Is it Time to Rock and Roll on Resyndications Again?

ZDC is helping a bunch of clients review their year 15 portfolios for resyndication opportunities.  Here are some sage words of advice from one of our experts.  

Appraised value – if no new soft debt is coming in, there needs to be a lot of acquisition credits to offset the cost of the hard costs. We can often work with appraisers to get a high valuation despite regulatory restrictions if the project is located in a high-cost area, whereas projects in lower-cost areas will not appraise high enough to make them feasible for a resyndication. Getting an appraisal (or at least values from an appraiser) early in the process is key in evaluating feasibility.

Preservation Project vs Other Rehab for 4% Projects - Does the property qualify as a Preservation Project? In 2023, the Preservation Project pool was less competitive than Other Rehab. The following are the requirements to qualify as Preservation Projects, with (1) and (3) the more likely applicable to your portfolio:

(1) has a pre-1999 HCD loan that is being restructured pursuant to Health and Safety Code section 50560 of (AB 1699 projects); *

(2) is a replacement or rehabilitation project approved by HUD pursuant to a Section 18 or Section 22 Demolition/Disposition authorization; 

(3) is an At Risk project that is not subject to a regulatory agreement imposing a rent restriction with a remaining term that is greater than five years from the year in which the application is filed that restricts income and rents on the residential units to an average no greater than 60% of the area median income; 

(4) is a project being rehabilitated under the HUD Rental Assistance Demonstration (RAD) Program

*Note though that for (1), the Loan Portfolio Restructuring Program (LPR) process with HCD is cumbersome and take a lot of time/capacity

Hard costs – A resyndication project needs to meet minimum requirements for hard costs, but without new soft sources coming in, a project with extensive capital needs likely won’t be feasible. Minimum hard cost requirements are as follows:

CDLAC 4% Projects: TCAC requires the minimum hard costs to be the greater of $15k per unit or 20% of adjusted basis (with the latter generally driving the minimum). CDLAC additionally requires Other Rehab projects to have a minimum of $60,000 per unit, and 60% of the costs to be for immediate health and safety improvements, seismic and accessibility improvements, and/or the replacement of major systems with a remaining useful life of less than ten years.

TCAC 9% Projects: TCAC requires the minimum hard costs to be the greater of $40k per unit or 20% of adjusted basis.

If you cut corners on scope and cost for the CDLAC/TCAC application to get an award, it may make execution challenging - LIHTC investors and perm lenders will do their own due diligence on capital needs and may raise issues if they don’t believe the required capital needs are being addressed in the scope. 

Relocation – does the scope of work necessitate relocation? That will drive up soft costs significantly, taking away from the hard cost scope (or decrease feasibility). Ideally in-unit work would be limited to avoid extensive relocation, with most of the hard cost scope focused on building envelopes and systems.

ADA – does the project currently have Americans with Disabilities Act (ADA) mobility units that meet current code? Due to TCAC having higher requirements than California Building Code (CBC) requirements, you’ll likely need to convert some number of units to ADA mobility. Conversions require relocation and are often expensive (sometimes walls need to be moved, etc), so can be a drag on hard costs and overall feasibility, so having some units that are already ADA mobility accessible will help minimize hard costs and relocation costs. 

Ground lease vs Fee – projects on ground leases are more challenging to get high appraised values, and also the existing ground lease would likely need to be extended out, so would need a willing partner in the ground lessor to get commitments for the extension prior to the application, and then execute on the extension for the closing. 

Existing Soft Loans – What existing loans does the project have? Existing soft loans will likely need to be extended out to a minimum of a new 55-year term, so you will need willing and capable public partners get you commitments for the extensions approved before the application is due, and then to execute on the modified and extended loans for the closing. HCD is able to extend their loans through the LPR process, and through the LPR process you can also get regulatory restrictions adjusted and rents increased, however the LPR process is burdensome. 

Operations/NOI – is the property currently struggling in operations? If yes, unless there are Project Based Section 8 Vouchers (PBVs) available, the resyndication likely won’t significantly improve operations, and in fact may make execution challenging.

Joint Venture Partner - Is there a joint venture in the deal, which both reduces the benefit to you of doing the deal, and also can make the app and transaction more complicated and messier.

Additional Resources – Does the Housing Authority have a PBV RFP open, or general availability of PBVs? Does the City or County have Notice of Funding Availability (NOFAs) coming out that can be pursued to get new soft sources into the deal? 

Scatter Site Projects –Scatter site resyndications can contain up to 5 sites (unless additional sites approved by the TCAC Executive Director) and must be either a) all located in the same city, b) within a 10-mile diameter in the same County, or c) within the same county if no location is within a city with a population over 500,000. 

Scatter site resyndication projects can be attractive for reasons such as consolidating multiple projects into one, gaining transactional efficiencies, and sometimes having higher value/lower capital needs projects cross subsidize lower value/higher capital needs projects. However, beware! Scatter site projects can add complexity to the application and closing, especially when the projects have different soft lenders, and particularly if one project is owned fee and another on a ground lease.
Please let us know how we can help with your resyndication efforts.

Jeremy Hoffman, Principal

Zen Development Consultants LLC

jeremy@zendevelopment.org | Cell:  510.501.4529