The PLR Was Published OnJanuary 19, 2007 • Each tenant, granted a right of first refusal, can buy that unit, along with all the tenants in the property, upon the conversion of Section 42 rental property to condominiums. The ownership plan can be implemented after the compliance period ends. All tax credits taken will not be recaptured. • The State HFA can terminate the existing LURA after the compliance period terminates and substitute a new LURA for rental and home ownership.
MHDC Supported PLR • A conversion does not diminish the affordable housing pool; • Tenants will be more committed to stay to conversion date, keeping property in better condition; • Prior to conversion, the owner has the incentive to maintain the property; • Following the conversion, tenants, as owners, have the incentive to maintain the property; • MHDC will not have to use new allocations of housing tax credits or other resources; • The property’s use for affordable housing is maintained and extended; and • The American Dream of home ownership is advanced.
Major PLR Guidelines • The Mathematical Formula setting the home’s sales price is derived from the maximum monthly LITC rent. The new monthly payment pays the mortgage and the condominium fee. • No displacement can occur after the conversion process starts. • The extended use period was extended from 15 years to 30 years.
The PLR’s Redacted Facts • The sales price is $79,500 for the 1BR and $89,500 for the 2BR (including one parking space). • The condominium fee is all inclusive. • The tenancy rent credit is 1% of the sales price for each full year of occupancy. • Any home re-sales must be to a then income eligible Section 42 buyer. • The re-sale price is capped at the original sales price plus 10%, compounded per year.
MHDC’s Baseline • MHDC has issued a Baseline memorandum detailing implementation rules that include: i. No ongoing tenant income re-certifications after conversions; ii. Non-tenant and resale home buyers are income certified on the date of the sale contract; iii. HOA manager must be Section 42 experienced; iv. All units must be owner occupied; and v. The qualified contract period can be by-passed.
The Baseline sets forth PLR criteria for other 1990 – 1995 project conversions: i. MHDC must approve all PLR conversions; ii. Once approved, all leases must include a tenant right of first refusal; iii. A physical needs assessment must be prepared; iv. A sales schedule and HOA management plan must be submitted; v. No conversion will be approved if there are material Form 8823 violations; and vi. MHDC will continue to monitor the property’s physical condition. • Nixon Peabody Reliance Letter.
PLR Sponsor Imposed Requirements • Common paymaster for mortgage payment and condominium fee; • Mandatory home ownership counseling course; and • HOA management company will have entry rights to fix common elements and make unit repairs.
Each State HFA Must Adopt the PLR • Nixon Peabody Reliance Letter. • Each State HFA may specify its own approval process.
Quality Hill Phase II-B • 84 Units 60 1-BRs 24 2-BRs • Parking 90 • LITC Allocation – 1991 • Year Completed – 1993 • LITC Award – 9%
Phase II-B • 2005/2006 NOI = $200,000 ± per year • Apartment Value = $2,500,000 ± • Existing Debt (12/31/06) = $5,110,000 ± (1st Mortgage = $1,110,000) (2nd – 5th Mortgages = $4,000,000 ±)
Phase II-B Value as Condos = $6,900,000 • Less 1. Commissions 2. Marketing 3. Closing costs 4. Project Close Out 5. Home Ownership Counseling 6. Professional Fees 7. Condominium Survey/Platting 8. Rehabilitation – Interior/Exterior 9. Conversion Loan Interest/Additional Advance • Existing Debt Retirement • Developer Fee • LP Return of Capital/Taxes
Phase II-B 1 BR2 BR Current Maximum Tax Credit Rents (Net of Utility Allowances) $ 695 $ 817 Purchase Price (with 1 parking space) $79,500 $89,500 Monthly Payment All In Condo Fee $ 232 $ 276 Mortgage-Monthly (6%, 30 Year) (95% Financing) $ 454$ 510 $ 686 $ 786 Down Payment Required Before Occupancy Credit & Grant $ 3,706 $ 4,516
Special Home Buyer Incentives • 1% Per Annum Credit To Tenant For Occupancy Up To 10 Years. • Homeowner Down Payment/Closing Grant From City of $3,000 per Home. • Real Estate Tax “Freeze”. • CRA End Loan Programs (A) Bank Of America (B) HFA (First Time HFA Financing).
Purchase Example For A 3-Year Tenant 1 BR2 BR Price $79,500 $89,500 Closing Costs 905 905 Less: City Grant ($3,000) ($3,000) Credit 3 yr Occupancy ($2,385) ($2,685) Cash Down Payment ($500) ($500) $74,520 $84,220 Monthly Payment Loan (6%, 30 years) $ 447 $ 505 Condo Fee 232 276 Total $ 679 $ 781 Max Tax Credit Rent $ 695 $ 817 (Net Of Utility Allowance)
Other Issues • Local and State condominium conversion laws. • Section 8 Tenants. • Partner Consents. • Lender Consents. • Tax Implications.
Take Aways • Each State HFA Must Approve the PLR. • The “politics” of affordable/workforce Home Ownership are positive and real. • The Mathematical Formula must “work” for the homebuyers and the developer. • Conversions are not for “beginners”. • Most post compliance period properties may not fit into the PLR.