Cooperative Housing and FHA Insurance

Presenters

• Tim Gruenes: Minneapolis HUD; Supervisory Project Manager/Team Leader

• Scott WerdalWerdal: Minneapolis HUD; Operations Officer

• Terry W. McKinley; President & CEO of Cooperative Housing Resources in St. Paul, MN:– President of the Senior Coop Foundation– CHR is an FHA Approved Lender

Agenda

• Basic co-op concept

• General characteristics

• Board of Directors

• Structure - $’s

• HUD (Section 213) requirements

• Pre-sale of units

• Review of share purchasers

Agenda - Continued

• MN Hub procedures

• Section 213 for purchasers/consumers

• Section 213 for sponsors/developers

• Section 213 for HUD

• Appreciation – limited equity vs. market

• Co-op legal documents

• References

Agenda - Continued

• Why is the Co-op so Popular With Older Adults?

• Why do developers like the co-op model so much?

• Sponsorship Incentives – Business• Sponsorship Incentives – Mission• Community Incentives

Agenda - Continued

• Difficulties in Developing/Managing a Coop

• Pictures of Coops.

Basic Cooperative Concept

• Mortgagor = N.P. corp. owns the project

• Co-op members: own a membership certificate in the corporation

• Membership certificate gives them the right to occupy and the right to participate: – Board member– Voter

Cooperative Structures

• There are many ways to structure a cooperative.

• This presentation deals with the most common structure that the MN HUD office has processed.

Structure –General Characteristics

• Processed under Section 213

• Elderly, new construction

• Pre-sale, management type

• Co-operative formed before construction

• Sponsor/development service agent (DSA)

• Loan term of 40 years

Structure – General Characteristics

• Valuation, downpayment and carrying charge amounts are usually allocated by sq. ft.; average optimal unit size 1350 s.f.

• Typical unit mix of newer co-ops:– 20-30% 1 BR’s– 50-60% 2 BR’s– 10-20% 2+Den/3 BR’s

• Most utilities are typically included

Structure – Board of Directors

• Provisional Board of Directors till first annual meeting of members– Within 1 year and 3 months of Cert. of Occupancy/Final

Endorsement – Usually individuals from sponsor/DSA

• Board of Directors (after provisional)– Members/occupants of units– Staggered, eventually 3 year terms

• Training is now available for board members through Senior Cooperative Housing Education Program

Structure - $’s

• Development costs covered by:– Downpayments: (typically 30 – 40%)– FHA Insured mortgage (typically 60-70%)

• Carrying charges: covers on-going expenses/debt service (typically $700 – $1,500 PUPM); Trending down!

• 100% of income after expenses & reserves used for debt service

HUD (Section 213) Requirements

• Criterion 3 maximum mortgage = 98% of Replacement Cost

• Stat. Limits > (d)(4) – similar to 207/220• No MAP – right now must go TAP• General Operating Reserve: begins at 3% of total

carrying charges. Controlled by mortgagor. • Minimum downpayments: 3% of total cost.• Pre-Sale – see next two slides

Pre-sale of UnitsInsurance of Advances

• 90% + of the units prior to Initial Closing• If construction has begun, 50% + of the units with

Director’s permission.• Sponsor/DSA must cover difference

– Sponsor/DSA must agree to pay the monthly carrying charges on any remaining units for a maximum of 3 years or until sold.

• HUD must review/approve share purchasers before Initial Endorsement

Pre-sale of UnitsInsurance Upon Completion

• 97% + of the units prior to closing• Director may adjust downward.• Sponsor/DSA must agree to pay the

monthly carrying charges on any remaining units for a maximum of 3 years or until sold.

• HUD must review/approve share purchasers before Final Endorsement

Review of Share Purchasers

• Handbook 4550.2 (paragraph 11-6).

• Co-op Membership Exhibit (FHA 3203)– Credit Reports– Personal Financial Statements (FHA 3232A)– Verification of employment– Verification of deposit

MN Hub Procedures

• Variable down payments: Allowed by handbook, however we require at least 5% participation in mortgage (Common Interests)

• Collections of downpayments:– Handbook - no collections until commitment

– We typically waive – allow after invite issued and legal documents reviewed.

• Ins. Upon Completion: 60% + pre-sale prior to allowing use of downpayments.

Section 213 for Purchasers/Consumers Advantages:

• Long-term, fixed-rate, non-recourse• Built-in mechanisms to protect the consumer • FHA known to Seniors generation: trusted

name recognition• Institutional oversight and discipline: audits,

reserves., etc• Distributive Shares - MIP has been refunded.

Section 213 for Purchasers/ConsumersDisadvantages

• Some co-op members chafe under co-op oversight

• Some members or their beneficiaries may prefer unrestricted equity returns and non age-restricted potential buyers to liquidity and ease of transfer to waiting list elderly (i.e., condo structure)

• Lock-outs (when excluding is not priced within the rate)

Section 213 for Sponsors/Developers

Advantages:• Nonrecourse• Not rate-sensitive• Equity funded by buyers, and non-

mortgageable costs can be paid from equity.• Profit margin

Disadvantages:• Pre-sale requirement• Unless IUC is used, must collect full down

payment prior to construction

Section 213 for HUD

Advantages:• Very low loan-to-cost (50%-65%; Trend to 35%)• Significant pre-sale requirement before closing• Very favorable default experience - good track-

record• High resident creditworthiness• Is not subject to credit-subsidy limits

Disadvantages:• Co-op members call HUD when they have a

problem with the developer

Appreciation - Limited Equity vs. Market

• Model Form of Bylaws sets appreciation as the amount of principal pay-down.

• We have seen different approaches:From:From:

1-3% appreciation per annum plus principal paydown (most utilized)

To:To:Market – appreciation not limited

Transfer of Membership(Regulated by the Bylaws)

• Co-op has first option to deal with departing member’s share.– Co-op compiles waiting list

• If co-op waives right, member responsible– New member must be approved by co-op.

• MN Insured projects usually sold by Co-op– 7500 York – current waiting list > 550 people– Avg. transfer time of one developer, 1-5 days

Cooperative Legal Documents

• Articles of Incorporation

• Subscription Agreement

• Occupancy Agreement

• Cooperative Agency Agreement

• Management Agreement

• Bylaws

• Information Bulletin (Disclosures!)(Disclosures!)

References

• New construction:– HUD Handbook 4550.1– HUD Handbook 4550.2

• Existing: HUD Handbook 4550.3

• HUD Clips does not contain Appendices (legal docs and forms): Contact MN office if you need copies.

WHY IS THE CO-OP SO POPULAR WITH ACTIVE

OLDER ADULTS?

“It is most important to understand that the cooperative concept appeals to older adults

—especially couples--who would not normally consider ‘seniors’ housing and who typically would remain in their single-family

homes.”

Rick Fenske, Senior Market Researcher

Maxfield Research, Minneapolis

Co-op Advantages for Older Adults

• They remain in control at a time of life when most other alternatives require sacrificing control.

• Seniors can get out of SF home maintenance, and especially with high down-payments, live like snow birds (with no better “high return” safe investment available for their nest egg savings from SF home sale)!

• Co-op governance provides a forum for active participation and taking of responsibility

• Preserve equity - no “spend-down” of assets.

Co-op Advantages for Older AdultsContinued

• They preserve tax benefits of homeownership

• They save money paying only the actual costs - no outside owner or mandatory services ($1000 PUPA < G.O. Rental)

• Affordable by senior homeowners with modest income

• Attracts young- and old-old alike.

SENIOR LIVING ENVIRONMENTSAge 65+

75%

20%

5%

DEPENDENT LIVING - RENTAL

INDEPENDENT LIVING - RENTAL

INDEPENDENT LIVING - OWNERSHIP

Source: AARP

Outdoor Heavy Light Trips to Light Cooking Personal

maintenance housework maintenance store, etc. Housework meals grooming

SENIORS ANTICIPATING NEED FOR HELPPage 65+

65%

54%

34%

26%

18%14%

11%

0%

10%

20%

30%

40%

50%

60%

70%

Source: AARP

Senior Cooperative Members' Ages

0

10

20

30

40

50

60

70

80

90

100

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101

105

109

113

117

121

125

129

133

137

141

Ag

es Median

Age:74

Age 55-594%

Age60-646%

Age 65-6919%

Age 70-7429%

Age 75-7927%

Age 80-8418%

Age 85-902%

Age 90+1%

Buyers

Senior Cooperative Members' Incomes

-

20,000

40,000

60,000

80,000

100,000

120,000

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101 106 111

Median Income:$38,300

BUYERS

INCOMES

Cardinal Pointe - Purchasers' Single-family Home Values

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91Buyers

Hom

e V

alu

es

Two add'l buyers' homes at $970,000 & $1,630,000

Median: $110,000

Mean: $146,400

WHY DO DEVELOPERS LIKE THE CO-OP MODEL

SO MUCH?

Cooperative Developers(nonprofits in italics)

• Ebenezer Society (1976)• Episcopal Church Home of Minnesota (1980)• Calvary Lutheran Church - Golden Valley (1980)• Nokomis Community Development Corp (1980)• Presbyterian Homes (1985)• Realife Corporation (1988)• Gramercy Corporation (1995)• Paul Sentman - Sentman Enterprises (1998)• Elim Care (2000)• Nichols Development (Summerhill) (2001)• United Properties• Real Estate Equities, LLC (2003)• Guardian Angels (2003)• St. Anne’s Extended Care (2005)

Year: 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Growth of Older Population1990-2050

0

5000

10000

15000

20000

25000

30000

35000

40000

Old

er P

op

ula

tion

(in

tho

usa

nd

s)

Ages 65-74

Ages 75-84

Ages 85+

Little Falls - 15 Mile RadiusHouseholds, age 65-85, by Income

613

284264 259

218204

130104 108 116

103

70

3725 22

4 4 00

100

200

300

400

500

600

700

< $

10,0

00

$10,0

00-$14,9

99

$15,0

00-$19,9

99

$20,0

00-$24,9

99

$25,0

00-$29,9

99

$30,0

00-$34,9

99

$35,0

00-$39,9

99

$40,0

00-$44,9

99

$45,0

00-$49,9

99

$50,0

00-$59,9

99

$60,0

00-$74,9

99

$75,0

00-$99,9

99

$100,0

00-$124,9

99

$125,0

00-$149,9

99

$150,0

00-$199,9

99

$200,0

00-$249,9

99

$250,0

00-$499,9

99

> $

500,0

00

Income Ranges

Num

bers of H

ousehold

s

Median Income: $23,400

Sponsorship Incentives - Business

• Land profit• Development profit • Appeals to a diverse market -- especially

young old• Simple operating program• Creating a market for elder services• Management fees

Sponsorship Incentives - Mission

• Providing a better alternative that --– Supports aging in place– Enhances true independence through

interdependence– Improves members’ health and well-being– Preserves seniors’ financial resources– Frees up affordable homes for younger

families• Contributing to community economic health

Community Incentives

• Turns over single-family homes to younger families

• Retains seniors and their contributions in the community

• Economic development• Adds a significant amenity/housing option in

order for a community to retain otherwise out-migrating elderly who would prefer to stay in the neighborhoods they know best (tale of two mayors)

Difficulties in Developing/Managing a Coop

• Marketing a cooperative project is very different than a rental - selling a sense of community.

• If this is the first cooperative, nothing to show people other than plans – some developers build sample units.

• Oftentimes, experienced marketing personnel from other cooperatives are hired by new developments.

“...decreased environmental controllability is associated with negative health outcomes, while

increased controllability is associated with positive outcomes.”

Judith Rodin, Ph.D., gerontologistPresident, University of Pennsylvania

Gerald Glaser, GerontologistEbenezer Center for Aging, testifying before the

President’s Housing Commission, 1981

"From a gerontological point of view, the essential benefit of the cooperative is that it provides an economic structure and social framework that fosters self-reliance, self-control and determination, interdependence, and cooperation among the resident members, even among those with severe chronic conditions. As gerontologists we know that these factors contribute directly to continued independent living, successful aging and the enhancement of longer life."

Gross Floor Area(est.): 82,760 DEVELOPMENT BUDGETProject: Current Project Interest Rate: 6.5%Location: Minnesota Term (yrs): 40 CONSTRUCTION/SF 60$ 4,965,600$ Project #: Not Assigned Down Payment/SF: 54.00$ Architect 3.00% 148,968

Average Monthly Charge/SF: 0.916$ Other Fees/DU 2,500$ 105,000 253,968$ Loan Amount: 4,050,000$ TOT. for all Improvements 5,219,568$

PRICING, INCOME & EXPENSES FINANCING, TAXES, CLOSING COSTS:

Interest 12 mos. & 6.50%

Total 40.0% Required Total Total on 4,050,000$ 131,625$

# of Unit Unit Unit Down Monthly Income to Down Monthly Taxes 15,000

Units Descr. Size Price Payment Charge Qualify Payments Charges FHA Fees 1.8% 72,900

3 1BR/1BA 800 112,080$ 44,830$ 760$ 19,826$ 134,490$ 2,280$ Consulting 54,000

6 1BR/D/1BA 960 134,500$ 53,800$ 890$ 23,217$ 322,800$ 5,340$ Finance Fees/Discounts 3.0% 121,500

6 2BR/1.5BA 1,075 150,610$ 60,240$ 980$ 25,565$ 361,440$ 5,880$ Appraisal 7,000

9 2BR/2BA 1,150 161,120$ 64,450$ 1,060$ 27,652$ 580,050$ 9,540$ Title & Rec. 20,250 422,275$

12 2BR/2BA 1,240 173,730$ 69,490$ 1,130$ 29,478$ 833,880$ 13,560$

6 2BR/D/2BA 1,360 190,540$ 76,220$ 1,230$ 32,087$ 457,320$ 7,380$ LEGAL, ORG.MARKETING, & DEV. FEES42 48,000 2,689,980$ 43,980$ Furnishings 75,000

Working Capital 81,000 OTHER INCOME: Total Annual Monthly Charges: 527,760$ Legal 35,000

Paid parking: 0 stalls @ -$ Organizational 10,000 Guest Room: 10 nights @ 35$ 350$ Marketing 5,000$ 210,000

350$ 4,200$ Developer's Fee 10,000$ 420,000 831,000$ Total Annual Income, all Sources: 531,960$

LAND VALUE 6,000$ 252,000$ OPERATING BUDGET: Estimate of Annual Common Expense 210,000$

Per unit: 5,000$ TOTAL PROJECT COSTS: 6,724,843$ Annual Fixed Charges: LTV: 60%

Int.Rate. 6.50% Term/yrs: 40 TOTAL REQUIREMENTS FOR SETTLEMENTInterest Plus Curtail 7.025482% 284,532 TOTAL COSTS/USES: 6,724,843$ Mortgage Insurance 0.50% 20,250 SOURCES: Mortgage Amount 4,050,000$ Operating Reserve 3.00% 15,833 320,615$ Downpayments 2,689,980$

Total Funds Available: 6,739,980$ Total Gross Ann.Exp. And Fixed Charges: 530,615$ CASH INVESTMENT REQUIRED (15,137)$

NET INCOME/(LOSS): 1,345$ Total Project Costs: 6,724,843$ Project Cost per unit: 160,115$

Project Cost per netsquare foot: 140$

Contacts

• Tim Gruenes: tim_p._gruenes@hud.gov

• Scott WerdalWerdal: scott_a._werdal@hud.gov

• Terry W. McKinley: terrym@seniorcoops.com