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Economic and Feasibility Analysis
A Review of Seven Developments Under Consideration by the Virgin Islands Housing Authority
Presented to RHG/CVR Associates by
One Post Street, Suite 2130 San Francisco, CA 94104 (415) 956-2454
May 31, 2011
Table of Contents
I. II. III. IV. V. Exhibits Executive Summary Introduction of Developments Summary Recommendations Feasibility Analysis Key Assumptions Page 3 Page 8 Page 10 Page 16 Page 34 Page 40
Virgin Islands Housing Authority Economic and Feasibility Analysis
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I.
Executive Summary
RHG/CVR Associates has engaged CSG Advisors (CSG) to prepare an Economic and Feasibility Analysis (the Analysis) for seven development projects under review by the Virgin Islands Housing Authority (the Authority or VIHA). The proposed developments include Louis E. Brown, Phase 2; Louis E. Brown, Phase 3; Nicasio Nico; Ralph de Chabert; Sugar Estate; Walter Hodge; and Williams Delight. The Authority, via its consultant RHG/CVR Associates, provided information about the type of development, number of units, development costs, operating data, and other relevant assumptions. Below please find a summary of the Analysis and its findings, based on available information:
Feasibility Summary
Estimated Development Costs Based on the development programs evaluated for each site and cost assumptions discussed in Section V, total development costs for the seven projects are estimated at $198 million. Estimated Costs by Development Estimated Development Costs $11,151,396 $30,118,141 $22,050,928 $58,090,555 $19,598,234 $41,581,797 $15,236,666 $197,827,717 Hard Construction Cost Per Unit $165,287 $204,915 $246,225 $223,472 $133,141 $122,768 $94,133 $170,757 Development Cost Per Unit $278,785 $295,276 $367,515 $343,731 $241,954 $247,511 $208,721 $285,466
Development Louis E. Brown 2 Louis E. Brown 3 Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight Total/Average
Estimated Development Costs By Category Amount Cost Item Acquisition - Land Value $3,250,000 Acquisition - Building Value $12,050,000 Site Work $5,460,800 Demolition $6,309,132 Hard Costs - Residential $118,334,271 Hard Costs- Other $250,000 A/E, Permits, Reports, Etc. $8,790,085 Legal $1,900,000 Interim Financing & Insurance $8,919,016 Permanent Financing Costs $165,145 Soft Costs $2,072,812 Relocation $0 Reserves $9,666,304 Developer Fee $20,660,151 Total Uses of Funds $197,827,717
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Note that hard construction costs per unit vary from one site to another based on the mix of bedroom sizes (because costs are based on square foot cost estimates, 3-bedroom units are more expensive than 1-bedroom units). Because many transaction costs are the same (or similar) for large or small developments, the total development costs for smaller developments are usually higher than those for larger developments. Development costs also include seller-financed acquisition values in the case of Delight and Hodge. Projected Funding Sources The financing strategies evaluated for the seven sites assume an estimated $133 million in funding sources for the proposed developments, including $101 million in non-VIHA funds, $20 million in direct VIHA funding, and $12 million in pass-through VIHA funding. The Analysis assumes competitive awards of $14 million in Choice Neighborhood Funds, $6 million in annual 9% tax credit allocations (sufficient to generate an estimated $45 million in LIHTC equity), $6 million in USDA Rural funds, and $9 million in AHP grant funds. Projected Funding by Development Potential Funding Sources $10,607,098 $20,898,800 $11,827,369 $38,268,794 $18,418,800 $22,873,070 $10,488,804 $133,382,735 Amount $45,017,418 $23,306,358 $4,498,942 $6,000,000 $8,820,000 $0 $13,905,992 $101,548,710 $401,015 $3,500,000 $4,809,132 $3,250,000 $2,400,000 $5,470,065 $19,830,212 $11,187,345 $816,468 $12,003,813 Page 4 May 31, 2011
Development Louis E. Brown 2 Louis E. Brown 3 Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight Total Projected Funding by Source Source LIHTC Equity (9% Credits) LIHTC Equity (4% Credits Conventional Debt USDA Section 515 FHLB - Affordable Housing Program HUD Section 202 Choice Neighborhoods Subtotal - Non-VIHA Funds VIHA Capital Funds VIHA Replacement Housing Factor Funds VIHA Demolition Funds VIHA Land Contribution VIHA Operating Reserves VIHA Program Income / Land Sale Subtotal - VIHA Funds VIHA Seller Financing (pass-through) VIHA Deferred Developer Fee (pass-through) Subtotal - VIHA Pass-Through Funds Virgin Islands Housing Authority Economic and Feasibility Analysis
Funding Gap CSG has estimated a total funding gap of roughly $64.4 million for the seven developments, based on the development program and assumptions described further in this Section and in Section V. After taking into account projected program income to VIHA totaling $6.3 million, the net funding gap drops to approximately $58.1 million. Projected Funding Gap by Project Total Funding Gap $544,298 $9,219,341 $10,223,559 $19,821,761 $1,179,434 $18,708,726 $4,747,863 $64,444,982 Program Income $0 $0 $0 $0 $0 -$4,228,112 -$2,078,745 -$6,306,857 Net Funding Gap $544,298 $9,219,341 $10,223,559 $19,821,761 $1,179,434 $14,480,614 $2,669,118 $58,138,125
Development Louis E. Brown 2 Louis E. Brown 3 Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight Total
Operating Considerations Operating feasibility varies widely from one development to the next depending on the expected mix of public housing, project-based vouchers, unsubsidized tax credit, and market rate units. Only Louis E. Brown, Phase 2 (LEB 2) and Walter Hodge have substantial operating deficits during the 15-year tax credit compliance period. These deficits can be addressed by increasing the number of project-based vouchers, including a capitalized reserve to fund projected deficits, or providing an acceptable guarantee from VIHA to fund ongoing deficits. Cumulative cash flow, which is after any required debt service and deferred developer fee payments is slightly positive for the seven developments together. Operating Feasibility Measures for All Rental Developments Year 15 Cumulative Development Year 1 NOI NOI NOI Louis E. Brown 2 $18,926 -$21,938 $10,170 Louis E. Brown 3 $38,631 -$68,748 -$141,292 Nicasio Nico $64,976 $11,834 $624,062 Ralph de Chabert $583,953 $562,362 $8,691,367 Sugar Estate $70,035 $4,429 $672,725 Walter Hodge -$65,193 -$275,363 -$2,407,433 Williams Delight $119,033 $72,925 $1,489,689 Total $830,360 $285,501 $8,939,288
Cumulative Cash Flow $10,170 -$141,292 $61,712 $2,033,395 $672,725 -$2,407,433 $0 $229,277
Recommendations for Improving Feasibility

CSG has identified several recommendations for potentially reducing the $58 million funding gap identified above:
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Review Key Assumptions The projected feasibility of the proposed developments depends on the strength of the assumptions used in the Analysis. Because important sources of information were limited or not available, key assumptions should be reviewed and refined as appropriate. Prioritize Development of Sites The seven developments should be prioritized based on several considerations, including: total funding gap, number of households impacted, project readiness, policy priorities, political considerations, and other relevant factors. Continue Working with VIHFA to Obtain Future 9% Credit Allocations VIHFA has been an integral financing partner for the Authority. Continuing this partnership in the years ahead may help significantly reduce the funding gap. Phase Developments to Maximize Access to Funding Phasing the proposed developments over the next 5-10 years will help VIHA secure the other funding sources identified in each financing strategy. Ensure Third Party Developers Provide Sufficient Guarantees For VIHA to realize the full value of third-party developers, it is important to ensure that the developer provide all the appropriate guarantees. Maximizing Tax Credit Pricing and Terms Employing a competitive investor solicitation process that reaches the broadest group of prospective investors is the best way to maximize tax credit pricing and terms. Increase Project-Basing Capacity by Attaining Replacement Vouchers Project-based voucher units can add $100K more in revenues over a 15-year period than a comparatively sized public housing unit. VIHA may be able to project-base as many as 146 additional units by pursuing replacement vouchers for public housing units that have or will be demolished and not replaced. Capital Fund Financing Program VIHAs projected 2011 grant amounts would likely support a CFFP borrowing of roughly $22 million, with net proceeds of about $19 million. Walter Hodge is a good candidate for CFFP proceeds because this development will address the largest number of public housing units. Income Targeting for Homeownership Program To make the homeownership program most beneficial to VIHAs clients, prospective buyers should have sufficient income to cover the costs of regular building maintenance, and yard upkeep, as well as periodic repair costs such as furnace or roof replacement. Increase Choice Neighborhoods Funding Potential The financing strategy for Ralph de Chabert assumes roughly $13.9 million in Choice Neighborhoods funds. This amount could be increased by including more public housing units in the development program, though this must be balanced with operating considerations.
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Update Economic and Feasibility Analysis The development programs for several sites will likely change over time, as will the assumptions used in the financing strategies. The Analysis should be updated to reflect such changes so that this document can be helpful to VIHA in planning for, and implementing, the proposed redevelopment projects. Evaluate Scoring Potential for Key Funding Sources VIHA may want to prepare a pre-scoring analysis for each of the funding sources included in the financing strategies, including the proposed Choice Neighborhoods Implementation Grant, AHP, and USDA funds.
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II.
Introduction of Developments
RHG/CVR Associates has engaged CSG Advisors (CSG) to prepare an Economic and Feasibility Analysis (the Analysis) for seven development projects under review by the Virgin Islands Housing Authority (the Authority or VIHA). The proposed developments include the following: Louis E. Brown, Phase 2; Louis E. Brown, Phase 3; Nicasio Nico; Ralph de Chabert; Sugar Estate; Walter Hodge; and Williams Delight. The Authority, through its consultant RHG/CVR Associates, provided information about the type of development, number of units, development costs, operating data, and other relevant assumptions. Below is a brief description of the seven potential developments. Louis E. Brown, Phase 2 (LEB 2) LEB 2 represents the second phase of redevelopment for Louis E. Brown, and will involve new construction of 40 senior units in low-rise/garden apartments in the Estate Paradise community of St. Croix. Carlisle Development Group (Carlisle) has already been selected as the developer for this site, and Phase 1 of Louis E. Brown has already begun construction. Carlisle has prepared a draft tax credit application for LEB 2 that will be submitted later this Spring. A single financing scenario for LEB 2 was evaluated for the Analysis, and is described in Section IV. Louis E. Brown, Phase 3 (LEB 3) LEB 3 will be the third phase of redevelopment for Louis E. Brown, and will also be developed by Carlisle. There are no imminent plans for submitting a tax credit application for this phase. LEB 3 will involve new construction of 102 family units in low-rise/garden apartments in Estate Paradise. A single financing scenario for LEB 3 was evaluated for the Analysis, and is described in Section IV. Nicasio Nico Nicasio Nico will involve new construction of 60 family units in low-rise/garden apartments in the Estate Princess community of St. Croix. Nicasio Nico will be developed in partnership with a third-party developer, though a developer has not yet been selected for this development. VIHA owns this site, and the 60 original public housing units are still standing. Three financing strategies for Nicasio Nico were evaluated for the Analysis, and are described in Section IV. Ralph de Chabert Ralph de Chabert will involve new construction of 169 family units in a mix of building types located in the Estate Richmond community of St. Croix. VIHA has identified Ralph de Chabert as a candidate for a Choice Neighborhoods Implementation Grant. Ralph de Chabert will be developed in partnership with a third-party developer, though a developer has not yet been selected for this development. VIHA owns this site, and the 264 original public housing units are still standing. Two financing strategies for Ralph de Chabert were evaluated for the Analysis, and are described in Section IV. Sugar Estate Sugar Estate will involve acquisition and new construction of 81 senior units in mid-rise/elevator apartments on the island of St. Thomas. VIHA has identified Sugar Estate as a likely candidate for a 2012 allocation of 9% tax credits and also expects to pursue HUD Section 202 funding for this site. Sugar Estate will be developed in partnership with a third-party developer to be selected. The Sugar Estate site is expected to be provided to VIHA for a nominal cost through a Virgin Islands Housing Authority Economic and Feasibility Analysis Page 8 May 31, 2011
bill being considered in the Legislature of the Virgin Islands. Two financing strategies for Sugar Estate were evaluated for the Analysis, and are described in Section IV. Walter Hodge Walter Hodge is located in the Frederiksted community of St. Croix and is currently comprised of 250 public housing units situated in 3-story walk-up buildings. The existing units are in a state of significant disrepair and VIHA plans to demolish 82 of the existing units and make significant rehab improvements to the remaining 168 units. The development program for Walter Hodge lends itself well to a self-developed acquisition/rehab using 4% tax credits and tax-exempt bonds. Three financing strategies for Walter Hodge were evaluated for the Analysis, and are described in Section IV. Williams Delight Williams Delight is also located in the Frederiksted community of St. Croix and was originally comprised of 300 public housing units situated in single-family buildings. The buildings are currently in a state of significant disrepair. VIHA has begun to rehabilitate some of the original units and ultimately plans to demolish 100 of the original units and rehabilitate the remaining 200 units. Of the rehabilitated units, half are expected to be sold to public housing clients and other low-income buyers, while the remaining units will be maintained as rentals. The rehab of homeownership units will be funded entirely from Capital Funds, with repayment anticipated from USDA soft second mortgages. The sources and uses for the homeownership component were not included in the summary analysis. Three financing strategies for Williams Delight were evaluated for the Analysis, and are described in Section IV. Following this introduction, Section III summarizes recommendations for improving the feasibility for the developments described above. Section IV describes the development program, budget, and feasibility of each site. This Section also describes alternative financing strategies and identifies potential approaches to improving feasibility. Section V outlines the key assumptions used for the Analysis.
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III.
Summary Recommendations
Based on the financing strategies described in Section 4, CSG has identified a net funding gap of roughly $58 million associated with the proposed development of the seven projects discussed more thoroughly in Section IV. This funding gap is expected to remain even after making some aggressive assumptions about funding availability. For example, the Analysis assumes competitive awards of $14 million in Choice Neighborhood Funds, $6 million in annual 9% tax credit allocations (sufficient to generate an estimated $45 million in LIHTC equity), $6 million in USDA Rural funds, and $9 million in AHP grant funds. To achieve VIHAs ambitious goals for redeveloping and expanding its portfolio, it will be necessary to pursue opportunities to reduce the total funding gap. Below is a discussion of several potential methods for increasing access to external funding sources, reducing total costs, and employing other strategies to refine current projections and reduce the funding gap.
1. Review Key Assumptions

The projected feasibility of the proposed developments is entirely dependent on the specific development programs evaluated and the assumptions made regarding development and operating costs, project revenues and funding sources, and others described in Section V. In many cases, only partial information about costs, revenues, and other items was available at the time of this writing. In other cases, no information was available, and placeholder assumptions were used. One of the first steps in moving forward should be to refine the assumptions used so that the Analysis can be updated and the projected feasibility for each development can be reevaluated. The following assumptions, in particular, should be reviewed:
Market Rents. Specific information about market rents was not made available, although some anecdotal information about developments near Nicasio Nico and Ralph de Chabert indicated strong rents may be achievable. The analysis for Ralph de Chabert is sensitive to this input. If achievable market rents are equal to the PBV payment standard (rather than 20% higher than that standard), the funding gap for that project would increase by $1.1 million. Utility Allowances. These allowances reduce the rents that can be charged for tax credit units. The Analysis uses the allowances applicable to LEB 1 and 2, which are high in comparison with many other cities, but these may not be applicable to all of the other sites. If allowances were reduced by 20% for example, 4 project-based units could be shifted from Nicasio Nico to Walter Hodge, which would reduce the funding gap and provide improved operating feasibility. Operating Costs. A key input in determining operating feasibility, the operating costs for all new construction scenarios were based on LEB 1 and LEB 2, but actual costs will depend on building types, configuration, unit mix, location, and other considerations. Construction Costs. A per square foot cost of $217 was used for all new development on St. Croix based on the construction contract for LEB 1. Actual costs will likely vary from one project to the next.
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Relocation Costs. Estimated relocation costs were not provided, but once estimates are made available, the Analysis should be updated. Building Values. Building values generate 4% tax credit equity in the rehab scenarios for Williams Delight and Walter Hodge. Because no information was available about appraised building values, a placeholder estimate of $50,000 was used. An increase in value of $10,000 per unit would increase tax credit equity by over $500,000 for Walter Hodge.
CSG can prepare an updated Analysis once these and other assumptions have been refined.
2. Prioritize Development of Sites

An important first step will be for VIHA to prioritize the seven developments based on several considerations, including: total funding gap, number of households impacted, project readiness, policy priorities, political considerations, and other relevant factors. Those sites that are the highest priority should receive VIHAs immediate focus, while those sites that are the lowest priorities may be placed on hold until significant additional funding sources can be identified.
3. Continue Working with VIHFA to Obtain Future 9% Credit Allocations

VIHFA has been a valuable financing partner in the Authoritys redeveloment efforts, having already provided $3.0 million in annual 9% tax credits for LEB 1, even with territory-wide credit availability that averages around $2 million each year. Building on the success of this partnership in the years ahead may help significantly reduce the funding gap. Nine percent tax credits represent the single largest funding source represented in the Analysis, projected to provide as much as $45 million in tax credit equity. This level of funding assumes 9% credit allocations can be secured for 4 developments: LEB 2 and LEB 3; Ralph de Chabert; and Sugar Estate. The Authority may also be able to work with VIHFA to secure allocations for the Nicasio Nico, Walter Hodge, and Williams Delight projects. If, for example, $1.5 million in annual 9% credits were allocated to these additional developments and to a second phase of Ralph de Chabert, the funding gap could be reduced by as much as $25 million.
4. Phase Developments to Maximize Access to Funding

VIHA can significantly reduce the projected funding gap by phasing the developments over time to maximize access to potential funding sources. As noted above, if VIHFA is willing to provide a 9% credit allocation each year over the next 8 years the funding gap would drop by an estimated $25 million. Phasing the proposed developments over the next 5-10 years will also help VIHA secure the other funding sources identified in each financing strategy. For example, it may not be realistic to assume multiple awards of USDA and AHP funds in a given year, but if the developments are phased so that VIHA pursues funding for a single project in each year, the likelihood of obtaining the needed funding awards is much higher.
5. Ensure Third Party Developers Provide Sufficient Guarantees

Third party developers can provide substantial value to VIHAs developments by guiding each project through predevelopment, securing funding, providing guarantees, managing the construction process, and overseeing project operations until the project has achieved stabilization. With the exception of providing guarantees, these services can often be provided by a development consultant for substantially less cost. For VIHA to realize the value of the developer, then, it is important that the developer provide all of the appropriate guarantees. Ensuring that this occurs requires vigilance not only in drafting and implementing the developer Virgin Islands Housing Authority Economic and Feasibility Analysis Page 11 May 31, 2011
agreement, but also overseeing the arrangements made with construction contractors, equity investors, lenders, and other partners. For example, deal terms with investors can obscure hidden guarantees provided by VIHA, such as reserves that are out of scale with comparable deals or additional equity payments conditioned on timely completion.
6. Maximizing Tax Credit Pricing and Terms

Because LIHTC equity is so critical to the overall financing plan, providing more than $70 million in funds (an average of 34% of estimated development costs for the seven sites), it is critically important that VIHA maximize both the pricing and the terms of each equity investment. If, for example, equity pricing of $0.85 per credit were achieved rather than the $0.80 price assumed, the total funding gap described above would be reduced by roughly $4.3 million. The tax credit equity market has improved markedly since an investor was selected for LEB 1, and VIHA will likely find that more investors are interested in acquiring credits for these developments. In this environment, VIHA should benefit not only from higher pricing, but improved business terms as well. For example, reserve requirements may be less stringent, and upward tax credit adjusters may be provided. In CSGs experience, it is highly advisable to solicit as many potential investors as possible rather than work with a small group of relationship syndicators. The specific attributes of each project, and even individual phases of the same project, may appeal to a different set of investors based on project location, timing, project unit mix and funding sources, relationship between credits and losses, and other factors. Employing a highly competitive solicitation process that reaches out to the widest range of prospective investors can help ensure that both the pricing and the terms are optimized for VIHA. Aspects of the proposed developments underscore the need to reach as many potential investors as possible. First, not all investors are familiar with HUD mixed-finance developments, and those that arent familiar typically require higher reserves than those that have already become comfortable with mixed-finance requirements and the nature of HUD subsidies. Also, investors for projects located in the Virgin Islands will not benefit significantly from CRA credit, so it will likely be more difficult to find interested investors than it would otherwise be.
7. Increase Project-Basing Capacity by Attaining Replacement Vouchers

Including project-based voucher (PBV) units in the development program can add significant value to each project. A 2-bedroom PBV unit at Walter Hodge, for example, would provide an estimated $11,200 in operating revenue while a public housing unit would provide about $5,700 in revenue. Over the 15-year tax credit compliance period the difference in potential subsidy from these two types of units totals over $83K. For a 3-bedroom unit, the difference in subsidies is more than $125K over the 15-year period. VIHAs Housing Choice Voucher program includes authority for 1,469 vouchers, and up to 20% of this figure, or 293 units, can be project-based. A total of 165 project-based units have already been committed to Patriot Manor, Croixville, LEB 1, and LEB 2, which leaves a balance of 128 units that can be project-based given VIHAs current voucher authority, as shown in the table on the following page.
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VIHA Capacity to Project-Base Voucher Units Total Housing Choice Voucher Allocation Maximum Project Based Units Less PBVs Committed to Patriot Manor Less PBVs Committed to Croixville Less PBVs Committed to LEB 1 Less PBVs Committed to LEB 2 Existing Project-Basing Capacity
1,469 293 -42 -80 -25 -18 128
The preferred financing strategies described in the Analysis assumed a limit of 128 PBV units, and allocated these units as reflected below. PBV Units Planned for VIHA Developments Existing Project-Basing Capacity Less PBVs Planned for LEB 3 Less PBVs Planned for Nicasio Nico Less PBVs Planned for Ralph de Chabert Less PBVs Planned for Sugar Estate Less PBVs Planned for Williams Delight Remaining Project-Basing Capacity
128 -25 -10 -42 -35 -16 0
To the extent VIHA can increase its total voucher allocation authority beyond the current 1,469 vouchers, the Authority can project-base 20% of those additional units as well. VIHA may increase its voucher authority by requesting replacement voucher units for developments that have or will receive demolition or disposition approval from HUD. For example, if VIHA did not already request replacement vouchers for public housing units that are not being replaced at Louis E. Brown, it would be worthwhile to pursue this option with HUD.1 Of the 436 original public housing units, only 176 will be replaced. If VIHA were awarded 260 replacement vouchers for this site, the project-basing capacity would increase by 52 units. VIHA should also pursue replacement vouchers for units planned for removal at Nicasio Nico, Ralph de Chabert, Walter Hodge, and Williams Delight. If awarded, an additional 146 units could be project-based, as shown in the table on the following page.
General HUD procedures permit authorities to request replacement vouchers for units with tenants in place at the time HUD approves the demolition/disposition application. Typically, these applications are submitted prior to demolition of units, but there have been cases in which HUD approved replacement vouchers after buildings were demolished. HUD may also be willing to consider providing replacement vouchers for vacant units if VIHA can make a compelling case that project vacancies were due to extenuating circumstances such as health and safety concerns that precluded occupancy of those units.
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Potential Additions to HCV Allocation Net Loss of ACC Units at Louis E. Brown Net Loss of ACC Units at Nicasio Nico Net Loss of ACC Units at Ralph de Chabert Net Loss of ACC Units at Walter Hodge Net Loss of ACC Units at Williams Delight Total Additional Project-Basing Capacity
260 60 208 82 116 726 146
At a value of around $100,000 per unit over public housing units, the importance of obtaining as many replacement vouchers as possible is clear. CSG can provide additional assistance with this process if appropriate.
8. Capital Fund Financing Program

HUDs Capital Fund Financing Program (CFFP) may be a good way for VIHA to access needed capital funds now in order to finance some of the planned developments. The CFFP program allows housing authorities to borrow against future appropriations of CFP and RHF funds. According to the most recent guidance from HUD, authorities can pledge up to one-third of annual CFP grants and 100% of RHF grants, provided the total amount pledged in a given year does not exceed 50% of combined CFP and RHF funds. CSG projected VIHAs 2011 CFP and RHF grant amounts assuming a 19% reduction from 2011 funding levels. These funding levels would likely support a borrowing of roughly $22 million, of which about $19 million would be available to VIHA after transaction costs and debt service reserve. This information is summarized in Exhibit 1, attached. The actual debt sizing would be based on actual 2011 grant amounts (or subsequent grant amounts if a CFFP isnt pursued this year), so the total borrowing capacity may ultimately be higher or lower that $22 million. Walter Hodge is a good candidate for CFFP proceeds because this development will address the largest number of public housing units. CSG has assisted several other public housing authorities, including Puerto Rico, with a CFFP borrowing to finance rehabilitation of existing units. However, only the portion of the debt that is supported by regular Capital Funds can be used for existing units. The portion of the debt that is supported by RHF funds must be used toward developing or acquiring replacement public housing units. CSG can assist with CFFP application process if desired.
9. Income Targeting for Homeownership Program

The homeownership program for the Williams Delight site is expected to involve the rehab and sale of units to public housing clients and other low-income households. As VIHA refines its homeownership program, it may want to pay particular attention to the incomes targeted for homeownership. To make the program most beneficial to its clients, prospective buyers should have sufficient income to cover the costs of regular building maintenance, and yard upkeep, as well as periodic repair costs such as furnace or roof replacement. This can be built into the affordable mortgage calculation by establishing a monthly payment that is set-aside from the monthly mortgage payment and held in reserve by the lender. For example, if a family can afford a total housing payment of $300 per month, $30 could be set aside in a repair reserve account and the balance of $270 per month can be used to size the mortgage. Alternately, if a household can Virgin Islands Housing Authority Economic and Feasibility Analysis Page 14 May 31, 2011
afford a total mortgage of $40,000, VIHA might use $35,000 of this to repay the rehab costs it has financed and set aside the balance of $5,000 in an account to be used by the family for repairs.
10. Increase Choice Neighborhoods Funding Potential

The financing strategy for Ralph de Chabert assumes roughly $13.9 million in Choice Neighborhoods funds. Including more public housing units in the development program could increase this amount. For example, each additional 2-bedroom public housing unit would increase the maximum grant amount by more than $150K. Adding public housing units will have a negative impact on operating feasibility, however, so this will need to be balanced. Initial projections indicate the total funding gap for Ralph de Chabert could be reduced by $4.9 million by replacing 40 additional public housing units (and removing 40 market-rate units) while still maintaining positive cashflow throughout the tax credit compliance period. The potential for additional grant funds, of course, must also be balanced with policy objectives for mixing incomes at the site.
11. Update Economic and Feasibility Analysis

The financing strategies presented in the Analysis are preliminary in nature. They represent a selected approach to each development based on information and input available at the time the Analysis was prepared. The development programs for several sites will likely change over time, as will the assumptions used in the financing strategies. This feasibility analysis should be updated to reflect such changes so that this document can be helpful to VIHA in planning for, and implementing, the proposed redevelopment projects.
12. Evaluate Scoring Potential for Key Funding Sources

The Analysis makes several assumptions related to competitive funding awards for the proposed developments. While an initial review of the potential funding sources indicates that these sites are eligible for funding, it is important for VIHA to understand how competitive each site will be for these funding awards. If VIHA has not already done so, it may want to prepare a prescoring for each of the funding sources, particularly the proposed Choice Neighborhoods Implementation Grant. The scoring analysis can help VIHA prioritize developments based on relative competitiveness and may also result in refinements to the development program as needed to maximize application points. CSG can assist with this process if appropriate.
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IV.
Feasibility Analysis
As described previously, CSG has estimated a total funding gap of roughly $64 million for the seven developments, based on the development program and assumptions described further below. After taking into account projected program income to VIHA totaling $6 million, the net funding gap drops to approximately $58 million. Total and Net Funding Gaps for All Rental Developments Total Funding Program Net Funding Development Gap Income Gap Louis E. Brown 2 $544,298 $0 $544,298 Louis E. Brown 3 $9,219,341 $0 $9,219,341 Nicasio Nico $10,223,559 $0 $10,223,559 Ralph de Chabert $19,821,761 $0 $19,821,761 Sugar Estate $1,179,434 $0 $1,179,434 Walter Hodge $18,708,726 -$4,228,112 $14,480,614 Williams Delight $4,747,863 -$2,078,745 $2,669,118 Total $64,444,982 -$6,306,857 $58,138,125 Operating feasibility varies widely from one development to the next depending on the expected mix of public housing, project-based vouchers, unsubsidized tax credit, and market rate units. Only Louis E. Brown, Phase 2 (LEB 2) and Walter Hodge have substantial operating deficits during the 15-year tax credit compliance period, as shown below. These deficits can be addressed by adjusting the unit mix to include additional project-based vouchers. For LEB 2, it is expected that an increase of 4 PBV units would result in feasible operations throughout the compliance period. For Walter Hodge, 22 PBV units would need to be included based on current operating assumptions. As described earlier in the Analysis, VIHA may increase its project-basing capacity by pursuing replacement vouchers for any units that are demolished/disposed but not replaced as public housing. Alternately, including a capitalized reserve to fund projected operating deficits or providing an acceptable guarantee from VIHA could address this problem. Operating Feasibility Measures for All Rental Developments Year 15 Cumulative Development Year 1 NOI NOI NOI Louis E. Brown 2 $18,926 -$21,938 $10,170 Louis E. Brown 3 $38,631 -$68,748 -$141,292 Nicasio Nico $64,976 $11,834 $624,062 Ralph de Chabert $583,953 $562,362 $8,691,367 Sugar Estate $70,035 $4,429 $672,725 Walter Hodge -$65,193 -$275,363 -$2,407,433 Williams Delight $119,033 $72,925 $1,489,689 Total $830,360 $285,501 $8,939,288
Cumulative Cash Flow $10,170 -$141,292 $61,712 $2,033,395 $672,725 -$2,407,433 $0 $229,277
Cumulative cash flow, which is after any required debt service and deferred developer fee payments is slightly positive for the seven developments together. However, the positive cash flow from one development may not necessarily be used to offset operating shortfalls at another. For example, the largest cash flow is projected for Ralph de Chabert, which is expected to include
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market rate units and be developed by a third party developer. VIHA would likely need to share cash flow with the developer. The projected development and operating feasibility of the proposed developments is entirely dependent on the specific development program and the assumptions described in Section V. As noted in Section III, there are several key assumptions that must be reexamined due to insufficient information at the time of this writing. The Analysis should be updated to include any adjustments to the development program and key assumptions.
Development Costs and Funding Sources

Estimated Development Costs Based on the development programs evaluated for each site and cost assumptions discussed in Section V, total development costs for the seven projects are estimated at $198 million, as shown below. Estimated Development Costs By Category Amount Cost Item Acquisition - Land Value $3,250,000 Acquisition - Building Value $12,050,000 Site Work $5,460,800 Demolition $6,309,132 Hard Costs - Residential $118,334,271 Hard Costs- Other $250,000 A/E, Permits, Reports, Etc. $8,790,085 Legal $1,900,000 Interim Financing & Insurance $8,919,016 Permanent Financing Costs $165,145 Soft Costs $2,072,812 Relocation $0 Reserves $9,666,304 Developer Fee $20,660,151 Total Uses of Funds $197,827,717 The table on the following page shows estimated development costs by site. Note that hard construction costs per unit vary from one site to another based on the mix of bedroom sizes (because costs are based on square foot cost estimates, 3-bedroom units are more expensive than 1-bedroom units). Also, because many transaction costs are the same (or similar) for large or small developments, the total development costs for smaller developments are usually higher than those for larger developments. In the case of Williams Delight and Walter Hodge, development costs also include seller-financed acquisition values, which do not represent a net cost to VIHA.
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Estimated Costs by Development Estimated Development Costs $11,151,396 $30,118,141 $22,050,928 $58,090,555 $19,598,234 $41,581,797 $15,236,666 $197,827,717 Hard Construction Cost Per Unit $165,287 $204,915 $246,225 $223,472 $133,141 $122,768 $94,133 $170,757 Development Cost Per Unit $278,785 $295,276 $367,515 $343,731 $241,954 $247,511 $208,721 $285,466
Development Louis E. Brown 2 Louis E. Brown 3 Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight Total/Average
Projected Funding Sources The financing strategies evaluated for the seven sites assume an estimated $133 million in funding sources for the proposed developments, including $101 million in non-VIHA funds, $20 million in direct VIHA funding, and $12 million in pass-through VIHA funding. The feasibility analysis assumes competitive awards of $14 million in Choice Neighborhood Funds, $6 million in annual 9% tax credit allocations (sufficient to generate an estimated $45 million in LIHTC equity), $6 million in USDA Rural funds, and $9 million in AHP grant funds. Projected Funding by Source Source LIHTC Equity (9% Credits) LIHTC Equity (4% Credits Conventional Debt USDA Section 515 FHLB - Affordable Housing Program HUD Section 202 Choice Neighborhoods Subtotal - Non-VIHA Funds VIHA Capital Funds VIHA Replacement Housing Factor Funds VIHA Demolition Funds VIHA Land Contribution VIHA Operating Reserves VIHA Program Income / Land Sale Subtotal - VIHA Funds VIHA Seller Financing (pass-through) VIHA Deferred Developer Fee (pass-through) Subtotal - VIHA Pass-Through Funds Amount $45,017,418 $23,306,358 $4,498,942 $6,000,000 $8,820,000 $0 $13,905,992 $101,548,710 $401,015 $3,500,000 $4,809,132 $3,250,000 $2,400,000 $5,470,065 $19,830,212 $11,187,345 $816,468 $12,003,813
The table on the following page shows total projected funding sources by site.
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Projected Funding by Development Potential Funding Sources $10,607,098 $20,898,800 $11,827,369 $38,268,794 $18,418,800 $22,873,070 $10,488,804 $133,382,735
Development Louis E. Brown 2 Louis E. Brown 3 Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight Total
Below, please find descriptions of the proposed development program and the preferred financing scenario for each site, as well as a discussion of possible alternative financing strategies.
Louis E. Brown, Phase 2

LEB 2 represents the second phase of redevelopment for Louis E. Brown, and will involve new construction of 40 senior units in low-rise/garden apartments in the Estate Paradise community of St. Croix. Carlisle Development Group (Carlisle) has already been selected as the developer for this site, and Phase 1 of Louis E. Brown has already begun construction. Carlisle has prepared a draft tax credit application for LEB 2 that will be submitted later this Spring. Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a funding gap of just under $500K for LEB 2. Projected operations are shown to run negative during the 15-year tax credit compliance period; it will likely be necessary to provide a capitalized reserve to address this shortfall or increase the number of PBV units to 22. The economic and financial feasibility of LEB 2 may be improved by: Increasing the number of PBV units; Obtaining a higher tax credit allocation; Achieving higher tax credit pricing; Revisiting assumptions that impact feasibility, and funding the replacement reserves for public housing units from VIHA capital funds; and Identifying additional funding sources. Development Program The development program for LEB 2 will involve new construction of 40 senior units in lowrise/garden apartments, all of which will be tax credit units, restricted to households earning up to 30% or 50% of AMI. A summary of the unit mix is provided below: Louis E. Brown, Phase 2 Unit Mix Public Housing 22 0 22 Tax Credit Units Project-Based Vouchers 14 4 18 Without Subsidy 0 0 0 Market Rate Units 0 0 0 Total Units 36 4 40
1-Bedroom 2-Bedroom Total
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Development Budget The development budget for LEB 2 is estimated at roughly $11.2 million, as shown in Exhibit 2, attached. The total budget represents development costs of $279K per unit, of which $165K is related to hard construction costs. These costs are relatively low compared to the other developments involving new construction because of the high concentration of 1-bedroom units. Development costs are primarily based on those of Louis E. Brown, Phase 1 (LEB 1) as well as the draft tax credit application prepared for LEB 3. Financing Strategy The financing strategy for LEB 2 is generally based on the draft tax credit application prepared for this site, which anticipates an award of 9% tax credits.2 LIHTC equity will be the primary funding source for LEB 2, contributing an estimated $9.1 million in funding, based on current pricing estimates. VIHA is expected to contribute $1.6 million in funds, including about $66,000 in Capital Funds, $250,000 associated with the value of the site, and $1.3 million in program income generated from land sales and developer fees earned at LEB 1. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $470,000 is estimated for LEB2. Operating Feasibility To secure investors for LIHTC developments, it is generally necessary to demonstrate that cashflow will remain positive through the end of the 15-year tax credit compliance period. If investors do not predict operating feasibility through Year 15, they will likely require a guarantee from the public housing authority to fund shortfalls or an additional capitalized reserve in the development budget (thus increasing the total development costs) sufficient to fund projected operating shortfalls. For LEB 2, the inclusion of project-based voucher (PBV) units is critical to its ongoing operating feasibility because the subsidies from these units help offset the operating deficit from the public housing units. With 18 PBV units, the project net operating income (NOI) in year 1 is $19K. Standard underwriting requires that operating expenses increase at a faster rate than tenant rents and operating revenues, resulting in an operating deficit of $22K projected to occur by Year 15. This could be remedied by increasing the number of PBV units to 22. Alternate Financing Scenarios Alternative financing scenarios were not evaluated for LEB 2.
Louis E. Brown, Phase 3

LEB 3 will be the third phase of redevelopment for Louis E. Brown, and will also be developed by Carlisle. There are no imminent plans for submitting a tax credit application for this phase. LEB 3 will involve new construction of 102 family units in low-rise/garden apartments in Estate Paradise.
2
Based on guidance from VIHA, CSG assumed construction costs that were in line with LEB 1 for this analysis rather than the higher cost estimates reflected in the draft tax credit application for LEB 2. As a result, our analysis shows a maximum tax credit award of $1,206,513 instead of the $1,443,714 award anticipated in the draft application.
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Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a funding gap of $9.2 million for LEB 3. Projected operations are shown to run negative during the 15-year tax credit compliance period. It will likely be necessary to provide a capitalized reserve to address the $141K cumulative shortfall. The economic and financial feasibility of LEB 2 may be improved by: Obtaining a higher tax credit allocation, achieving higher tax credit pricing; Revisiting assumptions that impact feasibility; and Funding the replacement reserves for public housing units from VIHA capital funds; and Identifying additional funding sources. Development Program The development program for LEB 3 will involve new construction of 102 family units in lowrise/garden apartments. All units will be tax credit units, restricted to households earning up to 30% or 50% of AMI. A summary of the unit mix is provided below: Louis E. Brown, Phase 3 Unit Mix Public Housing 20 39 18 77 Tax Credit Units Project-Based Vouchers 6 12 7 25 Without Subsidy 0 0 0 Market Rate Units 0 0 0 Total Units 26 51 25 102
1-Bedroom 2-Bedroom 3-Bedroom Total
Development Budget The development budget for LEB 3 is estimated at roughly $29.7 million, as shown in Exhibit 2, attached. The total budget represents development costs of $295K per unit, of which $205K is related to hard construction costs. Development costs are primarily based on those of Louis E. Brown, Phase 1 (LEB 1). Financing Strategy The financing strategy for LEB 3 assumes an allocation of $1.5 million in 9% tax credits (annually over 10 years), which would generate an estimated $12.0 million in LIHTC equity based on current pricing estimates. The feasibility analysis also assumes competitive awards of $1.5 million in USDA Section 515 funds and $2.0 million in Affordable Housing Program funds through the Federal Home Loan Bank. VIHA is expected to contribute $5.4 million in funds, including about $3.5 million in Capital Funds and $1.9 million in program income generated from land sales and development fees earned at LEB 1. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $8.8 million is estimated for LEB 3. Operating Feasibility As explained above, it is important to demonstrate operating feasibility throughout the 15-year compliance period. The 25 PBV units planned for LEB 3 will probably not accomplish this. Virgin Islands Housing Authority Economic and Feasibility Analysis Page 21 May 31, 2011
Based on the assumptions described in Section V, the net operating income (NOI) is expected to be $38K in Year 1, but this is projected to become an annual operating deficit of $69K by Year 15. Alternate Financing Scenarios Alternative financing scenarios were not evaluated for LEB 3.
Nicasio Nico
Nicasio Nico will involve new construction of 60 family units in low-rise/garden apartments in the Estate Princess community of St. Croix. Nicasio Nico will be developed in partnership with a third-party developer, though a developer has not yet been selected for this development. VIHA owns this site, and the 60 original public housing units are still standing. Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a funding gap of $10.3 million for Nicasio Nico. Projected operations are shown to remain positive throughout the 15-year tax credit compliance period, with cumulative cashflow of roughly $61K. The economic and financial feasibility of Nicasio Nico may be improved by: Obtaining an allocation of 9% tax credits; Achieving higher tax credit pricing; Revisiting assumptions that impact feasibility; and Funding the replacement reserves for public housing units from VIHA capital funds; and Identifying additional funding sources. Development Program The development program for Nicasio Nico will involve new construction of 60 family units in low-rise/garden apartments, all of which will be tax credit units, restricted to households earning no more than 60% of AMI. A summary of the unit mix is provided below: Nicasio Nico Unit Mix Public Housing 0 0 0 0 0 Tax Credit Units Project-Based Vouchers 0 0 0 10 10 Without Subsidy 12 12 12 14 51 Market Rate Units 0 0 0 0 0 Total Units 12 12 12 24 60
1-Bedroom 2-Bedroom 3-Bedroom 4-Bedroom Total
Development Budget The development budget for Nicasio Nico is estimated at roughly $22.2 million, as shown in Exhibit 2, attached. The total budget represents development costs of $368K per unit, of which $246K is related to hard construction costs. These costs are the highest of the seven developments due to the high concentration of 3- and 4-bedroom units and the proportionately high transaction costs for smaller developments. Development costs are primarily based on those of Louis E. Brown, Phase 1 (LEB 1).
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Financing Strategy The financing strategy for Nicasio Nico combines tax-exempt bonds with 4% tax credits. LIHTC equity will be the primary funding source for this development, contributing an estimated $6.7 million in funding, based on current pricing estimates. The feasibility analysis also assumes competitive awards of $1.5 million in USDA Section 515 funds and $1.2 million in AHP funds. VIHA is expected to contribute $1.9 million in funds, including the $1 million estimated land value and about $890,000 in Capital Funds to be used for demolition. The analysis also assumes that VIHA defers about $600K in developer fees that would be generated by the project. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $10.3 million is estimated for Nicasio Nico. Operating Feasibility Nicasio Nico can likely achieve operating feasibility throughout the 15-year compliance period with the inclusion of just 10 PBV units. Based on the assumptions described in Section V, the net operating income (NOI) is expected to total $65K in Year 1 and under $12K in Year 15. Alternate Financing Scenarios CSG evaluated two alternative financing scenarios for Nicasio Nico:
Alternative 1: Market Rate Development. The first financing alternative assumes all 60 units are developed as market rate, with no income restrictions. Based on the assumptions described in Section V, a market rate development could support an estimated $5.8 million in conventional financing for Nicasio Nico. However, this financing structure would preclude it from competing for USDA or AHP funds, which could total about $2.7 million. Also, the 4% tax credits would generate about $200K more in equity than the project could support in permanent debt. For these reasons, Alternative 1 reflects a higher funding gap of $13.9 million and was not pursued further. Alternative 2: 9% Tax Credit Development. The second financing alternative assumes an allocation of $1.5 million in 9% tax credits (annually over 10 years), which would generate an additional $5.2 million in LIHTC equity for Nicasio Nico. In order to secure a competitive allocation of 9% credits, the unit mix described in the table above (in which the unsubsidized LIHTC units are available to households earning up to 60% of AMI) would likely need to shift in favor of units targeted to lower income categories like 30% or 50% of AMI. Any change to the income targeting would have a negative impact to the projects operating feasibility. Assuming, for example, that a competitive application requires that half the units are restricted to 30% of AMI and half the units are restricted to 50% of AMI, then the NOI would turn negative in Year 4 and additional reserves of $500,000 would likely be required.3 Also, because of the diminished cashflow, only a minimal deferred developer fee could be supported. The funding gap in this case is estimated at $6.3 million - an improvement of $4.0 million over the preferred financing scenario described more fully above. Due to the limited availability of 9% credits, this alternative was not pursued. If 9% credits become available for this project, however, this would be the preferred option.
This scenario assumes an additional 5 PBV units, for a total of 15 PBV units. The additional PBV units help improve the operating feasibility of this scenario.
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Ralph de Chabert
Ralph de Chabert will involve new construction of 169 family units in a mix of building types located in the Estate Richmond community of St. Croix. VIHA has identified Ralph de Chabert as a candidate for a Choice Neighborhoods Implementation Grant. Ralph de Chabert will be developed in partnership with a third-party developer, though a developer has not yet been selected for this development. VIHA owns this site, and the 264 original public housing units are still standing. Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a funding gap of $19.8 million for Ralph de Chabert. Projected operations are shown to remain positive throughout the 15-year tax credit compliance period, with cumulative cashflow of roughly $2 million. The economic and financial feasibility of Ralph de Chabert may be improved by: Increasing the Choice Neighborhoods Grant amount by including more public housing units; Obtaining multiple allocations of 9% tax credits; Achieving higher tax credit pricing; Revisiting assumptions that impact feasibility; and Funding the replacement reserves for public housing units from VIHA capital funds; and Identifying additional funding sources. Development Program The development program for Ralph de Chabert will involve new construction of 169 family units in a mix of building types. Ralph de Chabert is located in the Estate Richmond community of St. Croix. Of the 169 total units, 113 will be tax credit units (targeted to households earning up to 30% or 50% of AMI) and 56 will be market-rate units, as shown in the unit mix below: Ralph de Chabert Unit Mix Public Housing 12 16 24 4 56 Tax Credit Units Project-Based Vouchers 0 14 24 4 42 Without Subsidy 12 3 0 0 15 Market Rate Units 12 16 24 4 56 Total Units 36 49 72 12 169
1-Bedroom 2-Bedroom 3-Bedroom 4-Bedroom Total
Development Budget The development budget for Ralph de Chabert is estimated at roughly $58.1 million, as shown in Exhibit 2, attached. The total budget represents development costs of $344K per unit, of which $223K is related to hard construction costs. Like Nicasio Nico, these costs are relatively high compared with the other developments due to higher concentrations of 3- and 4-bedroom units. Development costs are primarily based on those of Louis E. Brown, Phase 1 (LEB 1). Financing Strategy The financing strategy for Ralph de Chabert anticipates the award of a Choice Neighborhoods Implementation Grant, which would provide roughly $13.9 million in funds to be used toward
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demolition and development of the public housing units.4 The financing strategy also assumes an award of $1.5 million in 9% tax credits, which would provide roughly $12.0 million in LIHTC equity, based on current pricing estimates. Based on the market rent assumptions described more fully in Section V, Ralph de Chabert could support an estimated $3.9 million in conventional debt. In addition, competitive awards of $1.5 million in USDA Section 515 funds and $2.0 million in Affordable Housing Program funds through the Federal Home Loan Bank were assumed. VIHA is expected to contribute roughly $4.9 million in funds, including the $1 million estimated land value and about $3.9 million in Capital Funds to be used for demolition. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $19.8 million is estimated for Ralph de Chabert. Operating Feasibility Due to the inclusion of market rate and PBV units, Ralph de Chabert is expected to maintain strong operations throughout the 15-year compliance period, sufficient to support conventional debt. Based on the assumptions described in Section V, the net operating income (NOI) is expected to total $584K in Year 1 and $562K in Year 15. Alternate Financing Scenarios CSG also evaluated an alternative financing scenario for Ralph de Chabert, which assumes the 169-unit development is divided into two LIHTC phases, each of which is able to secure an allocation of 9% credits. If an additional $1.5 million allocation of annual 9% credits were made available, an extra $12 million in tax credit equity may be generated. The total project costs in this scenario would increase because some costs like market studies, lender legal, and construction inspection would need to be duplicated. Hard construction costs may also increase due to lost economies of scale and multiple mobilizations. Such costs may add $2 million or more to the total costs, which would reduce the net benefit of the additional tax credit equity to about $10 million. The funding gap in this scenario would decline to an estimated $13.5 million.
Sugar Estate
Sugar Estate will involve acquisition and new construction of 81 senior units in mid-rise/elevator apartments on the island of St. Thomas. VIHA has identified Sugar Estate as a likely candidate for a 2012 allocation of 9% tax credits and also expects to pursue HUD Section 202 funding for this site. Sugar Estate will be developed in partnership with a third-party developer to be selected. The Sugar Estate site is expected to be provided to VIHA for a nominal cost through a bill expected to be passed in the Legislature of the Virgin Islands. Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a funding gap of $1.2 million for Sugar Estate. Projected operations are shown to remain positive throughout the 15-year tax credit compliance period, with cumulative cashflow of just under $700K. As noted in Section 3, developing the
The grant sizing methodology provided in the 2010 NOFA limited grant amounts (excluding supportive services and critical community improvements) to the applicable TDC limits for replacement public housing units plus demolition costs for public housing units not replaced.
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Sugar Estate site will require at least $2.3 million in VIHA funds and several competitive funding awards. The economic and financial feasibility of Sugar Estate may be improved by: Increasing the allocation of 9% tax credits; Increasing the number of PBV units; Achieving higher tax credit pricing; and Revisiting assumptions that impact feasibility; and Identifying additional funding sources. Development Program The development program for Sugar Estate will involve acquisition and new construction of 81 senior units in mid-rise/elevator apartments. All units will be tax credit units, restricted to households earning up to 30% or 50% of AMI. A summary of the unit mix is provided below: Sugar Estate Unit Mix Public Housing 0 0 0 Tax Credit Units Project-Based Vouchers 30 5 35 Without Subsidy 46 0 46 Market Rate Units 0 0 0 Total Units 76 5 81
1-Bedroom 2-Bedroom Total
Development Budget The development budget for Sugar Estate is estimated at roughly $19.6 million, as shown in Exhibit 2, attached. The total budget represents development costs of $242K per unit, of which $133K is related to hard construction costs. These costs are the lowest of the new construction developments due to a lower per-square-foot construction cost estimate and the high concentration of 1-bedroom units. Financing Strategy The financing strategy for Sugar Estate assumes a $1.5 million allocation of 9% tax credits (annually over 10 years), which would generate an estimated $12.0 million in LIHTC equity. The feasibility analysis also assumes competitive awards of $1.5 million in USDA Section 515 funds and $1.6 million in Affordable Housing Program funds through the Federal Home Loan Bank. VIHA is expected to contribute $3.3 million in funds, including the $1 million estimated land value and $2.3 million in program income generated from land sales and developer fees earned at LEB 1. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $1.2 million is estimated for Sugar Estate. Operating Feasibility Sugar Estate can likely achieve operating feasibility throughout the 15-year compliance period with the inclusion of 35 PBV units. Based on the assumptions described in Section V, the net operating income (NOI) is expected to total $70K in Year 1, declining to about $4K in Year 15. Alternate Financing Scenarios CSG also evaluated an alternative scenario for Sugar Estate that assumed an award of HUD Section 202 funds and financing with tax-exempt bonds and 4% tax credits. This scenario Virgin Islands Housing Authority Economic and Feasibility Analysis Page 26 May 31, 2011
assumed 25 Section 202 units, and a grant amount of $4.8 million (equal to the full allocation of rural units for the Atlanta HUB). Because Sugar Estate will be a senior development, and not subject to the 25% project-basing cap, the remaining 56 units were expected to be PBV units. The funding gap in this scenario was estimated at $2.9 million, due in large part to increased reserve requirements associated with the additional PBV units. VIHA expects to pursue a Section 202 grant in the next funding round, but given the highly competitive nature of the Section 202 application process, and the low probability of securing a grant for the entire rural allocation in this region, this alternative was not selected as preferred financing strategy.
Walter Hodge
Walter Hodge is located in the Frederiksted community of St. Croix and is currently comprised of 250 public housing units situated in 3-story walk-up buildings. The existing units are in a state of significant disrepair and VIHA plans to demolish 82 of the existing units and make significant rehab improvements to the remaining 168 units. The development program for Walter Hodge lends itself well to a self-developed acquisition/rehab using 4% tax credits and tax-exempt bonds. Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a net funding gap of $14.8 million for Walter Hodge. Much of this gap could be addressed through a Capital Fund Financing Program borrowing. Because the financing strategy contemplates 100% public housing units, projected operations are expected to remain negative throughout the 15-year tax credit compliance period. In order to secure a tax credit investor for this development, VIHA would need to guarantee breakeven operations for Walter Hodge throughout the compliance period. Alternately, VIHA could adjust the unit mix to include a sufficient number of PBV units to cross-subsidize the public housing units. Initial projections indicate that including 22 PBV units at Walter Hodge would result in feasible operations throughout the tax credit compliance period. As described earlier in the Analysis, VIHA may increase its project-basing capacity by pursuing replacement vouchers for any units that are demolished/disposed but not replaced as public housing. The economic and financial feasibility of Walter Hodge may be improved by: Pursuing a CFFP financing; Obtaining an allocation of 9% tax credits; Including PBV units up to 25% of total units; Achieving higher tax credit pricing; Revisiting assumptions that impact feasibility; Combining the Walter Hodge and Williams Delight rental developments into a single tax credit transaction; and Identifying additional funding sources. Development Program The development program for Walter Hodge will involve demolition of 82 existing public housing units and rehabilitation of the remaining 168 existing public housing units in the Frederiksted community of St. Croix. All units will be tax credit units, restricted to households earning no more than 60% of AMI. This analysis assumes that VIHA would develop this project with the assistance of its consulting team rather than a third party developer. A summary of the unit mix is provided below:
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Walter Hodge Unit Mix Public Housing 66 66 36 168 Tax Credit Units Project-Based Vouchers 0 0 0 0 Without Subsidy 0 0 0 0 Market Rate Units 0 0 0 0 Total Units 66 66 36 168
Development Budget The development budget for Walter Hodge shown in Exhibit 2 reflects total development costs of roughly $41.6 million. The total budget represents development costs of $248K per unit, of which $123K is related to hard construction costs. The development costs are substantially higher than the hard construction costs because the financing structure requires including $8.4 million in value attributed to the existing buildings, as explained further below. Development costs are based primarily on construction and demolition estimates provided by the Authority as well as assumptions related to acquisition value and other costs, as described in Section V. Financing Strategy The financing strategy for Walter Hodge is based on an acquisition and rehabilitation transaction involving tax-exempt bonds and 4% tax credits, similar to structures CSG has developed for housing authorities in Puerto Rico, New York, Indianapolis, Seattle, and several others. In each of these cases, the housing authority developed the acquisition/rehab without the assistance of a third party developer, allowing developer fee to be returned to the authority. The acquisition/ rehab tax credit structure allows the market value of the existing buildings (appraised without public housing restrictions) to be included in eligible basis. In the case of Walter Hodge, the assumed acquisition value would generate an estimated $2.2 million in LIHTC equity. The costs associated with the rehab of the buildings generate another $10.0 million in LIHTC equity. The feasibility analysis also assumes a competitive award of $1.0 million in AHP funds. VIHA is expected to contribute $1.2 million in accumulated rental revenues from Walter Hodge toward maintenance-related improvements needed within the development. VIHA will also contribute the $8.4 million in acquisition value. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $18.7 million is estimated for Walter Hodge. An estimated $4.2 million in developer fee would offset a portion of this, for a net funding gap of about $14.5 million. As a rehab development with the 168 public housing units, Walter Hodge is likely the best candidate for a CFFP financing, which could address a significant portion of the projected funding gap. The table below illustrates the potential benefit to VIHA of rehabilitating units at Walter Hodge using the acquisition/rehab tax credit approach described above. As shown, VIHA may generate about $11 million in benefits relative to paying the direct costs of the rehab without the advantage of tax credit equity.
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Potential Benefits to VIHA of Leveraged Rehabilitation Walter Hodge Anticipated VIHA Funding ($1,200,000) Additional Funding Required (Funding Gap) ($18,708,726) Plus Acquisition Payments Received $0 Plus Developer Fee Earned $4,228,112 Net VIHA Funding Required ($15,680,614) Demolition and Site Work Costs Construction Costs (including contingency, A&E) Total Costs (excluding transaction costs) Savings Compared with Unleveraged Rehab Plus Value of Reserves to Benefit Project Total Value to PHA $3,000,000 $21,530,000 $24,530,000 $8,849,386 $2,119,416 $10,968,802
Operating Feasibility Because this financing strategy assumes 100% public housing units, an operating deficit is projected throughout the tax credit compliance period. Based on the assumptions described in Section V, the project would have an operating shortfall of $65K in Year 1, which would drop to a deficit of $275K in Year 15. In order to secure a tax credit investor for this development, VIHA would need to guarantee breakeven operations for Walter Hodge throughout the compliance period or include a capitalized reserve sufficient to fund projected deficits. Alternately, VIHA could adjust the unit mix to include a sufficient number of PBV units to cross-subsidize the public housing units. Initial projections indicate that including 22 PBV units at Walter Hodge would result in feasible operations throughout the tax credit compliance period. As described earlier in the Analysis, VIHA may increase its project-basing capacity by pursuing replacement vouchers for any units that are demolished/disposed but not replaced as public housing. Alternate Financing Scenarios CSG evaluated two alternative scenarios for Walter Hodge:
Alternative 1: Include 42 PBV Units. The first financing alternative assumes that 6 3bedroom public housing units and 36 4-bedroom public housing units are replaced with PBV units. The inclusion of the 42 PBV units would improve operations and support an estimated $1.9 million in conventional debt and nearly $1.0 million in deferred developer fee. The net funding gap in this scenario would be $13.8 million. Due to the limited capacity for projectbasing additional voucher units, this alternative was not pursued. However, if VIHA can increase its total supply of voucher units by securing replacement vouchers for demolished units, it will be worthwhile to examine this option again. Alternative 2: 9% Tax Credit Development. The second financing alternative assumes an allocation of $1.5 million in 9% tax credits (annually over 10 years), which would generate an additional $4.2 million in LIHTC equity for Walter Hodge. The net funding gap in this scenario would be reduced to $9.5 million. This alternative was not selected as the preferred financing strategy due to the limited availability of 9% tax credit allocations, but if an allocation becomes available, this would be the preferred alternative.
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Williams Delight
Williams Delight is also located in the Frederiksted community of St. Croix and was originally comprised of 300 public housing units situated in single-family buildings. The buildings are currently in a state of significant disrepair. VIHA has begun to rehabilitate some of the original units and ultimately plans to demolish 100 of the original units and rehabilitate the remaining 200 units. Of the rehabilitated units, half are expected to be sold to public housing clients and other low-income buyers; the remaining units will be maintained as rentals. The rental program program for Williams Delight lends itself well to a self-developed acquisition/rehab strategy using 4% tax credits and tax-exempt bonds. Based on the development program and financing strategy described below, as well as the assumptions described in Section V, CSG projects a net funding gap of $2.7 million for the rental component of Williams Delight. Because the financing strategy includes some PBV units to balance negative operations of the public housing units, projected operations are expected to remain positive throughout the 15-year tax credit compliance period. The homeownership program involves VIHA-funded rehab of 100 units, 14 of which have already been completed. VIHA will occupy the units with tenants enrolled in or interested in a lease-to-purchase program and will sell 18 units per year. The sources and uses for the homeownership component were not included in the summary analysis. VIHA will likely want to ensure that the households targeted for ownership have incomes sufficient to benefit from their new role. Households with incomes below 50% of AMI often do not have the capacity to address the ongoing costs of homeownership; owning a home for these families may prove more burdensome than beneficial. The economic and financial feasibility of Williams Delight may be improved by: Obtaining an allocation of 9% tax credits; Including PBV units up to 100% of total units; Achieving higher tax credit pricing; Revisiting assumptions that impact feasibility; Combining the Walter Hodge and Williams Delight rental developments into a single tax credit transaction; and Identifying additional funding sources. Development Program The development program for Williams Delight will involve selected demolition of 100 vacant public housing units and rehabilitation of the remaining 200 single-family public housing units in the Frederiksted community of St. Croix. Of the 200 units to remain, 100 will be sold to public housing families through VIHAs homeownership program and the balance of 100 rental units will be included in an acquisition/rehab tax credit transaction similar to the one described above for Walter Hodge. All rental units will be tax credit units, restricted to households earning no more than 60% of AMI. This analysis assumes that VIHA would develop this project with the assistance of its consulting team rather than a third party developer. A summary of the unit mix is provided below:
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Williams Delight Unit Mix Tax Credit Rental Units Public Project-Based Housing Vouchers 37 0 20 8 0 8 57 16 Other Rental Units 13 11 3 27 Home Ownership Units 49 40 11 100 Total Units 99 79 22 200
Development Budget The development budget for the rental component at Williams Delight is shown in Exhibit 2 and reflects total development costs of roughly $15.2 million. The total budget represents development costs of $209K per unit, of which $94K is related to hard construction costs. The development costs are substantially higher than the hard construction costs because the financing structure requires including $3.7 million in value attributed to the existing buildings, as explained further below. Development costs are based primarily on construction and demolition estimates provided by the Authority as well as assumptions related to acquisition value and other costs, as described in Section V. The rehabilitation costs for the homeownership component are expected to total $50,000-$75,000 per unit. The costs for the homeownership units will be paid entirely from Capital Funds and are not reflected in the summary tables. Financing Strategy The financing strategy for the rental component of Williams Delight is based on an acquisition and rehabilitation transaction involving tax-exempt bonds and 4% tax credits, similar to the structure proposed for Walter Hodge. In this case, the tax credits would generate an estimated $4.3 million in LIHTC equity, of which $1.0 million is generated from the assumed acquisition value of the existing buildings. The inclusion of 19 project-based vouchers would likely support a conventional loan of about $600K, and a competitive award of $1.0 million in AHP funds is also assumed. VIHA is expected to contribute $1.2 million in accumulated rental revenues from Williams Delight toward maintenance-related improvements needed within the development, as well as $335K in Capital Funds. In addition, VIHA would contribute the estimated $5.0 million in acquisition value and about $460K in deferred fee. Based on the development cost estimates and potential funding sources identified above, a funding gap of roughly $7.3 million is estimated for the rental component. An estimated $2.5 million in developer fee would offset a portion of this, for a net funding gap of about $4.8 million. The table below illustrates the potential benefit to VIHA of rehabilitating units at Williams Delight using the acquisition/rehab tax credit approach described above. As shown, VIHA may generate about $5.6 million in benefits relative to paying the direct costs of the rehab without the advantage of tax credit equity.
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Potential Benefits to VIHA of Leveraged Rehabilitation Williams Delight Anticipated VIHA Funding ($1,535,000) Additional Funding Required (Funding Gap) ($4,747,863) Plus Acquisition Payments Received $862,655 Plus Developer Fee Earned $1,216,090 Net VIHA Funding Required ($4,204,118) Demolition and Site Work Costs Construction Costs (including contingency, A&E) Total Costs (excluding transaction costs) Savings Compared with Unleveraged Rehab Plus Value of Reserves to Benefit Project Total Value to PHA $500,000 $7,146,600 $7,646,600 $3,442,482 $2,119,416 $5,561,898
For the homeownership units, VIHA plans to rehabilitate the remaining 86 homeownership units using Capital Funds. The units will be occupied with households enrolled in, or interested in, a lease-to-purchase program. VIHA expects to sell up to 18 units per year over 5 years using USDA soft seconds of $50,000 each. The sales proceeds will be used to fund future affordable housing redevelopment activities at Williams Delight and other VIHA sites. Operating Feasibility The rental component of Williams Delight is expected to maintain positive cashflow throughout the 15-year compliance period, due to the inclusion of 16 PBV units. Based on the assumptions described in Section V, the net operating income (NOI) is expected to total $119K in Year 1 and about $73K in Year 15. Once the homeownership units are sold to tenants, VIHA will not be directly responsible for the continued operations of these units. However, to make the homeownership program successful, it will be important for VIHA to target households with sufficient income so that the costs of building maintenance and repairs, as well as care and maintenance for yards and other obligations of home ownership, do not unduly burden low-income families. Alternate Financing Scenarios CSG also evaluated two alternative scenarios for the rental component of Williams Delight:
Alternative 1: 100% Public Housing. The first financing alternative assumes that all rental units will remain as public housing. In this scenario, operating shortfalls are expected beginning in Year 2 of the tax credit compliance period and grow to an operating deficit of roughly $77K by Year 15. The net funding gap in this scenario is estimated at $2.9 million. Alternative 2: 9% Tax Credit Development. The second financing alternative assumes an allocation of $1.5 million in 9% tax credits (annually over 10 years), which would generate an additional $5.7 million in LIHTC equity for Williams Delight, which eliminates the funding gap. In this alternative, VIHA would benefit from roughly $3.4 million in program income, including about $1.9 million in cash acquisition payments and $1.5 million in developer fee. These proceeds could be used to offset funding gaps at the homeownership Page 32 May 31, 2011
component of Williams Delight as well as for other sites. This alternative was not selected as the preferred financing strategy due to the limited availability of 9% tax credit allocations, but if an allocation becomes available, this would be the preferred alternative. As noted earlier, because the projected development and operating feasibility of the proposed developments depends on the specific development program and the assumptions described in Section V, the findings described in this section should be updated to reflect any updates to assumptions or development program.
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V.
Key Assumptions
The Analysis relies upon many inputs related to development program and costs, operating costs and revenues, availability of HUD subsidies, availability of other funding sources, market values of rents and property, and others. Because these developments are in the initial planning stages, CSG used available information to draw assumptions for each of these inputs. In many cases, assumptions were made based upon the projections prepared for Louis E. Brown Phase 1. In other cases, assumptions were based upon the performance of existing properties or other available information. Because the feasibility analysis is derived from these inputs, it is important to review the appropriateness of key assumptions to make the Analysis as valuable as possible. Below is a description of the key inputs and assumptions used in the Analysis.
Development Costs
a. Acquisition Costs. Land values were based on information provided by VIHA. Building acquisition values were based on a placeholder estimate of $50,000 per unit. Because market information is not available, this assumption has not been updated. Building values have a significant impact on the amount of tax credit equity generated in the financing scenarios for these developments, so this assumption should be updated with available information when feasible. Assuming that market rents for these developments are equal to 60% tax credit rents, the $50,000 per unit estimate represents a capitalization rate of 6.3% for Walter Hodge and 6.1% for Williams Delight, which is on the low-end of the typical range of 5-10%. However, without a better indication of market value, the funding gap for these scenarios can not be effectively projected. b. Demolition and Relocation Costs. Costs for demolition were estimated to total $14,843 per unit, based on VIHAs costs at LEB 1. Relocation cost estimates were not made available for this analysis, and are consequently not included in the development budget. Once available, these costs should be added to the development budgets for Nicasio Nico, Ralph de Chabert, Walter Hodge, and Williams Delight. c. Site Work Costs. Site work costs were provided by the Authority and range from $0 for LEB 1, Nicasio Nico, Ralph de Chabert, and Williams Delight to roughly $2 million for Sugar Estate and Walter Hodge. d. Construction Costs. With the exception of Sugar Estate, hard costs for all new construction projects were based on the construction contract for LEB 1, which equals $217 per square foot. The project architect for Sugar Estate provided cost estimates for this site equal to $184 per square foot. Because the building types, amenities and location vary from one site to the next, these assumptions should be refined further. A 10% contingency was added to the per square foot estimates. e. Architectural, Engineering, and Survey Costs. Based on information provided for LEB 1 and LEB 2, design fees were estimated at 5% of hard costs and engineering costs were estimated at 1% of hard costs for the new construction projects. The estimated design fee for the two rehab projects was reduced to 3% of hard construction costs. Survey costs were estimated at $45,000 for each development.
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f.
Third Party Reports. Costs for environmental, appraisal, and market study reports were based on the draft tax credit application for LEB 2 in the case of the senior developments and the F1 for LEB 1 in the case of the family developments.
g. Permitting Costs. Permit costs and utility hook up fees were based on the draft tax credit application for LEB 2 and the F1 for LEB 1, for the senior and family developments, respectively. These sources reflect costs of $2,200 per unit for family developments and $2,125 per unit for senior developments. h. Construction Financing Costs. With the exception of scenarios involving 4% tax credits and tax-exempt bonds, financing cost estimates for all projects assumed a 6.0% all-in interest rate, a 1% loan origination fee, $50,000 in lender legal fees, $20,000 in lender diligence costs, and construction inspection fees of $1,500 per month. The interest rate for tax-exempt bond scenarios was reduced to 5.0%; all other assumptions remained the same. i. j. Legal, Consulting, and Other Costs. Assumptions for legal, consulting, and other costs are shown in the detailed development budgets attached as Exhibit 2. Developer Fee. Developer fees for each project were limited to 12%, the maximum safe harbor standard for HUD mixed-finance developments.
k. Reserves. Tax credit investors and, to a lesser extent, project lenders, require certain capitalized reserves to be included in the development budget or otherwise provided by the developer or project sponsor. Although reserve requirements vary from one investor to the next, CSG included the following reserve levels based on its experience with investor and lender requirements in mixed-finance transactions throughout the country.
Operating Reserve. Equal to 6 months of operating expenses (including any replacement reserve deposits and required debt service payments), this reserve is available to fund any shortfall in cashflow. ACC Subsidy Reserve. Equal to 12 months of projected ACC operating subsidy, this reserve is available to fund any shortfall in the amount of operating subsidy provided for the public housing units. PBV Transition Reserve. Equal to 24 months of projected PBV subsidy, this reserve is available to fund any shortfall in the amount of PBV subsidy provided for the public housing units. The reserve requirements for this reserve vary widely from one investor to the next, depending on their level of comfort with PBV subsidy. Lease-Up Reserve. Equal to 3 months of operating expenses (including any replacement reserve deposits and required debt service payments), this reserve is available to fund operating costs through stabilization. Replacement Reserve. CSG typically includes a replacement reserve funded from project cashflow equal to $300 PUPY to address larger repair needs not covered in the annual operating budget. Because several of the VIHA developments are not expected to have sufficient cashflow to fund ongoing reserve deposits, the
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replacement reserve was capitalized in the development budgets for LEB 1, LEB 2, and Walter Hodge.
Operating Costs
Operating costs for new construction projects were based on the closing projections for LEB 1 in the case of family developments, which showed costs of $6,078 per unit per year (PUPY) and the draft tax credit application for LEB 2 in the case of Sugar Estate, which showed costs of $6,073 PUPY. Operating costs for Walter Hodge and Williams Delight were based on reporting provided for the respective AMPs, which showed PUPY costs of $5,836 and $5,668, respectively. Utility allowances have a significant impact on operating feasibility. Because project-specific information was not available, CSG based its assumptions on the utility allowance amounts reflected in the LEB 1 closing projections and the LEB 2 tax credit application, which reflect $155 for a 1-bedroom, $223 for a 2-bedroom, and $269 for a 3-bedroom. The 3-bedroom allowance was increased by 10% for 4-bedroom units. These allowances represent between 2329% of maximum tax credit rents, which is high in comparison with most other communities in which CSG has worked.
Operating Revenues
Assumptions related to operating revenues are described below. A 5% vacancy factor was applied to tenant-paid rents and PBV subsidy. Income sources were assumed to increase at 2% per year, while expenses were expected to increase at 3% per year a. Public Housing Rents. For new construction projects, the tenant paid portion of public housing rents were based on the LEB 1 closing projections and the LEB 2 tax credit application, both of which reflect tenant-paid rents of $75.00 per unit per month (PUPM). In the case of Walter Hodge and Williams Delight, rents were based on reporting provided for the respective AMPs, which showed tenant-paid PUPM rents of $61.47 and $94.13, respectively. b. Section 8 Rents. Section 8 payment standards were provided by VIHA, and reflect rents for St. Croix of $774 for a 1-bedroom, $937 for a 2-bedroom, $1,171 for a 3-bedroom, and $1,339 for a 4-bedroom unit. On St. Thomas, maximum tax credit rents are $930 for a 1-bedroom, $1,198 for a 2-bedroom, $1,484 for a 3-bedroom, and $1,550 for a 4bedroom unit. c. Tax Credit Rents. Tax credit rents were based on information provided by the Authority, which reflect maximum rents for St. Croix of $580 for a 1-bedroom, $696 for a 2bedroom, $804 for a 3-bedroom, and $898 for a 4-bedroom unit. On St. Thomas, maximum tax credit rents are $663 for a 1-bedroom, $796 for a 2-bedroom, $919 for a 3bedroom, and $1,026 for a 4-bedroom unit. d. Market Rents. Although a market study was prepared that addressed some aspects of the housing market for Louis E. Brown, Nicasio Nico, Ralph de Chabert and Estate Donoe (comparable to Sugar Estate), the study did not provide information about market rents. Based on discussions with RHG/CVR Associates and VIHA, CSG assumed market rents were equal to 120% of the Section 8 payment standard for the Ralph de Chabert and Nicasio Nico developments, though this information should be replaced with actual market rents as soon as feasible. Virgin Islands Housing Authority Economic and Feasibility Analysis Page 36 May 31, 2011
e. HUD Operating Subsidy. For new construction projects, HUD operating subsidy estimates for public housing units was based on the LEB 1 closing projections and the LEB 2 tax credit application. An estimate of $339 PUPM was used for new family developments and an estimate of $283 PUPM was used for LEB 2 and Sugar Estate. Subsidy estimates for Walter Hodge and Williams Delight were based on reporting provided for the respective AMPs, which showed PUPM subsidy levels of $413 and $402, respectively. f. Other Income. Other income was estimated at roughly $4 PUPM based on projections at LEB 1 and LEB 2.
Funding Sources
The feasibility analysis makes a series of assumptions about funding availability for the seven developments. Many of these assumptions are aggressive, particularly when viewed at an aggregate level. For example, while it may be realistic to secure a 9% tax credit allocation as well as maximum levels of USDA and AHP funds for a single project, it is unlikely that this performance could be repeated for all of the projects. However, understanding the best case funding scenario for each site can help VIHA prioritize the sequence of developments and allocated its limited resources in the most effective manner. a. Low Income Housing Tax Credits. The feasibility analysis assumes 9% tax credit allocations of up to $1.5 million (annually over 10 years) for LEB 2, LEB, 3, Ralph de Chabert, and Sugar Estate. As indicated in Section III, additional allocations for the remaining developments would significantly reduce the projected funding gap. The 4% tax credits, which are included in the financing strategies for Nicasio Nico, Walter Hodge, and Williams Delight, are available for developments that finance at least 50% of the projects aggregate basis (roughly equivalent to total project costs) with tax-exempt bonds. CSG has assumed equity pricing of $0.80 for this analysis, but the actual pricing may be higher or lower, depending on the prevailing conditions at the time an investor is selected. Based on the assumed pricing and allocations, an estimated $45.1 million in equity would be generated from 9% credits and another $24.0 million in equity would be generated from 4% tax credits. As noted further in Section III, employing a competitive investor solicitation process will help VIHA secure optimal tax credit pricing. b. VIHA Sources. Information provided by VIHA reflects a total of $19.8 million in VIHA funding sources, including the following: $5.5 million in program income generated from land sales and developer fees earned at LEB 1; $5.2 million in Capital Funds; $3.5 million in Replacement Housing Factor Funds; $3.3 in contributed land values; and $2.4 million in accumulated rental revenues that will be used toward maintenance-related costs at Williams Delight and Walter Hodge. If the $2.4 million in accumulated rental revenues is needed for development costs, VIHA may pursue a waiver for this use; otherwise, cash flow generated from public housing sources must be used for public housing eligible operating expenses. In addition to the $19.8 million in direct VIHA funding, an additional $13.5 million in pass-through funding from VIHA is also reflected in this analysis, including $12.5 million in building value for Walter Hodge and Williams Delight, and $1.0 million in deferred developer fees. c. United States Department of Agriculture. The USDA Section 515 program provides lowinterest loans to developers and public agencies to fund construction of low-income rental Virgin Islands Housing Authority Economic and Feasibility Analysis Page 37 May 31, 2011
housing. The feasibility analysis assumes a total of $6 million in Section 515 funding awards, including $1.5 million loans for LEB 2, Nicasio Nico, Ralph de Chabert, and Sugar Estate. Although typical awards are limited to $1.0 million, funding may be increased for high cost areas such as the Virgin Islands. d. Federal Home Loan Bank Affordable Housing Program. The Federal Home Loan Bank (FHLB) Affordable Housing Program provides funding through member banks to projects that develop low-income rental and homeownership housing. Potential funding amounts vary from one FHLB location to the next, but the New York FHLB provides grants of up to $2 million per project. Funding applications must be sponsored by a member bank that will be providing a construction and/or permanent loan to the project. The feasibility analysis assumes a total of $9.3 million in AHP funding including $2 million grants for LEB 2 and Ralph de Chabert, a $1.6 million for Sugar Estate, a $1.2 million grant for Nicasio Nico, and $1 million grants for Walter Hodge and Williams Delight. e. Choice Neighborhoods. The financing strategy for Ralph de Chabert assumes an award of Choice Neighborhood Implementation Grant funds, including $13.9 million in funding available for development. Choice Neighborhoods is an extremely competitive grant program, with just 2-3 implementation grants expected to be funded this year of 42 applications submitted. If VIHA has not already done so, it should have a scoring analysis prepared for the target neighborhood to determine the likelihood of a successful Choice Neighborhoods Implementation Grant application. If the neighborhood scores well, VIHA should consider applying for a Choice Neighborhoods Planning Grant in the next funding round. f. HUD Section 202. Although Section 202 funds are not included in the preferred scenario for Sugar Estate, VIHA does expect to pursue this funding source in the next funding round with the assistance of a third-party developer. The 2010 NOFA provided up to $4.8 million for the Atlanta HUB for development of up to 43 Section 202 units in rural areas. The alternative scenario for Sugar Estate includes the entire rural allocation for the Atlanta HUB and still reflects a $2.9 million funding gap.
g. Tax-Exempt Bonds. As noted above, securing 4% tax credits requires tax-exempt bonds roughly equal to 50% of development costs, which must remain outstanding through the construction period. Because the operating income from affordable developments is usually insufficient to support this level of permanent debt, these bonds are typically repaid upon conversion with a combination of funding sources, including tax credit equity and subordinate loans such as VIHA and AHP funds. The financing strategies for Nicasio Nico, Walter Hodge, and Williams Delight contemplate a total of $39.3 million in tax-exempt bonds. h. Conventional Permanent Financing. For scenarios that maintain positive cashflow, conventional permanent financing is included as a funding source. Two types of permanent loans were modeled:
The first is a 30-year loan based on the NOI of project units up to the maximum market or tax credit rents. This debt is calculated assuming an amortization period of 30 years, 7% interest rate, and 1.15 debt coverage.
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The second loan is a 15-year loan based on the additional revenue generated from PBV units, which typically often tax credit rents. This debt is limited to 15-years to coincide with the Housing Assistance Payment (HAP) contract term for the PBV units. These loans are modeled using an amortization period of 15 years, 8% interest rate, and 1.20 debt coverage.
As noted previously, the conclusions of the Analysis rest entirely on the specific development programs evaluated and the assumptions described above. Once VIHA has an opportunity to review and comment upon the above assumptions, the Analysis can be updated as appropriate.
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Exhibits
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Exhibit 1 Preliminary Analysis of CFFP Debt Capacity
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Estimated RHF Funds Year of Initial Allocation 2002 2005 2010 876,247 709,760 44,644 36,162 36,162 36,162 36,162 540,183 437,548 437,548 437,548 437,548 437,548 437,548 437,548 437,548 437,548 -
Total RHF Funds 1,461,074 1,183,470 473,710 473,710 473,710 437,548 437,548 437,548 437,548 437,548 -
Estimated CFP Funds 6,039,611 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085
Total Capital Funds 7,500,685 6,075,555 5,365,795 5,365,795 5,365,795 5,329,633 5,329,633 5,329,633 5,329,633 5,329,633 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085 4,892,085
Max Debt Payment N/A 2,814,165 2,104,405 2,104,405 2,104,405 2,068,243 2,068,243 2,068,243 2,068,243 2,068,243 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695 1,630,695
Total
709,760
144,647
3,937,934
4,792,341
97,841,698
102,634,039
37,406,240 $22,474,900 2,814,165 $224,749 $80,000 $80,000 $10,000 $10,000 $10,000 $50,000 $75,000 $539,749 $19,120,986
Maximum Debt Capacity (1) Less Debt Service Reserve Less Transaction Costs Origination Fee Bond Counsel HUD Counsel Management Assessment Fairness Opinion Trustee Fees Lender Legal Financial Advisor Total Net Bond Proceeds (1) Assumes all-in rate of 6%.
Exhibit 2: Summary of Preferred Financing Scenarios Economic Feasibility Report Virgin Islands Housing Authority Louis E Brown, Phase II I. GENERAL Location Development/Financing Strategy Third Party Developer? Construction Type (new, rehab, acquisition) Tenant Type (senior, family, etc.) Building Type (highrise, walkup, etc.) II. UNITS Existing Units New Units Public Housing HUD 202 Project-Based Section 8 LIHTC (unsubsidized) Market-Rate Total Units Bedroom Distribution 1-bedroom 2-bedroom 3-bedroom 4-bedroom Total III. OPERATIONS Total Revenue Year 1 (including subsidy) Total Expenses Year 1 Net Operating Income - Year 1 Net Operating Income - Year 15 Cumulative NOI Cumulative Cash Flow Key Operating Assumptions Operating Cost - PUPY Replacement Reserves PUPY Public Housing Subsidy PUPM Public Housing Rents (Tenant-Paid) PUPM Project-Based Section 8 Rents LIHTC Rents (unsubsidized) Market-Rate Rents Utility Allowance 1-bedroom 2-bedroom 3-bedroom 4-bedroom Vacancy Assumption ProRation Loss Percent Subsidy Maintained by VIHA Louis E. Brown, Phase III Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight (LIHTC Rental Portion Frederiksted, St. Croix ACC & PBS8 / 4% Acqu&Rehab Credits No Rehabilitation Family Single/ Detached Total
Estate Paradise, St. Croix 9% Credits / ACC & PBS8 Yes New Senior Low-Rise/ Garden
Estate Paradise, St. Croix 9% Credits / ACC & PBS8 Yes New Family Low-Rise/ Garden
Estate Princess, St. Croix 4% LIHTC Yes New Family Low-Rise/ Garden
Estate Richmond, St. Croix Choice Neighborhoods / 9% LIHTC Yes New Family Mix of Building Types
St. Thomas 9% LIHTC Yes New Senior Mid-Rise / Elevator
Frederiksted, St. Croix 100% ACC/ 4% Acqu&Rehab Credits No Rehabilitation Family 3-Story Walk-Ups
Varies Varies Varies Varies Varies Varies
0 40 22 0 18 0 0 40 Units Avg. SF 36 641 4 891 0 N/A 0 N/A 40
0 102 77 0 25 0 0 102 Units Avg. SF 26 641 51 863 25 1074 0 N/A 102
60 60 0 0 6 54 0 60 Units Avg. SF 12 641 12 863 12 1074 24 1289 60
264 169 56 0 42 15 56 169 Units Avg. SF 36 641 49 863 72 1074 12 1289 169
0 81 0 0 35 46 0 81 Units Avg. SF 76 641 5 891 0 N/A 0 N/A 81
250 0 168 0 0 0 0 168 Units Avg. SF 0 N/A 66 928 66 1073 36 1247 168
200 0 57 0 16 0 0 73 Units Avg. SF 0 N/A 37 638 28 792 8 858 73
774 452 380 0 142 115 56 693 Units 186 224 203 80 693
$280,125 $242,920 $37,205 $2,180 $326,264 $326,264
$658,587 $619,956 $38,631 -$68,748 -$141,292 -$141,292
$443,899 $364,680 $61,219 $6,877 $559,091 $43,398
$1,661,835 $1,027,182 $583,953 $562,362 $8,691,367 $2,033,395
$586,248 $491,913 $70,035 $4,429 $672,725 $672,725
$915,291 $980,485 -$65,193 -$275,363 -$2,407,433 -$2,407,433
$554,721 $413,789 $119,033 $72,925 $1,489,689 $0
$5,100,706 $4,140,924 $844,881 $304,662 $9,190,410 $527,057
$6,073 capitalized $283 $358 $75 VIHA Pmt. Std. N/A N/A $155 $223 N/A N/A 5% 0% 5%
$6,078 capitalized $339 $75 VIHA Pmt. Std. N/A N/A $155 $223 $269 N/A 5% 0% 5%
$6,078 $300 N/A N/A VIHA Pmt. Std. Max 60% Rents N/A $155 $223 $269 $296 5% N/A N/A
$6,078 $300 $339 $75 VIHA Pmt. Std. Max 60% Rents 120% of S8 $155 $223 $269 $296 5% 0% 5%
$6,073 $300 N/A N/A VIHA Pmt. Std. Max 30%/50% Rents N/A $155 $223 N/A N/A 5% N/A N/A
$5,836 capitalized $413 $61 N/A N/A N/A N/A $223 $269 $296 5% 0% 5% $474
$5,668 $300 $402 $94 VIHA Pmt. Std. N/A N/A N/A $223 $269 $296 5% 0% 5%
Varies Varies Varies Varies VIHA Pmt. Std. Max 60% Rents Varies $0 $0 $0 $0 5% 0% 5%
Exhibit 2: Summary of Preferred Financing Scenarios Economic Feasibility Report Virgin Islands Housing Authority Louis E Brown, Phase II IV. SOURCES AND USES Sources of Funds LIHTC Equity (9% Credits) LIHTC Equity (4% Credits Conventional Debt USDA Section 515 FHLB - Affordable Housing Program HUD Section 202 Choice Neighborhoods Subtotal - Non-VIHA Funds VIHA Capital Funds VIHA Replacement Housing Factor Funds VIHA Demolition Funds VIHA Land Contribution VIHA Operating Reserves VIHA Program Income / Land Sale Subtotal - VIHA Funds VIHA Seller Financing (pass-through) VIHA Deferred Developer Fee (pass-through) Subtotal - VIHA Pass-Through Funds Unidentified (Funding Gap) Less Additional Program Income Earned Net Funding Gap Uses of Funds Acquisition - Land Value Acquisition - Building Value Site Work Demolition Hard Costs - Residential Hard Costs- Other A/E, Permits, Reports, Etc. Legal Interim Financing & Insurance Permanent Financing Costs Soft Costs Relocation Reserves Developer Fee Total Uses of Funds Hard Construction Cost / Unit Total Development Cost / Unit Key Sources/Uses Assumptions New Construction Cost/ SF Rehab Costs in LIHTC Project Building Value / Unit (w/o public hsng restrction) Site Work Costs LIHTC Pricing LIHTC Allocation Bond Allocation $9,021,018 $0 $0 $0 $0 $0 $0 $9,021,018 $66,015 $0 $0 $250,000 $0 $1,270,065 $1,586,080 $0 $0 $0 $544,298 $0 $544,298 $250,000 $0 $0 $0 $6,611,465 $250,000 $776,676 $275,000 $806,697 $40,156 $221,480 $0 $812,146 $1,107,777 $11,151,396 $165,287 $278,785 $11,998,800 $0 $0 $1,500,000 $2,000,000 $0 $0 $15,498,800 $0 $3,500,000 $0 $0 $0 $1,900,000 $5,400,000 $0 $0 $0 $9,219,341 $0 $9,219,341 $0 $0 $1,500,000 $0 $20,901,375 $0 $1,613,483 $275,000 $772,811 $0 $141,780 $0 $1,777,159 $3,136,534 $30,118,141 $204,915 $295,276 $0 $6,721,096 $0 $1,500,000 $1,200,000 $0 $0 $9,421,096 $0 $0 $890,580 $1,000,000 $0 $0 $1,890,580 $0 $515,693 $515,693 $10,223,559 $0 $10,223,559 $1,000,000 $0 $0 $890,580 $14,773,498 $0 $1,138,410 $200,000 $1,050,163 $0 $113,066 $0 $473,324 $2,411,886 $22,050,928 $246,225 $367,515 $11,998,800 $0 $3,945,450 $1,500,000 $2,000,000 $0 $13,905,992 $33,350,242 $0 $0 $3,918,552 $1,000,000 $0 $0 $4,918,552 $0 $0 $0 $19,821,761 $0 $19,821,761 $1,000,000 $0 $0 $3,918,552 $37,766,802 $0 $2,772,808 $275,000 $2,882,057 $79,454 $933,780 $0 $2,394,688 $6,067,414 $58,090,555 $223,472 $343,731 $11,998,800 $0 $0 $1,500,000 $1,620,000 $0 $0 $15,118,800 $0 $0 $0 $1,000,000 $0 $2,300,000 $3,300,000 $0 $0 $0 $1,179,434 $0 $1,179,434 $1,000,000 $0 $1,960,800 $0 $10,784,400 $0 $1,208,840 $275,000 $1,145,840 $0 $221,480 $0 $1,010,312 $1,991,563 $19,598,234 $133,141 $241,954 $0 $12,273,070 $0 $0 $1,000,000 $0 $0 $13,273,070 $0 $0 $0 $0 $1,200,000 $0 $1,200,000 $8,400,000 $0 $8,400,000 $18,708,726 -$4,228,112 $14,480,614 $0 $8,400,000 $2,000,000 $1,000,000 $20,625,000 $0 $955,000 $300,000 $1,577,347 $0 $276,921 $0 $2,119,416 $4,328,112 $41,581,797 $122,768 $247,511 $0 $4,312,191 $553,492 $0 $1,000,000 $0 $0 $5,865,683 $335,000 $0 $0 $0 $1,200,000 $0 $1,535,000 $2,787,345 $300,775 $3,088,120 $4,747,863 -$2,078,745 $2,669,118 $0 $3,650,000 $0 $500,000 $6,871,731 $0 $324,869 $300,000 $684,101 $45,535 $164,306 $0 $1,079,259 $1,616,865 $15,236,666 $94,133 $208,721 $45,017,418 $23,306,358 $4,498,942 $6,000,000 $8,820,000 $0 $13,905,992 $101,548,710 $401,015 $3,500,000 $4,809,132 $3,250,000 $2,400,000 $5,470,065 $19,830,212 $11,187,345 $816,468 $12,003,813 $64,444,982 -$6,306,857 $58,138,125 $3,250,000 $12,050,000 $5,460,800 $6,309,132 $118,334,271 $250,000 $8,790,085 $1,900,000 $8,919,016 $165,145 $2,072,812 $0 $9,666,304 $20,660,151 $197,827,717 $170,757 $285,466 Louis E. Brown, Phase III Nicasio Nico Ralph de Chabert Sugar Estate Walter Hodge Williams Delight (LIHTC Rental Portion Total
$217 N/A N/A $0 $0.80 $1,443,714 N/A
$217 N/A N/A $1,500,000 $0.80 $1,500,000 N/A
$217 N/A N/A $0 $0.80 4% Credits $11,300,000
$217 N/A N/A $0 $0.80 $1,500,000 N/A
$184 N/A N/A $1,960,800 $0.80 $1,500,000 N/A
N/A $18,250,000 $50,000 $2,000,000 $0.80 4% Credits $20,600,000
N/A $6,247,028 $50,000 $0 $0.80 4% Credits $7,400,000
Varies Varies Varies Varies $0.80 Varies $39,300,000

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Economic and Feasibility Analysis

Presented to RHG/CVR Associates by

May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 2 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 3 May 31, 2011

Recommendations for Improving Feasibility

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 5 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 6 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 7 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 9 May 31, 2011

1. Review Key Assumptions

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 10 May 31, 2011

2. Prioritize Development of Sites

3. Continue Working with VIHFA to Obtain Future 9% Credit Allocations

4. Phase Developments to Maximize Access to Funding

5. Ensure Third Party Developers Provide Sufficient Guarantees

6. Maximizing Tax Credit Pricing and Terms

7. Increase Project-Basing Capacity by Attaining Replacement Vouchers

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 12 May 31, 2011

1,469 293 -42 -80 -25 -18 128

128 -25 -10 -42 -35 -16 0

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 13 May 31, 2011

260 60 208 82 116 726 146

8. Capital Fund Financing Program

9. Income Targeting for Homeownership Program

10. Increase Choice Neighborhoods Funding Potential

11. Update Economic and Feasibility Analysis

12. Evaluate Scoring Potential for Key Funding Sources

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 15 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 16 May 31, 2011

Development Costs and Funding Sources

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 17 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 18 May 31, 2011

Louis E. Brown, Phase 2

1-Bedroom 2-Bedroom Total

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 19 May 31, 2011

Louis E. Brown, Phase 3

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 20 May 31, 2011

1-Bedroom 2-Bedroom 3-Bedroom Total

1-Bedroom 2-Bedroom 3-Bedroom 4-Bedroom Total

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 22 May 31, 2011

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 23 May 31, 2011

1-Bedroom 2-Bedroom 3-Bedroom 4-Bedroom Total

Virgin Islands Housing Authority Economic and Feasibility Analysis

Page 24 May 31, 2011