Exchange, TCAP Funds Work Magic to Save Deals in Delaware, Maryland
By Caitlin Jones
6 min read
One by one, a growing number of developers are getting their new low-income housing tax credit (LIHTC) deals funded and closed. Often it’s a convoluted, lengthy, and less than pretty process, but sponsors are finding success nonetheless.
Usually the magical glue making it all happen is federal stimulus dollars, from the Tax Credit Assistance Program (TCAP) or Section 1602 credit exchange program. Provided by the U.S. Departments of Treasury and Housing and Urban Development through state housing credit agencies, these monies are helping to close the funding gap in stalled LIHTC projects so that they can move forward. In practice, each assisted project has its own unique story.
At the National Housing & Rehabilitation Association’s 2009 Fall Developer’s Forum conference in Boston, developers described their rescued projects and the issues they have had to deal with.
David Layfield, of David Layfield and Associates, Salisbury, Md., reported on his “nightmare” moments with a stalled project called Hollybrook Apartments, set to be completed by November 30th.
Located in Laurel, Del., Hollybrook Apartments is a $16.2 million project involving the acquisition, rehabilitation, and consolidation of four existing Rural Development Section 515 apartment complexes with 15 buildings into 124 affordable rental units.
Layfield obtained a housing credit allocation of $800,000 for the project from the Delaware State Housing Authority (DSHA). He then secured a syndicator, who agreed to pay 92 cents per dollar of housing credit, and closed on the investment in June 2008, funding it on a warehouse line and making an initial equity capital contribution of $2.5 million. Construction began in July.
In May 2009, however, with construction 58% complete and two days before the due date of a second capital contribution of similar size, Layfield was told the syndicator wouldn’t be able to make the second or future equity future payments. This second equity installment was to have taken out the project’s three construction lenders.
“We had a nightmare situation on our hands,” Layfield said. “And it was too early in the TCAP and exchange process to be able to tap the money right away.”
The young, bearded developer worked feverishly to try to close the funding gap and save the deal.
Deciding not to pursue litigation, and to keep the project moving, Layfield opted to work with the investor and the deal was recast “with a fairly large deferred developer fee.” The new investor was the syndicator’s warehouse lender, which assumed the initial capital contribution.
Layfield also approached DSHA to seek stimulus dollars. Eventually, in August 2009, he received an award of $4.3 million in exchange funds, after turning in 67% of his original credit allocation for 85 cents on the dollar.
During the period of limbo, until he knew for sure he would receive exchange funds, and until the dollars flowed in, Layfield had to play Houdini to keep the project alive. “One of our biggest issues was convincing the construction lenders to keep lending money to us during construction.” Layfield went over two months without being able to pay the general contractor, which couldn’t pay its subcontractors, which couldn’t pay its workers. A few subs even quit. “Fortunately the GC was very understanding and stayed on the job,” Layield said. “And when the money finally came in the job continued on.”
Layfield said DSHA’s six-page application for stimulus funds was simple and easy to complete. But it took three weeks to get the “hard” funding award letter from the agency that the construction lenders wanted before they would lend any more funds. Five weeks after submitting the application, Layfield learned the exchange funds were on their way. “Since then we’re paying our construction draws two weeks early. It’s the fastest construction financing I’ve ever had.” Some $1.5 million of the exchange funds will be used to pay down the third position construction loan. “The game’s completely turned around now because thanks to the exchange money,” says Layfield. “If it wasn’t for the exchange program Hollybrook Apartments would still be 58% complete.”
Maryland Project
Nancy Rase, of Homes for America, Inc., an Annapolis, Md.-based nonprofit developer, reported on City Arts, a Baltimore project assisted with TCAP funds on which Homes for America is the lead developer in a joint venture with two other nonprofits.
The new construction development will contain 69 affordable apartments – 11 reserved for persons with disabilities and 58 targeted to artists – on a site being acquired from the city in the Station North Arts and Entertainment District. The total development cost is $13.5 million, with funding sources including a permanent mortgage, TCAP loan, LIHTC equity, and deferred developer fee (see sources and uses chart below).
“The TCAP process for us has been relatively easy,” said Rase, who admitted some trepidation at deciding to move forward on construction before getting official notice that the project would receive TCAP funds.
Bank of America is the equity investor and construction/permanent lender. Rase said the project’s allocated housing credits, including extra credits from a 30% boost, will be sold soon. A housing credit reservation of nearly $1.4 million was received in March 2009 from the Maryland Community Development Administration (CDA), which also provided the TCAP funds, in August 2009. Initial closing is to occur before November 30.
The project’s funding gap arose when the developer’s assumption that the project would receive a soft second mortgage from CDA didn’t pan out. Because of a budget shortfall, Maryland is making fewer awards of soft funds than usual.
CDA is providing the TCAP funds as a loan at 4% interest, which troubles Rase. She noted the addition of this debt at 4% accrued interest to the first mortgage will make the deal more highly leveraged than the norm for Homes for America, and lead to some thorny issues down the road that her successors will have to address. Capital account issues for investors will occur sooner, and the sponsor will have to figure out how to repay the large debt balance in the future. The extra accrued debt will also increase the right of first refusal purchase price to the nonprofit at the end of the 15-year compliance period. Rase worried about this debt issue and urged others to pay close attention to this in other projects, predicting it will become a “big problem.”
