

    • loan/cash

    • upfront/deferred


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Key concepts with the “pie split” and the MPR seller and soft costs

  • Stay in owners – No split - It’s all about rehab

    • Underwritten once

    • Full use of MPR tools to fund rehab

    • Some soft costs may be included.

  • Transfer – It’s a three way split

    • Underwritten twice

    • First to fit the CRCU test

      • seller payment and soft costs must make economic sense

      • RD funds can be included if “in hand”

      • If not in hand - use 538 at AFR to size the transaction

    • Second to fit MPR underwriting

      • Deferral used to keep rents affordable

      • MPR tools not used for seller payment


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Why is the MPR a good idea for the Program? seller and soft costs

  • Cheapest way to revitalize a project

    • Deferral, soft money, grants and zero percent loans are cost effective tools

    • 08 average MPR rents went down by 2% or $17 PUPM

  • May be the only feasible way to address existing capital needs

    • Last year – rehab plus 20-years CNA needs over $29K per unit

    • Typical project could not afford rehab or higher reserves within CRCU without MPR

    • Without MPR tools the cost is carried by RA

    • Without MPR tool rehab is limited and may leave the job half done

  • Many owners have no ability to sell or pay off

    • The gap between current rents and CRCU is a pivotal feasibility measure

    • Many projects don’t have the market position to satisfy all expectations

    • Bringing in third party funds through a transfer not an option – project starts a death spiral

  • Mechanism for stay in owner to recapitalize

    • Over 50% of MPR transactions with stay in owners last year

    • Government funds not used for equity payout or huge developer fees

  • Magnet for third party funding

    • Last year $100 Million leveraged by $30 Million in MPR BA

    • Provides additional funds to get the transaction to work


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Portfolio Management Direction for FY 2010 seller and soft costs

  • Reduced portfolio energy consumption

    • Improved operations at the property

    • Promote energy generation at the property

  • Seek better operations by Industry Collaboration

    • Role model - IPIA improvement

    • Continue to reduce duplicate monitoring

  • Major update to automation systems

    • Increase flexibility to new programs and relationships

    • Improve Servicing – focus on major challenges and reduce the burden of routine tasks