Cooperative Housing and FHA Insurance

Presenters
Tim Gruenes: Minneapolis HUD; Supervisory Project Manager/Team Leader Scott Werdal: Minneapolis HUD; Operations Officer Terry W. McKinley; President & CEO of Cooperative Housing Resources in St. Paul, MN:
President of the Senior Coop Foundation CHR is an FHA Approved Lender

Agenda
Basic co-op concept General characteristics Board of Directors Structure - $s HUD (Section 213) requirements Pre-sale of units Review of share purchasers

Agenda - Continued
MN Hub procedures Section 213 for purchasers/consumers Section 213 for sponsors/developers Section 213 for HUD Appreciation limited equity vs. market Co-op legal documents References

Agenda - Continued
Why is the Co-op so Popular With Older Adults? Why do developers like the co-op model so much? Sponsorship Incentives Business Sponsorship Incentives Mission Community Incentives

Agenda - Continued
Difficulties in Developing/Managing a Coop Pictures of Coops.

Basic Cooperative Concept

Mortgagor = N.P. corp. owns the project Co-op members: own a membership certificate in the corporation Membership certificate gives them the right to occupy and the right to participate:
Board member Voter

Cooperative Structures
There are many ways to structure a cooperative. This presentation deals with the most common structure that the MN HUD office has processed.

Structure General Characteristics

Processed under Section 213 Elderly, new construction Pre-sale, management type Co-operative formed before construction Sponsor/development service agent (DSA) Loan term of 40 years

Structure General Characteristics

Valuation, downpayment and carrying charge amounts are usually allocated by sq. ft.; average optimal unit size 1350 s.f. Typical unit mix of newer co-ops:
20-30% 1 BRs 50-60% 2 BRs 10-20% 2+Den/3 BRs

Most utilities are typically included

Structure Board of Directors

Provisional Board of Directors till first annual meeting of members
Within 1 year and 3 months of Cert. of Occupancy/Final Endorsement Usually individuals from sponsor/DSA

Board of Directors (after provisional)

Members/occupants of units Staggered, eventually 3 year terms

Training is now available for board members through Senior Cooperative Housing Education Program

Structure - $s
Development costs covered by:
Downpayments: (typically 30 40%) FHA Insured mortgage (typically 60-70%)

Carrying charges: covers on-going expenses/debt service (typically $700 $1,500 PUPM); Trending down! 100% of income after expenses & reserves used for debt service

HUD (Section 213) Requirements

Criterion 3 maximum mortgage = 98% of Replacement Cost Stat. Limits > (d)(4) similar to 207/220 No MAP right now must go TAP General Operating Reserve: begins at 3% of total carrying charges. Controlled by mortgagor. Minimum downpayments: 3% of total cost. Pre-Sale see next two slides

Pre-sale of Units Insurance of Advances

90% + of the units prior to Initial Closing If construction has begun, 50% + of the units with Directors permission. Sponsor/DSA must cover difference
Sponsor/DSA must agree to pay the monthly carrying charges on any remaining units for a maximum of 3 years or until sold.

HUD must review/approve share purchasers before Initial Endorsement

Pre-sale of Units Insurance Upon Completion

97% + of the units prior to closing Director may adjust downward. Sponsor/DSA must agree to pay the monthly carrying charges on any remaining units for a maximum of 3 years or until sold. HUD must review/approve share purchasers before Final Endorsement

Review of Share Purchasers

Handbook 4550.2 (paragraph 11-6). Co-op Membership Exhibit (FHA 3203)
Credit Reports Personal Financial Statements (FHA 3232A) Verification of employment Verification of deposit

MN Hub Procedures
Variable down payments: Allowed by handbook, however we require at least 5% participation in mortgage (Common Interests) Collections of downpayments:
Handbook - no collections until commitment We typically waive allow after invite issued and legal documents reviewed.

Ins. Upon Completion: 60% + pre-sale prior to allowing use of downpayments.

Section 213 for Purchasers/Consumers Advantages:

Long-term, fixed-rate, non-recourse Built-in mechanisms to protect the consumer FHA known to Seniors generation: trusted name recognition Institutional oversight and discipline: audits, reserves., etc Distributive Shares - MIP has been refunded.

Section 213 for Purchasers/Consumers Disadvantages

Some co-op members chafe under co-op oversight Some members or their beneficiaries may prefer unrestricted equity returns and non age-restricted potential buyers to liquidity and ease of transfer to waiting list elderly (i.e., condo structure) Lock-outs (when excluding is not priced within the rate)

Section 213 for Sponsors/Developers

Advantages: Nonrecourse Not rate-sensitive Equity funded by buyers, and nonmortgageable costs can be paid from equity. Profit margin Disadvantages: Pre-sale requirement Unless IUC is used, must collect full down payment prior to construction

Section 213 for HUD

Advantages: Very low loan-to-cost (50%-65%; Trend to 35%) Significant pre-sale requirement before closing Very favorable default experience - good trackrecord High resident creditworthiness Is not subject to credit-subsidy limits Disadvantages: Co-op members call HUD when they have a problem with the developer

Appreciation Limited Equity vs. Market

Model Form of Bylaws sets appreciation as the amount of principal pay-down. We have seen different approaches: From:
1-3% appreciation per annum plus principal paydown (most utilized)

To:
Market appreciation not limited

Transfer of Membership (Regulated by the Bylaws)

Co-op has first option to deal with departing members share.
Co-op compiles waiting list

If co-op waives right, member responsible

New member must be approved by co-op.

MN Insured projects usually sold by Co-op

7500 York current waiting list > 550 people Avg. transfer time of one developer, 1-5 days

Cooperative Legal Documents

Articles of Incorporation Subscription Agreement Occupancy Agreement Cooperative Agency Agreement Management Agreement Bylaws Information Bulletin (Disclosures!)

References
New construction:
HUD Handbook 4550.1 HUD Handbook 4550.2

Existing: HUD Handbook 4550.3 HUD Clips does not contain Appendices (legal docs and forms): Contact MN office if you need copies.

WHY IS THE CO-OP SO POPULAR WITH ACTIVE OLDER ADULTS?

It is most important to understand that the cooperative concept appeals to older adults especially couples--who would not normally consider seniors housing and who typically would remain in their single-family homes.
Rick Fenske, Senior Market Researcher Maxfield Research, Minneapolis

Co-op Advantages for Older Adults

They remain in control at a time of life when most other alternatives require sacrificing control. Seniors can get out of SF home maintenance, and especially with high down-payments, live like snow birds (with no better high return safe investment available for their nest egg savings from SF home sale)! Co-op governance provides a forum for active participation and taking of responsibility Preserve equity - no spend-down of assets.

Co-op Advantages for Older Adults Continued

They preserve tax benefits of homeownership They save money paying only the actual costs - no outside owner or mandatory services ($1000 PUPA < G.O. Rental) Affordable by senior homeowners with modest income Attracts young- and old-old alike.

SENIOR LIVING ENVIRONMENTS Age 65+

DEPENDENT LIVING RENTAL 5%

INDEPENDENT LIVING - RENTAL

20%

75% INDEPENDENT LIVING - OWNERSHIP

Source: AARP

SENIORS ANTICIPATING NEED FOR HELP Page 65+ 70% 60% 50% 40% 30% 20% 10% 0%

Source: AARP

65% 54%

34% 26% 18% 14% 11%

Outdoor Heavy maintenance housework

Light Trips to maintenance store, etc.

Light Housework

Cooking meals

Personal grooming

Senior Cooperative Members' Ages

100 Age 85-90 2%

90 Age 70-74 29% Age 75-79 27% Age 65-69 19%

80

70

Age 60-64 6%

Age 80-84 18% Age 90+ 1%

60
Ages

50 Age 55-59 40 4%

Median Age: 74

30

20

10

0
13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 1 5 9 101 105 109 113 117 121 125 129 133 137

Buyers

141

Senior Cooperative Members' Incomes

120,000

100,000

80,000

INCOMES
60,000

40,000

20,000

Median Income: $38,300

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101 106 111

BUYERS

Cardinal Pointe - Purchasers' Single-family Home Values

Tw o a dd'l buye rs ' homes at $970 ,0 00 & $1 ,6 30,00 0

$500,000 $450,000 $400,000 $350,000

Home Values

$300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1 7 13 19 25 31 37 43 49 55 61 67 Buyers 73 79 85 91

Media n: $1 10,00 0 Mea n: $1 46,40 0

WHY DO DEVELOPERS LIKE THE CO-OP MODEL SO MUCH?

Cooperative Developers (nonprofits in italics)

Ebenezer Society (1976) Episcopal Church Home of Minnesota (1980) Calvary Lutheran Church - Golden Valley (1980) Nokomis Community Development Corp (1980) Presbyterian Homes (1985) Realife Corporation (1988) Gramercy Corporation (1995) Paul Sentman - Sentman Enterprises (1998) Elim Care (2000) Nichols Development (Summerhill) (2001) United Properties Real Estate Equities, LLC (2003) Guardian Angels (2003) St. Annes Extended Care (2005)

Growth of Older Population 1990-2050

40000

35000

Older Population (in thousands)

Ages 65-74

30000

25000

20000

Ages 75-84
15000

10000

Ages 85+

5000

Year:

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Numbers of Households
100 200 300 400 500 600 700 0

< $10,000 $10,000-$14,999 $15,000-$19,999

284 613

$20,000-$24,999
264 259

$25,000-$29,999 $30,000-$34,999
218

$35,000-$39,999
204

$40,000-$44,999
130

$45,000-$49,999
104 108

Median I ncome: $23,400

$50,000-$59,999 $60,000-$74,999 $75,000-$99,999 $100,000-$124,999 $125,000-$149,999 $150,000-$199,999 $200,000-$249,999 $250,000-$499,999

37 70

Little Falls - 15 Mile R adius Hous eholds , age 65-85, by Income

Incom e Ranges 116 103 25 22

> $500,000

4 4 0

Sponsorship Incentives - Business

Land profit Development profit Appeals to a diverse market -- especially young old Simple operating program Creating a market for elder services Management fees

Sponsorship Incentives - Mission

Providing a better alternative that - Supports aging in place Enhances true independence through interdependence Improves members health and well-being Preserves seniors financial resources Frees up affordable homes for younger families Contributing to community economic health

Community Incentives
Turns over single-family homes to younger families Retains seniors and their contributions in the community Economic development Adds a significant amenity/housing option in order for a community to retain otherwise outmigrating elderly who would prefer to stay in the neighborhoods they know best (tale of two mayors)

Difficulties in Developing/Managing a Coop

Marketing a cooperative project is very different than a rental - selling a sense of community. If this is the first cooperative, nothing to show people other than plans some developers build sample units. Oftentimes, experienced marketing personnel from other cooperatives are hired by new developments.

...decreased environmental controllability is associated with negative health outcomes, while increased controllability is associated with positive outcomes.
Judith Rodin, Ph.D., gerontologist President, University of Pennsylvania

"From a gerontological point of view, the essential benefit of the cooperative is that it provides an economic structure and social framework that fosters self-reliance, self-control and determination, interdependence, and cooperation among the resident members, even among those with severe chronic conditions. As gerontologists we know that these factors contribute directly to continued independent living, successful aging and the enhancement of longer life."
Gerald Glaser, Gerontologist Ebenezer Center for Aging, testifying before the Presidents Housing Commission, 1981

Proje ct: Curre nt Project

Location: Minnesota Project #: Not Assigned

Gross Floor Area(est.): 82,760 Interest Rate: 6.5% Term (yrs): 40 Dow n Payment/SF: $ 54.00 Average Monthly Charge/SF: $ 0.916 Loan Amount: $ 4,050,000

DEVELOPM ENT BUDGET

CONSTRUCTION/SF Architect Other Fees/DU $ $ 60 $ 3.00% 148,968 2,500 105,000 $ TOT. for all Improvements $ 4,965,600 253,968 5,219,568

PRICING, INCOM E & EXPENSES Total Unit Price 112,080 134,500 150,610 161,120 173,730 190,540 40.0% Down Payment $ 44,830 $ 53,800 $ 60,240 $ 64,450 $ 69,490 $ 76,220
Required Income to Qualify $ 19,826 $ 23,217 $ 25,565 $ 27,652 $ 29,478 $ 32,087 Total Down Payments $ 134,490 $ 322,800 $ 361,440 $ 580,050 $ 833,880 $ 457,320 $ 2,689,980 Total Monthly Charges $ 2,280 $ 5,340 $ 5,880 $ 9,540 $ 13,560 $ 7,380 $ 43,980 527,760

FINANCING, TAXES, CLOSING COSTS: Interest 12 mos. & on $ Taxes FHA Fees Consulting Finance Fees/Discounts Appraisal Title & Rec. 4,050,000 1.8% 3.0%

6.50% $ 131,625 15,000 72,900 54,000 121,500 7,000 20,250

# of Units 3 6 6 9 12 6 42

Unit Descr. 1BR/1BA 1BR/D/1BA 2BR/1.5BA 2BR/2BA 2BR/2BA 2BR/D/2BA

Unit Size 800 960 1,075 1,150 1,240 1,360 48,000

$ $ $ $ $ $

M onthly Charge $ 760 $ 890 $ 980 $ 1,060 $ 1,130 $ 1,230

422,275

OTHER INCOME: Paid parking: Guest Room:

0 10

stalls @ nights @

Total Annual Monthly Charges: $ $ 35 $ 350 $ 350 $ Total Annual Income, all Sources: $ $

4,200 531,960 210,000

LEGAL, ORG.MARKETING, & DEV. FEES Furnishings Working Capital Legal Organizational Marketing $ 5,000 Developer's Fee $ 10,000 LAND VALUE $

75,000 81,000 35,000 10,000 210,000 420,000 6,000

$ $

831,000 252,000

OPERATING BUDGET:

Estimate of Annual Common Expense Per unit: $ 5,000 Annual Fixed Charges: Int.Rate. 6.50% Term/yrs: 40 Interest Plus Curtail 7.025482% Mortgage Insurance 0.50% Operating Reserve 3.00%

284,532 20,250 15,833

320,615 530,615 1,345

Total Gross Ann.Exp. And Fixed Charges: $ NET INCOME/(LOSS): $

TOTAL PROJECT COSTS: $ 6,724,843 LTV: 60% TOTAL REQUIREMENTS FOR SETTLEMENT TOTAL COSTS/USES: $ 6,724,843 SOURCES: Mortgage Amount $ 4,050,000 Downpayments $ 2,689,980 Total Funds Available: $ 6,739,980 CASH INVESTMENT REQUIRED $ (15,137) Total Project Costs: Project Cost per unit: Project Cost per netsquare foot: $ 6,724,843 $ 160,115 $ 140

Contacts
Tim Gruenes: tim_p._gruenes@hud.gov
Scott Werdal: scott_a._werdal@hud.gov Terry W. McKinley: terrym@seniorcoops.com