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Presentation, discussion, and possible action on amendment to the loan terms and waivers of 10 TAC Chapter 13 for Rio Manor (22204)
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RECOMMENDED ACTION
recommendation
WHEREAS, the Board has previously approved a HOME loan of $1,257,000 to Rio Manor, which proposes the reconstruction of 60 affordable units in Del Rio, Val Verde County;
WHEREAS, the Development also includes financing from the U.S. Department of Housing and Urban Affairs (HUD), which is scheduled to close by December 12, 2023, and in order to meet this deadline, the Owner has made a sponsor loan to the Development which will be repayable with the Department’s HOME funds when that loan closes;
WHEREAS, due to the layering of HUD funding, the Housing Tax Credit funding, and the Department’s HOME funds, a modification of the initially proposed 22 HOME units is required, and staff recommends approval of this modification only to the extent necessary to maintain feasibility and only in a manner that would not have impacted the Application’s original competitiveness; and
WHEREAS, proceeding with the sponsor loan and modification of the number of HOME units requires Board approval of a waiver of 10 TAC §13.3(e)(15) and loan term amendments, as further detailed below;
NOW, therefore, it is hereby
RESOLVED, that the waiver of 10 TAC §13.3(e)(15) and the modification of the loan terms for Rio Manor is hereby approved, conditioned on the requirement that the Applicant may not draw down or expend any of the funds from the sponsor loan prior to the closing of the HOME loan.
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BACKGROUND
Rio Manor was previously approved for $1,450,000 in annual Housing Tax Credit funding and $1,257,000 in HOME funds structured as a repayable loan at 0.5% interest. The Development also includes funding from HUD, which is scheduled to close on December 12, 2023. While the Department anticipates contracting and closing the HOME loan in the near future, it is not possible to close concurrently with the HUD loan. In order to close on the HUD loan, the Applicant has made a sponsor loan that is equivalent to the HOME loan to the Development that will be repayable once the HOME loan closes. Department staff finds this to be a reasonable proposal; however, this structure requires a waiver in order to be allowable. 10 TAC §13.3(e)(15) establishes that certain costs are ineligible for Department funding, including:
Costs that have been allocated to or paid by another fund source (except for soft costs that are attributable to the entire project as specifically identified in the applicable federal rule, or for TCAP RF if specifically allowed by the NOFA), including but not limited to, contingency, including soft cost contingency, and general partner loans and advances. (Emphasis added).
This provision of the rule is necessary because, in order for repayment of a loan or interest on a loan to be federally eligible for reimbursement, any costs paid from that initial loan must have been program eligible. Because the Department does not have procedures in place for appropriately enforcing this requirement, and enacting such procedures would create a significant administrative burden, the rule prohibits such a transaction entirely. Accordingly, staff is recommending that a waiver of this rule be granted, conditioned on the requirement that the Applicant may not expend or draw down any funds from the sponsor loan prior to it being replaced by the Department’s HOME loan.
Finally, the Application was initially submitted with 22 HOME units restricted at the 50% AMI. All units at the Development are restricted by the Housing Tax Credit program to at least 60% AMI, and 19 of the units have been approved by HUD for project-based Section 8 to be restricted to either 30% or 50% AMI. In accordance with HUD’s approval, the Department can layer 19 of the 22 50% HOME units onto 19 of the project-based units that are restricted to either 30% or 50% AMI; however, it is not possible to layer the remaining three HOME units onto the remaining project-based units, as it would restrict those units beyond what HUD has approved. In order to maintain 22 HOME units, the remaining three would need to be layered onto 60% Housing Tax Credit units that do not have HUD funding; however, the first-year stabilized Debt Coverage Ratio for the project is currently 1.15, which is the minimum allowable under program rules, and it is not likely that the deal will underwrite when three of the 60% units are restricted to 50%.
Applicants are generally not allowed to reduce the number of HOME units from what was initially represented in the Application, except at the Department’s sole discretion. Because of this, staff is requesting approval to modify the 22 50% HOME units that were initially presented to the Board, and believes that the least-disruptive way to make the deal feasible would be to convert three of those units to 60% AMI. Because these units will be layered onto 60% Housing Tax Credit units, those units will, for all practical purposes, be unaffected by this change. Staff does not currently anticipate that the number of HOME units will have to decrease; however, the final determination of what change needs to be made will be determined by the Department’s Real Estate Analysis division. In any case, all units at the Development will remain restricted due the combination of fund sources present. All of the units are affordable, and no market units will be created through any change to the loan terms. No change will be made by the Real Estate Analysis division that would have affected the Application’s initial competitiveness for funding.