EAH Housing has closed one of the most complicated transactions in its long history to take over a large affordable seniors housing community in Napa, Calif.
The transaction involved a complex with three adjacent, but separate, projects that were each built under different financing programs and regulatory restrictions.
The deal, with total project costs of about $36 million, shows the different challenges that developers face and the tough conditions in the financial markets. In this case, EAH was assisted by Union Bank.
In all, 361 housing units were involved. The 100-unit Rohlffs Memorial Manor was built with a Department of Housing and Urban Development (HUD) Sec. 202 loan in 1968. The 48-unit Concordia Manor was built in 1975 with a HUD Sec. 236 loan. The 213-unit Rohlffs Manor III was developed in 1992 using low-income housing tax credits (LIHTCs), tax-exempt bonds, a Rental Housing Construction Program loan from the state, and a loan from the Housing Authority of the City of Napa.
To make the deal even more complicated, 98 units were licensed to provide assisted-living services.
The properties had been experiencing financial shortfalls for years, leaving the church-affiliated nonprofit owner to support the project with its own funds. Despite its good intentions and efforts over the years to self-manage, the owner had limited experience operating a large and intricate housing development.
As a result of the complexities of daily management and reporting requirements, EAH was hired as a property manager. EAH had been managing the communities for five years and knew that major changes had to take place for the properties to continue operating, so it began looking at ways to purchase and restructure the development, said Matt Steinle, vice president of real estate.
Essential to the deal was coming up with a plan to maintain services in a way that could be financially supported. EAH officials spent more than a year meeting with every service provider in the area and exploring different solutions, said Lynn Berard, EAH senior project manager.
One key decision was to de-license the assisted-living units. This was important because if residents live in an unlicensed facility and are eligible for Medi-Cal then Medi-Cal would help to pay for the services. It also enabled the property to eliminate the expensive insurance coverage that is required for an assisted-living facility, reducing operating expenses, said Berard.
EAH also came up with a two-part service package, with the group providing meal, laundry, housekeeping, and other services. Residents who need a higher level of care can contract for personal aid and medication assistance, with Medi-Cal likely now helping to pay for these services. Overall, most residents are saving about $400 per month under the new arrangement.
Financing was another challenge as EAH put together a plan to use tax-exempt bonds and LIHTCs to acquire and rehabilitate the properties. EAH wanted to prepay the Sec. 202 loan and had some assurances that this could happen but learned about a month and a half before the deal was to close that HUD denied the request.
Eventually, the federal agency agreed to a plan that allows EAH to capitalize an account of about $318,000, roughly the same amount as the loan principal. In addition, HUD agreed to subordinate the Sec. 202 loan to a new loan provided by Union Bank. In addition, HUD required a new use agreement, restricting affordability under the Sec. 202 program for another 20 years.
While working through the HUD approvals, EAH moved to still sell the bonds before the California Debt Limit Allocation Committee deadline of Aug. 10, 2008, or risk losing the bonds and tax credits. To do this, the bond proceeds were placed into escrow until the issues could be resolved, said Steinle.
Meanwhile, investors began pulling out of the LIHTC market and prices began to fall in mid-2008. The deal lost its investor, and officials struggled to find a new one before a March 13, 2009, deadline to close on the real estate.
Union Bank had agreed to buy the bonds and to provide the debt. In an unusual move, it also agreed to buy the tax credits when it looked like EAH would not be able to find a new LIHTC investor. The bank usually does not provide both the debt and equity on a project that involves tax-exempt bonds because doing both causes the bank to lose the tax-exemption benefits on the interest earned by the tax-exempt bond loans.
Still, if the bank didn’t buy the credits, the deal would have likely died, said Jonathan Klein, vice president in the community development finance department of the bank.
“The key factor really was about the relationship,” he said, explaining that Union Bank had worked with EAH on several other affordable housing deals. “This is a relationship we value.” Union Bank eventually provided $11.5 million in bond financing and $5.8 million in LIHTC equity.
The local housing authority and the state also helped to make the deal happen.
EAH was able to close the transaction a day before the deadline, taking over the ownership of the properties. It is preserving the affordability of the housing units for an additional 55 years and rehabbing the buildings.