FHA Risk Share: Denver Metro Village

6 min read

Colorado Housing Teams with FHA to Conserve Resources

Originally constructed in 1971, Denver Metro Village is a 191-unit affordable rental housing property serving seniors. It’s west of downtown Denver at West Colfax Avenue and Quitman Street, near Sloans Lake, the city’s largest, and is being preserved through a partnership with the nonprofit owner, manager and developer, MGL Partners. Buses, light rail and a new library are nearby. The rehab will add 19 additional units for a total of 62 studios and 148 one-bedroom apartments. Additional parking and amenity space will also be added. The target senior population earns 40 to 60 percent of area median income (AMI), which in the Denver metro area translates to $28,000 to $56,000 for a single earner.

Colorado Housing and Finance Agency is supporting the project with construction and permanent financing, using Federal Housing Administration (FHA) – Housing Finance Agency (HFA) Multifamily Risk-Sharing, Private Activity Bonds and the accompanying four percent Low Income Housing Tax Credit, and gap financing from the CHFA-administered Capital Magnet Fund. The amortization on the permanent loan is 38 years.

“We are a one-stop shop,” says Denver Maw, CHFA finance minister. “We handle the LIHTC, we’re the construction lender and the permanent lender. MGL Partners is the fee developer. They came to us with the project. We do a lot of work with them and have a good relationship.” MGL, cofounded by Mike Gerber and Glen Glade, is a Denver-based multifamily development company that has developed and acquired more than $300 million of senior and affordable housing throughout Colorado and other select markets.

Affordable housing is, by its nature, a collaborative process, involving many partners and sources of financing. Perhaps nowhere is the collaboration more defined than in the Federal Housing Administration Section 542(c) Risk Share program. Through the program, the FHA and state or local housing credit allocating agencies (HCAAs) share the risk and mortgage insurance premium on multifamily transactions, with the HCAA serving as both issuer and lender and responsible for full underwriting. This is the structure CHFA employed when it took on the acquisition and rehabilitation of Denver Metro Village last year.

“We’ve been a Risk Share lender since 1994,” says Maw. “It mitigates CHFA’s risk and, as a state FHA lender, we have to be aware of our resources and how to conserve them. It’s become a main tool in our multifamily lending portfolio.” (The given name, by the way, is purely coincidental rather than aspirational on his parents’ part for the Utah-born Maw, though his first job upon moving to Colorado was in the Denver mayor’s office.)

The National Council of State Housing Agencies (NCSHA) writes, “The Risk-Sharing Program provides credit enhancement to HFA bond and debt issuances through FHA mortgage insurance resulting in lower borrowing costs. HFAs are then able to pass these savings on to borrowers and tenants. HUD also benefits because, compared to traditional FHA, the Risk-Sharing program has reduced risk at the transaction level, increases affordable housing production and significantly reduces HUD staff resources.

“FHA-HFA Risk-Sharing commitment volume is now 9.5 percent of total FHA commitment volume. These loans also represent 30 percent of all Low Income Housing Credit units financed under all FHA insurance programs. The Risk-Sharing program outperforms HUD’s traditional FHA multifamily mortgage insurance programs. Program loan default rates have been very low and premium revenue has exceeded total claims, generating net revenue for the federal government. Since 2010, the average FHA-HFA Risk-Sharing program claim rate has been .05 percent, while the average claim rate for multifamily loans with full FHA insurance has been .62 percent.” FHA will accept between ten and 90 percent of the risk.

Why Risk Share?
“Metro Village is the first we’ve done of this particular type of project,” Maw says. “We don’t have a large balance sheet, and we structured it this way because we want to mitigate risk wherever possible. Actually, it’s been years and years since we’ve had a HUD claim, but they respond within five days. This all helps the bond become more marketable, as well as bringing down the rate. And the fact that we can add Risk Share to the permanent loan makes it an easy execution for borrowers.”

This is important, Maw notes, because, “There is stress all across Colorado. All of the state needs more affordable housing. The City of Denver now has its own affordable housing department [the Denver Housing Authority].”

CHFA issues both short- and long-term bonds.

“Equity pays off the short-term bonds,” Maw explains. “The long-term bonds are issued at construction loan close with the rate locked in. It converts to permanent financing at stabilization, which means essentially full occupancy. We added ten basis points to make up for the negative arbitrage during the construction period to bring it to net present value.” The funding stack for the project acquisition and rehabilitation includes: $41.5 million CHFA construction loan; $19.3 million CHFA permanent loan, enhanced with FHA-HFA Risk Share; $600,000 Capital Magnet Fund loan, administered by CHFA; $150,000 Capital Magnet Fund grant, administered by CHFA; $1 million loan from City of Denver Office of Economic Development; $17.3 million in federal tax credit equity; and $3.1 million deferred developer fee. CHFA issued $22.2 million in short-term, tax-exempt Private Activity Bonds and $19.3 million in long-term, tax-exempt Private Activity Bonds. CHFA awarded $2,775,554 in federal four percent Low Income Housing Tax Credits to support Denver Metro Village in 2019.

One issue that comes up with FHA-HFA Risk share is the triggering of Davis-Bacon Act, which requires contractors and subcontractors on federally funded projects to pay their workers wages and benefits no less than what others locally pay for similar projects. In the case of the Denver Metro Village rehab, the rates being paid were above the Davis-Bacon standard, but would still involve some complex compliance administration, which most developers and contractors don’t want to have to deal with if they don’t have to, given the myriad of other permits, administrative requirements and “moving parts” involved in a construction project.

However, the way the deal is structured, the risk share element only comes in at the permanent financing phase, by which point the construction is done so there are no Davis-Bacon eligible hires to consider. Again, this is not a question of paying a fair wage; it is a matter of avoiding additional administrative headaches.

The Denver Metro Village rehabilitation is now underway, and Maw expects the entire project to take about 18 months, which means it could open as early as April or May 2021. Some units will be vacated through attrition over that period. The developer will assist residents in temporarily relocating by paying for the associated costs. Residents may choose to either relocate to an alternate apartment inside the existing property, if available, or relocate to a nearby apartment complex or an extended-stay hotel. A proposal has been negotiated with Residence Inn, which is less than three miles away, and offers shuttle services, breakfast, laundry, housekeeping and pet services.

Upon construction completion, residents will have the option to move back into their original, fully renovated units or choose a different unit.

Story Contacts:
Megan Herrera, Public Relations and Communications Specialist
Colorado Housing and Finance Authority, mherrera@chfainfo.com

Denver Maw, Finance Manger
Colorado Housing and Finance Authority, dmaw@chfainfo.com