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Low-Income Housing Tax Credit

An Oasis of Affordability
Nonprofit Greens and Preserves Older Property in Washington Suburb

West Wood Oaks Apartments, Fairfax, Virginia


Photo by Eric Taylor

4 Tax Credit Advisor | March 2013

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Low-Income Housing Tax Credit

or years, affordable housing has been at a premium in the City of Fairfax, Va., a high-cost bedroom community of Washington, D.C. Northern Virginia has long seen numerous affordable apartments converted to market-rate apartments or condominiums. So when officials of the Community Preservation and Development Corporation (CPDC) launched an 18month effort to renovate the nonprofits existing 54-unit HUD-subsidized apartment complex in the city with the latest green features, using low-income housing tax credits, they had no doubts about finding new tenants to make their continued investment a success once the work was finished. According to CPDC President and CEO Michael Pitchford, the renovation required leaving an entire stairwell of apartments vacant so that current tenants in the other units could be rotated in and out while their apartments were being updated with new kitchens, bathrooms, and other high-efficiency features. CPDCs efforts paid off. The new West Wood Oaks Apartments (formerly Suburbia Fairfax) was fully leased by the time of its grand opening in August 2012. The two low-rise brick and wood frame buildings comprising the development, originally constructed in the 1970s, provide the only dedicated affordable housing in the City of Fairfax. In addition to a brand new community clubhouse for residents, the renovation and green makeover included replacing inefficient old insulation and installing new Energy Star lighting and appliances, solar panels to assist the new hot water heaters, low-flow toilets, and new high-efficiency HVAC systems with a 15-SEER rating. The upgraded development meets the Enterprise Green Communities and EarthCraft Virginia standards for green buildings.

Pitchford described the property as long in the tooth and in need of recapitalization to maintain its affordability for the next decade and beyond. But there was a significant hurdle to a recapitalization. Because the development was a LIHPHRA preservation project, there were long-term use restrictions limiting the amount of distributions to CPDC from surplus cash flow. We had to figure out how to work through the LIHPHRA regulations and get a tax credit deal done to recapitalize it, Pitchford said. The LIHPHRA program rules require some units to have deeper affordability than does the LIHTC program, while dramatically restricting the amount of surplus cash flow that owners can tap. Dealing with the LIHPHRA programs restrictions was a major concern for CPDC, which needed to obtain a larger share of surplus cash flow distributions and refinance the property. A lot of time and financial engineering was spent working with HUDs Richmond office, says Pitchford, getting to the point where they said, All right, you can have a distribution to service a seller surplus cash note. You can use more cash flow. Well let you amend the LIHPHRA rules to allow you to do the tax credit deal and move forward. That was a big deal. CPDC proceeded to structure a new acquisition/ rehab transaction to make the recapitalization possible.
West Wood Oaks, continued on page 6

Source and Uses Summary


PERMANENT SOURCES

Challenge to Recapitalization Officials at CPDC, which acquired the property in the 1990s under the Low-Income Housing Preservation and Resident Homeownership Act (LIHPRHA), knew a while back that the development needed to be upgraded and recapitalized. Its 1970s construction, which included materials designed before the first real energy crunch and gas crisis, had poor insulation, Pitchford said. The units were functional, but dated, he noted.

9% LIHTC Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,832,071 First Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,900,000 Surplus Cash Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,197,123 Replacement Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .$437,358 Residual Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$172,290 Deferred Developer Fee . . . . . . . . . . . . . . . . . . . . . . . . . . .$231,032 Total Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$9,769,874
USES

Acquisition Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,668,577 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,484,089 Architectural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$270,250 Professional Services and Fees . . . . . . . . . . . . . . . . . . . . .$165,390 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$382,989 Partnership Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$73,500 Carrying Costs and Reserves . . . . . . . . . . . . . . . . . . . . . . .$808,194 Developer Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$915,885 Total Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$9,769,874

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March 2013 | Tax Credit Advisor

Low-Income Housing Tax Credit

West Wood Oaks, continued from page 5

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Stearns Bank truly understands affordable housing. Without them, many of our deals would have never gotten out of the ground. They are creating a win-win for all parties. Stearns Bank gets the job done! willing to think outside the box,

by Arby Smith & son ei Ke th Richard

Funding Sources The nearly $9.8 million transaction was funded by low-income housing tax credit equity, a first mortgage, a surplus cash note, replacement reserves, residual receipts, and a deferred developer fee. The Virginia Housing Development Authority allocated the 9% housing tax credits. Enterprise Community Investment, Inc. syndicated the tax credits and Enterprise Community Partners provided a permanent loan. Virginia Community Capital made the construction loan. At the projects ribbon-cutting ceremony in late September, Fairfax Mayor R. Scott Silverthorne said West Wood Oaks benefits the city by providing affordable housing for local residents. This residential community has been a great asset to the City of Fairfax, he said, helping to ensure that people who work in the area can afford to live here. One study found that a household in the City of Fairfax needs to earn $60,240 to be able to afford a typical two-bedroom apartment. City officials were grateful to CPDC for keeping the property affordable in one of the wealthiest counties in the nation. Entry-level teachers, firefighters, retail workers, and many others have difficulty finding affordable housing in Northern Virginia. Affordable Rents West Wood Oaks Apartments offers plenty of affordability for renters, with monthly rents for the 10 one-bedroom apartments and 44 two-bedroom units ranging from $889 to $1,287. Thirty-nine units are reserved for tenants earning 50% or less of the area median income (AMI) $53,650 for a four-person family. Another three units are reserved for households making 51% to 80% of AMI and another 12 units for tenants making 81% to 95% of AMI. Ten units qualify for project-based Section 8 rental assistance and six apartments meet universal design standards to accommodate residents with disabilities. Pitchford said CPDC, based in Washington, D.C. and now 23 years old, is going through the first round of recapitalizations on its affordable housing properties. West Wood Oaks is not going to need a comprehensive rehab for another 20 years, he says. Use restrictions run for its useful life. TCA

Call 1-800-320-7262.
Talk with Dave Feriancek or Steve Domine www.stearnsbank.com Member FDIC.

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