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EJP/Praxis 1

Board of Commissioners Planning Session

Scott Jepsen, EJP Consulting, LLC Eric Novak, Praxis Consulting Group, LLC April 23, 2010

  Review Findings to Date (5 minutes)   Review Goals/Principles (5 minutes)   Issues of Concern (60 minutes): ◦  Issue#1: Self-Develop vs. Procure a 3rd-Party Owner/Developer ◦  Issue#2: Ownership Structure ◦  Issue#3: Disposition Proceeds ◦  Issue#4: Homeownership ◦  Issue#5: Splitting Portfolio ◦  Issue#6: Reconfiguring Portfolio

  Review Critical Path Schedule / Transition Issues (10 minutes)

  Wrap Up / Next Steps (10 minutes)

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EJP/Praxis 2

Work Completed To Date:   Capital Needs Assessment: April 2009   LIPH / RHCP Strategic Plan July 2009   Community / Resident Meetings: October – December

2009   Property Appraisals: November 2009   Inventory Removal Application / Preliminary Relocation

Plan: December 2009   Board Establishes Goals / Principles for Disposition:

January – February 2010   Environmental Review Submission: March 2010

Findings:   Small portfolio consisting of all 3- and 4- bedroom units;

75 LIPH/RHCP units on 15 properties (3.62 acres total)   LIPH program operates at a loss annually of about

$106K; BHA operating costs of about $8,533/unit annually

  Extremely difficult portfolio to own and manage: ◦  Inefficient size; all large-family units; no on-site

presence ◦  Bound by same HUD regulations as larger PHAs ◦  “Troubled” status since 2007 ◦  Have tried many management models since inception.

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Findings (continued):   LIPH units (built 1989) 21 years old   RHCP units (built 1983) 27 years old   High level of deferred maintenance. Estimate of $4.5

million in hard costs to repair and modernize 75 units ($60,405 per unit)

  BHA receives about $131K annually from HUD for LIPH capital repairs. (27.5 years to address capital repairs)

  The RHCP units are older and in poorer condition. The RHCP program does not provide funds for capital replacement.

Still, the LIPH and RHCP stock is a valuable public resource…

  Townhouse configuration with front and back doors, yards, and off-street parking.

  Good infill locations, near schools, transit and services.   Large family rental units still in demand.   Units need significant renovation, but are still functional.

Would cost at least $250K/unit to replace new.   Berkeley housing market extremely tight—near 0% rental

vacancy rates, high rents, new production expensive and difficult.

  City Housing Element cites need for Large Family Units (Policy H-23)

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BHA public housing has operated as a “closed system”…   Many long-time residents   No LIPH/RHCP re-housing options for “empty nesters”

RELOCATION REQUIREMENTS PER BHA ACOP—LIPH UNITS ONLY

CATEGORY

TO NON-PORTFOLIO

UNIT

TO PORTFOLIO

UNIT

REMAIN IN CURRENT UNIT POST

REHAB

OVER-HOUSED 22 14 0

UNDER-HOUSED 0 1 0

OVER INCOME 4 0 0

APPROPORAITELY HOUSED 0 0 13

TOTAL 26 15 13

Goals/Outcomes:   Preserve 75 units of affordable housing   Maintain at least 75 units on the existing sites   Serve same household income population (up to 50%

AMI) by providing a Section 8 voucher or Project Based assistance

  Optimization of financial compensation to BHA

* adopted by BHA Board February 2010

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Principles for Process – what BHA is committing to our current residents:

  Ensure the diversity of the population of those who will live in the units after repositioning/disposition process

  Least possible displacement/disruption to current residents

  Residents are offered/receive the information, services, and housing they need

  Residents continue to pay 30% of adjusted income – no minimum income requirement

Principles for Process (Continued) – what BHA is committing to our current residents:

  Transparency – communicate openly about what we’re doing and why

  Existing residents have 1st priority for rehabbed units

  Residents are integral part of planning/relocation process

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EJP/Praxis 6

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Four Development Models: A.  Private/Non-Profit Owner/Developer B.  Fee-Based Developer (Turn-Key) C.  PHA Partners w/ Developer D.  PHA at Developer …And Many Variations in Between

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What does an affordable housing developer do?   Assembles development team (architect, engineers, lawyers,

property manager, general contractor)   Conceptualizes project (location, units, amenities, market)   Oversees design   Obtains zoning and permits   Obtains financing   Covers the cost of predevelopment out of own pocket   Provides financial guarantees to lenders   Oversees construction and lease-up   Manages property and ensures regulatory compliance

…and receives a developer fee at the end if the project is successful

A. Private/Non-Profit Owner/Developer What is it?   BHA procures 3rd-party private owner/developer to develop, own, and manage portfolio.   BHA role limited to development contract, provider of rental assistance, potentially land owner

BHA capacity to carry out:   Since all of the development activities are procured, need relatively little in-house capacity   BHA would require legal and development assistance to negotiate contracts and monitor performance

Advantages:   Developer responsible for completion (assumes all risk)   No BHA ramp-up of internal capacity required   BHA can still exercise control through contracts   Operating efficiencies of folding units into larger owner portfolio   Once procured, developer not subject to state and Federal procurement rules

Disadvantages:   Developer gets entire fee (more later)   While not carrying out the work, BHA needs to vigilantly monitor owner/developer performance.

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B. Fee-Based Developer (Turn-Key) What is it?   3rd-Party developer carries out redevelopment for a fee and then hands property back to BHA to operate.

BHA capacity to carry out:   BHA would require legal and development assistance to negotiate contracts and monitor performance.   BHA would need to address operating inefficiencies.

Advantages:   Developer responsible for construction completion (assumes all risk)   No ramp-up of internal capacity required for development phase   Relies on expertise of 3rd-party developer for construction   BHA retains full control of portfolio post-renovation   Once procured, developer not subject to state and Federal procurement rules

Disadvantages:   Developer gets entire fee (more later)  BHA left with existing operating inefficiencies   Turn-key model more typical of capital grant projects—probably wouldn’t work with Project-Based Section 8 financing.

C. PHA Partners with Developer What is it?   BHA is a co-owner of project with 3rd-party developer. Typically, the developer retains managing control of project in return for carrying out most of the work and providing financial guarantees.

BHA capacity to carry out:   BHA would require legal and development assistance to negotiate contracts and monitor performance.   BHA might need to create spin-off entity in order to partner.

Advantages:   Developer still assumes most risk   Little BHA ramp-up of internal capacity required   BHA a party to most contracts—more control   Operating efficiencies of folding units into larger owner portfolio   BHA potentially would build capacity to take on future projects   Possibility of developer fee

Disadvantages:   May scare away some developers   Entails modest time commitment and risk   Developer fees contingent on successful performance—usually don’t come until project completion   Entity may be subject to state and Federal procurement rules

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D. PHA as Developer What is it?   BHA creates spin-off non-profit to own portfolio.   BHA acts as sole developer and property manager.

BHA capacity to carry out:   BHA would need to bring on (or contract with) new development staff in order to carry out project.

Advantages:   BHA would control all aspects of project and long-term operations.   To the extent that the project generates fee or cash flow, the BHA gets it all.   BHA would build capacity to take on future projects

Disadvantages:   Entails extensive time commitment and financial risk   Entity would be subject to state and Federal procurement rules   BHA left with existing operating inefficiencies   Unlikely that banks would work with 1st-time developer in current environment

Observations:   If BHA does not plan future development projects, it may not

need or want to build internal development capacity. (Is this a one-time event?)

  Bay Area has many competent affordable housing developers—not true in some communities.

  We believe that there continues to be interest within the affordable housing community in responding to an RFQ.

  BHA control and oversight, and compensation, can be achieved through the HAP Contract, Ground Lease, Disposition and Development Agreement, etc.

  Disposition/repositioning goals and principles can be achieved under any of the development models.

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EJP/Praxis Recommendation: 1.  Pursue development model #A: Procure 3rd-Party Private

Owner/Developer (Alternative: pursue model #C where BHA takes on a minority ownership role in partnership with private developer)

2.  Board still to decide: ◦  Roles/responsibilities of BHA and private developer ◦  BHA compensation desired ◦  Development scope of work ◦  Mechanisms for input / long-term oversight of properties ◦  Tenant protections/relocation ◦  Supportive services

Issues: 1.  Land lease vs. fee simple ownership 2.  BHA as an ownership partner with 3rd-party developer

(addressed in last section) 3.  BUSD-owned properties (long-term ground leases on Francisco

and Ward St.—28 units)

EJP/Praxis Recommendation: 1.  Ground lease all properties to 3rd-party ownership entity. This

structure is common and should not be a barrier to obtaining development financing.

2.  Work with BHA legal counsel to decide on optimum structure to achieve disposition goals

3.  Work with BUSD to amend or rewrite Francisco/Ward ground leases.

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Issues: 1.  How much is potentially available to the BHA based

upon the different financing scenarios and development models?

2.  What is the potential timing of proceeds? 3.  What can these proceeds be used for? 4.  How will the BHA evaluate developer proposals with

regard to compensation? 5.  How can the BHA ensure that it receives its share of

proceeds from a 3rd-party developer?

1. How much is available?

  Financing Assumptions—Sources: ◦  Tax credits not viable alternative ◦  Limited sources of grant funds ◦  Main financing source: the leverage provided by

project-based housing choice voucher (i.e. How much can the developer borrow?)

◦  Used conservative assumptions (10- or15-year term and amortization, 1.2 debt service coverage, large reserve requirements, etc.)

◦  Won’t know for sure until we receive proposals from developers.

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1. How much is available?

  Financing Assumptions—Operating Income and Expenses: ◦  Rents at 120% of FMR (less utility allowance)   $2,101 3-bdrm rent   $2,599 4-bdrm rent

◦  Operating expenses at $7,540/unit annually (including replacement reserve)

◦  5% vacancy rate

1. How much is available?

  Financing Assumptions—Uses: ◦  Hard construction costs of $4.5 million ◦  10% rehab contingency ◦  Soft costs include design, relocation, financing fees

and interest, reserves and developer fee. ◦  Total development cost (not including acquisition)

of about $8.75 million Sources – Uses = Proceeds potentially available to

pay BHA for acquisition

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1. How much is available?   Between $1.46 million and $3.68 million is potentially available for

initial acquisition of (or ground lease payment for) the portfolio   The project will also generate about $239K a year in cash flow

after debt service which potentially could be shared with the BHA.

10-Year Amort./Term

15-Year Amort./Term

Maximum Loan Amount

$8,498,769 $10,930,056

Potential BHA Proceeds After Development Costs

$1,462,500 $3,675,000

Annual Cash Flow

$239,463 $239,463

1. How much is available? •  Financing scenario also includes a 15% developer fee

(approx. $925K to $950K). •  Developer fees are typically received at project

completion—after construction and lease-up—if everything goes as planned.

•  Until then, the developer has to bankroll its own activities. Typically, half of fees cover direct developer expenses (overhead) in carrying out project.

•  If BHA were minority development partner, it could potentially share in some portion of fee.

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2. What is the Timing of Proceeds? •  We will ask developer to specify timing of proceeds in

development proposal. •  Acquisition payment usually occurs at the start of

construction—once all project financing is in place. •  If the developer is pledging a portion of developer

fee, this is usually contingent upon successful completion of project.

•  Cash flow payments might occur annually or quarterly, based upon an agreed upon operating budget and performance benchmarks.

3. What Can These Proceeds Be Used For? “All net proceeds from the sale of the LIPH properties will be allocated

for eligible purposes under Section 18(a)(5) of the Act. Specifically, the BHA will allocate the net proceeds from the disposition for the following purposes: •  To pay for the provision of supportive services to the residents of the

rehabilitated 61-unit development and participants in the BHA’s existing Housing Choice Voucher program, including case management, child care and transportation vouchers, and stipends for education and training opportunities; and,

•  To cover future operating deficits in the administration of the BHA’s Housing Choice Voucher program, which provides low-income housing assistance and benefits the residents of the BHA, as authorized by 24 CFR 970.19(e).”

* Inventory Removal Application, Section 5, Line 11.

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4. How Will the BHA Evaluate Developer Proposals With Regard to Compensation? •  Owner/Developer RFQ will include a set of questions

about BHA compensation: o Acquisition price and timing o  Portion of developer fee, if any, and timing o  Portion of available cash flow, after debt service

•  Owner/Developer will be required to submit full development pro forma and financing letters.

•  Fee proposals will be evaluated based upon amount, timing, and realism of financing assumptions.

5. How Can BHA Ensure That It Receives Its Share of Proceeds From a 3rd-Party Owner/Developer? •  Fee commitments will be included in Disposition and

Development Agreement and Ground Lease and will be legally binding

•  BHA’s control of HAP contract provides additional leverage.

•  Won’t know potential proceeds and variation of financing approaches until we put out for bids.

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Potential Tenant Ownership Models: 1.  Sell all or a portion of the portfolio outright

to the tenants 2.  Create a homeownership option outside the

portfolio—perhaps with Housing Choice Vouchers

3.  Create a tenant-controlled limited-equity co-op to purchase and renovate property.

1. Sell to Tenants Description   BHA to sell individual units outright to tenants.   Could be combined with HCV mortgage program.

Fit with BHA Goals/Principles   Option does not meet many of the BHA disposition goals and principles

Advantages:   Some existing tenants would like to purchase their units   Small number of existing households with high incomes might be good candidates for homeownership

Disadvantages:   Permanently lose valuable rental housing stock in Berkeley.   Units have extensive capital needs which might not be addressed in a sale to tenants   Limited proceeds back to BHA   Credit barriers to obtaining mortgage   Homeownership programs targeted to very low-income (<50% AMI) households have poor track record nationally

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2. Create Ownership Option Outside of Portfolio Description   BHA could work with existing residents interested in buying to pursue tenant ownership options outside the existing portfolio   Could be combined with HCV mortgage program.

Fit with BHA Goals/Principles   Generally compatible with goals/principles   Would expand re-housing options for residents who will not be able to return because over-income

Advantages:   Small number of existing households with high incomes might be good candidates for homeownership   Housing prices have dropped in last two years. There may be purchase options in the surrounding East Bay communities.   HCV could convert to $200K+ in mortgage proceeds.

Disadvantages:   Credit barriers to obtaining mortgage   Homeownership programs targeted to very low-income (<50% AMI) households have poor track record nationally   Successful HCV mortgage programs rely on very large pool of applicants

3. Create Tenant-Controlled Limited-Equity Co-op Description   A cooperative housing complex designed for low-income families who become owners and share in management decision.   A limit on resale profits helps maintain a low price for future owners.

Fit with BHA Goals/Principles   Mixed: would promote resident involvement and long-term affordability; but would make implementation far more difficult and perhaps adversarial.

Advantages:   Promotes long-term affordability   Residents are an integral part of the planning and implementation.   Potential to build the capacity of residents to take on more responsibilities over time (leadership, jobs, etc.)

Disadvantages:   Still need professionals to finance, develop, and operate portfolio   Would add another layer of complexity in trying to attract 3rd-party developer   Portfolio would remain small and inefficient to operate   Many residents may not want to make time commitment required to learn development and build org. capacity.

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EJP/Praxis Recommendation: 1.  Do not pursue homeownership as part of existing

disposition process. 2.  BHA should explore opportunities to promote

homeownership as “next step” housing through HCV program: ◦  Ascertain interest among HCV residents and explore

development of a HCV homeownership program. ◦  Incorporate credit counseling and financial literacy classes into

future FSS programming.

Issues:   Developers may be more interested in participating if BHA

allowed option of splitting portfolio or bidding on individual parcels

  Some properties are poorly located for family housing or might have real redevelopment potential as another use.

Concerns:   Developers might “cream” the portfolio, leaving the BHA with

least attractive parcels unsold   Portfolio consists of all small infill sites—limited redevelopment

potential   Each separate development agreement multiplies complexity of

deal.

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EJP/Praxis Recommendation:   Issue RFQ with stated preference to dispose of entire

portfolio intact   Revisit approach if there is a lack of interest in

portfolio as a whole

Issue:   Many existing households will not be eligible for a 3- or 4-

bedroom units, post renovation   Current BHA waiting list favors smaller 1- and 2-bedroom units

Concerns:   It’s expensive and impractical to reconfigure existing townhouses

into flats; however, it might be feasible to convert some 3-bdrm units to 2-bdrm units, by removing a wall.

  Need to weigh reconfiguration against loss of large family units in Berkeley and loss of income to development.

  According to OPC, there are adequate re-housing options in Berkeley to accommodate all over-housed households.

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EJP/Praxis Recommendation:   Refrain from major reconfiguration of portfolio as this

will increase project cost exponentially.   Continue tenant relocation planning to ascertain

which households plan to move with tenant voucher.   If demand exists, and BHA has weighed costs and

benefits, explore reconfiguration of some 3-bdrm units to 2-bdrm units by removing wall.

May 2010 (approx) HUD approval of Inventory Removal Application. June 2010 (approx) BHA releases Owner/Developer Request for Qualifications (RFQ)

to purchase, renovate and operate LIPH/RHCP portfolio as affordable rental housing. 

June 2010 (approx) Begin negotiations with California Departments of Housing and

Community Development (HCD) to refinance RCHP debt and transfer ownership to selected developer.

June 2010 (approx) Complete Resident Relocation Plan. Issue 90-Day Notice to Vacate

to households who do not want to return, post-rehabilitation, or who, because of income or family size, will not be able to return.

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June 2010 (approx) Submit application to HUD for Replacement Housing Choice

Vouchers. September 2010 (approx) Execute Disposition and Development Agreement (DDA) between

BHA and selected affordable housing developer or developers. September 2010 – May 2011 (approx) Carry out relocation of residents who do not want to return, or

who, because of income or family size, will not be able to return to rehabilitated housing.

May 2011 (approx.) Owner/Developer(s) closes on the construction financing. LIPH/

RHCP properties transfer from BHA to selected developer. BHA enters into HCV Agreement to Enter into Housing Assistance Payment (AHAP) contract with developer.

May 2011 – February 2012 (approx.) Developer(s) carries out rehabilitation of 75 units. Existing

residents who choose to stay receive temporary relocation assistance during the renovation or move directly to newly renovated units.

February 2012 (approx.) Renovation complete. Execute Project-Based Housing Choice

Voucher HAP contract.

February 2012 (approx) Project complete.

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  Loss of ACC operating subsidy—conversion to Asset Repositioning Fee (75% of subsidy 1st year; 50% of subsidy 2nd year)

  Budgeting for consultants, relocation, operations during hand-off period

  Other Issues?

1.  Decisions Made Today 2.  Areas Requiring Additional Research in Order

to Make Decision 3.  Next Step

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EJP/Praxis 23

Board of Commissioners Planning Session

Scott Jepsen, EJP Consulting, LLC Eric Novak, Praxis Consulting Group, LLC April 23, 2010