Issues With Developers NSP Webinar - HUD Exchange...Smaller nonprofit developers with $100,000 in...

U.S. Department of Housing and Urban Development

HUD WebinarHUD Webinar

Issues with Developers O t b 11th, 2011 October 11th 2011

U.S. Department of Housing and Urban Development • Community Planning and Development

att e te se Co u a t e s

PresentersPresenters • Host and Moderator

– Kent Buhl, Enterprise Community Partners/KB Consulting

• Panelists – Ben Nichols, Enterprise Communityy Partners

– My Trinh, Enterprise Community Partners

– Matthew Do, Enterpprise Community Partnerso, ty

• HUD Staff: David Noguera and John Laswick, NSP

U.S. Department of Housing and Urban Development • Community Planning and Development 2

AgendaAgenda • Definition of Developers (NSP) • Selecting Developers • Monitoringg Develo ppers • Developer Best Practices Building Sustainable OrganizationsBuilding Sustainable Organizations NSP Examples

•• Issues with Developers Issues with Developers Q&A


NSP Definition of De elopersNSP Definition of Developers

•• A for profit or private nonprofit individual or entity that: A for-profit or private nonprofit individual or entity that:

(1) acquires homes and residential properties to rehabilitate for use or resale for residential purposesrehabilitate for use or resale for residential purposes

(2) constructs new housing in connection with the redevelopment of demolished or vacant properties.

• Public non-profits, such as Housing or Redevelopment Authorities, cannot be developers

• To be treated as a developer, the entity must demonstrate ownership or control of the property to be rehabilitated or redeveloped [CFR 20 4 570 202(b)(1)] rehabilitated or redeveloped [CFR 20.4 570.202(b)(1)]


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Selecting D lopersSelecting Developers

•• Financial benchmarks Financial benchmarks • Checklist • NSP l ti f d lNSP selection of developers


Selecting Developers – FinancialSelecting Developers Financial Benchmarks • A hi A highh perfformiing ddevelloper iin whhom we would i ld investt

for a LIHTC project would have: Current Current RRatio atio ≥ 1 5≥ 1.5

Months of operating cash ≥ 4.0

Cash balance/ Liquidity ≥ $1 million

Leverage (Total liabilities to Net assets) <3.0 Net assets/ Net worth ≥ $5 million

Wh d d h i ?Why do we need these ratios?

6

Se ect e e s a c a

Selecting Developers – Financialg ope Benchmarks • NSP t t h th l t b lNSP grantees may not have the luxury to be as selectitive

about their development partners, so how can you mitiggate yyour risk?

• There is a continuum on which you should invest, depending on the size of the development

• Project size may not be as big:

Smaller nonprofit developers with $100,000 in the bank and a $200,000 line of credit

Private single developers with a credit card to the l l h tlocal harddware store


S l ti D l Ch kliSelecting Developers – Checklistt

•• Strong financial reporting Strong financial reporting

• Excellent relationships

B k d i Banks and investtors

City departments

General contractors and/or subcontractors

• Organizational capacity

• Forecasting and scenario planning


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Selecting D lopers NSPSelecting Developers – NSP • Establish policies and procedures for selection

Note: Not required, but many grantees do RFQs

• Review developer’s experience and capacity to work with federal funds and NSP activities

• Know Developer’s Background – lines of business and track recordtrack record

• Ask for development budgets and operating pro formas when specific projects are proposedwhen specific projects are proposed


t

–

NSP D NSP Develloper AAgreement • Key Elements:Key Elements:

– Clear scope of work

Specific milestonesSpecific milestones – Performance requirements and strict

deadlinesdeadlines – Strong termination clause

• The only legal enforcement tool available


Monitoring Developers

• CConsttructition ddashb hboardd crititeriia

• Sample dashboard M i i NSP • Monitoring undder NSP


Construction Dashboard CriteriaConstruction Dashboard Criteria On Target (A) Monitor Closely (B) Workout (C)

Scope Unchanged or Minor changes Medium changes Significant changes

Schedule On or ahead of schedule 1 or 2 months behind schedule 3 or more months behind schedule

Sources and Uses Within or under budget Costs projected to go beyond contingency by $__

OR Contingency drawn down exceeds

the percent of construction completed

OR Projected to cut into contingency by

% of TDC, or % of corporate__ , __ p liquid assets

No contingency remaining Expecting $__ to finish the project and __ is the expected source for

this gap.

Tax Credit Adjusters or Other Funding

Gaps

None or increase expected Little change in equity Expecting $__ amount to be adjusted down by investor and why

there is an adjuster. ___ is the expected source for this

gap.

Review Review on a monthly basis Review on a weekly basis or as unexpected events occur

Review on a weekly basis or as unexpected events occur


Sample DashboardSample Dashboard Project

Green Briar View Point

Middle City Bella Vista Quimby Chateau Chateau Wiggin

Units 180 24 185 64 106 40 100 115

On Schedule?

On schedule–

A 4 mths

behind – C

Ahead of Schedule –

A 3 mths

behind – C 6 wks

behind – B On schedule

– A

2 mths behind –

C

On schedule –

A

Scope of Work

Some Changes –

B

Few Changes –

A

Few Changes –

A

Some Changes –

B

Some Changes –

B

Significant Changes –

C

Significant Changes

– C

Some Changes –

B

Funding Gap O t tOn target –

A O t tOn target –

A O t tOn target -

A O t tOn target -

A O t tOn target –

A

Within C ti Contingency

– B Gap toGap to fill - C

O t tOn target – A

NSP Deadline issue? No – A No – A No – A Yes – C Within 2 mths – B No – A Yes – C No - A

NSP Compliance A A A A B A A A

Scor

es

Current

A 4 4 5 2 1 3 1 4 B 1 0 0 1 4 1 0 1 C 0 1 0 2 0 1 4 0

Last month

A 5 3 5 4 3 2 5 1 B 0 1 0 1 1 3 0 1 C 00 11 00 00 11 00 00 33

2 months

ago

A 5 3 4 2 1 0 4 0 B 0 0 1 1 2 4 1 2 C 0 2 0 2 2 1 0 3

Notes All funds will be will be spent

Watching time closely

Issue is cleared upp

Environm ental


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Monitoring Under NSPMonitoring Under NSP • Step 1: Select qualified competent partners.

Communicate expectations and obligations.

Establish and communicate your monitoring plan.

Use agreements to establish clear goals.

• Step 2: Monitoring “verifies” the competence of your partners to assure:

Compliance with applicable federal requirements.

Performance goals are being achieved.

• Why? Reduce Risk and Ensure Performance


De eloper Best Practices Developer Best Practices • Recommendations from Building Sustainable

OOrganiizatiti ons 1) Strengthen financial reporting

2) Monitor large cash receipts carefully

3) Grow strategically

4) Cut revenue draining projects

• NSP Best Practices


Strengthen Financial Reporting andStrengthen Financial Reporting and Analysis • PPoor IIntternal Fi l Financiial St l Stattementts Not detailed or broken out by cost center Overhead was not allocated

• Accounting Staff Turnover ComplexComplex organizationsorganizations Understanding all the compliance and regulations Internal controls

What does this mean for NSP grantees?


Monitor Large Cash Receipts Caref ll Monitor Large Cash Receipts Carefully

• Real Estate is a Business of Large Real Estate is a Business of Large, Uneven Payments• Uneven Payments

• These Payments May Delay Tough Decisions on Properties or Business Lines.

• How does this business imppact NSP pprojjects? Timing of projects and payments – stalled

pipelines Where is the equity for the NSP deal?Where is the equity for the NSP deal? Too many units – not enough financing


Gro Strategicall Grow Strategically


Grow StrategicallyGrow Strategically

BBuildild on exiisti ting core compettenciies Avoid mission creep Challenging for Propperty Managgementg g y Pitfalls of new business lines or new territory Expertise and infrastructure not built Chasing NSP projects?Chasing NSP projects? Weak relationships in new territory New to your territory?


e en e Cast Off R Draining Projects Cast Off Revenue Draining Projects


Revenue Draining Projects• Soak Up Senior Management’s Time CCannott spend time on th the NSP projjecttd ti NSP

• Slow pp pipeline

• Developers are optimistic people “If these three things happen then all will be okay”If these three things happen then all will be okay

• Sunk Costs ThiThis could b ld be the NSP d NSP deal’l’s equitity th


t

NSP D NSP Develloper BBest PPractitices

•• Experience in Project type Experience in Project type

• Partnerships with Banks, Realtors, Counselors

E d i th f fit t h titl Engaged in the for-profit sector: has a title company, realtor, and loan officer that understands and works with NSP

If they don’t have these partnerships, they are willing to use your partners

• Strong marketing plan

• Provide a point of contact, be responsive and flexible


Issues with DevelopersIssues with Developers

• U d t di d lUnderstanding developers Recommendations to avoid problems

• IIssues wi h D ith Devellopers: Problems and Solutions Developer Fees


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Understanding D lopersUnderstanding Developers • Ask these qquestions first:

What is causing the delay?

• Another project or projectsAnother project or projects

• Problems with financing

•• Problem within your jurisdictionProblem within your jurisdiction

• NSP Rules

Is the project facing a previously unforeseen gap?Is the project facing a previously unforeseen gap?

• Extra funding?


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Understanding D lopersUnderstanding Developers

•• Did the developer overpromise? Did the developer overpromise?

Pressure is on

• Th k Sh ld t b it dif l ti hiThen ask – Should we cut bait or modify relationship??


Recommendations for GranteesRecommendations for Grantees • Incentivize Long-term Ownership of Units

KKeep your self lf-iimposed NSP rulles flflexiblible. d NSP If they are in stone and a project goes sideways

then the developper will stopp working.

• Embrace an Early Warning System Early Warning System referencedEarly Warning System referenced Welcome developers and owners who come to the

table early FFear off penalty


NSP Developers: Problems and SolutionsNSP Developers: Problems and Solutions

•• Problem: Goals and Performance milestones are Problem: Goals and Performance milestones are not clearly defined Solution: Create/Amend Developer Agreements toSolution: Create/Amend Developer Agreements to

provide clear language:

Timelines, Objectives, and Reporting Requirements

Solution: Ensure program manuals and procedures are iin pllace tto monit itor


NSP Developers: Problems and SolutionsNSP Developers: Problems and Solutions • Problem: Project not on schedule Solution: increase resources devoted to oversight andSolution: increase resources devoted to oversight and

inspections

Solution: Maintain regular communication withSolution: Maintain regular communication with developer:

Reggular repportingg and calls/meetinggs.

Identify barriers: review program procedures, opportunities to provide technical assistance

Solution: Evaluate incentives.

Solution: Reassess schedules and enforce agreements.


NSP Developers: Problems and SolutionsNSP Developers: Problems and Solutions

• Problem: Developer Not Meeting Performance Goals Solution: Review budget/actuals and evaluate

b idi d l t d di iti subsidies – development and disposition

Solution: Maintain regular communication and allocate staff resources based on early warningallocate staff resources based on early warning system/risk assessment

Solution: Enforce aggreement – reassess ggoals;; reduce funding; termination


De eloper Fees Developer Fees

•• Means to incentivize good performance Means to incentivize good performance

• Factors to consider: risk, comparable profit in area

• B lBalance b tbetween iincenti tiviiziing ddevelloper andd unddue enrichment

The aggregate of all fees needs to be in line with feesThe aggregate of all fees needs to be in line with fees typically paid in their market. [24 CFR 570.202(b)(1)]


Developer Fee [HUD Policy Alert, updated 9/16/11]


rces

ResoResources

•• HUD Sample Developer Agreement HUD Sample Developer Agreement

• P li Al t All ti f D l t C Policy Alert on Allocation of Development Costts

P li Al D l d S b i i• Policy Alert on Developers and Subrecipients

• HUD Webinar: Activity Delivery v. Program Administrative Costs II on November 3rd, 2011


http://hudnsphelp.info/index.cfm?do=viewFindaResourceDetails&resourceID=676&searchType=4

http://hudnsphelp.info/index.cfm?do=viewFindaResourceDetails&resourceID=867

http://www.hudnsphelp.info/media/resources/NSPPolicyAlert_Obligations_4-23-10.pdf

NSP Resource Exchange Links

NSP Resource Exchange http://hudnsphelp info NSP Resource Exchange http://hudnsphelp.info

Search the Resource Library http://hudnsphelp.info/resources

Search the FAQs http://hudnsphelp.info/faqs

View All Training Materials on the Learning Center http://hudnsphelp.info/learning

Submit a Policy Question via Ask A Question http://hudnsphelp.info/question

Request Technical Assistance http://hudnsphelp.info/RequestTA Request Technical Assistance http://hudnsphelp.info/RequestTA

Connect with NSP

Join the Listserv http://hudnsphelp info/listserv Join the Listserv http://hudnsphelp.info/listserv

Visit the NSP Flickr Gallery http://www.flickr.com/photos/nspresourceexchange

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