Pooling Rural Properties

4 min read

Churchill Stateside’s innovative funding solution

The challenge of providing affordable housing is often one of providing options to those that live in high cost metropolitan areas. Indeed, the attention these cities receive is well-deserved considering the well-documented dichotomy between average median household income and the cost of living. What gathers less attention, yet is equally as challenging, is the plight of providing suitable, affordable housing to those in rural sections of the United States. Although not faced with the same issues as high-cost metropolitan areas, those living in rural areas are challenged with substandard living conditions, limited existing housing options and limited new development. For developers, each project given its size and rural location pose a challenge to develop.

As with all facets of the affordable housing world, where demand is great and resources are scarce, industry stakeholders must be innovative in order to be successful.

In late 2014, Churchill Stateside Group (“CSG”) and Rea Ventures Group (“RVG”) showed the necessary creativity when they partnered to preserve and recapitalize 20 rural affordable housing properties located throughout the state of Georgia. The properties are located in 18 markets and the majority were constructed in the 1980’s and 1990’s using the USDA 515 Loan Program and Section 42 Low-Income Housing Tax Credits. The acquisition and rehabilitation financing package was provided by Florida-

based Churchill Stateside Group and included several components, including financing from the USDA 538 loan program, subordination and re-amortization of the original USDA 515 loans, short-term tax exempt bonds sold by Merchant Capital and equity proceeds from Churchill Stateside Group’s investment in the 4% federal and state LIHTC. The total capitalization equaled to $71.6 million broken down as follows:

USDA 538 Guaranteed Rural Rental Housing Loan – $14.25 million construction and permanent financing.

USDA 515 Loan – restructure of $15.95 million of original USDA 515 debt.

Tax Exempt Bonds – $24.65 million in short-term bonds issued by the City of Cordele.

Federal LIHTC – investment of $11.15 million for the acquisition of federal credits awarded by the Georgia Department of           Community Affairs.

Georgia State LIHTC – investment of $5.16 million for the acquisition of state credits.

The comprehensive financial package allowed for a rehabilitation plan that consisted of modernizing interiors with flooring, energy efficient appliances, kitchen and bathroom fixtures, as well as HVAC, plumbing, electrical, and hot water heaters. Exterior improvements include roofs, siding, energy efficient windows and doors, and upgrades to community centers, parking areas, and accessibility updates. The average hard cost of improvements was expected to be $25,000 per unit. During renovations, none of the tenants are expected to be displaced, and of the 620 apartment units, 66% will continue to receive Section 521 Rental Assistance provided by USDA.

“We were pleased to be able to offer a short-term bond execution program, coupled with Churchill’s 538 lending program, to create the financing package to reposition these properties so that they are suitably rehabilitated to meet the affordable housing needs of families and seniors in these communities,” stated Keith J. Gloeckl, CEO of the Churchill Stateside Group. “The country currently has a shortage of affordable housing and a number of properties are at risk of loss. So it is critical that we use bonds and tax credits to preserve and improve these properties.”

This portfolio is noteworthy, not just for its complexity, but because it should serve as a guide for how other developers can pool resources together to successfully develop affordable housing for residents in Rural America. There are a few components to the transaction that stand out.

  1. The first step to successfully reposition the Georgia Portfolio was to pool the properties together in one transaction, generating economies of scale, and likely garnering more attention from the financial sector to participate in the financings, by offering a larger debt and equity raise.
  2. The development team utilized various financing sources, including a resubordinating of existing RD 515 loans.
  3. The challenge of solving the rural affordable housing dilemma will take input and collaboration from all participants involved. The Georgia portfolio developed by RVG provides evidence that those willing to innovate and push boundaries will move us closer to finding the answer to the rural housing dilemma.

Further, RVG partnered with a firm that has expertise in the structuring and underwriting of USDA loan products, tax-exempt bonds and LIHTC equity. The one-stop shop approach, provided RVG with an efficient execution.