Recommendation Staff recommends that Mayor and Council: Staff recommends that Mayor and Council: 1. Receive a presentation from Rockville Housing Enterprises (RHE) on a) its plans to refinance its existing loans and obtain additional financing for modernizing the property; and b) its request for a 500,000 grant from the City to help fund the modernization.
The purpose of this work session is for the Mayor and Council to a receive presentation from RHE and discuss RHE s proposal for the refinancing of existing loans on RHE s Fireside Park Apartments, and its planned modernization2 of the property with additional money obtained
3.A Packet Pg. 5 Financially, the property continues to meet its debt service obligations and generate sufficient revenue to maintain the property for continued occupancy. However, due to the higher than anticipated vacancy rates, it did not generate a net operating income (NOI) after debt service, in 2016. Even so, Fireside Park has 1) completed most of the capital repair planned at the 2012 acquisition; 2) carried out unit turnover activities; and 3) continued to address emergency repairs. The property has received satisfactory ratings on its annual assessment of the physical conditions of properties conducted by HUD s Real Estate Assessment Center. Current Project Financial Structure The City s loan terms require that Fireside Park pay interest at 3 annually, and principal payments equal to 15 of annual net cash flow, if available. Fireside Park has paid interest annually. The property also made principal payments in the years it realized net cash flow, bringing the outstanding principal balance on the City loan to 1,705,709. The property did not realize a net cash flow during 2016, and therefore, no principal payments were paid to the City. Similarly, RHE did not earn the allowable management fee of 80,000 in 2016, which was also to be paid with net cash flow, if available. A financial audit is in progress, which will address the property s net cash flow position for 2017. All three loans have similar terms and mature seven years after closing. The County s loan carries the same interest rate as the City at 3 . The Citibank loan carries an interest rate of 3.5 . The remaining principal balances will be due in full when the loans mature in 2019.
3.A Packet Pg. 8 Fireside Park is seeking a refinance package of an estimated amount of 56.7 million. It is seeking to maintain some of the same partners for the refinance transaction, including the City of Rockville and Montgomery County. To that end, Fireside Park is seeking funding from both the City and the County. RHE, on behalf of Fireside Park, has approached the County with its request for funding, and the County has expressed interest in remaining in the project financially by lending 2,773,224 for the project.8
Financing Costs 4,061,467 The refinance will allow Fireside Park to meet its obligations of the original loans and obtain additional funds to undertake modernization of the property. Of the nearly 57 million, 60 (or 34 million) will be applied toward repayment of existing loans; approximately 16 million (or 28 ) will fund the hard and soft costs of the modernization. The financing costs, operating reserves (required by lenders, HUD, and tax credit investors) and legal counsel are estimated to cost 10 of the total project expense, or approximately 5 million. RHE will earn a fee of 1 million for the direct costs, coordination and management of the refinance and rehabilitation activities.10 RHE will utilize the funds toward other RHE housing programs and address deferred maintenance issues at other properties owned and managed by RHE. Housing agencies typically employ such strategies where they prioritize and plan their spending to maximize and leverage their funding sources for the most impact. For example, RHE is programming its accumulated Replacement Housing Factor Funds (RHF)11 in the amount of 197,415 towards the modernization of Fireside Park Apartments because it is opportune timing, and the preservation of Fireside Park Apartments is the most impactful project now. RHE took a similar action in its use of its federal funds available at the time in the acquisition of Fireside in 2012. HUD funds are typically not fungible, targeted for specific use and timing. A
3.A Packet Pg. 10 developer fee, on the other hand, is not as restricted giving housing agencies flexibility and general use of the funds across other housing programs. Development Team In anticipation of the refinancing, RHE has been preparing for this transaction and modernization of the property for the past two (2) years by promoting the project to lenders and funders; drafting a mixed finance proposal for submission to HUD; and assembling a development team. The team members and their respective roles are as follows: Owner RHE Fireside Park, Inc. (RHE may decide to create a new entity to own the property.)12 Developer an RHE developer entity to be created13 Development Consultants NDEVCO The Hampstead Group, Inc. Architectural Consultants Natura Architectural Consulting Architect The Arcadia Group Inc. Civil Engineer AMT Consulting Engineers Surveyors General Contractor - Harkins Builders Legal Counsel Ballard Spahr LLP Property Management Agent Edgewood Management These firms were procured in a competitive bid process and City staff served on some of the review panels for the selection of the firms RHE is currently reviewing proposals from debt and equity providers. The selected debt and equity providers will issue a Letter of Interest (LOI) for the project, outlining the terms and conditions of financing to be provided for the refinancing of the existing loan and the additional funds. Fireside Park is anticipating LOIs from debt and equity partners over the next several weeks. Similarly, Fireside Park is seeking a Letter of Commitment (LOC) from the City of Rockville and Montgomery County. The LOIs and LOCs will be submitted to the State of Maryland as part of RHE s Tax-Exempt Bonds application, upon receiving the City s authorization to submit the Bonds application as part of RHE s refinancing strategy. RHE is seeking to submit the Tax-Exempt Bonds application in April.
3.A Packet Pg. 11 Risk for RHE as Developer and Impact on the Organization- Similar to the current ownership structure, the ownership for the refinanced Fireside Park Apartments will be organized to minimize the risk to RHE. 221(d)(4) is a HUD-backed FHA 40-year non-recourse low-interest loan.14 The loan will be secured by the land and improvements. This type of loan has no direct fiscal impact on RHE because it is asset-based. HUD scrutinizes the property location, the proforma rents and expenses, development, and management team to ensure performance and success. The same scrutiny and due di ligence will be undertaken by the lender, State and tax credit syndicator/investor. RHE's current programs and assets will be insulated by establishing a limited partnership entity as the borrower as required by the tax credit investor. The continued ownership of Fireside Park Apartments will be a stand-alone ownership with no adverse impact on RHE's financial condition. The proforma of Fireside Park Apartments will be based solely on the operations and financial projections of the Fireside Park Apartments and not the parent company, RHE. As required by the tax credit investor, the property will continue to be managed by a third-party management company. RHE management staff and Board of Commissioners will be involved in Fireside Park Apartments policy issues only by providing oversight and quality control of management company operations. Modernization Schedule RHE anticipates commencing the modernization effort immediately following the financial closing in late 2018. The modernization is projected to be completed in 24 months, or by December 2020, from construction to stabilization. Residents will remain at the property while the modernization effort is in progress, with onsite relocation of directly-impacted residents. It should also be noted that there may be some shifts in the project schedule due to potential unforeseen delays. Financial Feasibility of the Project
3.A Packet Pg. 12 operating expenses also includes a 82,600 set-aside for replacement reserve, or 350 per unit/ year, as typically required by most lenders and HUD. The projected operating expenses reduce the effective gross income to 2.5 million. The annual debt service is estimated at 2.18 million. This results in a debt service coverage ratio of 1.15, which meets HUD s requirement for the loan products contemplated for this project (a 221(d)(4) FHA loan) and for affordable properties like Fireside Park Apartments . The net cash flow after debt service is estimated at nearly 344,000. These figures assume 1) an annual vacancy rate of 5 ; 2) an annual 2 growth in rents; and 3) an annual increase of 3 in operating expenses. The projected vacancy rate of 5 may be somewhat aggressive given the property s vacancy rates over the last few years, however, the substantial modernization is anticipated to help reduce the vacancy rate significantly. Furthermore, RHE has retained a property manager that is widely recognized and respected in the industry. The management firm was able to turnaround the vacancy rates rapidly, bringing the occupancy rate to 90 from 83 four-months following the assumption of the management responsibilities for the property. The overall vacancy rate for the City of Rockville is 5.7 , and 6.1 for the County.16 As noted above, the proforma is based on the property s continued operation during the 24- month construction period. The property will maintain a vacancy rate of 12 to 17 , (or 28 to 40 units) during construction, so that impacted residents can be relocated within the property, as needed. This will allow the property to continue its revenue generation, which is estimated at 3,428,065, net of operating expenses, or 142,844 per month for the 24 months during construction. Debt service is suspended during construction and interest on the permanent financing will be paid from reserves funded at closing, making available project net operating income a funding source for construction. This onsite relocation approach will also allow RHE to move residents within the development and avoid offsite relocation, a cost savings to the project, which will minimize extraordinary disruptions to the families. RHE has budgeted 354,000 for relocation expenses. RHE, through a third-party relocation services contractor, will conduct the relocation in accordance with HUD s Uniform Relocation Act, based on a HUD-approved relocation plan for the project. RHE will be submitting a Relocation Plan to HUD as part of its mixed finance proposal submission package.
3.A Packet Pg. 13 Options to Consider As noted previously, the refinancing of Fireside Park Apartments was always intended as indicated by the terms of the original the 2012 financing. The loans were structured as seven- year loans, maturing in December 2019. Moreover, the refinancing strategy that was explicitly stated seven years ago included tax credits and Tax-Exempt Bonds with the idea that the property would undergo substantial modernization. The purpose was to support the financing that would be sought and required to repay the seven-year loans and to modernize the property for long-term viability. Moreover, the repayment of the outstanding loans is predicated on Fireside Park s ability to refinance the existing loans. The property was not envisioned to generate sufficient revenue to repay is entire debt obligation in seven years time. As such, not refinancing would cause Fireside Park to default on its current loans, including the loan from the City.
Given the detrimental impacts of not approving the refinance to allow Fireside Park to obtain additional funding for modernization, below are two primary options for the City to consider.
Staff Recommendation Staff recommends Option 2, providing RHE the grant in the amount of 500,000 while also authorizing Fireside Park to move forward with the refinancing of its existing loan and obtaining additional funds for modernization of the property. The grant would fund hard construction costs and the funds would be drawn down based on invoices submitted to the City. 3.A Packet Pg. 14 Supporting RHE's proposal will continue to preserve the long-term affordability and viability of an apartment community that has a history of offering Rockville residents an affordable, high- quality housing option in a mixed-income community and neighborhood. Given the age of Fireside Park Apartments, lack of modern amenities (i.e. fitness center, standalone in-unit washer and dryer), and dated architectural style, the property is one of the naturally occurring affordable housing developments in the City, with income restricted units targeted to households with income at or below 80 of AMI, while the market-rate units are affordable to households with incomes of up to 120 of AMI, essentially what would be considered workforce housing units in the County and area jurisdictions. As noted previously, this mixed- income model provides for the project s financial stability and affordability for the next 40 years. Should the Mayor and Council decide to provide funding as requested, staff recommends that 500,000 originate from the restricted Housing Opportunities Fund. This fund was established to support and further affordable housing activities. The fund is sourced with excess sales proceeds from the sale and/or foreclosure of MPDU homeownership units, and in-lieu fees from developers who may opt to pay into the Housing Opportunities fund to comply with their MPDU requirements.
It should also be noted that while RHE is an independent entity, it is the City s housing agency charged with providing affordable housing to some of the City s most vulnerable populations. RHE collectively owns, manages, and administers housing programs that serve many of the City s low and moderate households in the City. RHE is the City s most important partner in achieving the City s policy on affordable housing and in addressing the City s housing needs current and future. Lastly, providing the 500,000 grant for the project is a strong showing of an inter-governmental partnership and cooperation with RHE and Montgomery County. Mayor and Council History RHE presented a conceptual refinance and modernization plan for Fireside Park Apartments to Mayor and Council as part of the annual Fireside Park Apartments report in August 2016 and September 2017. 3.A Packet Pg. 15 RHE has discussed the refinance and modernization of Fireside Park Apartments in its
Boards and Commissions Review RHE will be presenting to Mayor and Council during the work session, and members of the RHE Board of Commissioners will be in attendance. City staff also invited the Community Services Advisory Board and the Human Rights Commission to this work session. Fiscal Impact The refinancing will enable RHE to repay its City loan in the amount of 1,705,709. Should the Mayor and Council decide to provide the 500,000 in grant funds to the project, it will be included in the proposed FY 2019 budget. The City could either use its general funds or its Housing Opportunities Special Activities fund ( Housing Opportunities Fund ) to fund the grant request. Next Steps
k A pa rtm en ts Re fin an ce an d M od er niz ati on ) Fireside Park Apartments q Fireside Park Apartments, located at 735 Monroe St., Rockville, MD, (the Property ) was purchased by RHE Fireside Park, Inc. in December 2012 through Montgomery County s Right of First Refusal program. q The City of Rockville, Montgomery County, and Citi Community Capital provided loans to RHE to finance the acquisition of the property with a seven year term ending in 2019.
k Fireside Park Apartments: Rehabilitation Project Overview q RHE is in a unique position to refinance the property with a long-term, low-interest, non-recourse financing vehicle guaranteed by HUD under the HUD 221(d)(4) program and leverage the financing strategy for modernization and improvements to the apartment homes and community space. q Fireside Apartments is wholly owned by Rockville Housing Enterprises. Under the refinancing plan, the City of Rockville has no ownership or financial liability. q RHE plans to pay off the existing loans and refinance the property through a mixed finance redevelopment strategy. The financing strategy utilizes the State s Multifamily Tax Exempt Bond program, the Maryland Partnership and Rental Works program, as well as 4 Low Income Housing Tax Credits. q The total development cost proposed for the redevelopment is 57,963,791. q This project will serve as a shining example of the City of Rockville and Montgomery County s commitment and investment in the preservation of affordable and mixed-income housing.
k Fireside Park Apartments: Proposed Scope of Work RHE and the development team have conducted a detailed site assessment related to project physical needs and have consulted with the management company for areas of increased marketability and asset functionality. The property is in need of widespread improvements and repairs to successfully position itself in the marketplace and operate sustainably.
TOTAL SOURCES 57,963,791 Uses Repayment of Citibank Loan 29,740,382 Repayment of Montgomery County Loan 2,773,724 Repayment of City of Rockville Loan 1,705,709 Construction Costs 12,429,648 Due Diligence Third Party Reports 104,500 Legal 150,000 Soft Costs (architect, consultants, legal, taxes, due diligence) 2,753,718 RHE Developer Fee 1,000,000 Operating and Financing Reserves 2,093,174 Financing Costs 5,132,655
k Fireside Park Apartments: Financing Plan Summary q Permanent Financing The FHA 221(d)(4) loan guaranteed by HUD is a low-cost, non-recourse, fixed-rate loan. 221(d)(4) loans are fixed and fully amortizing for 40 years. RHE has initiated preliminary discussions with private lenders.
q Income during Construction Net operating income from tenant rent proceeds and other tenant income projected over the rehabilitation and stabilization period of 18 months from the start of construction. Interest on the permanent financing will be paid from reserves funded at closing, allowing all Project net operating income to be utilized as a construction source. q Maryland Partnership Funds (MPH) Maryland Rental Housing Works (RHW) MPH is a partnership loan program designed by the State for entities such as the Housing Authority who plan to own and operate affordable housing with units less than 50 AMI. RHW is subordinate gap financing to be used solely for projects financed using the State Multifamily Bond Program and 4 Low Income Housing Tax Credits. q Reserves Comprised of the existing restricted reserve and capitalized replacement reserve.
k Fireside Park Apartments: Financing Plan Summary q Montgomery County Long term subordinate financing to ensure preservation of affordability. q Rockville Housing Enterprises RHE has secured pre-development grant financing from HUD. q City of Rockville 500,000 Grant investment. Eligible uses of Grant financing are limited to Construction and Rehabilitation costs. q LIHTC Equity 4 Low Income Housing Tax Credit Equity. RHE will procure term sheets from equity syndicators.
Commissioners, and manage the development team, Property Manager and other stakeholders. Ms. Anderson has extensive experience in the management of large mixed finance redevelopments as well as real estate finance and is well positioned to lead the refinance and rehabilitation of Fireside Park Apartments. Ms. Anderson has managed over 5 mixed income affordable redevelopment projects in South Carolina, Georgia and Louisiana with combined Total Development Costs of over 570 million and a total of 2134 affordable and market rental and homeownership units. Additionally, Ms. Anderson has extensive finance and underwriting experience gained during her tenure as the Manager of the Affordable Housing Program at the Federal Home Loan Bank of Dallas. Christele Etienbla, Finance Analyst. Ms. Etienbla will be responsible for management of public solicitations and procurements, maintenance of financial and asset management records. Ms. Etienbla is a finance professional with extensive banking experience including 13 years in senior leadership roles within the banking and financial services sector , working predominantly in Retail Banking. RHE staff has worked closely with its Board of Commissioners over the past two years to strategically craft the refinancing plan and prepare for the take- out of the existing Project financing. During its monthly Board meetings, RHE has and will continue to provide a full report on project progress from pre- development through project completion and stabilized occupancy. The organizational structure for the refinancing will be comprised of the following: Project Owner/Sponsor RHE will establish a Limited Partnership (LP) entity to serve as the Project Owner and borrowing entity, with RHE operating as a general partner in the LP. At the time of the financial closing, the selected Low Income Housing Tax Credit investor ( Investor ) will serve as the Limited Partner, resulting in an ownership split as follows: Low Income Housing Tax Credit Investor 99.99 and RHE s entity .01 . Developer RHE will likely form a single purpose entity to serve as the Developer for the rehabilitation and refinancing.
k A pa rtm en ts Re fin an ce an d M od er niz ati on ) 6 P a g e have a demonstrated track record of successfully working with the State of Maryland utilizing Housing Tax Credits, Tax Exempt bonds and multiple equity lenders. Collectively, the team has been planned and developed over 1,000 mixed income, mixed financed developments with a total development cost of approximately 115,561,767 in the Washington metropolitan region. NDevco and Hampstead bring direct experience in virtually every area of community redevelopment and affordable housing finance, creatively layering a variety of financing sources together to create the most advantageous financing structure for the Project to allow for modernization and much needed upgrades and improvements with quality finishes. NDevco, LLC. NDevco, LLC plans, develops, and preserves signature, affordable housing communities. NDEVCO, LLC s mission is rooted in the undertaking of projects that require creative solutions and public/private partnerships to achieve complex community development and neighborhood revitalization objectives. Over the past five years, NDEVCO, LLC has led the planning efforts and co- developed over 525 units of affordable and mixed income housing in the Washington, D.C. metropolitan area. NDEVCO, LLC s past performance includes the master planning and development of projects amounting to approximately 115 million dollars of total development costs. This success is a result of NDEVCO, LLC s community- centric approach and proven track record of developing effective public/private partnerships with clients, community and civic stakeholders. The Hampstead Group. The principals of The Hampstead Group, Inc. are experienced affordable housing developers who have developed approximately 5,800 units across the United States, including the 130 unit R Street Apartments development in NW Washington, DC that was financed by DHCD. The Hampstead Group specializes in the preservation of existing affordable housing for an extended regulatory period, using multiple layers of public and private financing including tax credits. Hampstead focuses its development efforts on infill neighborhoods with other active redevelopment projects underway and typically works with local stakeholders to create a more cohesive development plan to create long term sustainable neighborhoods. Hampstead s extensive track record, combined with broad industry knowledge provides valuable insights into client needs and market conditions to be able to negotiate optimal risk allocation. In particular, the depth and geographic reach of our group makes us an ideal choice when it comes to large portfolio transactions with substantial due diligence requirements. Hampstead has developed a strong reputation and gained valuable experience related to development and repositioning of existing properties. Hampstead is active in the Washington Metropolitan market where participation is limited by the fact that such development requires the assemblage of complex, multi- layered financing and that developers must be prepared to address the issues associated with existing partnerships in order to purchase assets for such redevelopment. Another complexity is the overlay of various regulatory constraints related to the many financing pieces. Every bit as important 3.A.c Packet Pg. 40 A tta ch m
as purchasing properties and financing them is completing the rehab on budget and successfully operating the properties post rehab. Hampstead often joint ventures redevelopment efforts with both new and existing owners as well as non- profits. Past Performance of Similar Projects in the Region Completed by the Joint Venture of
Property Manager Edgewood Management Corporation A leader in the field of affordable housing management, especially HUD subsidized and mixed- income properties, with a management portfolio of over 25,000 units nationwide. Since taking over management of the Property in July 2017, the management team has worked successfully to get the Fireside s occupancy levels above 90 . PROJECT FINANCING RHE is in a unique position to refinance the property with a HUD 221 (d)(4) loan. The advantages of the 221 (d)(4) loan product are: the 40 year term, the low- interest rate, and the fact it is non- recourse and guaranty by HUD. Fireside Apartments is wholly owned by Rockville Housing Enterprises. Under RHE s refinancing strategy for the rehabilitation, the City of Rockville has no ownership or financial liability in the Property. The original acquisition of Fireside Park by RHE occurred in December 2012 and was financed with a 7 year mortgage term. It was originally determined that the original 7 year loan would be refinanced and at the time of refinance the property would rehabilitate the property utilizing the Low Income Housing Tax Credit Program. RHE is excited to be on track with the implementation of the refinance and rehabilitation plan. RHE will pay off the City of Rockville, Montgomery County, and Citibank and refinance the property through a mixed finance redevelopment strategy. The rehabilitation financing strategy includes, but is not limited to the State s Multifamily Tax Exempt Bond program, the Maryland Partnership and Rental Works program, 4 Low Income Housing Tax Credits, subordinate loan financing from Montgomery County and a City of Rockville grant. RHE respectfully requests the following from the Mayor and City Council: A grant in the amount of 500,000 is requested for the project development plan to assist with the rehabilitation and preservation of affordable rents at the Property. The grant financing would be limited to the following eligible use: Construction Costs. 3.A.c Packet Pg. 42 A tta ch m
Attic insulation Paint, replace flooring in common areas Replace water heater/circulation pumps Replace carpeting with resilient flooring in all areas except bedrooms Replace kitchen cabinets and countertops including sink and hardware Replace kitchen range hood, refrigerator, AC condensing units, and furnace (Energy Star) Replace range Replace thermostat Duct sealing and repairs Replace apt. unit entrance/interior door and hardware New window blinds Replace apartment unit light fixtures with LED smoke detectors Landscape enhancements, including tree trimming New property signage Exterior architectural enhancements Exterior building painting Redesigned trash enclosures The total development cost for the Project will be 57,963,791.
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