2013-06-25 HRA Agenda PacketPLEASE TURN OFF CELL PHONES & PAGERS IN COUNCIL CHAMBERS
AGENDA
MOUND HOUSING & REDEVELOPMENT AUTHORITY
REGULAR MEETING
TUESDAY, JUNE 25, 2013 6:50 P.M.
MOUND CITY COUNCIL CHAMBERS
Page
1. Open meeting
2. Action approving agenda, with any amendments
3. Action approving June 11, 2013 regular meeting minutes 1
4. Action approving claims 2 -5
5. Catherine Pausche, Finance Director /Clerk/Treasurer, providing an 6 -16
update on the RAD Financial Screen and Corresponding Action Plan
6. Adjourn
MOUND HOUSING AND REDEVELOPMENT AUTHORITY
JUNE 11, 2013
The Mound Housing and Redevelopment Authority in and for the City of Mound, Minnesota, met
in regular session on Tuesday, June 11, 2013, at 6:55 p.m. in the council chambers of city hall.
Members present: Chair Mark Hanus; Commissioners Heidi Gesch, Ray Salazar and Mark
Wegscheid
Members absent: Kelli Gillispie.
Others present: Acting City Manager /Fin Dir /Clerk/Treasurer Catherine Pausche, Community
Development Director Sarah Smith, City Attorney Sarah Sonsalla, Jay Green, Ron Hendley,
Gary Vogel, Katy Kolbeck.
1. Open meeting
Chair Mark Hanus called the meeting to order at 6:56 p.m.
2. Approve agenda
MOTION by Salazar, seconded by Gesch to approve the agenda. All voted in favor. Motion
carried.
3 Approve minutes
MOTION by Salazar, seconded by Gesch, to approve the minutes of the May 28, 2013 regular
meeting. All voted in favor. Motion carried.
4. Approve claims
MOTION by Salazar, seconded by Gesch to approve the claims in the amount of $18,139.55.
All voted in favor. Motion carried.
5. Adiourn
MOTION by Salazar, seconded by Gesch to adjourn at 6:58 p.m. All voted in favor. Motion
carried.
Attest: Catherine Pausche, Clerk
N
Chair Mark Hanus
f►.IM
Im
1 '/• • 1
-2-
$2,673.95
$2,991.38
$5,665.33
MOUND, MN
Payments
Current Period: June 2013
Batch Name 0625COMBOND User DollarAmt $2,673.95
Payments Computer Dollar Amt $2,673.95
$0.00 In Balance
Refer 5 COMMONBONDCOMMUNITIES
Cash Payment E
680- 49800 -101 F T Empl Regular
PAYROLL
REIMS
6 -14 -13 OFFICE SALARY
Invoice 158700
6114/2013
E 680- 49800 -103 Part-Time Employees
Invoice 158702
6/14/2013
Cash Payment E
680- 49800 -111 Other IKM Maint
PAYROLL
REIMS
06 -14 -13 Mi SALARY
Invoice 158701
6/14/2013
Cash Payment E
680- 49800 -122 FICA
PAYROLL
REIMS
6 -14 -13 OFFICE ER TAX
Invoice 158703
6114/2013
Cash Payment E
680 - 49800 -130 Employer Paid Ins (GEN
PAYROLL
REIMS
6 -14 -13 MTCE ER TAX &
INSURANCE
Invoice 158704 6/14/2013
Cash Payment E 680 - 49800 -131 Employer Paid Health
Invoice 158706 611412013
Cash Payment E 680 - 49800 -121 PERA
Invoice 158708
6/14/2013
Cash Payment
E 680- 49800 -321 Telephone & Cells
Invoice 158710
6/14/2013
Cash Payment
E 680- 49800 -103 Part-Time Employees
Invoice 158702
6/14/2013
Cash Payment
E 680- 49800 -121 PERA
Invoice 158709 6/14/2013
Cash Payment E 680 - 49800 -321 Telephone & Cells
Invoice 158711 6114/2013
Cash Payment E 680 - 49800 -122 FICA
Invoice 158705 6114/2013
Cash Payment E 680 - 49800 -122 FICA
Invoice 158658
6/1412013
Transaction Date
6 /1 912 01 3
Refer _
6_ COMMON 80ND COMMUNITIES
Cash Payment
E 680- 49800 -121 PERA
Invoice 150096
614/2013
Cash Payment
E 680- 49800 -430 Miscellaneous
Invoice 156073
6110/2013
Transaction Date
6/19/2013
Fund Summary
680 HRA PUBLIC HOUSING
PAYROLL REIMS 6 -14 -13 OFFICE ER
INSURANCE
PAYROLL REIMB 6 -14 -13 OFFICE ER 401K
MATCH
OFFICE CELL PHONE ALLOWANCE 6 -14 -13
PAYROLL REIMB 6 -14 -13 JANITOR SALARY
PAYROLL REIMS 6 -14 -13 JANITOR ER 401 K
MATCH
JANITOR CELL PHONE ALLOWANCE 6 -14 -13
PAYROLL REIMS 6 -14 -13 JANITOR ER TAX &
INSURANCE
ADP PR TAX CORR 1/11- 5/31/13
Wells Fargo HRA 10120
ADP 401 K ADMIN FEES 5 -13 #6380
AMERIPRIDE MT /CT UNIFORMS 5 -13
Wells Fargo HRA 10120
10120 Wells Fargo HRA
$2,673.95
$2,673.95
Pre - Written Check $0.00
Checks to be Generated by the Computer $2,673.95
Total $2,673.95
-3-
06/19/13 10:48 AM
Page 1
$1,009.71
$328.13
$99.75
$35.48
$105.35
$35.59
$25.18
$689.91
$2.15
$15.93
$263.22
$39.50
Total $2,649.90
$8.08
$15.97
Total $24.05
MOUND, MN
Payments
Current Period: June 2013
Batch Name 062513HRA User Dollar Amt $2,991.38
Payments Computer Dollar Amt $2,991.38
$0.00 In Balance
Refer
1 ALLIED WASTE
_
Cash Payment
E 680 - 49800 -384 Refuse /Garbage Disposa GARBAGE SERVICE APRIL 2013 IKM
Invoice 0894- 003142623
3/25/2013
$151.00
Cash Payment
E 680 -49800 -384 Refuse /Garbage Disposa GARBAGE SERVICE JUNE 2013 IKM
Invoice 0894- 003197458
5/25/2013
_
Cash Payment
Transaction Date
6/19/2013
Wells Fargo HRA 10120 Total
Refer
2 CULLIGAN -METRO
PLUGGED INTAKE SCREENS
Cash Payment
E 680- 49800 -440 Other Contractual Servic
5 80LB SOLAR SALT DELIVERED 5 -7 -13
Invoice 101X25404503 5/31/2013
Transaction Date
6/19/2013
Wells Fargo HRA 10120 Total
Refer
3 FRED HOFF PAINTING
_
_ _
Cash Payment
E 680- 49800 -402 Building Maintenance
PAINT WALLS #216 IKM
Invoice 267
5/22/2013
$500.86
Cash Payment
E 680- 49800 -402 Building Maintenance
PAINT WALLS #109 IKM
Invoice 267
6/11/2013
Transaction Date
6/1912013
Wells Fargo HRA 10120 Total
Refer
4 FRONTIEWCITIZENS COMMUNICA
_
Cash Payment
E 680 - 49800 -321 Telephone & Cells
PHONE SERVICE IKM 6 -13 -13 THRU 7 -12 -13
Invoice 06252013
6/13/2013
Transaction Date
6/19/2013
Wells Fargo HRA 10120 Total
Refer
5 HAMERNICK DECORATING COMP
_
Cash Payment
E 680- 49800 -402 Building Maintenance
TAKE UP & INSTALL GLUE DIRECT CARPET
UNIT #109 IKM
Invoice CG304975 5/30/2013
Cash Payment E 680 - 49800 -402 Building Maintenance TAKE UP & INSTALL GLUE DIRECT CARPET
UNIT #216 IKM
Invoice CG304924 5/30/2013
Transaction Date 6/1 912 01 3 Wells Fargo HRA 10120 Total
Refer _ 6 LEVEL ONE CORE LEASING SOLO
Cash Payment E 680 - 49800 -475 Tenant Related Services JUNE CALL CENTER MTCE PLAN & ROLL
OVER PHONE NUMBER IKM
06/19/13 9:41 AM
Page 1
$232.14
$232.14
$464.28
$95.12
$95.12
$178.90
$211.50
$390.40
$258.77
$258.77
$346.95
$504.50
$851.45
$151.00
Invoice 0325081
6/1/2013
Transaction Date
6/1 912 01 3
Wells Fargo HRA 10120 Total
$151.00
Refer
_7 N_S 11 MECHANICAL CONTRACTING, _
_
Cash Payment
E 680- 49800 -401 Building Repairs
REPAIR HOT WATER HEATER -, CLEAN
$279.50
PLUGGED INTAKE SCREENS
Invoice W28539
6/11/2013
Transaction Date
6/19/2013
Wells Fargo HRA 10120 Total
$279.50
Refer
8 THYSSEN -KRUPP ELEVATOR COR
Cash Payment
E 680 - 49800 -440 Other Contractual Servic
ELEVATOR MAINTENANCE 6 -1 -13 THRU 8 -31-
$500.86
13 IKM
Invoice 3000586967 6/1/2013
Transaction Date
6/19/2013
Wells Fargo HRA 10120 Total
$500.86
-4-
MOUND, MN 06/19/13 9:41 AM
Page 2
Payments
Current Period: June 2013
a'v
Fund Summary
10120 Wells Fargo HR4
680 HR4 PUBLIC HOUSING $2,991.38
$2,991.38
Pre - Written Check $0.00
Checks to be Generated by the Computer $2,991.38
Total $2,991.38
-5-
Date: June 18, 2013
To: Mound HRA Board Chair and Commissioners
From: Catherine Pausche, Finance Director /Clerk /Treasurer
Subject: Indian Knoll Manor Conversion Update
The final report from Signet Partners is attached as well as an email from Common Bond stating
that assuming ownership of the building is not feasible for them under these circumstances.
HUD's RAD conversion program would result in less subsidy than we are currently receiving
under the public housing program. In discussions with the Met Council HRA, they recommend a
voluntary conversion to project based Section 8 which will result in higher subsidy than the RAD
program. It is clear that the Mound HRA will have to lead the effort to convert and then look
for a potential buyer. As noted in the report, there are many challenges with the marketability
of the property, although I don't believe they are as dire as the report makes it sound.
We have determined the next steps are necessary to begin the process of voluntary conversion
to project based section 8:
• Hire a consultant to perform a physical needs assessment.
• Hire a consultant to perform a rent study.
• Hire an attorney and /or consultant specializing in HUD conversions.
It is important that we use providers who have experience in each of these areas, so we will be
using referrals versus an RFP process. Capital funds will be used for the physical needs
assessment and operating funds will be used for the rest. Many housing authorities have or are
in process of converting to project based section 8 because of the ease of administration,
particularly with regards to HUD requirements. Met Council's section 8 program is run by Metro
HRA. They converted 150 public housing units (scattered site) to project based section 8 and
are pleased with the results. Metro HRA administers the section 8 vouchers for Mound and are
very willing to assist and advise us in the process.
Common Bond will continue to be the property manager through this process. In July, we will
give the board a semi - annual update on the property. Our HUD status is reviewed every two
years, so while our "Trouble Performer" status won't technically change, our score improved
with our most recent submission of our 12/31/12 year -end financials.
Please let me know if you have any other questions or concerns.
Catherine Pausche
From:
Lee, Cynthia [Cynthia. Lee @commonbond.org)
Sent:
Thursday, June 13, 2013 11:06 AM
To:
Catherine Pausche; Kandis Hanson
Cc:
Wilcox- Erhardt, Lisa; Eatmon, Todd; Higgins, Ellen
Subject:
Indian Knoll
Catherine and Kandis —thank you for arranging the meeting with HUD on Tuesday. It was really informative. As we
discussed, I followed up with Scott Clark at the city of Columbia Heights yesterday morning to get further information on
the Voluntary Conversion process they are undertaking for the Parkview Villa property. Scott indicated that earlier HUD
had encouraged them to pursue the RAD program, but they determined that RAD would not work. He indicated that the
Voluntary Conversion process requires that the applicant must show that there are savings achieved by converting to
project -based Section 8, following a detailed HUD formula. There are a number of other HUD conditions related to
rehabilitation standards, appraised value, etc. They will hear back from HUD in July regarding their eligibility for the
program, but overall Scott indicates it has been an extremely long and difficult process. If approved, the Section 8
'conversion' will actually occur while the city still owns the property, but ultimately the city still plans to sell the property
to Aeon.
There are a number of reasons why the Parkview Villa approach may not be feasible for Indian Knoll. For one, Columbia
Heights is dedicating significant 'fund balance' resources (^'$880,000) to the project, plus there is $1.9M of HOME
funding approved for the project, and a significant amount of state financing resources. Also, the conversion rents for
Parkview Villa are well over $700 /month (compared to the $500 /month RAD conversion rents for Indian Knoll), and witl-
100 total units, there are some operating efficiencies that might not be possible for a 50 unit project. It is not clear
whether you could demonstrate significant savings achieved by converting to project -based section 8 for Indian Knoll,
but you could continue to explore this further.
HUD's other suggestion was to arrange a call with Greg Burn at HUD HQ to discuss the RAD program further, and to talk
to him about running the HUD RAD analysis. This might be helpful for you as you continue to explore your options, but
as we have mentioned, the RAD conversion rent levels are going to be a feasibility issue for this property.
We really appreciate being given the opportunity to explore options to purchase the property, but we have come to the
conclusion that neither the Voluntary Conversion nor the RAD program will be feasible for us. We want you to know
that at this point it is fine with us for you to start offering the property to other interested purchasers.
CommonBond is happy act as a sounding board as you move ahead with your deliberations. We value our relationship
with the city and we are interested in helping you move forward. Thanks — Cynthia
cyntbia ]-cc
Associate Vice President, Housing Development
CommonBond Communities
328 W. Kellogg Blvd. I St Paul, MN 55102
Phone: 651- 290 -6245 Main: 651- 291 -1750 1 Fax: 651- 291 -1003
canthia lcc@Connnonbond.ozg facebook
CommonBond builds stable homes, strong futures, and vibrant communities.
-7-
Indian Knoll, Mound
Feasibility Factors:
34 1 -BR and 16 efficiency units
Financing Issues:
• Average RAID conversion rent is $507 /month
• Transition from PILOT to full RE taxes adds $30K+ to operating costs
• Monthly deposits to replacement reserves will be required
• Cash flow /NOI does not appear to support new perm loan debt
• Gap funds for rehabilitation are available (Hennepin County, MHFA etc.) but magnitude needed
exceeds reasonable request for these funds, noting that these funds will requires the full scope
of rehab noted below
Construction Issues:
• Elevator — undersized, not code
• Plumbing stacks — cast iron, likely to need complete replacement. Will require vacating the
building, triggering relocation requirements
• Mechanicals —all need replacing
• Site issues — severe drainage issues, retaining walls
• Siding— need to investigate condition beneath siding
• Roof — not acceptable type for MHFA
• Concrete walls —can't reconfigure easily
• Narrow corridors, very low ceilings
• Lead paint — pre 1978 construction
• Asbestos — likely in floors and ceilings
Other Issues:
• Marketing — efficiency units have high vacancy
• Marketing — image, competition with Westonka
• Long term physical viability
• Rent levels — question re: ongoing rent increases
• Relocation —will require full URA
• Resident service needs
Notes /Suggestions:
• The City should consider obtaining a full PCNA to determine the immediate vs. long -term capital
needs of the property
• The City may find potential purchasers who may be comfortable with or more moderate
rehabilitation approach, just addressing the immediate property needs
• The City may find potential purchasers who may achieve operating cost savings which could
support other financing options
in
Page �1
Financial Screen - RAD Conversion Summary
1. Development Information
PHA: Housing Redevelopment Authority of the City of Mound, Minnesota (Mound HRA)
PICDevelopment #: MN74000001
Development: Indian Knoll Manor
Proposed assistance type post - conversion: PBRA
Total units at the property: 50
Number of units to be converted: 50
2. Unit Configuration
Comment: CommonBond Communities is the Management Agent. It is our understanding that
CommonBond is engaged in discussions with the Mound HRA regarding a potential acquisition
of the property. As part of its due diligence, CommonBond is evaluating whether a conversion
of the efficiency units to 1- bedroom units would be beneficial for the residents and the long-
term viability of the property. CommonBond has provided a preliminary construction cost
estimate to convert these units, but associated relocation costs have yet to be considered. We
have evaluated the feasibility of a RAD conversion using both unit configurations.
3. Existing Indebtedness
CommonBond indicates that Indian Knolls Manor has no recorded mortgage debt.
4. Contract Rents Post - Conversion (PUPM)
0 -BR
1 -BR
2 -BR
Current
15
33
1
Post RAD Conversion
0
41
1
Comment: CommonBond Communities is the Management Agent. It is our understanding that
CommonBond is engaged in discussions with the Mound HRA regarding a potential acquisition
of the property. As part of its due diligence, CommonBond is evaluating whether a conversion
of the efficiency units to 1- bedroom units would be beneficial for the residents and the long-
term viability of the property. CommonBond has provided a preliminary construction cost
estimate to convert these units, but associated relocation costs have yet to be considered. We
have evaluated the feasibility of a RAD conversion using both unit configurations.
3. Existing Indebtedness
CommonBond indicates that Indian Knolls Manor has no recorded mortgage debt.
4. Contract Rents Post - Conversion (PUPM)
Comment: Contract rents post -RAD- conversion are determined by formula. For projects
converting to PBRA, rents are equal to the lower of (a) current funding and (b) 120% of FMRs
minus any utility allowance. (Indian Knoll Manor does not have utility allowances.) For projects
converting to PBVs, rents are equal to the lower of (a) current funding; (b) 110% of FMRs minus
any utility allowance; and (c) reasonable rent. Reasonable rent is calculated at 93% of FMR.
Current Funding is based on the funding that all units in the PIC are eligible for. If Indian Knoll
Manor were to convert its assistance through the program RAD, the property's new contract
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
www.sig_g.)artners.com
0 -BR
1 -BR
Z -BR
Weighted Avg.
Current Funding
$507
Reasonable Rent
$662
Hennepin County 2012 FMRs
$632
$745
$904
110% of FMRs
$783
120% of FMRs
$588
$693
$841
$854
Comment: Contract rents post -RAD- conversion are determined by formula. For projects
converting to PBRA, rents are equal to the lower of (a) current funding and (b) 120% of FMRs
minus any utility allowance. (Indian Knoll Manor does not have utility allowances.) For projects
converting to PBVs, rents are equal to the lower of (a) current funding; (b) 110% of FMRs minus
any utility allowance; and (c) reasonable rent. Reasonable rent is calculated at 93% of FMR.
Current Funding is based on the funding that all units in the PIC are eligible for. If Indian Knoll
Manor were to convert its assistance through the program RAD, the property's new contract
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
www.sig_g.)artners.com
Page (2
rents at the time of conversion would be equal to Current Funding (at the time the property
entered the RAD program),
5. Operating Income
i otai Potentiat operating Income: $306,500
Comment: The property does not have any market rate units or commercial spaces. Ownership
currently pays all utilities and does not provide air conditioning. Some residents have installed
their own A/C unit and are charged an extra $20 a month in the summer months, if they run
their a/c unit, to cover the additional electrical usage. Miscellaneous income includes late
charges, NSF charges, damage charges, laundry and vending income, if any.
6. Vacancy/ Bad Debt Loss Factors
# Units
Weighted Avg. Rent
Total Income
RAD Units
50
$506.66
$303,996
Misc Income
0
$0
$1,800
Excess Utility Charges
0
$0
$500
i otai Potentiat operating Income: $306,500
Comment: The property does not have any market rate units or commercial spaces. Ownership
currently pays all utilities and does not provide air conditioning. Some residents have installed
their own A/C unit and are charged an extra $20 a month in the summer months, if they run
their a/c unit, to cover the additional electrical usage. Miscellaneous income includes late
charges, NSF charges, damage charges, laundry and vending income, if any.
6. Vacancy/ Bad Debt Loss Factors
Comment: The RAD program allows applicants to use a projected vacancy /bad debt loss rate of
as low as 3% and 2% respectively, so long as the applicant can adequately explain to HUD's
satisfaction why their projected loss rate is below the property's historical (3 -year) average loss
rate.
The average vacancy /bad debt loss factors at Indian Knoll Manor from 2009 -11 are reported to
be 7.20% and 0.27% respectively, For the period Jan -Oct 2012 the vacancy rate appears to have
averaged closer to 12 %. However, it is reported that the rate has since declined and that the
property is almost fully occupied. The property's historic vacancy rate is above the expected
range of 3 -5% for subsidized housing properties. We have not investigated the reasons behind
the elevated vacancy rate. There could be several reasons why the vacancy rate is above the
expected range, including but not limited to: a declining senior population in the community,
lack of demand for the efficiency units, general age /condition of the units, or slow unit turnover
due to lack of resources. Absent any systemic or market driven issues, we would expect
properties such as Indian Knoll to operate at a 3-5% vacancy rate after completion of all
necessary repairs and capital replacements. At an average of 0.27 %, the property's historical
bad debt loss rate is better than the typical affordable housing property. Ultimately, your lender
will be responsible for underwriting the new 1" mortgage loan and will determine appropriate
loss factors for use in the underwriting. For purposes of this analysis, we have utilized loss
factors of 5% and 2 %.
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
www.si.Qlo- ariners.com
3 -Yr Historical Average
Projected Post- Conversion
Vacancy
7.2%
5.0%
Bad Debt
0.27%
2.0%
Comment: The RAD program allows applicants to use a projected vacancy /bad debt loss rate of
as low as 3% and 2% respectively, so long as the applicant can adequately explain to HUD's
satisfaction why their projected loss rate is below the property's historical (3 -year) average loss
rate.
The average vacancy /bad debt loss factors at Indian Knoll Manor from 2009 -11 are reported to
be 7.20% and 0.27% respectively, For the period Jan -Oct 2012 the vacancy rate appears to have
averaged closer to 12 %. However, it is reported that the rate has since declined and that the
property is almost fully occupied. The property's historic vacancy rate is above the expected
range of 3 -5% for subsidized housing properties. We have not investigated the reasons behind
the elevated vacancy rate. There could be several reasons why the vacancy rate is above the
expected range, including but not limited to: a declining senior population in the community,
lack of demand for the efficiency units, general age /condition of the units, or slow unit turnover
due to lack of resources. Absent any systemic or market driven issues, we would expect
properties such as Indian Knoll to operate at a 3-5% vacancy rate after completion of all
necessary repairs and capital replacements. At an average of 0.27 %, the property's historical
bad debt loss rate is better than the typical affordable housing property. Ultimately, your lender
will be responsible for underwriting the new 1" mortgage loan and will determine appropriate
loss factors for use in the underwriting. For purposes of this analysis, we have utilized loss
factors of 5% and 2 %.
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
www.si.Qlo- ariners.com
Page 3
7. Operating Expenses
Operating Expense Comparison
2009
2010
2011
Average
Post- Conversion
Pro Forma
$265,3256
$309,998
$259,659
$278,338
$261,180
Comment: The property's most recently approved (2013) operating budget lists total operating
expenses of $276,380 ($5,528 per unit per annum). In developing a post -RAD- conversion pro
forma operating expense budget we removed capital expenditures /depreciation expense of
$46,200 (which is not considered an operating expense) and added estimated annual real estate
taxes of $35,000 (because the property would no longer be eligible for PILOT after transfer of
the Physical Asset (TPA) to CommonBond), which results in a pro forma expense budget of
$261,180 ($6,219 pupa at 42 units). (This figure does not include collection loss or annual
reserve deposits, both of which are addressed elsewhere.)
Upon completion of a RAD conversion, a property will "move" from the PfH side of HUD to the
Multifamily (MF) side of HUD, and follow HUD MF reporting guidelines. in recent years, HUD MF
has placed special emphasis on the way that owners account for their capital replacement
spending. HUD MF prefers that all capital replacements be funded through the property's
reserve account and that the operating account be used only to fund true maintenance and
repair items.
We note that approved 2013 budget for Indian Knoll Manor lists $18,000 in Contract Costs,
$8,000 in Materials, $12,000 in projected Building Repairs, and $15,000 in Building
Maintenance. We do not have a detailed breakout as to what these expenses represent but, it
is our experience that many properties fund at least a portion of their capital replacement needs
through their operating account. In addition, some of these expenses may be reduced or
eliminated upon physical rehabilitation of the property. Additional research /analysis of the
property's historical expense ledgers would be required to in order to make a reasonable
projection.
8, Capital Replacement Reserve Account Funding
After conversion the property will utilize its capital replacement reserve account to pay for its
capital expenditures. The RAD application uses a formula to determine an appropriate initial
Deposit to the Replacement Reserve account (IDRR) and Annual Deposit to the Replacement
Reserve (ADRR). The formula sets the ADRR equal to the property's projected capital
replacement needs in years 2 -20 divided by 20. The IDRR is set equal to the property's short-
term (year 2 -5) replacement needs less five times the ADRR. Thus, the IDRR tends to be zero
unless short-term needs significantly exceed long -term (years -20) needs.
The short -term and long -term capital replacement needs of a property cannot be truly
understood without a Physical Condition Assessment (PCA). Participants in the RAID program
are required to obtain a RAD compliant PCA (an "RPCA "). However, HUD does not require
Signet Partners
7400 East Cresttine Circle, Suite 150, Greenwood Village, CO 80111
www.sig-ll-)artners.com
Page i4
owners to obtain an RPCA until afterthey have submitted, and HUD has accepted, a RAD
application.
An RPCA includes a review of a// building systems and capital components at the property and
an estimate of remaining useful life (RUL) of each item. It also contains a schedule which
projects the timing of all capital replacements at the property over the next 20 -years and the
estimated cost to replace each item. Preparing a comprehensive and unique schedule for each
individual property provides a highly effective means for planning capital replacements and
ensuring that "reserves" are being adequately funded.
Since the Indian Knoll Manor does not currently have an RPCA estimating its long -term capital
replacements needs (years 2 -20) we have utilized a HUD rule of thumb and estimated that the
property will need to make an ADDR of $350 per unit ($17,500 per annum). Also, for purposes
of this analysis we have set the IDRR at $0.
9. Net Operating Income (NOI)
Potential Rental Income
$303,996
V /BD Loss
- $21,280
Other Income
$2,300
Effective Gross income
$285,016
Operating Expenses
- $261,180
ADRR
- $17,500
Net Operating Income
$6,336
Comment: The amount of money that an owner can borrow via anew first mortgage loan is
primarily a function of the Net Operating Income of the property. The two main components of
NOI are income and expenses. In the RAD program, the property's conversion rents are
determined by formula, and any future rent increases are determined by OCAF. Thus, there is
relatively little that an owner can do to increase its effective gross income outside of controlling
Its vacancy and bad debt loss. However, owners do have some significant control over their
operating expenses. Ensuring that operating expenses are optimized can assist owners in
identifying the maximize size of their new first mortgage loan.
10. First Mortgage Loan Sizing
Interest Rate %
3.50%
Mortgage Insurance Premium %
0.45%
Amortization Term
35 years
Maturity Term
35 years
Debt Service Coverage Ratio
1.20
Maximum Supportable New 1st Mortgage Loan
$97,600
First Mortgage Annual Debt Service
$5,280
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
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Page I5
Comment: For purposes of this analysis, we have assumed that the new first mortgage will be
FHA insured. Most HUD MF loan programs have terms of 30-40 years. The actual loan term and
interest rate will vary depending on the loan program chosen and the time of closing. Given a
projected N01 of $5,280, we estimate that the property can support a maximum new 1"
mortgage loan of $97,600. This would support a maximum of $2,323 per unit (42 units) in
capital replacements, before taking into account any soft costs. Net Operating Income minus
Debt Service results in projected annual operating cash flow of only $1,056.
It is very important to note that if ownership of the property were to remain with the Mound
HRA and the PILOT were to remain in effect, pro forma operating expenses would be
significantly less, and the estimated NOI significantly higher, than what is shown above.
N01 with PILOT
Potential Rental Income
$303,996
V /BD Loss
- $21,280
Other Income
$2,300
Effective Gross Income
$285,016
Operating Expenses
- $230,180
ADRR
- $17,500
Net Operating Income
1 $37,336
A projected N01 of $37,336 would support a maximum new 1s` mortgage loan of nearly
$575,100 ($11,502 per unit at 50 units) in immediate capital replacement needs, before soft
costs. This illustrates the impact of operating expenses with respect to loan size.
11. Immediate (Year 1) Capital Replacement Needs
The primary objective of the RAD program is to allow owners to obtain mortgage financing
and /or equity to address their property's immediate and longer term capital replacement
needs. Therefore, we must be able to identify the extent of the property's capital replacement
needs in order to determine whether the new loan will be adequate to address those needs.
Comment: We were provided a copy of a twelve page report from MNSpect dated May 15,
2009 which contains a list of 'findings' based on their inspection of the property. The findings
are grouped under the headings: Plumbing, Electrical, Mechanical, Air Handling Unit,
Trash /Maintenance Room, General Building, Roof, Interior, and Exterior. Each finding contains a
recommended action, a cost range, a recommendation as to who should perform the action,
and a priority number.
While the information in the MNSpect report is useful, the report is now 3 -years old and
somewhat outdated. In addition, the report is not comprehensive. The findings are primarily
related to the property's immediate and short-term maintenance and repair needs, and /or
items that are do not meet current building code standards. However, significant portions of
the property are not addressed. (For example, there is no discussion as to the condition /age of
components within unit interiors such as cabinets, appliances, carpet, light fixtures, etc.) in
Signet Partners
7400 East Crestline Circle, Suite 160, Greenwood Village, CO 80111
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Page 16
addition, the report contains no information regarding the property's long -term capital
replacement needs.
We recommend that ownership consider procuring a RAD compliant Physical Condition (needs)
Assessment (RPCA). An RPCA would provide the Mound HRA with a high value planning tool
which would be useful regardless of whether or not the HRA ultimately decides to pursue a RAD
conversion. An RPCA would, among other things, contain a list of all building systems /capital
items at the property. It would contain a description of each item /system, the current condition
of each item /system, and both an Estimated Useful Life (EUL) and estimated Remaining Useful
Life (RUL) for each capital item /system at the property. It would also provide a pro -forma
replacement schedule for each item /system and an estimated cost of replacement. In addition,
it would identify, analyze and provide recommendations regarding building systems which use
water or energy or impact energy consumption at the property. (In the RAD program,
items /systems which pass a financial payback analysis qualify for immediate replacement.)
We also received a spreadsheet entitled Capital Grants 2009 to Present, which indicates that
between 2009 -2012 the property expended some $162,000 ($1,080pupa) in Capital Grant funds
on the following improvements: Site & ground repairs $32,000; Asbestos abatement $58,000;
Hot water heaters: $7,500; Carpet /Paint: $21,800; Fire Alarm: $17,500; Lighting
upgrades /retrofits: $25,250. An RPCA would also take these replacements into account.
Finally, CommonBond provided us with a summary bid package to perform capital replacements
which they believe represent the baseline replacements necessary for stabilizing the property,
and ensuring on -going operating and market viability. Some of the proposed capital
replacements include:
Building Exterior: Roof, roof hatch, scuppers and downspouts, cement board siding,
exterior wall stucco, roof fascia, a/c sleeves, windows, and building entrance doors.
Interior Common Areas: doors, paint, wall coverings, signage, emergency lighting, exit
signage, fire extinguishers, corridor light fixtures, stairway railings, hall way railings,
elevator controls, boilers, water heaters, plumbing stacks, air handling unit, corridor
carpet & tile, mailboxes, hallway heaters, community room flooring and kitchen,
common boilers, and laundry room flooring and exhaust fans.
Dwelling Units: Conversion of efficiency units, entry doors, interior doors, flooring, light
fixtures, a/c units, electrical panel upgrades, kitchen cabinets, appliances, faucets, sinks
toilets, showerheads, and exhaust fans.
Site Improvements: Sidewalks, retaining walls, curbs, paving, storage sheds, storm
water management, landscaping, security cameras.
The bid cost of the improvements proposed by CommonBond is as follows:
Building Exterior: 605,764
Interior Common Areas: 1,007,366
Dwelling Units: 1,049,533
Site Improvements: 318,445
Total Improvements: 2,981,108
General Contractor Fees: 260.989
Total Cost: 3,242,097
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
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Page 17
The bid package provided by CommonBond also includes an estimated cost to convert the 16
efficiency units to 8 one - bedroom units. Upon conversion of these units the property would
have a total of 42 units. Therefore, the cost of ComonBond's rehabilitation and conversion
proposal is approximately $81,052 per unit. In all likelihood, this cost is well in excess of the
property's replacement cost.
The list of capital replacements in CommonBond's bid package reflects what they believe is an
appropriate level of immediate capital improvements. However, it does not necessarily reflect
the level of immediate capital improvements required by the RAD program. The RAD program
requires only that the applicant property demonstrate that it already has funds on -hand or can
obtain debt or equity funding sufficient to address its immediate repair and capital replacement
needs, and to be able to begin reserving funds sufficient to meet its anticipated future (long-
term) capital replacement needs.
Over the past 12 years, we have analyzed hundreds of elderly and family Section 8 properties for
similar HUD programs and we work, on a regular basis, with several PCA contractors who are
familiar with the requirements of the RAD PCA. We have previously spoken with some of these
PCA providers in an effort to obtain a generalized estimate of immediate capital replacement
needs for similarly aged and situated properties. We are told that each property is different and
that without a site visit and a review of a property's building systems and capital replacement
history it is difficult to provide even a ballpark estimate. That being said, we most frequently
see PCA reports for Section 8 MF properties listing immediate capital replacement needs in the
$10 -$20K per unit range. At properties which historically have been able to adhere to a
schedule of relatively robust on -going capital replacements we frequently see PCA reports
indicating immediate capital needs in the $0 -10K per unit range. At properties with unique
needs and /or more deferred maintenance, we sometimes see PCA reports indicating immediate
capital needs of $20 -40Kf per unit range.
12. Total Uses of Funds
Acquisition Costs
$0
Construction Costs
$77,600
Relocation Costs
$0
Professional Fees
$0
Lender Fees and Loan Closing Costs
$20,000
Additional Reserve Requirements
$0
Developer Fees
$0
Total Uses of Funds
$97,600
Comment: A new 1st mortgage loan of $97,600 would support only a very limited amount of
repairs and capital replacements ($1,952 per unit at the current unit configuration). A relatively
high percentage of the loan proceeds would be needed to pay legal fees, lenderfees, title
insurance fees, and other closing costs. We are not privy to the terms of the proposed sale
agreement between the Mound HDA and CommonBond. For purposes of this analysis we have
assumed only a nominal sales price. Given the small mortgage, we have not allocated any
Signet Partners
7400 East Crestilne Circle, Suite 150, Greenwood Village, CO 80111
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Page 18
amount to relocation costs, professional fees, or developer fees. The projected uses of funds
shown above are a result of our informal discussions with lenders, third party contractors, title
agents, and legal counsel. Additional uses of funds beyond those listed above may be required
by your lender or depending upon your source(s) of funds.
13. Funding Gap
Comment: The funding gap is the difference between the maximum supportable 1n mortgage
loan amount and the total proposed uses of funds. Given that, in the event of a sale of the
property to CommonBond the maximum supportable 1' mortgage for this property is around
$2,000 per unit and the immediate needs of a typical property are $15 -$20K per unit, there is a
strong likelihood of a significant funding gap. This is not necessarily fatal to a RAD application.
However, the purchaser would probably need to seek additional (outside) sources of funds to
close this gap, such as grants and /or tax credits.
Conclusion /Recommendation:
Due to the likelihood of significantly increased operating expenses (real estate taxes) and corresponding
lower NOI likely to result from a transfer of ownership to CommonBond, a RAD conversion at the
Current Funding level appears feasible only if: a) the property has very limited immediate capital
replacement needs and only light to moderate longer term capital replacement needs, or b)
CommonBond is able to obtain additional sources of funds, such as grants or low- income housing tax
credits (LIHTCs), to accommodate the higher level of immediate rehabilitation that deems appropriate.
However, if the intent of the parties is to transfer the asset for a nominal sales price, LIHTCs would not
appear to something that the purchaser would be able to qualify for due to the purchaser's lack of basis
in the property.
If the Mound RHA were to retain ownership of Indian Knoll Manor a RAID conversion would appear to be
feasible depending upon the properties actual capital replacement needs. However, an RPCA is needed
to determine the property's true immediate and longer term capital replacement needs. An additional
important consideration will be determining whether or not the efficiency units at the property are
approaching functional obsolescence. We recommend that the Mound HRA consider obtaining a RAD
compliant PCA since it would provide them with a useful planning tool regardless of whether they
ultimately elect to pursue a RAD conversion. If desired, we can provide a list of the PCA providers that
we use.
Signet Partners
7400 East Crestline Circle, Suite 150, Greenwood Village, CO 80111
www.si�- 16 _ artners.com