|
|
Phelps House in Manhattan, New York.
|
|
by Kristopher M. Rengert, Community Development Expert, OCC
JPMorgan Chase (JPMC) supports affordable multifamily housing preservation efforts across its different lines of business. In this model, divisions within the overall JPMC corporate structure are responsible for different types of affordable multifamily housing preservation activities. In some situations, these divisions may participate together in a particular deal. In other instances, because of the unique nature of affordable multifamily housing preservation deals, participation may be limited to only one division.
JPMC has three primary business units that are regularly involved in financial transactions supporting affordable multifamily housing preservation. These are the Commercial Bank, JPMorgan Securities (JPMS), and JPMorgan Capital Corporation (JPMCC), with the latter two being housed within the Investment Banking division.
Commercial Bank
The Community Development Real Estate Group (CDRE), a unit in the Commercial Bank, provides more than $1 billion in loans almost exclusively in affordable housing with a significant portion in preservation projects. (See sidebar on Phelps House.) In the affordable multifamily housing preservation arena, this includes letters of credit that serve as credit enhancement for rated municipal and state tax-exempt bond issues, construction loans, and permanent financing. The CDRE has also participated in the creation and funding of multiple pooled loan funds that facilitate real estate acquisition by not-for-profit entities seeking to preserve the affordability of multifamily housing.
As a noteworthy example, JPMC played a leadership role in the creation of the New York City Acquisition Fund. This is a fund to help nonprofit organizations compete more effectively with for-profit entities in acquiring affordable housing properties that might otherwise be converted to market-rate housing units. The Acquisition Fund provides rapid access to bridge financing for acquisition and predevelopment costs, which is then taken out once developers have lined up conventional acquisition/construction financing. The fund is supported by a syndicate of 16 banks; JPMC serves as the senior lender agent for the syndicate and provides a $40 million line of credit, which is used to initially fund individual projects prior to their transfer to the fund’s core revolving credit facility.
The Acquisition Fund includes an approximately $192 million revolving line of credit maintained by the 16-bank syndicate. These funds are secured by a $40 million guarantee by the New York City Department of Housing Preservation and Development and a group of six charitable foundations. The Acquisition Fund has been operational since October 2006 and so far has closed four projects with a substantial pipeline of projects in process.
The Community Development Intermediaries Lending and Investing (ILI), another unit within the Commercial Bank, participates as a lender or investor in a number of community loan funds across the United States. Many of these funds, such as the one administered by The Community Preservation Corporation in the New York-New Jersey-Connecticut tri-state area and the Community Investment Corporation in Chicago regularly invest in affordable multifamily preservation projects.
JPMorgan Securities
JPMorgan Securities (JPMS) is the business unit responsible for purchasing bond securities. These include the purchase of tax-exempt bonds issued by municipal or state agencies to finance affordable multifamily housing preservation projects. These are frequently associated with projects supported by 4 percent LIHTCs issued by state housing finance agencies. JPMS buys bonds both to hold in portfolio and to pool and sell.
JPMS frequently partners with the CDRE Group on affordable multifamily housing preservation projects. Typically, JPMS purchases a tax-exempt bond that provides construction and permanent financing for the project. The Real Estate Group underwrites the real estate, administers the disbursement of bond proceeds during the construction period, and assumes credit risk prior to completion and income stabilization of the asset. Once the required occupancy and debt service tests are achieved, credit risk is transferred back to JPMS.
JPMorgan Capital Corporation
JPMCC is responsible for tax-preferred investments such as LIHTC projects. JPMCC has invested in more than 50 affordable multifamily housing preservation transactions in the last four years. These are typically projects where a property subsidized under an older federal program (e.g., Section 202, Section 8, or Section 236) is recapitalized through the LIHTC program, resulting in reduced ongoing debt service obligations and new capital to be used to upgrade aging properties. Long-term Section 8 contracts are also renewed, allowing these properties to maintain affordable rents.
JPMCC invests in LIHTC projects through four investment vehicles. As the sole investor, JPMCC invests in private label syndicated funds, direct investments through a developer, guaranteed investments, and multi-investor funds.
JPMCC partners with the CDRE on transactions where the CDRE Group finances construction and sometimes permanent debt, and JPMCC provides LIHTC equity. To date, these groups have partnered on many new construction and public housing transformation projects, creating efficiencies and savings to the project.
Nonfinancial Support of Affordable Multifamily Housing Preservation
In addition to its financial investments in affordable multifamily housing preservation projects, JPMC also provides nonfinancial support in this arena. The firm has worked with municipal agencies, charitable foundations, and other organizations to develop policies and entities supportive of affordable housing preservation. JPMC bankers also regularly provide technical assistance to nonprofit affordable housing developers and other partners who may need assistance in putting together preservation deals. This is a particularly valuable contribution for partners with limited experience in preservation work as these deals tend to include multiple financial layers.
For additional information, e-mail Mark Willis, Executive Vice President, JPMorgan Chase Bank, N.A., or visit JPMorgan Chase Bank.
Investment Example: Phelps House
The Phelps House project provides a useful example of the layered financing typically required to make affordable multifamily housing preservation projects feasible. JPMC provided an 18-month standby letter of credit for up to $12.645 million and a construction loan for up to $3.4 million for the refinance and moderate rehabilitation of an 11-story, 169-unit low-income senior rental property on the upper west side of Manhattan. This property, known as Phelps House, was constructed in 1983 and carried a HUD Section 202 mortgage dating from 1990.
The following is a brief summary of the sources of capital and required financial transactions employed (see table). The project sponsor, Goddard Riverside Community Center, prepaid its 9.25 percent Section 202 loan, which was set to mature in 2030, and recapitalized the project using $12.645 million of fixed-rate tax-exempt private activity bonds and $6.645 million of equity raised from the sale of 4 percent LIHTC. Other sources of capital included $410,000 of existing reserves, a $3.9 million subordinated seller note, and a $711,000 deferred developer fee. The JPMC letter of credit provided construction-period credit enhancement for the bonds.
Collateral for both the letter of credit and the construction loan included a first mortgage lien with cross-collateral, cross-defaults and assignments of various income streams (e.g., rent) associated with the property. Upon the completion of construction and lease-up, the JPMC construction loan was repaid from tax credit equity and the JPMC letter of credit was replaced by New York City Residential Mortgage Insurance Corporation (NYC REMIC) mortgage insurance.
This project worked to the mutual benefit of JPMC and Goddard Riverside and the tenants of Phelps House. The refinance of the Section 202 loan led to a substantial reduction in debt service payments, which in turn meant that Goddard Riverside could improve services for tenants. Tenants enjoy a range of improvements including a modernized elevator, new roof, new windows, kitchen and bathroom upgrades, and program and community space improvements.
This deal is a win, win, win to JPMC, Goddard, and the community because it makes good business sense and supports community reinvestment. Because of the high demand for affordable senior housing in this market area and a substantial waiting list of households wishing to live in this development, the project was considered by JPMC to be a low-risk investment. It resulted in the preservation of affordable multifamily housing for 168 low-income senior households.
For additional information, e-mail Mark Willis, Executive Vice President, JPMorgan Chase Bank, N.A., or visit JPMorgan Chase Bank.
|
|
Sources and Uses of Funds for Phelps House
Sources |
Tax-Exempt Bonds (NYC HDC) |
$ 12,645,000 |
| LIHTC Equity |
6,645,000 |
| Construction Loan |
3,400,000 |
Subordinated Seller Note |
3,981,845 |
Transfer of Existing Reserves |
410,046 |
Deferred Developer Fee |
710,673 |
Construction Loan Repayment |
(3,400,000) |
Total |
$24,392,565 |
| |
Uses |
| Acquisition |
$ 12,629,362 |
Hard Costs |
6,222,195 |
Soft Costs |
2,142,545 |
Reserves, Working Capital |
915,000 |
Developer Fee |
2,483,463 |
Total |
$ 24,392,565 |
Source: JPMC |
|
|
.jpg)
