Freddie Mac and its lender partners are working closely with their Gulf Coast borrowers to make sure multifamily owners have the help they need to rebuild properties in communities devastated by Hurricane Katrina in August 2005.
Freddie’s lenders are willing in some cases to underwrite higher vacancies and work with borrowers to get projects on track. But first, owners and developers must assess the extent of structural damage to their properties, negotiate with insurance companies, and come up with a plan for re-leasing their units.
Freddie Mac typically requires occupancy levels at 90% before it will provide permanent financing, but “we break that routinely for New Orleans,” said Michael McRoberts, Freddie Mac’s multifamily vice president for the Southeast region. “We’ve broken it on all of the deals we’ve done so far because we understand people want to take care of their financing [right away]. If we’re comfortable enough with the market, with the borrower, and the property, we’ll fund that and they can move residents in.”
Some of Freddie’s borrowers are also making use of help from the federal government in the form of its Gulf Opportunity (GO) Zone program, which released extra allocations of low income housing tax credits (LIHTCs) to the Gulf Coast states hit by Katrina and the other 2005 hurricanes. Alabama, Louisiana and Mississippi each received an additional $18 per capita of LIHTC allocation for their populations located in the GO Zone (for additional GO Zone details, see Affordable Housing Finance, January 2006, page 14, and this issue, page 16).
The GO Zone credits are expected to sell for as much as $1.10 per dollar of credit, “which we have never seen before in the South,” said Tim Leonhard, vice president of affordable housing debt products at CharterMac Mortgage Capital.
The Gulf Coast is not expected to see much new construction until building codes, flood maps, and insurance standards are updated and released. But the first wave of repairs and rehabilitation projects are under way.
Freddie officials could not provide details on the numbers of loans they were working on in the Gulf Coast. But one typical Freddie deal is the forward financing it made available for the rehabilitation of the 120-unit Waverly Park apartment complex in Jackson, Miss.
The substantial rehab was not a result of the hurricanes, which caused some wind damage. Waverly Park was a failed condominium conversion when local developer Park Development bought it. The 1970s-vintage property had stood vacant and boarded up for about four years before Park Development stepped in, said Cliff Bates, Park Development’s director of acquisitions. It was 100% vacant when it was financed, but Leonhard expects it to be 100% occupied as soon as it opens its doors after the 14-month construction period ends in late 2006 or early 2007.
The $10.6 million deal included a $3.6 million Freddie Mac LIHTC forward-commitment loan through CharterMac Mortgage Capital and about $7 million in equity from 9% LIHTCs, which were syndicated by CharterMac. A $3.6 million construction loan was provided by Bank Plus of Mississippi. Eighty percent of the units are affordable to residents earning no more than 60% of the area median income (AMI), and the remaining units are affordable to residents earning no more than 50% of AMI.
Waverly Park received 2006 tax credits that were forward-allocated in 2005 before the storm. After the storm, the Mississippi Home Corp. reissued the credits as GO Zone credits, which in this case didn’t affect the amount of credits but did give Park Development the Zone credit’s special depreciation schedule: 50% depreciation could be realized in the first year, according to Bates.
CharterMac was confident about the strength of the Jackson market. “Jackson wasn’t as hard hit as New Orleans or certain places on the coast,” said Justin Ginsberg, managing director of CharterMac Capital. With the influx of residents from areas where there was significant housing loss, “the demand for good-quality affordable housing is high in Jackson.”
New Orleans and the southern coast of Mississippi are another matter, having been hit the hardest by the hurricanes. “The only thing you can equate it to is what a city would look like after a war,” said Leonhard, who had to leave New Orleans with other residents before the storm, and for a time worked from a temporary office in Lafayette, La.
Park Development’s properties along the coast also received more damage than its Waverly Park site; some of them were hit by a 10-foot high wall of water. After the storm, communities in that region became much more open to multifamily housing. “We’ve been successful in rezoning a couple sites down on the coast and had no opposition at all,” said Bates. “They know they need affordable housing and they need it as fast as they can get it.”
Insurance and other challenges
New Orleans apartment owners fall into three categories, according to Leonhard. First, there were those who simply walked away from their properties or sold them at fire-sale prices after the storm. Second, there are the owners who are still holding out, waiting to see what options become available. Third, there are the owners who are in “epic battles” with their insurance companies.
Up in Jackson, Park Development has had all of its hurricane, flood, and loss-of-income claims paid. “That hasn’t been the case with everyone, of course,” said Bates.
“Claims are starting to trickle out of the insurance companies for the repair work, but the rent-loss insurance has been a difficult thing to reach settlement on,” said McRoberts. Another big point of contention between owners and insurance companies is whether property damage was caused by wind or by flooding. The wind damage “would be covered under the hazard policy,” said McRoberts, but the flooding usually isn’t.
Other obstacles also remain, including the failure of the Federal Emergency Management Agency to publish new flood maps, which determine whether an owner can get flood insurance. There are still unsettled questions about how the levees will be repaired and whether the districts of New Orleans protected by the levees will be safe for rebuilding. And owners with apartments in some areas of New Orleans are still facing a lack of utilities, schools and other urban amenities.
But the reconstruction has begun. The Waverly Park deal “represents only the beginning of Freddie Mac’s commitment to providing financing to tax-credit properties in the hurricane-affected area,” said Kimball Griffith, Freddie’s director of structured and affordable sourcing.