Case Study

Kings Ferry

5 min read

Preserving a troubled property? Start early.

What strategies can developers use for successful affordable housing preservation of tax credit properties that have hit the 15-year mark with negative equity? Though there probably will never be a cookie cutter solution to resolving these kinds of troubled properties, a project in Philadelphia is showing one possible way of getting out from under the financial water.

The Kings Ferry project in Philadelphia is presenting The Michaels Organization of Marlton, NJ, with two thorny problems. The project, which Michaels developed in the 1990s, is both overleveraged and in need of rehab to the tune of about $23,000 per unit.

The estimated value of the 71-unit Low Income Housing Tax Credit project is about $3.4 million, according to Michaels senior vice president Milton Pratt, Jr., while the liabilities add up to about $5.2 million. That leaves Kings Ferry under water by about $1.8 million in negative equity.

“The question is, at year 15, what are we going to do?” says Pratt.

The three-story project with two- and three-bedroom unit apartments on Reed Street near the Schuylkill Expressway and the Schuylkill River in the City of Brotherly Love has rentals ranging from 840 to 975 square feet. It has four mortgages totaling more than $2 million and accrued interest of about $3 million, according to a presentation Pratt made at the annual meeting of the National Housing & Rehabilitation Association in Palm Beach, FL, and in a subsequent interview.

“Doing nothing after year 15 isn’t an option,” he says. “A responsible owner makes an investment to make it sustainable.”

A key is renegotiating the subordinated mortgages. In the case of Kings Ferry, the project has an interest-free second mortgage of $675,000, a third mortgage of $500,000 at one percent, and a $1 million fourth mortgage at 6.35 percent.

“These are real loans,” he says. The lending agencies “expect you to repay them.”

Michaels currently has four Philadelphia projects around the 15-year mark, and it is talking with the city now about redeveloping them.

Pratt is hoping that the four percent tax credit will be part of the Kings Ferry redevelopment. He outlines a potential $7.1 million transaction that would include LIHTC equity of about $2.2 million, permanent debt of $1.3 million and a seller’s note of $3.1 million. Smaller funding amounts would go towards reserves and a deferred developer’s fee.

Costs would include $3.4 million to acquire the property (that matches the estimated value), a hard cost of $1.7 million, and the balance in design fees ($150,000), finance fees ($580,000), soft costs ($360,000), reserves ($330,000), and developer’s fee ($650,000).

The redevelopment, which Pratt estimates will be finished in 2019, faces a fistful of challenges, he feels:

  • State and city agencies want real paydown on old, soft debt.
  • The debt in excess of value needs to get restructured.
  • The investor wants to maximize sales proceeds.
  • Transfer taxes need to be paid twice in some jurisdictions.
  • The seller must be willing to accept a large seller’s note.
  • The old owner gets no equity out of sale after 15 years.
  • Rehab scope may not meet competitive HFA standards.

Pratt says the plan with Kings Ferry involves first, getting an appraisal of the properties, next persuading the investor to exit the deal, and then making deals on the soft seconds.

Agencies can be very helpful in making these deals work, he says, showing flexibility in order to make the projects fly.

“The agencies are willing to renegotiate. But they need some nominal amount of paydown of existing debt,” he says.

“The goal is to own and operate communities acquired across the years and restructure them both financially, to right size the debt, and for some level of rehab. Our goal is to keep these units affordable. That’s our core mission.”

The developer can’t do that by itself, though. “We need stakeholders to come to the table. They need to say preservation of year 15 deals are a priority,” Pratt feels.

Stakeholder musts, include making a real preservation strategy for properties between years 15 and 30 at every housing finance agency, he says. The agencies need to be willing to renegotiate debt. Investors need to moderate their positions that sales must be done at year 15. Local governments and public housing authorities need to be more vocal on the threat of these units falling out of affordability stock due to deferred maintenance or irresponsible owners.

Kings Ferry is “a great property at the end of its initial compliance period,” the executive says. There are many long-term tenants in place in the family project, for instance. One family he particularly notes is a mother who moved in with her two sons about ten years ago. During their time of tenancy, the family has prospered. The mother has progressed from being a certified nursing assistant to a registered nurse, and the two boys have graduated high school and now have jobs of their own.

Kings Ferry is “the first of many, many deals” like this for Michaels, Pratt says. “There is a huge upswing in year 15 deals. Figuring them out is going to be a cottage industry for somebody.” And he doesn’t think there is one template for doing them. “Unwinding these deals, everyone is going to be different,” he says.

His best advice? “Start early,” he says. “Start in year ten or 11.”

Story Contact:
Milton Pratt, Jr.
Senior Vice President, The Michaels Development Co.

Kings Ferry, Philadelphia: A 15-Year project
71 two- and three-bedroom units.
Estimated value: …………………………………………… $3,390,400
First mortgage (hard):………………………….. $110,333 at 8.5%
Second mortgage (cash flow):………………… $675,850 at 0%
Third mortgage (cash flow): …………………… $500,000 at 1%
Fourth mortgage (cash flow):…………… $1,000,000 at 6.35%
Accrued interest: ………………………………………….. $2,938,766
Total liabilities:………………………………………………. $5,224,949
Negative equity:………………………………………….. ($1,834,549)

Source: The Michaels Organization
Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.