By Jeffrey Banker

Finding funding for housing projects in 2011 can be a challenge. Programs are in peril, agency queues are backlogged, tax-credits and credit-enhancements are scarce and traditional funds are not as plentiful as they once were. However, despite these obstacles, housing deals are still being funded in 2011.

Lancaster Pollard recently financed two completely different housing projects by accentuating the strengths of the properties and weaving together creative and complex funding structures. These two rehabilitation projects, one affordable and one market-rate, demonstrate that in a challenging environment, the art of the financing plays as big of a role as the science.

Within just these two financings, 10 different sources of funding were used: Tax-exempt bonds, Low Income Housing Tax Credits, a Tax Credit Assistance program loan, a Financing Adjustment Factor loan, a HUD subordinate mark-to-market loan, a fixed rate construction permit loan utilizing The FHA Sec. 221(d)(4) program, Ohio State Historic Tax Credits, Federal Historic Tax Credits, property tax abatement and an asbestos abatement grant.

Indeed, funding housing projects is not simple in 2011. But with a little creativity and familiarity with various programs' intricacies, it can be done.

Millennia Housing Companies
Facility Type: Affordable Housing
Location: Three sites in Ohio
Objective: Redevelop existing rental housing
Financing amount: $3.44 million
Source of Funding: Tax-exempt bonds (Senior bonds credit enhanced by Fannie Mae and rated Aaa by Moody’s), Low Income Housing Tax Credits, Tax Credit Assistance Program loan, Financing Adjustment Factor loans and HUD subordinate mark-to-market loans

Millennia Housing Companies is an established affordable housing developer, manager and contractor of affordable housing properties. Included in its portfolio are Boston Commons, Melford Apartments and Concord Apartments, located in Ohio. Two of the three properties are in rural areas. Predominantly built in the 1980s and well managed, the properties nonetheless were in need of updating to extend the useful life for the benefit of the residents.

As part of the overall capital structure, Millennia applied for and was awarded a Financing Adjustment Factor (FAF) loan and Tax Credit Assistance Program (TCAP) loan from the Ohio Housing Finance Agency.

Additionally, Millennia applied for tax-exempt bonds through the Volume Cap Program, which also resulted in an allocation of tax credits (4%). Two of the projects had previously gone through the HUD mark-to-market program, which created an additional subordinate tranche of financing through loan assumptions.

Coordinating a structure that incorporated five different funding sources was challenging due to issues such as priority of payment and the varying set-asides for two of the three properties. The tumultuous municipal market conditions and scarcity of tax-exempt bonds presented additional unique challenges.

Due to the extraordinary circumstances described above, Lancaster Pollard acted as the investment banker and mortgage banker, creating a high level of efficiency. Underwriting was particularly challenging due to the fact that two of the three properties qualified as rural. Ultimately, the firm underwrote the bonds and the Ohio Housing Finance Agency issued them.

Because of time constraints and the need for only one bond issue for three properties, the firm decided that Fannie Mae was the best option. That direction enabled the firm to secure credit enhancement for the senior bonds through the Fannie Mae direct pay credit enhancement facility in approximately 120 days.

Because the projects will be completely occupied throughout the rehabilitation, Lancaster Pollard was able to structure an immediate funding for the borrower. The structure provided several advantages to Millennia, including:

• The ability to lock the rate immediately versus using a forward rate lock
• One closing instead of two
• The loan begins amortizing immediately
• No construction period letter of credit requirement
• The immediate funding resulted in a lower interest rate for the borrower. The proceeds will fund approximately $30,000 of significant upgrades per unit. Additionally, the project will have permanent debt in place for 15 years.

The Reserve at Fourth and Race
Facility Type: Commercial/Residential multifamily apartment building
Location: Cincinnati, Ohio
Objective: Substantial Renovation
Financing amount: $13.9 million
Source of Funding: Fixed-rate taxable construction/permanent loan using FHA Sec. 221(d)(4) mortgage insurance, State of Ohio Historic Preservation Tax Credits, Federal Historic Tax Credits, Property Tax Abatement, Asbestos Abatement Grant

Ashley Commercial Group created a joint venture partnership with Arcadia Communities with the purpose of acquiring and renovating the former Federal Reserve Building in downtown Cincinnati, Ohio.

The location has been designated as a historic building, allowing the borrower to receive an award of Ohio Historic Preservation Tax Credits and Federal Historic Tax Credits. At the end of construction, the project will be Leadership in Energy & Environmental Design (LEED) certified. In conjunction with this certification, the project will be eligible for a partial property tax abatement. In addition, the developer obtained an asbestos abatement grant from the Clean Ohio Assistance Fund for the removal of asbestos from the project.

Lancaster Pollard adopted a unique approach in utilizing the FHA Sec. 221(d)(4) mortgage insurance program, which is generally perceived to be an affordable housing financing program, for this mixed use commercial and market rate residential project. The firm guided the client through the HUD application process and used its extensive FHA/HUD expertise to make certain the various layers of financing were subordinated to and fit within the FHA 221(d)(4) program guidelines. To meet HUD’s commercial-to-residential space requirements, both existing and proforma underwriting were incorporated.

The borrower realized an efficient, low cost of capital by locking in a permanent fixed interest rate loan for 40 years at closing by using the AAA rated Ginnie Mae backed FHA mortgage insurance program.

The first mortgage loan plus the other financing sources will fund the purchase and renovation of the Federal Reserve Building, which will be converted to mixed-use. The bottom three floors will be commercial and the remaining 12 floors will be converted to 88 luxury apartment units.

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