A Providential Match: Nonprofit Preserves Rhode Island Property Acquired from Church

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You could say it was a heavenly transaction.

In the deal, which featured multiple “firsts,” POAH, a nonprofit affordable housing developer and owner based in Boston, acquired and is renovating a Providence, R.I. apartment building in order to preserve it as long-term affordable rental housing for seniors.

POAH, short for Preservation of Affordable Housing, purchased the property from a nonprofit corporation of Grace Episcopal Church that had developed Grace Church Apartments in 1978 and had operated it since then as elderly housing under the Section 202 program of the U.S. Department of Housing and Urban Development. In 2010, the church received two unsolicited proposals to purchase the property, eventually selecting POAH. Both bidders had committed to maintain the property as affordable housing – something very important to the church.

“We felt that was the mission of the property; that is why we built it in the first place,” says Polly Daly, a member of the church’s congregation and vestry (board of directors). “And it was important to us that that mission be continued, that the residents who are there be able to stay there.”

Helping to facilitate the transaction was a HUD policy change easing a prior requirement that nonprofit housing sponsors selling Section 202 properties reinvest the proceeds in affordable housing.

Daly said Grace Church Apartments was the only housing asset of Grace Church Housing Corporation. She said the church hasn’t decided yet what to do with the sales proceeds but has “other needs and missions.”

POAH retained the existing management staff at the property, which is being renamed Grace Apartments and is managed by a POAH affiliate.

POAH’s complicated transaction required securing key regulatory approvals and assembling the necessary financing, a big part of which was equity generated by federal low-income housing tax credits.

“As the name of our organization suggests,” says POAH project manager Cory Fellows, “we are all about preserving affordable housing, with an emphasis or priority on properties that are at risk of losing their affordability because their subsidy contracts might be set to run out or other regulatory frameworks may be maturing.”

POAH closed the transaction in December 2013 and expects to be substantially finished with construction by November 2014, spending about $40,000 per unit on rehabilitation. The work includes upgrading outdated kitchens and bathrooms, replacing all windows, light exterior work, new flooring and paint in the corridors, installing fire sprinklers in all apartments, and putting in low-flow water fixtures and toilets and energy-efficient appliances and lighting. Some renovations are to make apartments fully compliant with federal ADA standards for accessible design.

During the day, residents leave their apartments while the work goes on in their unit, spending the time if they wish in “hospitality suites” set up in the building. In the case of units requiring more extensive renovations, residents are relocated temporarily or permanently on-site to other apartments.

Housing Credit Units

POAH is keeping the same mix and number of units at Grace Apartments: 95 one-bedroom and 6 two-bedroom apartments. All apartments but one are low-income housing tax credit units, restricted to households at or below either 40% or 60% of the area median income (AMI). Annual income limits for a one-person household are $20,240 at 40% of AMI and $30,360 at 60% of AMI.

According to Fellows, residents’ out-of-pocket rent payments haven’t increased as a result of the transaction, since all are assisted under a new 20-year project-based Section 8 contract that limits their rent payments to 30% of income.

POAH obtained the new Section 8 contract and took the property through HUD’s Mark-Up-to-Market process after entering into a purchase and sale agreement with the church in June 2012. As a result of the Mark-Up-to-Market process, the monthly contract gross rents were raised from $1,086 to $1,286 for the one-bedroom apartments and from $1,420 to $1,647 for the two-bedroom units.

“One of the key things that made this transaction viable and helped make it possible for us to do such an extensive renovation scope is that we were able to work with HUD to get the rents marked up so that they’re more reflective of the local market,” says Fellows. “Having that increased revenue stream from the higher rents enables us to support more new financing, which in turn enables us to do a lot of the things we are doing to improve the property.”

A Number of Firsts

The financing for the deal featured several firsts:

 

  • The first LIHTC transaction in Rhode Island by the Massachusetts Housing Investment Corporation (MHIC), a Boston-based syndicator;
  • The first transaction with POAH by lender Red Mortgage Capital; and,
  • The first issuance of cash-collateralized tax-exempt bonds by Rhode Island Housing, the state housing finance agency.

Major funding sources for the $15.9 million transaction are equity generated by 4% federal housing tax credits, a HUD Section 221(d)(4) first mortgage originated by Red Mortgage Capital, and proceeds of short-term tax-exempt bonds issued by Rhode Island Housing. The bonds, placed privately with Boston Private Bank, will be paid off within two years.

An existing commercial loan on the property was paid off as part of the transaction.

MHIC syndicated the 4% housing tax credits at a price of 90 cents per dollar of tax credit, according to Peter Sargent, MHIC’s director of capital development. He said the Massachusetts Housing Investment Corporation was attracted to the transaction by the mission and motives of POAH, a major long-time client; the property’s “great location” in downtown Providence; the “spectacular” and fully-occupied building; and working with RBS Citizens Bank, MHIC’s bank investor. “It represented an opportunity for us to expand our geography a little bit and tiptoe into our neighboring state of Rhode Island,” said Sargent.

According to Paul Chan, MHIC’s director of development, another positive was the new Section 8 contract providing rent subsidies for all units.

Columbus, Ohio-based Red Mortgage Capital, an FHA Multifamily Accelerated Processing lender, originated the 221(d)(4) mortgage, which is providing construction and permanent financing. The mortgage, in the amount of $10,249,000, has a 40-year term and amortization period and interest rate of 4.74% plus a mortgage insurance premium of 45 basis points, according to Tracy Peters, senior managing director of Red Capital Markets, LLC. Peters said the mortgage closed about 40 days after HUD issued its final commitment to insure the loan, “which is pretty fast for a 221(d)(4) transaction.”

Peters said the transaction appealed to Red Mortgage Capital because of the lengthy development experience and great reputation of POAH, as well as the property itself. “They found an attractive product in Grace Church Apartments,” says Peters. “The property is 100% Section 8 and elderly. That’s one of the best ones out there that HUD likes to underwrite to. We had an initial look at the numbers and they penciled out real well.”

The transaction also benefited from a Rhode Island state program that provides partial abatement of real estate taxes for rent-restricted apartment properties that undergo substantial renovations.

A Sweet Twist

As if renovating the building and apartments was not enough, POAH, as part of the transaction, agreed to continue leasing commercial kitchen space on the ground floor to The Cookie Place, a nonprofit organization. The space had been used in the past for a resident meals program associated with the Section 202 program that was later discontinued.

The Cookie Place bakes and sells cookies to help fund its mission, which is to assist adults with developmental disabilities. At the space at Grace Apartments, The Cookie Place produces cookies, provides job training in food preparation, and operates an adjoining dining area.

“When we got involved their lease had expired and they were operating on a month-to-month lease,” says Fellows. “We entered into a new lease and license agreement with them.” As part the arrangement, Grace Apartments residents will be able to share the use of the dining area after the renovations are completed, such as for meetings and other events. “It will be a true multi-purpose space,” says Fellows.

For POAH, the Grace Apartments transaction has been something special.

“It seems like on every one of our projects there is at least one first, and this project definitely had a couple,” says Fellows. “That’s part of what makes this work interesting and rewarding. We were able to take on this challenge, with a very positive outcome.”

Said Daly, “It was a long and protracted sale, for many reasons beyond our control and POAH’s control. But they were very upfront, professional, and a pleasure to deal with.

Sources and Uses Summary
Permanent Sources  
HUD Section 221(d)(4) First Mortgage (Red Mortgage Capital) $10,249,000
Tax-Exempt Bond Proceeds (Rhode Island Housing) $7,410,000
Tax-Exempt Bond Proceeds Redeemed (24 Months) ($7,410,000)
Low-Income Housing Tax Credit Equity (Massachusetts Housing Investment Corporation) $4,063,488
Acquired Reserves $204,988
Existing Reserves $157,646
Construction Period Net Operating Income $657,568
Deferred Developer Fee $615,996
Total Sources $15,949,086
Uses  
Acquisition $7,036,400
Construction $3,636,000
Contingency $375,000
Soft Costs $2,111,828
Reserves $1,027,470
Developer’s Fee – Payable $1,146,392
Deferred Developer Fee $615,996
Total Uses $15,949,086