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Mixed-finance development has emerged as a new practice area that is literally reshaping the landscape of affordable housing across the country. Mixed-financing deals � those involving both public and private funds � have enabled a housing renaissance across America’s cities, even prompting private development where no builders would tread before. The approach leverages private and public funds to create mixed-income communities that include both affordable and market-rate housing (not rent or income-restricted) that meld with the surrounding area. The strategy contributes to major reinvestment in inner-city neighborhoods. The use of private funds in development is more critical now than ever, with ongoing shifts in government allocations demanding a flexible and strategic approach to building for the future. The national press has reported estimated cuts of up to 50 percent in the $4.7 billion Community Development Block Grant program � the bulk of the government’s community planning budget. Cities have become dependent on Department of Housing and Urban Development programs, especially the CDBG program, which has existed for 30 years. In addition, the Housing Choice Voucher (formerly Section 8) program is increasingly vulnerable to subsidy reductions. Housing authorities are adapting to this tenuous environment by honing their legal prowess in real estate finance. Mixed-financing real estate development brings complicated and technical legal transactions, each involving different combinations of funds with varying legal obligations and restrictions. Legal savvy is especially needed when developments are made up of a variety of housing types: i.e., rental, homeownership, private, subsidized, and public housing. As mixed financing grows more common, the legal practice is expanding, becoming a career itself. Knowledge of regulatory, real estate, finance, contract, and tax law all come into play. HUD issued an Interim Rule on May 2, 1996, adding a new Subpart F to the public housing development program. Known as the Mixed-Finance Rule, the section permits public housing authorities to use a combination of private and public financing and public housing capital funds to develop public housing units. The housing authority can also provide the capital funds to a third party for developing and owning the resulting public housing units. The rule enables public housing agencies to function like the traditional real estate industry. FUNDING SOURCES Traditional sources of public funding from HUD that can be used for mixed-finance purposes include public housing capital funds, such as HOPE VI grants. HOPE VI dollars replace severely distressed public housing projects with redesigned mixed-income housing. Public housing development funds and modernization funds add to the mix. Importantly, 32 housing authorities, including those of Philadelphia, Atlanta, and Washington, D.C., enjoy the special HUD designation as a Moving to Work agency. MTW permits housing authorities to combine existing operating capital and funds earmarked for rental vouchers into a single funding source to be used however the agency deems necessary. The authority can apply MTW funds to fill in any gaps in a mixed-finance deal. Housing authorities secure their private funding from the sale of tax credits and bonds through their state’s housing finance agency. Low Income Housing Tax Credits � the loans you don’t have to pay back � bring additional cash to the transaction. The authority receives the award, sells the credits to a syndicator, investor, or development partner, raises additional cash, and invests the money into developing the site. Investors receive their benefits in the form of tax write-offs from the federal government. For example, on the usual 9 percent tax credit, the investor puts in $900,000 and in turn receives about a $1 million write-off on his taxes over 10 years. Housing authorities can also apply for allocation of tax-exempt bonds. The authorities use various types of bonds to bolster construction and upgrades, including general purpose government bonds, private activity bonds with, for example, 4 percent Low-Income Home Tax Credits, and bonds secured by future allocation of capital funds. In addition, a housing authority can pursue an award for historic tax credits. The Philadelphia Housing Authority, for example, received historic designation from the Commonwealth of Pennsylvania and the National Park Service for Suffolk Manor, one of its sites with a Tudor revival-styled exterior. The overhaul of the 137-unit complex cost $24 million, of which $13 million came from tax credits. PUTTING IT TOGETHER HUD provides a convenient checklist at www.hud.gov/offices/pih/programs/ph/hope6/mfph/index.cfm. The list breaks down specific legal functions needed for each phase of a mixed-finance deal. A mixed-finance project will be subject to the mixed-finance amendment to the consolidated annual contributions contract signed by the public housing authority and HUD. This document provides for the delivery of HUD capital dollars to the authority for the units within the mixed-finance development and ensures that the units are operated according to public housing regulations. A mixed-finance deal for any new type of development consists of six basic phases: strategic planning, predevelopment, development, construction, closing, and occupancy/operations. During strategic planning, counsel for the housing authority advises the development team on federal and local procurement regulations and drafts contracts between all parties, including the authority, the developer, consultants, and managers. Developers must be procured through a publicly advertised and procedurally fair competition. Securing HUD funding also begins at this stage and continues through predevelopment. In predevelopment, the initial site is acquired. HUD approval requires an American Land Title Association form and documentation that the owner has site control; evidence that the proposed development complies with applicable zoning; and evidence of real estate property and leasehold tax exemption. The public housing authority also assists the HUD field office and the city with HUD compliance for environmental review. The development phase entails the broadest range of legal skill. Counsel for the housing authority secures financial structuring, advises on bond issuance and tax credit syndication to assure compliance with tax provisions, and prepares state and local financing applications. Other fundamentals include: •�Drafting the limited partnership. (Generally, the developments are owned by a limited partnership that the public housing authority creates to attract investor capital to the financing of the project.) •�Drafting and negotiating development, management, regulatory, and operating agreements. •�Preparing and submitting the mixed-finance proposal to HUD. •�Recording real property legal description and title. •�Securing regulatory approvals and permits. •�Preparing use restriction documents. •�Drafting and negotiating contracts related to construction contracts and financing. •�Drafting and negotiating the ownership structure for mixed-finance rental and homeownership. •�Preparing organizational documents of the owner. Key HUD evidentiaries prepared in this phase are the regulatory and operating agreement and the development agreement. The former outlines the steps required to ensure that the public housing units will be operated in accordance with all legal and contractual requirements. It governs the affordability of units, the methodology for providing operating subsidy, and unit restrictions. The development agreement sets the business terms and performance benchmarks for the deal. It establishes rights, obligations, and expectations for the housing authority and the developer, and memorializes financial commitments, project tasks, and the adherence to a development schedule. Guarantees, warranties, insurance, financial terms and fees, and default and termination terms are other key components. MIXED FINANCE IN PLAY Using tax credits can be a deal starter, attracting other money to a project. The Philadelphia Housing Authority invested about $2 million in the Spring Garden development, a 92-unit community on the northern edge of Center City, and we ended up with a $16 million redevelopment budget. About half the money came from tax credits; another $5 million, from the city. That means the PHA put in only about $20,000 for each $135,000 unit built. Bonds also play a vital role. The D.C. Housing Finance Agency is providing tax-exempt bonds to finance rental units in the city’s Henson Ridge development, located in the Congress Heights neighborhood in Anacostia. Related Capital Company in New York City is providing the equity investment for the tax-credit rental units, and SunTrust Bank has provided the construction financing for the town homes that will be sold. When added up, the total cost will be approximately $120 million. The project includes a $30 million HOPE VI grant from HUD, contributions of more than $10 million in direct grants through the D.C. Department of Housing and Community Development, and the Capital Improvement Program, with an additional $2 million coming from the D.C. Housing Authority. The Trenton Housing Authority recently announced that it closed on the largest state bond pool financing to date, sponsored by the New Jersey Housing and Mortgage Financing Agency, with proceeds totaling $78 million disbursed among 22 New Jersey housing authorities. The THA’s proceeds of $12.45 million will be used to accelerate the agency’s capital schedule, including the renovation of Campbell Homes (an 81-unit development) as well as 130 apartments, boiler and roof work, and site improvements. A combination of bonds, tax credits, and government allocations have enabled the Philadelphia Housing Authority’s ongoing $1 billion development program. Over one-fourth of the money is from private investors, leveraged with public funds. The Atlanta Housing Authority has used HOPE VI funds as a financial tool that has been leveraged up to nine times the original grant amount. West Highlands, for example, stands as Atlanta’s largest in-town development at 460-acres, financed with $46.7 million of seed money from the AHA and HUD. That money was leveraged to attract $257 million of private debt and equity for housing, $32.2 million from a TAD/TIF bond from the city, and $93.0 million of non-housing private debt and equity, bringing the total master plan investment to $428.9 million with surrounding neighborhood investment still to come. Mixed-finance funds sweeten the deal from the financial perspective; from the housing viewpoint, they literally salvage cities. Housing authorities are reviving large pockets of town with modern construction and attractive architecture that complement the surrounding areas, rivaling and surpassing many private communities across the city. Agencies have also added community centers and upgraded infrastructure and amenities at existing homes using mixed-finance dollars. Mixed financing is dramatically transforming America’s most distressed areas into vibrant neighborhoods. A broad range of legal talent has helped made it possible. Carl R. Greene is executive director of the Philadelphia Housing Authority and a certified property manager with the Institute of Real Estate Management. He previously served as executive director of the Detroit Housing Commission and held executive positions at the housing authorities in Washington, D.C., and Atlanta. A version of this article originally ran in The Legal Intelligencer , an ALM publication.

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